Year: 2014

Driving the change: Cyprus pushes for economic growth

Posted on by Ashton Wenborn

For decades, Cyprus has been successful in attracting investors, and now that the country is going through tough economic reforms, both the need and opportunities for foreign investment are increasing. In its efforts to build a stronger future for Cyprus, the government has put in place a series of measures to boost the economy and attract investment through modernising legislation, promoting development projects, diversifying tourism, introducing tax incentives and speeding up licensing procedures.

Cyprus is Europe’s eastern outpost at the crossroads of three continents: Europe, Africa and Asia. The country’s geographic location has been considered of strategic importance in global trade for thousands of years. Cyprus became a full member of the EU on May 1, 2004, and that accession launched a new era of commitment to quality and growth in Cyprus. Recently, the discovery of natural gas resources – and possibly oil – has further upgraded the strategic potential of the island, which is also considered to be a stabilising factor in the region’s political developments.

A welcome framework
There are few countries that make doing business within their borders so hospitable. Cyprus continues to encourage FDI opportunities, as well as entrepreneurship and innovation, by having a comprehensive, modern and forward-looking legal and regulatory framework based on the principles of English common law. The country’s legal framework is widely recognised as an effective system that allows for reliable and transparent business practices. Naturally, being an EU member state, Cyprus’ legal framework is aligned with EU laws and regulations – the Acquis Communautaire.

Recently, the discovery of natural gas resources – and possibly oil – has further upgraded the strategic potential of the island

Another added bonus is that Cyprus offers possibly the most attractive tax system in Europe, as well as one of the most appealing and simple systems in the world (see breakdown below). The country provides an effective and transparent tax regime that is fully compliant with the EU laws and regulations. In addition, the Organisation for Economic Cooperation and Development (OECD) includes Cyprus on its ‘white list’ as one of the 45 countries that have introduced and implemented the highest of internationally agreed standards on harmful tax practices.

In addition to the tax benefits already mentioned, Cyprus has an extensive and constantly growing network of attractive double taxation treaties (DTTs), which supports the overall tax system and forms a significant part of the country’s attractiveness. At the moment there are 46 ratified treaties in place, while a number of others are under negotiation. For individuals, Cyprus offers one of the lowest Income tax regimes in Europe with taxation ranging from five to a maximum of 35 percent. Tax residents are taxed on income earned both in Cyprus and abroad, whereas non-tax residents are taxed on certain income earned from Cypriot sources only.

In terms of intellectual property (IP) tax, Cyprus seeks to promote research, development and innovation in line with the EU’s strategy. Tax law provisions introduced in 2012 provide generous exemptions from tax of income related to IP under certain conditions. The Cyprus effective tax rate on IP related incomes and gains is currently below 2.5 percent.

Quality of life
One of Cyprus’ biggest and most important competitive advantages is its well-advanced infrastructure, which is further enforced and supported by its compact size. Cyprus has a robust telecommunication system, two newly built international airports (Larnaca, Paphos) and two multipurpose deep sea ports (Limassol, Larnaca). The country has developed into an international business centre that offers specialised services and rewarding business opportunities. Cyprus is catering for the diverse needs of international investors by enhancing its “ease of doing business” ethos. The World Bank’s Doing Business Report 2013 ranked Cyprus 36th out of 185 countries for its investor accessibility.

Cyprus in numbers

31st

Human development index quality of life report. Out of 178.

35%

25-64-year-olds with tertiary education

26.8%

EU average

Cyprus is a dynamic business centre that offers top level financial, legal, technical, and management services at competitive costs, making it a uniquely attractive destination for foreign Investors. At the same time, the cost of doing business in Cyprus has been declining over the past 12 months and is expected to become even more competitive over the coming years.

Human talent is probably Cyprus’ most compelling competitive advantage since it forms part of the people’s culture and history. Cypriots are highly educated, qualified and almost to their entirety bilingual, if not multilingual. Most importantly, however, business is still done with a personal touch. To give an example, the country ranks among the top countries in Europe for tertiary education per capita. In 2011, statistics by Eurostat revealed that more than 35 percent of Cypriots in the 25-64 age bracket have attained tertiary education, significantly higher than the EU-27 average of 26.8 percent.

Cyprus offers a clean and healthy environment with a high standard of living, directly related to its fabulous weather, beautiful nature, art and culture, safety, security, and above all, its hospitality and warm people. It is the combination of all these factors that make the experience of living on the island extremely desirable and attractive. The balance between work and family is part of everyday life, which is truly hard to match. The UNDP Human Development Index Report 2013 ranked Cyprus 31st out of 187 countries for quality of life.

Areas of opportunity
The biggest potential for investment in the coming years will be in the hydrocarbons sector. Cyprus is set to become a natural gas exporter at a time when international demand for liquefied natural gas (LNG) is expected to rise. The ambitious project for the construction of an LNG terminal is of strategic importance and represents the largest investment in the history of Cyprus.

The government is also prioritising renewable energy sources (RES), aiming to reach 13 percent RES electricity supply by 2020, through wind farms, photovoltaic (PV) systems, solar thermal plants and biomass and biogas utilisation plants, » providing investment opportunities in major infrastructure projects.

Cyprus’ banking and financial services sector is diverse, comprising of domestic banks, international banking units (IBUs), insurance companies, and other companies that offer financial intermediation services. There are many international banks that operate subsidiaries, branches or have representative offices in Cyprus. There are currently opportunities for more foreign banks to set up operations. Cyprus’ banking and finance sector legislation is in line with international best practice and has a simplified, effective and transparent tax system in place which is EU, OECD, FATF and FSF compliant.

A brief outline of Cyprus’ tax framework

The corporate tax rate is currently set at a flat rate of 12.5 percent; however, there are multiple exemptions from tax for companies, such as:

  • Complete exemption on dividend income in almost all instances;
  • Unconditional capital gains exemption on gains/profits from the disposal of shares, regardless of holding period or shareholding percentage, as well as bonds and debentures and many other securities;
  • No tax on capital gains from the sale of immovable property outside Cyprus;
  • Deemed deduction of 80 percent on the net income derived from intellectual property.

No withholding tax at all times on:

  • Dividends paid to non-resident shareholders;
  • Interest and most royalties paid from Cyprus;
  • Capital gains and income on the disposal of either the shares of the subsidiary’s share capital or the share of the Cypriot holding company;
  • No exit taxes on the liquidation or capital reductions of a Cypriot holding company.

There are also additional taxation incentives aimed at promoting growth, which include:

  • The provision for an increased 25 percent discount on taxable income payable by employers for each additional employee hired;
  • 100 percent tax deduction until 2016 on capital expenditure related to innovation, research, information, communications and renewable energy;
  • The extension until 2016 of the increased tax deduction, with a minimum of 20 percent on capital expenditure on other assets.

Cyprus international trusts are widely used as a vehicle for international tax planning, offering the following tax advantages:

  • Income and gains of a Cyprus International Trust are exempt from any Cypriot taxes;
  • Dividends, interest or other income received by a Cyprus International Trust are also not subject to any Cypriot taxes;
  • There is no capital gains tax on the disposal of assets of a Cyprus International Trust;
  • There is no withholding tax on distributions made by a Cyprus International Trust to beneficiaries or indeed any other parties;
  • Aliens who create an international trust in Cyprus and retire in Cyprus under certain conditions are exempt from taxation.

Banks located in Cyprus offer an array of services ranging from asset management, private banking, international corporate and investment banking, retail banking, syndicated loans, custodian services and more. In line with the business changes, Cypriot banking infrastructure has rapidly evolved and adopted the use of advanced technology systems, implemented actions to reduce risk management along with the acquisition of highly trained personnel.

The passing of the Undertakings for Collective Investments in Transferable Securities (UCITS IV) Law in 2012 and The Alternative Investment Fund Managers Directive (AIFMD) in 2013 have created new opportunities for the emerging fund industry of Cyprus, while foreign exchange trading is a key growth area. The number of investment firms and funds is constantly increasing.

Reasons to invest
Cyprus’ maritime sector is a true success story which contributes over €1bn to the country’s economy annually, accounting for around seven percent of its GDP and directly employing 4,000 shore-based personnel and 55,000 seafarers around the world. The proven advantages of Cyprus’ shipping legislation, ratified international conventions and the general framework of shipping-related business have prompted many of the world’s most influential names in shipping to base themselves on the island.

Furthermore, Cyprus continues to encourage innovation in the international shipping sector, providing debate and practical solutions for worldwide issues – proof of this is an EU-approved tonnage tax that secured Cyprus’ position as the largest third party ship management centre in the EU and the largest crew management centre in the world.

Despite the current economic situation in Cyprus, the professional services sector remains strong. The expertise of the country’s lawyers, accountants and other specialists – often UK- or US-trained – offer full and efficient services in all aspects of company law and tax planning. With around 80 percent of Cyprus’ economy based on the provision of services, this sector is one of the most important in the country.

Cyprus

Cyprus was the first country in the world for the Institute of Chartered Accountants in England and Wales (ICAEW) and the Chartered Institute of Management Accountants (CIMA) to set up training outside the UK – strengthening Cyprus’ reputation as a centre of excellence for professional services. The country has long been a desirable location for property investors, expats, retirees and those looking for a second home in the sun. Due to the current economic climate, property buyers can find exceptional properties at attractive prices. To further encourage investment from long-term residents, the government is working on simplifying the legislative framework and creating a fast-track procedure for granting long-term residence permits. Third country applicants who invest a total of €300,000 for the purchase of one or more residences will be granted permits, provided they are purchased from the same vendor.

Recognising the crucial importance of the ICT sector, Cyprus has formulated a national digital strategy, making IT development a priority in its economic development plan. With access to major satellite systems and supported by an extensive submarine fibre optic cable network – including the world’s longest optical submarine telecommunications cable SEA-MEWE-3, linking Cyprus directly with Southeast Asia, the Middle East and Western Europe – the island is attracting an increasing number of international companies looking for a reliable regional hub.

In the medical sector there are investment possibilities in the improvement of e-Health services to the public sector, specialised medical services and the development of rehabilitation centres. Approximately 60,000 health travellers visited Cyprus in 2010, with the overwhelming majority coming from the UK, followed by Germany, Israel and the Middle East, Sweden and Italy.

Cyprus also provides investment opportunities in wellness services thanks to its moderate climate, clean seas and rich natural environment. With the island’s renowned hotels and resorts, the potential to develop wellness tourism is well supported. Having an established tourism product ripe for diversification, with over 300 days a year of sunshine and the existence of thermal springs, spas and therapy centres, are of particular interest.

Throughout its history, Cyprus has proven resilient in the face of challenges. Investment interest has grown impressively, providing good and encouraging evidence that Cyprus’ prospects are very positive. The Cypriots have their priorities clearly set out. They support and promote private initiative and they are determined to implement the necessary infrastructure to expedite processes to ensure projects go forward.

Emerging markets key to high returns, says Argo

Posted on by Ashton Wenborn

The words ‘distressed securities’ were very carefully chosen because distressed assets or distressed companies do not really interest us at Argo. We do not want to be invested in enterprises where the underlying business model is in any doubt. We are, however, constantly on the lookout for good companies – companies that are capable of generating solid cash flows and/or have strong and defensible market positions. If they are distressed it will be because they have weak balance sheets or the economies in which they operate have suffered from macroeconomic shocks, and as a consequence their securities – be they secured or unsecured, senior or subordinated – will trade at low valuations.

Emerging markets are an attractive hunting ground for this style of investing. With strong GDP growth, large foreign exchange reserves, limited use of leverage and growing affluence, emerging markets are an exciting long-term prospect and offer better risk-adjusted returns than developed markets. The debt-to-GDP of the US stands at around 100 percent at present, and is forecast to rise this decade, while in Japan this figure is closer to 230 percent. It is rare to find an emerging economy with debt-to-GDP ratios approaching anywhere near these levels. Quite simply, the developed world has been living on borrowed money for far too long and although the current economic upturn it is experiencing is helpful, it will not result in a meaningful reduction of its debt levels anytime soon.

With strong GDP growth, large foreign exchange reserves, limited use of leverage and growing affluence, emerging markets are an exciting long-term prospect and offer better risk-adjusted returns than developed markets

However, distressed investing is not always a passive business, especially when it comes to emerging markets. While it is possible to buy a security and then simply wait for sentiment to change or for an upturn in the economic cycle to lead to a revaluation, not all situations are so straightforward. Distressed investing requires action, pretty much from the start. It also requires very specific expertise, including knowledge of bankruptcy law in multiple jurisdictions, experience of negotiation with multiple stakeholders and, often, access to additional capital in order to protect one’s initial position. Argo’s investment in Indonesian petrochemicals company TPPI is an example of when we had to call upon all these skills. After taking a position on the company’s senior debt, Argo forced the firm into bankruptcy and then helped negotiate a composition plan with all of its stakeholders. The key component of this plan is a debt-for-equity swap that will see Argo become a major shareholder and leave TPPI on a sustainable financial footing.

Cashing in on NPLs
A proven track record in broader fixed income or equity investing does not necessarily translate into the required know-how for distressed investing. Furthermore, the remit to invest across emerging market regions is essential to gaining exposure to the best opportunities. Funds with a country or region-specific mandate would have been unable to take advantage of all the opportunities that were made available in recent years. The aftermath of the 1997 Asian financial crisis, the Russian default in 1998, the Argentine moratorium in 2001, Uruguay’s banking crisis in 2002 and more recently the aftermath of the Lehman bankruptcy, all provided a wealth of undervalued distressed securities for the investor to benefit from.

But managing a global distressed opportunities mandate is not just about proficiency. In some instances managers are expected to produce innovative responses to unprecedented problems, especially in the context of a legal framework. When Essar Steel, a large Indian company defaulted on its debt, we at Argo were not prepared to litigate in the local courts as we felt our rights might be difficult to enforce. Instead, we sued for repayment through the English courts in 2005 – and won – in a landmark case which helped establish hedge funds as formidable players in the loan market.

In the coming years, Eastern Europe, particularly South Eastern Europe, is likely to produce some of the most attractive distressed securities opportunities as banks in the region sell-off their portfolios of non-performing loans (NPLs). In Greece, around 30 percent of loans made by the Greek banking sector are currently non-performing – that is over €75bn of loans. We at Argo are convinced that this segment will offer rich pickings for distressed investors.

Equally, NPL ratios are running high in Bulgaria, Romania and Serbia. Furthermore, the banking systems of these countries are dominated by eurozone banks which will face European Central Bank stress tests next year and are very likely to come under significant pressure to dispose of their NPL portfolios in the region. While a multitude of hedge fund are ready to pounce on the disposal of bank NPL portfolios in Western Europe, we believe South Eastern Europe NPL portfolios will be largely overlooked and as a consequence expect there to be some very lucrative deals to be done.

Shopping around
If one takes a long-term view, South Eastern Europe’s track record on economic growth is impressive. Between 2000 and 2010, average annual GDP growth for Bulgaria was 4.1 percent, Romania 4.2 percent and Serbia 4.4 percent. This compares with average growth in the eurozone of just 1.1 percent. And South Eastern Europe is forecast to continue to outperform the eurozone in the years ahead. Economists expect Bulgaria to enjoy growth of 1.7 percent this year and 2.8 percent next year; Romania 1.3 percent for this year and 1.8 percent for next; and Serbia 1.4 percent this year and 2.0 percent next. This compares with estimates of less than 0.5 percent growth for the eurozone in 2013 and around 1.5 percent in 2014.

Between 2000 and 2010, average annual GDP growth for Bulgaria was 4.1 percent, Romania 4.2 percent and Serbia 4.4 percent

Any NPLs bought by a distressed investor in South Eastern Europe will need very active management. It is likely they will need extensive balance sheet restructurings – usually in the form of a debt-for-equity swap – alongside follow on funding from the investor for working capital and capital expenditure. Furthermore, such plays are not for the impatient investor. The time between purchase of the distressed security and exit can be anything from 12 to 36 months or even longer. Exits include sales to trade buyers or private equity, an IPO or a recapitalisation of the company.

Some of the best NPL opportunities look set to be in the real estate sector, particularly loans to retail properties. Shopping centres and retail parks are very good cash generators. However, dozens in South Eastern Europe have found themselves with unsustainable debt levels due to a combination of excessive initial leverage and a fall in rents because of a contraction in the local economy in the aftermath of the financial crisis.

Minimising risk
Sometimes, distressed investment strategies require far more unorthodox structures. One of Argo’s most successful NPL investments was in Uruguay. A banking crisis in 2002 left several of the country’s biggest banks insolvent. By 2003, insolvent banks were placed into liquidation by the Central Bank of Uruguay (BCU). A BCU organised tender for the work out of insolvent bank NPLs was won by a local asset management company Argo created and capitalised solely for this purpose. This company went on to handle the work out of $1bn of consumer and corporate NPLs between 2005 and 2008 and resulted in Argo making a handsome return on the capital it invested.

As ever, Argo was totally focused on minimising the risk to its capital. To this end it financed its local asset management company via senior loans backed by the cash flows from the NPLs that were being worked out. Argo achieved a 200 percent return over three and a half years on this transaction while taking only senior debt risk. Furthermore, the Argo Distressed Credit Fund (ADCF) has been named Best Distressed Securities Fund, Europe – 2013 by World Finance. In 2012, ADCF generated a 24 percent return for its investors. So far this year, ADCF is up 13 percent. These are the kind of returns that distressed strategies can deliver if investors are willing to venture into emerging markets and employ innovative structures.

Argo Capital manages ADCF, The Argo Fund, the Argo Special Situations Fund LP, the Argo Local Markets Fund and the Argo Real Estate Opportunities Fund. When I founded Argo in 2000, investing in distressed securities was at the heart of the firm’s strategy. Although we manage a host of funds that hold more liquid assets, distressed strategies will be at the heart of the firm’s focus for the next decade and we expect them to continue to generate stellar returns for our investors.

Tax in Europe: what corporations need to know

Posted on by Ashton Wenborn

Alexander Hemmelrath has unparalleled experience in tax advice in Germany. With 30 years of experience in international tax law as a tax practitioner and a university professor, Hemmelrath has observed a changing tax environment in Europe. He has now brought his expertise to Norton Rose Fulbright, in a bid to combine their international legal know-how with his skills in tax structuring. Here, he talks to World Finance about the evolving global tax environment and what companies can do to remain efficient.

What are the most significant tax concerns affecting Germany and Europe right now?
We do not yet know what the new government will implement in terms of tax. After this year’s general election a coalition between the Christian Democrats and the Social Democrats formed the new government in Germany. The Social Democratic Party has already announced a number of ideas about where they want to increase taxes and to develop new taxes, but in their election campaign the Christian Democratic Party had stated that they do not want to increase taxes. The Social Democrats have also suggested implementing a new net-worth tax. The coalition agreement does not provide for any immediate tax increases. But we simply do not know what the coalition will decide during the forthcoming four years, and whether Germany will eventually end up with tax increases or new taxes.

Presently, I think Germany has a strong economic position, not only domestically, but within the EU

Presently, I think Germany has a strong economic position, not only domestically, but within the EU and in a global context; we are still gaining from the reforms implemented by Gerhard Schröder during his time in government – such as the so called “Agenda 2010”. In this set of policies, corporate taxes were decreased and new developments including labour laws were implemented which formed the platform from which the German economy developed significantly. If the tax environment were to change or taxes were to be increased, the environment for employers and corporations would deteriorate, which might in turn damage the German and the European economy. While this would not happen from one day to the next, new amendments to Agenda 2010, that may be implemented today, will have an influence over the next five to ten years. For the time being, we can only hope that the new government will be wise enough not to try to implement a new legal environment, which may potentially cause a negative turn for the economy.

What are the most significant tax trends you have observed?
On an international level there is an ongoing discussion about how to close any existing tax loopholes. There is a rather large debate going on between governments all over the world to try to avoid the erosion of their tax base to the advantage of other countries. Therefore, tax planning in an international environment is getting more and more difficult.

After having had discussions about big international groups who managed to decrease their tax loads internationally to substantially lower rates through resourceful tax planning, governments are now trying to save their own pieces of the international tax cake and are doing so by trying to implement domestic tax laws that avoid too aggressive tax planning in an international sphere. However, these measures to prevent misuse of the tax regulations in place do also increase the risk of double taxation. Another issue, particularly from a German point of view, is that the possibility to invest money abroad, without being closely observed by the authorities, is getting more and more difficult. The burden for investors is becoming increasingly heavy.

[T]he possibility to invest money abroad, without being closely observed by the authorities, is getting more and more difficult

There is also a trend among international authorities to urge individuals and corporations to be compliant with the applicable tax laws. This is also affecting our opportunities to structure taxes in a way that make investments efficient. Using different tax jurisdictions for investment structures means that investors are – more than it has been the case in the past – frequently on the verge of non-compliance. There are of course still possibilities, but tax planning and structuring is becoming more and more complicated.

You’ve recently joined Norton Rose Fulbright. How will this benefit your clients?
Norton Rose Fulbright is a global firm; it is one of the only ones in the field that have offices all over the world. The benefit for the clients is in the international style and profile of the firm, as many of them have international investments and international interests. This internationality is really important for my clients, as I am personally able to concentrate on tax advice, while Norton Rose Fulbright’s lawyers can support me globally with the legal part of what I am structuring tax-wise, as well as drafting contracts and negotiating what my clients need in order to get the most suitable tax structure. Nothing will change due to me joining Norton Rose Fulbright as far as my clients are concerned. I will continue to do what I have done over the past 30 years. The main focus of my business will not change. What will change, however, are the internal mechanics of the job, as I am currently busy building a team of corporate tax lawyers in Germany. Right now I am concentrating on the acquisition of good staff. In addition to my client work, this will require a lot of my attention.

In what ways are you hoping to expand Norton Rose Fulbright’s tax services?
Norton Rose Fulbright – particularly the Norton Rose part – follows the typical UK approach to tax in that tax advice is regarded as an additional service provided by a corporate law firm, but not as an autonomous business unit. What we are trying to establish is a tax department built in a way that it has its own clients and its own business environment and can be an independent unit within, of course, a strong team of corporate lawyers.

How has your career evolved over the years?
My career started in the early 1980s, at Peat Marwick – what is today called KPMG. I started in the tax department of this major accounting and auditing firm. This was the basis for establishing my own firm in 1987, which was a multidisciplinary firm of lawyers, tax advisors and certified public accountants. In Germany it is possible to combine auditing, tax advice and legal advice, which is not the case in most other countries in the world.

In 2005, many of my team joined me when I went to work with Mazars, another audit firm. I tried to build up legal and tax advice there, but because of many conflicts of interest I decided to leave and join a German tax consulting firm linked to Siemens. However, as this firm solely provided tax advice, I decided to leave in search of a firm that could offer me the legal support I need for my clients. That was when the partners of Norton Rose Fulbright approached me in Germany. I was attracted by their international background and really strong legal practice, which can help me with the implementation of my core business of tax planning.

Does your past experience in accounting have a part to play in your tax services?
Auditing and tax are a common combination. The big four auditing companies are combining audit and tax advice services. But the combination of auditing, tax advice and legal advice is challenging, because you can end up with a conflict of interests. The environment for lawyers is getting more and more complex all over the place, while at the same time auditors really have to remain independent and can no longer offer tax and legal advice in situations where they are auditing. Therefore, it is becoming more difficult for audit firms to offer tax structuring advice and legal advice.

This is why, from my experience as a tax adviser who has drafted tax opinions and has planned and structured optimised international investments, the combination between tax and legal advice makes more sense than the combination between tax and audit.

Central Asia: a major player in the oil and gas energy industry

Posted on by Ashton Wenborn

Reliance on Middle Eastern oil and gas has dominated the energy industry for decades now, but the instability caused by the political situation has led many enthusiastic buyers – like the US – to look elsewhere. New finds in Central Asia, however, have led to many observers predicting the region will enjoy the sort of dominance that the Middle East has seen. Excitement has been generated by finds in countries like Turkmenistan, while there have also been signs that Kazakhstan is finally converting its potential oil and gas reserves into something more substantial.

World Finance spoke to Dr David Robson, Executive Chairman and President of Tethys Petroleum, about the potential of Central Asia in the energy sector, what role Tethys can play in exploiting this potential, and the key projects it is working on.

Utilising a sustainable region
Robson thinks the region is finally ready to fulfil its potential, “Central Asia has all of the aspects necessary for it to be a key area for oil and gas. The area is large and contains some extremely prolific oil and gas basins.

“The geology in these areas is such that it contains some of the world’s largest oil and gas fields, several of which are already being exploited, but there are many areas where substantial potential still exists for new fields to be discovered and developed.

The geology in these areas is such that it contains some of the world’s largest oil and gas fields, several of which are already being exploited

“Central Asia, taken as a whole, is certainly on par with the Gulf in terms of its remaining ultimate potential for oil and gas. The other key thing about Central Asia is that energy hungry markets surround it, with Europe to the west and now China bordering Central Asia to the east and, in the future, the Indian sub-continent to the south.

“These areas are all desperate for energy and that energy can be sourced in Central Asia. The land borders make it easier to export both oil and gas cheaper and more securely than by sea, and Central Asia certainly is becoming a power hub for the whole of the surrounding region.”

Tethys has a focus on three Central Asian countries in particular – Kazakhstan, Uzbekistan and Tajikistan. Robson says these represent the three different degrees of development of the oil and gas market in the region.

Looking further afield for development
Kazakhstan has the most developed market in the region, with international investors having focused on it for a number of years. “The development of the Kazakh oil and gas sector, and the international investment there has been going on for some time with some of the world’s largest oil fields occurring there, as well as an increasing level of investment, particularly from China to carry oil and gas into the Chinese markets.

“Kazakhstan is the ninth-largest country in the world, and there are vast areas of this country remaining to be properly explored, particularly using more modern technology in order to supply more energy to the region as a whole.

“In addition, Kazakhstan acts as a key transit route for oil and gas going to Europe and, indeed, to China and as such, Kazakhstan’s role in the region is certainly ensured.”

Although Uzbekistan was partly explored during the Soviet times, Robson says it has not enjoyed the same level of foreign investment as Kazakhstan over the last few decades.

“As a result, there are still large fields to be discovered and developed in the region which are within the prolific basins in Central Asia, and we are now seeing that development happening with Tethys.

“Being the only independent company currently working in Uzbekistan and now negotiating for exploration acreage on the border with Kazakhstan, Tethys was the first company to discover oil immediately to the west of the Aral Sea.

Tethys was the first company to discover oil immediately to the west of the Aral Sea

“The main focus of activity in Uzbekistan is in the under-explored basins mainly in the central and western parts of the country. However, potential still exists in the older oil producing area in the east where modern technology will be required to develop some prolific fields which have been discovered and remain to be discovered in this area.

“Of course, Uzbekistan is now supplying gas into the pipeline to China and is acting as a transit country bringing gas from the super-giant fields in Turkmenistan for both the European and Chinese markets,” he says.

Pushing innovative boundaries
Tajikistan is at an earlier stage and has yet to be properly developed for its natural resources. Tethys believes, however, that the country has plenty of potential for yielding significant amounts of oil and gas.

Robson says, “Tajikistan is a country for which the oil and gas industry was never really a focus in Soviet times, despite the fact that one of the world’s most prolific basins, the Amu Darya Basin, occurs in the south west of that country.

Here, Tethys was the first company to work in Tajikistan with the first production sharing contract there, and now by bringing in Total and CNPC, moving another step closer to the realisation of the potential in that area.

Nearby Turkmenistan contains similar fields at the same geological horizon as in Tajikistan where they are a little deeper, but the potential is still there. There is now a gas pipeline planned to go to China through Tajikistan, and I believe that in the future Tajikistan will become an important supplier of gas in the region around, thereby becoming a significant player in the Central Asian great energy game.”

The company’s strategy, according to Robson, is to explore “new frontier areas” at an early stage, before they then potentially bring in partners to work on “giant structures or prospects”. Tethys also looks to employ local specialists in its operations that it shares its expertise with.

Nearby Turkmenistan contains similar fields at the same geological horizon as in Tajikistan where they are a little deeper, but the potential is still there

“Tethys aims to be a significant player in the region based on technical competence, good operational abilities and good local relationships. Being first in the area gives us a significant advantage and we are prepared to take risk.

“Unlike some other companies, we like to have a broad portfolio with projects in different stages of development, thereby balancing our risk and developing and maintaining a revenue stream to fund our growth,” says Robson.

Striking the right balance between exploration activities and production depends on the region Tethys is operating in. Robson says, “In each country, we like to have production and then access to big upside exploration. We have achieved that in Kazakhstan, initially through production from our gas fields leading to exploration for deeper oil.

“We are doing that in Uzbekistan with our production projects now leading to exploration projects and in Tajikistan where, although the production volumes were small, this led us to exploration, making the first new oil discovery in Tajikistan since independence. I believe that we have our balance pretty much right at present and, for example, our entry into Georgia gives us the potential for early production with big upside in unconventional exploration.”

Key projects on the horizon
Tethys has a number of projects in each of the regions, many of which are firsts for the industry Robson says, “In Kazakhstan, initially our development of the Kyzyloi gas field was the first development of a dry gas field by a private company in Kazakhstan.

This was followed by the first discovery of oil in the area to the west of the Aral Sea – an area where many people said we would never find oil – and that exploration discovery is now being developed.” They were the first company in Tajikistan to explore for oil since the country’s independence, and are now involved in a major exploration project with Total and CNPC.

This partnership has created a joint operating company that is equally owned by each partner, which Robson says, “bodes very well for the exploration and development of what should be world-class potential in Tajikistan.”

As for Uzbekistan, Tethys has built its operations up from a small oil field initially to a much larger one, and the potential for many more

As for Uzbekistan, Tethys has built its operations up from a small oil field initially to a much larger one, and the potential for many more. “We have now obtained a new oil field which has much bigger potential and we are confident that we will obtain further oil fields under a unique form of contract called a Production Enhancement Contract. “This will be our focus while we are finalising our exploration agreement to begin exploring the large Bayterek exploration block just south of our Kazakh discoveries. We are the only independent working in Uzbekistan and we work very successfully with our partner, the State oil company Uzbekneftegaz,” says Robson.

The company has also developed new projects in Georgia, which he describes as having “very big potential.” Robson expects the country to become extremely important to its future operations, and it plans to be the first company to exploit any shale oil in the region.

Tethys is also actively looking for new opportunities in both Central Asia and elsewhere. Robson concludes, “Our job is to use our considerable skill base, experience and knowledge to maximise the return for our shareholders.

“Although Central Asia is our base, there are other places in the world where we may be able to apply these skills in a practical and value-adding manner and, providing that we believe we have a competitive edge, then we will look at these areas to grow Tethys even further.”

Malaysian insurance market looks stable, says Etiqa

Posted on by Ashton Wenborn

Malaysia’s insurance sector has come to constitute a sizeable share of the nation’s burgeoning financial services sector in recent years. As of October 2013, insurance accounted for approximately six percent of Malaysia’s total financial assets, equivalent to 15 percent of national GDP according to the IMF (see Fig. 1).

Figure 1

Showing no sign of slowing, “the insurance sector is expected to continue its growth,” says Kamaludin Ahmad, Acting CEO of Etiqa Insurance and Takaful, who anticipates the progressive increase in Malaysia’s economy to compound the rate at which insurance will grow.

High-ranking national results
Total assets for Malaysia’s insurance sector in 2012 totalled MYR 195bn, and clocked up an impressive growth rate of 11.4 percent on the previous year, according to BNM Statistics. Moreover, Malaysia currently ranks second in South East Asia, in terms of insurance penetration by premiums as a percentage of GDP, behind only Singapore. “The increase in customer sophistication, greater demand for retirement savings, growing customer awareness and an increasing need for protection against escalating medical costs,” are just some of the facets driving the sector forward, says Ahmad.

Coupled with a growing Bancassurance business, in light of the sector’s on-going liberalisation, Malaysia will most likely continue with its current upwards growth trajectory. Etiqa ranks fourth in Malaysia’s insurance sector in terms of overall gross premium at MYR 5,382m, and second in total new business with MYR 2,188m. Moreover, on the grounds of profitability and total assets, the firm ranks third, with pre-tax profits of MYR 661m and assets totalling MYR 27.5bn as of FYE 31 December 2012.

“We are all about humanising insurance and takaful, which means we put people over policies. Caring about people is vital for our business’ sustainability, and we aim to change the face of the industry in order to make life easier yet tangibly richer for everyone. We offer products and services that creatively answer the respective needs of our customers, and at the same time allow them to understand the simplicity and transparency of our products and services.”

Well asserted local coverage
As part of Etiqa’s ethos to ensure services and products are made easily accessible to all grades of customer, the company features a strong agency force comprising over 22,000 agents and 33 branches throughout Malaysia, boasting a comprehensive Bancassurance and Bancatakaful distribution network with Maybank branches and other third-party banks.

“We create products and services to best fit the respective needs of all our customers. We offer both insurance and takaful products and services ranging from General, Life, Non-Life and others,” says Ahmad. “Not only do we provide personal insurance to our customers, but also corporate insurance which includes products specifically designed for retail services, manufacturing, construction, engineering, communications, energy, transportation and agriculture industries.”

Ahmad believes recent successes in the nation’s insurance sector to be in large part attributable to Malaysia’s macroeconomic growth. Last year the country surpassed consensus forecasts of little over five percent and demonstrated 5.6 percent real GDP growth.

Ahmad believes recent successes in the nation’s insurance sector to be in large part attributable to Malaysia’s macroeconomic growth

This year’s rate is expected to be 4.8 percent, according to MIER statistics, and although the rate is short of last year’s, the Government plans to implement a series of major investment programmes aimed to double GDP per capita, and turn Malaysia into a high-income country by 2020.

“Driven by the New Economic Model, the Economic Transformation Programme (ETP) and the Tenth Malaysia Plan, the insurance sector is expected to flourish,” says Ahmad. “Initiatives such as infrastructure work under the Employee Insurance Scheme (ETP), the Private Pension Scheme, and the Foreign Workers Health Insurance Scheme will all intensify Malaysia’s insurance sector development.”

The Life Insurance Association of Malaysia (LIAM) forecasts that insurance business will expand by 10 percent in 2013, spurred by the low penetration rate of life insurance (43 percent), the government’s Economic Transformation Programme and higher tax incentives for retirement products.

Keeping a wider scope in mind
The local insurance industry will also face further consolidation in the near future, with increased M&A activity and growing investment interest acting as catalysts for an upturn in general insurance coverage.

“The increase in maximum foreign ownership from 49 percent to 70 percent will make local insurance companies more attractive targets for foreign players,” says Ahmad, which plays into the hands of local provider Etiqa. The principal areas in which insurance will likely grow are medical, retirement, and investment-linked products, which will each be subject to significant developments over the next few months and years.

The rising costs of healthcare and the demand for all-round better benefits have inspired insurers to develop more cost-effective ways of offering protection. The improving conditions of life and a rising life expectancy in Malaysia also pose a challenge to the adequacy of retirement savings – and a growing awareness of financial planning is translating into an impetus for strong growth in investment-linked products.

Furthermore, the internet is emerging as an alternative distribution channel for insurance in Malaysia, with the potential to grow quite considerably from now onwards. “To cater for this market segment, Etiqa has been the frontrunner for direct sales through the internet with our e-channels. Customers also have access to the free 24 hour Auto Assist programme, and can check motor claim statuses on-line.”

Furthermore, the internet is emerging as an alternative distribution channel for insurance in Malaysia, with the potential to grow quite considerably from now onwards

Overall, claims Ahmad, “the outlook for the Malaysian insurance market is stable. Forecasts suggest that the industry’s premium income will remain steady, and the local insurance industry will remain well-capitalised.” Far from excluding external factors, Etiqa’s success is also due in large part to the company’s efforts to connect with consumers, implementing a client-centric and responsible corporate culture wherever possible.

“CSR has always been an important part of business all over Malaysia, but we feel more so in the insurance sector,” says Ahmad. “Insurance companies have always been seen as cold and calculative, but over the years, CSR has grown to complement the business of insurance. With the right tools, CSR can play an important role in demonstrating that insurance companies can also be sensitive towards the needs of society.”

Nowhere is this more so the case than with Etiqa, which often goes beyond what is expected, catering to matters of corporate social responsibility. “At Etiqa, we believe in going back to basics whereby insurance is all about helping people during the mishaps, accidents and challenges they face in their lives. In a way, CSR and insurance are one and the same,” says Ahmad.

Targeting CSR initiatives
“Since insurance and takaful is all about investing in one’s financial future, Etiqa’s CSR programme focuses on investing in people and preparing them for the future.

“This means that our corporate responsibility programme is geared towards providing assistance and support to selected community segments, and to have them better prepared in facing life and its challenges, be it financially or personally.” The umbrella message of Etiqa’s CSR programmes is to be prepared, and focusses specifically on educating the public on the importance of insurance so that they’re covered financially in the event of trauma or hardship befalling them.

Since 2006, Etiqa has proactively participated in a number of CSR initiatives geared specifically at women and the youth in Malaysia. “These programmes are important as they provide an avenue for youths and women to gain more knowledge on how they can further enrich their lives. “Through our programmes, they are offered the opportunity to learn how to face real life challenges such as starting and developing careers, juggling work and family, how to plan a career path and so much more.

Since 2006, Etiqa has proactively participated in a number of CSR initiatives geared specifically at women and the youth in Malaysia

“These segments were selected as they represent the youthful, dynamic and proactive nature of the Etiqa brand. The youth and women segments are not only the key target demographic for the Etiqa business but – more importantly – they also represent those most in need of assistance.”

Etiqa’s CSR efforts engage with the community and the firm’s staff. “An example of how we implement our responsibility in the office is the tracking of electricity bills and paper consumption. “By doing so, we are able to educate our staff members on how to be environmentally friendly by reducing electricity and paper wastage. We also expose the staff members to the negative impacts of paper and electricity wastage, which has also affected our operational costs in a positive manner.”

Etiqa is not only a product of recent economic gains in Malaysia, but also an example of how companies can give back to the communities in which they work. “Of course, there is still the business to run, but with CSR, we can give back to society by hosting community programmes that are aligned with our business strategy and direction. As our brand platform is humanising insurance and takaful, our CSR programmes and initiatives are all directed to help enrich and better the lives of those who are in need.

Using collaborative intelligence to grow the telecoms industry

Posted on by Ashton Wenborn

The telecommunications industry is suffering from growing pains. Revenues are declining almost worldwide, and whether communications service providers’ (CSPs) businesses are expanding or contracting, no one is quite sure.

A new report from the independent global analyst firm Ovum analysed full-year key performance indicators (KPIs) of 23 of the world’s largest operators, and concluded that this slow-down will last until at least 2018, especially among those with exposure to Europe and other mature economies. The only significant growth is taking place within emerging markets, particularly China.

Revenues from voice and SMS are both dropping, in part due to increased competition from over-the-top (OTT) players such as Skype and WhatsApp. Consequently, the traditional services provided by CSPs are being chiselled away by commoditisation.

Changing old for new services
As a clear sign that CSPs are re-evaluating old business models, we are witnessing the use of experimental new revenue streams, such as how CSPs are realigning their offerings by making voice and SMS services unlimited, while better monetising data consumption.

This pressing emphasis on data has been precipitated by the proliferation of it. 90 percent of the world’s data has been generated over the past two years alone, and Big Data has become a buzz word across most industries.

This pressing emphasis on data has been precipitated by the proliferation of it

The gold rush for meaningful data has dug up other problems. Without IT controlling the flow of information and technology, departments become segregated by different data practices. Databases, platforms and tools can – in turn – get trapped in silos, which isolate important information and lead to fragmented strategies. This is the area where contextual intelligence is going to play an increasingly important role. Whether CSPs are discussing the opportunities for leveraging and monetising Big Data, delivering improved and efficient IT and service operations or adopting modern and alternative IT paradigms (such as cloud-based systems), the topics can all be positively influenced by contextual intelligence and advanced analytics.

With this sophisticated approach, CSPs can best leverage all of the data at their fingertips, plus detect and analyse behavioural and historical patterns to make decisions that have important implications for their bottom lines.

Data that was once captured and collected in disparate operational silos now holds valuable insights that can be leveraged by others. When that data is consolidated, it’s possible to get a clear picture of each individual customer at a granular level – offering operators actionable intelligence that can be useful for every team across their organisations.

CSPs that can successfully extend those insights to include business-related data will benefit from the combined predictive and proactive capability of contextual intelligence. By focusing on automation and the use of real-time data across the organisation, CSPs can harness the power of real-time decision-making.

Contextual intelligence can eliminate silos by democratising data for every department, but only if CSPs can impose some sort of order on the wealth of valuable information at their disposal, and turn that information into action.

Self-service vs collaborative service
One of the biggest trends in data is the phenomenon of self-service. Tools like salesforce.com or Google Analytics are making data available to anyone with a working knowledge of the platform.

Sales staff don’t have to wait a week for IT to produce a new Excel sheet, because account managers can easily look up a customer’s status on their phones, iPads or tablet computers. Marketing can create campaigns based on very specific findings from automation tools, completely bypassing the IT process.

Marketing can create campaigns based on very specific findings from automation tools, completely bypassing the IT process

Yet for CSPs, there is still a rigid definition of who does what. The infrastructure that CIOs and CTOs oversee isn’t just software; it’s composed of complex networks often spanning long distances. When it comes to metrics, every number has far-reaching implications. Rather than self-service, CSPs need to think about how to collaborate instead. That means consolidating customer, network and service data to one central environment. A survey of APAC CSPs has confirmed that this is already beginning to happen, with nearly half (46 percent) saying that they are in the process of consolidating their OSS/BSS systems.

Imagine if mediation, policy and charging and analytics were all part of the same environment. How much easier would it be to foster smart decision-making from that data?

When the data is captured and available, the next step is to create a reliable and universal data governance strategy to avoid redundant or faulty information. Designating control of different data sets to different managers can help build transparency and accountability into the process.

Setting controls for whom can change what – and how he or she can share it – can also help secure the way that data is accessed and manipulated. Once CSPs have centralised data management and created a strategy for how teams can use it, it’s time to tackle the biggest obstacle standing in the way of contextual intelligence: the silos.

Building bridges between executives
If you ask a CMO and a CIO of the same operator what trends they’re seeing in the industry today, you’re going to get very different answers. CMOs may mention the market or consumer devices.

CIOs are more likely to talk about the effect of cloud or M2M on network performance. And, even though they are both responsible for the success of the same company, it’s likely that both executives will tell you that they have very different goals.

The CMO is probably going to say that his or her priorities are products, lead generation, conversion and churn. After all, that’s what he or she has been measured on when it comes to job performance. The person has to set his or her sights on goals based around revenue and reach, and make sure the team focuses on achieving them. Often, the CMO will focus so much that he or she gets tunnel vision – ignoring all of the other moving parts in the company.

The CIO will have tunnel vision, too, but he or she will be driving down a different highway. This person wants to know how he or she can improve network performance. How much data is being consumed? What regions could benefit from LTE or fibre deployment? At the end of the day, he or she will know that network problems are going to land in his or her lap.

The CIO doesn’t want to take his or her eyes from those objectives, and may end up overlooking the bottom line in favour of technology innovation and maintenance.

The CIO doesn’t want to take his or her eyes from those objectives, and may end up overlooking the bottom line in favour of technology innovation and maintenance

The same thing happens across all of the CSPs other departments. Executives are assigned responsibilities according to their roles, and those responsibilities rarely overlap. Underlying siloed organisations compound the effect.

Many CSPs may balk at the idea of coordinating a marketing campaign between the CMO, CTO and CIO, but the latest tools – and the democratisation of data – demand it. Data democratisation across CSPs is going to radically change the way executives interact. Thanks to the seamless integration of predictive analytics into OSS/BSS systems, Big Data can reveal customer trends across the network.

CMOs can decide which regions and at what pace different campaigns should be deployed, and analyse which marketing offers would most interest customers. They’ll be able to segment customers into more granular groups and figure out – in real time – how campaigns are performing.

If the CMO can see that customers are suffering from bad experiences in a particular region, then they will want to know how they can offer them something that improves that experience. This could usher in an age of contextually intelligent and highly relevant messaging to each customer – but to do it, they’ll have to go through their CIOs for guidance on device and network use. In this case, they’ll have to turn to the CIOs for guidance on device and network use. Likewise, the CIOs will need to know about these kinds of campaigns, so they can evaluate the impact of the campaigns on network performance.

Together, C-level executives can work on the most effective types of campaigns and implement new systems to build more personalised and targeted marketing. Custom marketing will be crucial to improving revenues in the future. As traditional telecoms services are commoditised or faced with an increasingly crowded market over the coming years, customer experience will become a premium differentiator for CSPs.

One study found that nine out of 10 consumers are interested in having a more personal relationship with their CSPs, which means that those making an effort to bridge their organisational silos could reap significant benefits.

By applying contextual intelligence to the data already available to them, CSPs can introduce an event-analysis-action paradigm that, for example, could pinpoint potential problems before they occur and help proactively address them, reduce churn and improve customer experience. In turn, this could help immensely in retaining high-value customers and building loyalty.

The trick is to measure customer experience, uniting every department and executive at a fundamental level. If CSPs implement a way of measuring their performance by how well customer experience is delivered – and how well departments work together to achieve that end – the silos within a company may finally be bridged. Therefore, contextual intelligence will be the building block.

Bangladeshi economy: inclusive finance key to real growth

Posted on by Ashton Wenborn

The Bangladeshi economy has been undergoing real GDP growth of more than six percent on average for more than 12 years now (see Fig. 1), despite ups-and-downs in the global economy: notably, the global financial crisis and the subsequent growth slowdown, and inflation being contained within single digit levels (see Fig. 2). This stable growth trend has been maintained because of the Bangladesh government’s inclusive development strategy, supported by Bangladesh Bank’s (BB) initiative of emphasising socially responsible financing in its everyday activities and pushing these objectives into the country’s financial sphere.fig-1

BB’s inclusive financing promotion exists within its monetary growth programme, designed to maintain price and macro-financial stability. All banks and financial institutions, whether state-owned, private, local or foreign, have enthusiastically engaged themselves in nationwide financial inclusion and green banking initiatives. Financial support from these initiatives has boosted agriculture, with SMEs and environmentally-friendly projects generating both domestic output and demand to compensate for external demand weakness from the slowdown in advanced Western economies.

Gains from inclusive financing
Exports have also continued to grow, and together with healthy inflows of remittances from workers abroad, have underpinned strong gains in external sector viability, reflected in a healthy current account balance – there has been more than a ten-fold increase in foreign exchange reserves to over $17bn, from only $1.6bn in FY2000 (see Fig. 3). Furthermore, prudent fiscal policy has helped accumulate higher revenues with moderate deficits, leading to declining public debt ratio. The inclusive financing initiatives which allow credit to flow to SMEs has helped enhance macro-financial stability, with incremental output on the supply side and employment and income generation on the demand side.

Inclusive initiatives which channel financing to under-served and excluded micro and small-scale productive undertakings, as well as ‘green’ projects which adopt energy efficient and environmentally benign output processes, are adding incremental output in the real economy on the supply side, while also bringing up demand from newly-created employment and income, preserving real sector stability.

fig-2

In the financial sector, the diverse small-sized financing in the inclusive initiatives constitute a new asset base, entailing lower aggregate credit risk than from large loan exposures to a few large borrowers. At the same time, the new client base of numerous small borrowers constitute a substantial base of new deposits that are more stable than large deposits from a small number of big depositors – enhancing financial sector stability. Ongoing inclusive financing initiatives in the underserved rural segment are also helpfully acting as a cushion against instability ripples in the urban segment.

Investment incentives
Bangladesh is maintaining a most welcoming regime for FDI and FPI inflows. Up to 100 percent foreign ownership is freely permissible for FDIs in the industrial sector and FPI inflows are freely permitted in the local equity and bond markets. Post-tax profit or dividends earned by non-residents on those FDIs and FPIs are freely repatriable abroad; disinvestment proceeds along with capital gains are likewise also freely repatriable. Besides manufacturing, major opportunities for foreign investors in Bangladesh exist in the infrastructure sector, including gas and electricity generation, toll bridges, hotels and other tourism facilities, tertiary healthcare hospitals, developing land port, seaport, airport facilities and so forth. Software and IT-enabled services are yet another new promising area for foreign investors in Bangladesh. Tax holidays, import tariff waivers/concessions on capital goods and serviced industrial zones are available for foreign and local investors.

Bangladesh has already attained a number of Millennium Development Goals (MDGs), including the halving of poverty well ahead of its 2015 timeline

Bangladesh has already attained a number of Millennium Development Goals (MDGs), including the halving of poverty well ahead of its 2015 timeline. Rapid poverty decline in the large population of 150 million is providing domestic and foreign investors with a large demand base: coupled with very competitive low wages in the largely young working population, which is attracting relocation of foreign investors from costlier locations elsewhere. Many large globally-active businesses, including Samsung, Unilever, Telenor, have setup manufacturing units and other facilities in Bangladesh.

Healthy economy
In the financial sector, globally active banks like HSBC and Citi N.A. have branches in Bangladesh. Recently, the World Bank ranked Bangladesh ahead of India, China and Vietnam in protecting investors’ interests. Bangladesh’s clothing exports continue to grow despite weakened demand from advanced Western economies. Working conditions in clothing factories are undergoing rapid upgrading following some recent episodes of factory fires/ building collapse. Besides clothing – which constitutes more than 75 percent of total exports – the export portfolio is diversifying into several new sectors including light engineering products, IT enabled services, horticultural produce, consumer durables, bi-cycles and marine vessels.

fig-3

Healthy macroeconomic trends have upheld BB- and Ba3 sovereign credit ratings with a stable outlook for four successive years now by S&P and Moody’s respectively. This positive view is also echoed by some of the leading international investment banks: Goldman Sachs names Bangladesh in its ‘Next 11’ countries list (those most likely to become the world’s largest economies after the BRIC nations) and is one of JPMorgan’s ‘Frontier Five’ economies. Citigroup has identified Bangladesh as one of 11 countries in terms of its ‘Global Growth Generators’ (or 3G countries).

Given the advantages of its current demographic of a large youthful workforce and its broad social consensus of including socially responsible-driven development strategies to harness the ingenuity and creative energy of its population to overcome poverty, Bangladesh is now charting the next phase of its progress, aiming to reach the upper middle income country group GNI threshold by 2030, and attaining developed advanced economy status by 2050.

Banorte grows in spite of Mexico’s slow economy

Posted on by Ashton Wenborn

Mexico has been facing headwinds during 2013, with a lower rate of economic growth as a result of reduced government spending, lower construction and infrastructure development, a contraction in consumption and retail activity, and weaker foreign trade.

The economy has also been affected by the volatility in the international financial markets, as a result of the uncertainty behind the FED’s tapering. This has led to movements in the forex markets and the Mexican yield curve, which in turn have led to higher risk aversion.

Mexico’s economy was expected to grow more than three percent when the first forecasts for 2013 were released, yet it has been revised downwards to growth rates of just over one percent.

Current market challenges
There are various challenges of operating in today’s financial environment. The most significant difficulties have been to achieve quality growth in spite of a weak economy, manage the troubled exposures of the main home developers, and maintain sound fundamentals.

The first one is exogenous and difficult to control. The bank has adapted its operations to the challenging economic environment by being more cautious on the risks that it undertakes, and follow up with existing clients to sense any changes in their payment capacity. The bank tends to be more conservative in terms of its growth and capital deployment under this type of environment.

The bank has adapted its operations to the challenging economic environment by being more cautious on the risks that it undertakes

In terms of the exposures to the three main home developers, Banorte has been very proactive in managing the potential losses from those loans. The bank frontloaded provisions and received payments to minimise the potential losses from those exposures.

It has also been working with companies to find solutions to restructure their liabilities, and help them face their financial difficulties. It’s confident that the home development sector in Mexico has great potential because of the housing deficit that the country faces.

Ensuring its balance sheet is resilient to adverse conditions, Banorte proactively manages asset quality, liquidity and capitalisation levels. Its efforts are focused to ensure that its asset growth is matched by liquid low cost liabilities, and also that any maturity mismatch is hedged properly.

Additionally, the bank tries to keep stable asset quality indicators through strict underwriting standards and advanced collection and recovery processes, maintaining capital levels that are sufficient to balance the rapid growth in its loan portfolio with strict internal and external capitalisation requirements.

The performance fundamentals
Under this backdrop, Grupo Financiero Banorte’s performance during 2013 has been relatively positive. It has been able to partially offset a lower expansion in its loan portfolio and an unfavourable interest rate environment with an improvement in its funding and loan mix, as well as the payment of some high interest paying liabilities, such as a syndicated loan and a perpetual bond.

Core deposits are growing close to 15 percent on a yearly basis, while consumer loans are increasing close to 20 percent. As a result, the bank’s net interest margin (NIM) is expanding this year, which is a positive development compared to the last time Mexico started an easing monetary cycle in 2008 – at that time Banorte’s NIMs contracted by over 300 basis points.

As a result of higher NIM’s and non-interest income, total revenues have grown by 12 percent over the last 12 months, and expenses by three percent. Provisioning costs are normalising after having to cover the expected losses of the bank’s home builder exposures during the first half of the year.

All in all Banorte is on track to delivering a significant expansion in earnings on the back of positive operating leverage and the integration of Afore Bancomer’s results. ROE currently stands at 14.3 percent despite the dilution to EPS and ROE that stemmed from a recent equity offering, and ROA is 1.4 percent expanding 20 basis points over the past 12 months.

Graph

Banorte’s capitalisation levels are adequate, reaching almost 15 percent, and its leverage ratio is above 12 percent. It is fully Basel III compliant in terms of capitalisation requirements, which allows it to concentrate more on achieving growth targets and less on complying with the new regulation, as other banks in the world are doing.

On the negative side, non-performing loans have risen lately to 3.2 percent due to the homebuilder exposures, but are relatively stable excluding this effect. Also, the corporate loan portfolio is contracting, as a result of weaker demand and pre-payment activity.

Capital to enhance future growth
Banorte’s sound fundamentals and positive outlook were recognised by local and global investors in a recent follow on offering in the local and international ECM markets, which became the most significant transaction in Mexico’s history, especially because all the shares were sold through the Mexican Stock Exchange (see Fig.1).

There was an over subscription of 3.4 times with a demand of more than $8.5bn, for a total amount issued of $2.5bn. The funds of the equity offering were used to pay for recent strategic initiatives, and to have the capital to continue feeding its growth prospects.

Since acquiring Afore Bancomer at the beginning of 2013, Banorte is the most significant player in the pension fund management industry, with a 28 percent market share. It also recently acquired the 49 percent minority stake that Generali held of its insurance and annuities business, and embarked in a transformational programme of its processes and IT in partnership with IBM.

Since acquiring Afore Bancomer at the beginning of 2013, Banorte is the most significant player in the pension fund management industry

All these moving parts have posed the important challenge of transforming the bank, while running it at the same time. In the coming months, Banorte needs to implement a number of initiatives.

It needs to extract the cost and revenue synergies from the recent acquisitions, integrate their operations to the rest of the organisation, industrialise its processes and IT, transform its operations from a product to a client driven institution, and upgrade its risk management systems to the new dynamics in the organisation.

The bank needs to execute these transformations almost flawlessly in order to achieve its strategic goals and profitability targets. Another important strategic priority is to continue enhancing its market position as one of the leading and most profitable financial institutions in Mexico, while at the same time focusing more on attending to its existing client base.

In the past, Banorte grew by expanding loan volumes and bringing more clients to the bank, without considering the value propositions that it could offer to the new client base. This led to high client attrition rates and low profitability per customer. Under its new model, Banorte will segment its client base more efficiently and provide targeted value propositions per client. This will lead to an expansion in the number of products per client, and in turn will help the bank enhance its market position and overall profitability.

Medium term perspectives
In the medium term, Banorte will continue its commitment with its home market, where it still sees significant growth opportunities. The prospects for Mexico’s economy and its financial sector are positive. The Mexican market continues to be under penetrated with one of the lowest loans to GDP indicators in the region – below 20 percent versus an average of more than double for Latin America.

Part of this low level of banking penetration is a result of the stringent regulation implemented after the crisis in the 1990s, which makes capitalisation and reserve requirements much tougher compared to other countries.

It is no coincidence that Mexican banks weathered the past economic crisis without many problems, and have been able to effectively adopt the Basel III requirements and expected loss provisioning.

Nonetheless, the stability of the banking system has been on the back of a smaller banking system. This is where the recently announced financial reform could play an important role. If the government effectively uses the development banks to provide special funding programmes and guarantees for risk sharing with the banking system, there could be a significant boost to credit penetration.

Also, if the foreclosure of collateral becomes more effective, banks will be able to lower the costs of financing, and more people will have access to credit at lower costs. This will generate a virtuous circle, which should translate into higher credit penetration and economic growth.

Banorte estimates that banking penetration could be at least 30 percent of GDP if all the right policies are implemented. There are many opportunities to continue growing the bank’s funding and lending activities by expanding its retail network though traditional and non-traditional channels, and also to reach out to the unbanked with specific product offerings such as micro loans and insurance.

In the medium term, the prospects for the Mexican economy continue to be favourable, and this will allow Banorte to expand its loan portfolio at a multiple of two to three times nominal GDP. There are few countries in the world that provide this type of opportunity.

Additionally, Mexico is finally moving forward in the reform agenda. A series of structural reforms have been approved on the labor, energy, fiscal, education, financial and telecommunications fronts. These reforms, if they are well executed, might give Mexico a higher level of potential GDP growth rate of at least four percent, but its adequate implementation will be fundamental to propelling Mexico’s medium-term growth rate.

LNG exports help to diversify Oman’s economy

Posted on by Ashton Wenborn

The picturesque coastal state of Oman, bordering oil rich Saudi Arabia and the UAE, is perhaps best known for its peaceful coexistence with its neighbours. A developing natural gas market has led to the country’s two liquefied natural gas exporters joining forces, in an effort to help drive the country’s wider economy.

With the government eager to diversify Oman’s economy, the energy industry presents an opportunity for it to increase revenues for the rest of the country. It owns a major stake in the country’s leading natural gas exporter Oman LNG, which recently completed a successful integration of Qalhat LNG into its operations. With other key international backers that include Shell and Total, the company is clearly seen as a rising star in the region’s energy market.

World Finance spoke to the company’s CEO, Harib Al Kitani, about the country’s prospects, the changing energy landscape, and how the recent integration with Qalhat LNG translates to an even greater competitive advantage for the company and country.

Catalyst for growth
The importance of the energy sector to Oman’s wider economy is obvious, as it generates substantial revenue for the government to invest in other areas. The sector is also an important investor in social development. Oman LNG, for instance, dedicates one and half percent of its after tax profits to investments in development programmes across a range of areas including job creation and healthcare.

Oman LNG by numbers (2012)

10.4MPTA

Production capacity

96.9%

Reliability

1,538

Cargoes exported

89.8%

Omanis in national LNG industry

Al Kitani is positive about the resources to hand, and what they can do for the country’s economy. “Like most economies of the world blessed with natural resources, Oman has for a long time focused on developing its energy resources, with earnings from these resources making up a large part of the country’s revenue.”

However, diversifying the economy is key to unlocking Oman’s potential in the region, and industries like tourism are getting considerable attention from the government.

“The focus is gradually shifting as the government continues to execute a far-reaching diversification programme. Tourism, for instance, has grown steadily over the years, with its contribution to the economy rising in a similar fashion.”

Al Kitani thinks that growing the tourism sector makes sense in Oman, given the hospitable nature of country’s people and the beauty of the landscape. “Frankly, it is not at all surprising when you consider the natural disposition of the Omani people to be friendly and welcoming; when you consider that Oman is largely a pristine location where you can see much of nature still in its untouched state, with a coastline of nearly 1,700km.

“Other non-oil sectors are also projected to grow in the coming years, and with some of the earnings from the energy sector directed to diversification, including spreading infrastructure, a new economic landscape based on a broader set of commercial endeavours is certainly emerging.”

With the government as a major shareholder in the integrated entity, much of the revenue generated from exports of natural gas contributes directly to Oman’s ability to grow its economy.

“Also, considering the government is the main shareholder with high stakes in the integrated company – it holds 51 percent shareholding in Oman LNG and 46.8 percent in Qalhat LNG – it benefits from the expected higher revenues which a combined structure positions us to achieve in the long term,” says Al Kitani.

Oman’s hydrocarbon sector
Oman LNG is one of the dominant players in the energy sector in Oman, having recently subsumed Qalhat LNG.

“With the consummation of recent integration with our sister company, Qalhat LNG, in September, Oman LNG has become the only face of liquefied natural gas (LNG) supply from the Sultanate to the world,” says Al Kitani.

“As the country’s only exporter of liquefied natural gas, with a three-train plant operation and 10.4 million tonnes per annum capacity, we play quite a significant role in the sector (see Fig. 1). Oman LNG and Qalhat LNG contribution to the country’s revenue in 2012 generated over $5bn.”

Oman LNG's gas intake

The integration of Qalhat LNG with Oman LNG has created an industry powerhouse that is ready to help spur the country’s economy further. The reasons the two companies decided to combine their operations lie in the similarities that existed in how they both work.

“The integration of Oman LNG and Qalhat LNG is based on a number of obvious synergies between the companies. After years of operating as individual entities and developing their respective niche markets, the government and other shareholders decided it would be wise to capitalise on these synergies, save costs in some respects and offer a better and more efficient service to our customers.”

The integration has also made sense because both firms received gas feedstock from the same supplier, as well as sharing some facilities. “Prior to the integration, both companies received feed-gas from a single supplier, Petroleum Development Oman (PDO), and utilised vessels from the Oman Shipping Company (OSC). They also both made use of shared facilities at the plant in Qalhat, Sur.”

News of the decision to combine the two corporations has also been met enthusiastically by shareholders, who believe the company is now better placed to successfully develop Oman’s energy market. “The integration brings together our strengths,” says Al Kitani. “It shows some clear thinking on the part of shareholders on how we can remain successful and has been well-received by investors, lenders, insurers, buyers (see Fig. 2) and our other stakeholders, because it positions Oman LNG to do more with its resources.”

Oman LNG's key buyers

When two leading companies decide to combine operations, there is a danger of a clash of corporate cultures and differences in the way things are run. However, Al Kitani is insistent that, due to his experience at both companies, this issue is unlikely to arise.

“I speak from personal experience of having had the privilege of serving at both entities prior to the integration. I was at Oman LNG for 10 years and left as the company’s marketing manager to assume the position of chief executive officer at Qalhat LNG in 2005. At both organisations, there was a deliberate effort to cultivate value in everything we set out to accomplish.

“I was appointed as a CEO of Oman LNG in August 2012 and although there were a number of remarkable changes over the seven years I was at Qalhat LNG, there remained at the company’s core: the desire to add more value to the many services delivered to stakeholders. The same mindset was cultivated at Qalhat LNG where we had a view of our stakeholders as being ‘partners in excellence’.”

Good governance
Corporate governance is also taken seriously at Oman LNG, and is supported by the government, which is keen to ensure it is carried out robustly. Al Kitani says that it is integral to how Oman LNG operates.

“Any activity that improves our corporate governance can only support our viability as a sound and transparent company. One of the principal reasons the integration has been so successful is because it passed through a rigorous due diligence process. This helped to give all stakeholders in these kinds of transactions good comfort on the fusion.

Oman LNG employee
An Omani employee at Oman LNG. Company policy has seen nationals placed at the heart of the country’s LNG industry

“I know that maintaining a sound corporate governance has always ranked high on our list of goals. I thank our leader, His Majesty Sultan Qaboos bin Said, for encouraging this attitude across all of Oman. At Oman LNG, we also want to thank the Minister of Oil and Gas, Dr Mohammed bin Hamad Al Rumhy, and the Under Secretary of Oil and Gas, Nasser bin Khamis Al Jashmi, for taking a continued and robust interest in seeing the company establish and abide by principles of good corporate governance. This has undeniably contributed to our success as a company.”

Looking to the future
In the near future, it’s unlikely that Oman will challenge the likes of neighbouring Saudi Arabia and the UAE in terms of oil and gas output; however, the contribution organisations such as Oman LNG can make to the region is not to be ignored.

“At the moment, our focus is making the best possible use of what is available to Oman LNG in terms of gas supply to meet demand in the market. We are not taking any options off the table and, as with most exploration activities, we cannot exactly predict what the ongoing search for more gas in the country could yield.”

The integration between the two firms will, however, help to strengthen the industry within Oman, and as a result Al Kitani is expecting good things for the coming years.

“This integration will definitely bring good opportunities to our company, the wider hydrocarbon industry in the country and Oman generally, as we seek new ways to deploy our resources profitably. So everything considered, I am optimistic about the future.”

Nyo Myint on Myanmar’s potential | KBZ Group | Video

Posted on by World Finance

50 years back and Myanmar was the Pearl of Asia – one of the region’s leading economies. While most of its neighbours have seen their economies skyrocket, Myanmar languished, and now has Southeast Asia’s lowest per capita GDP. But times are changing. Nyo Myint, Senior Managing Director from KBZ Group discusses the challenges Myanmar faces today, and how KBZ Group’s CSR activities are contributing to the country’s success.

World Finance: Nyo; tell us, what are the challenges that Myanmar faces today?

Nyo Myint: Myanmar faces major challenges in political, economic, and also social arenas.

In the political arena, we have transitioned from a military government to a democratic government very recently. Therefore we have many political challenges, but we believe we are now on the right track. Political prisoners have been released, and our government has re-engaged with international communities. Now we are in the process of developing a people-centric government to move the nation forward.

For the economic arena, the major challenge is to create a fully developed financial sector. Now the Central Bank of Myanmar has recently been granted full autonomy, after the separation from the Ministry of Finance. I believe a strong financial sector will create a vibrant economy for the country.

For the social sector, we have to focus on solving the ethnic conflicts in Myanmar. We have many minorities with diverse religious beliefs and cultural differences; it is very important to create a more harmonious society in order for the country to grow.

World Finance: And tell me more about the economic arena; what potential is there for growth, and what role are businesses going to play in that?

Nyo Myint: Myanmar is the largest country in continental Southeast Asia, which has an abundance of natural resources, and has a population of almost 70 million people. Myanmar has been closed to international businesses for 50 years, so the potential for growth is huge. I believe the sectors that will have first rate development and most potential are oil and gas, electric power generation, agriculture, and telecommunications.

Political prisoners have been released, and the Myanmar government has re-engaged with international communities

World Finance: What catalysts are needed then to unlock Myanmar’s potential?

Nyo Myint: One of the major catalysts is that more multinational companies need to enter and operate in Myanmar. So it will bring many positive knock-on effects on the whole business world and the economy of Myanmar.

Another catalyst is that more Myanmar-born ex-patriates return to the motherland with skills and technical expertise learned abroad, and contribute to the growth of the country.

World Finance: Let’s take KBZ Group as a case study. You’re one of the most successful businesses in Myanmar; what is your business philosophy?

Nyo Myint: Although we have grown in size, we are always focusing very much on giving back to the communities we work in. We believe doing the best for the people is a good business philosophy.

Our KBZ Group is well known for our best CSR initiatives in the country, and due to our latest contribution for various projects in health, education, religion, social, and disaster relief, we have been recognised as a most charitable company in the country.

Moreover, we are very much proud and feel honoured for being the highest tax payer in Myanmar for several years now.

World Finance: KBZ Group is also a heavily diversified conglomerate; what’s the key to your success?

Nyo Myint: In our KBZ Group we also want to serve the interests of our stakeholders, including our customers, our suppliers, and our employees.

We consider every one of our employees to be a part of our extended family

We believe that doing good for the people is a good business practice, and will pay dividends in the long run. In order to do that, we want to create the best corporate culture, based on merits, accountability, and transparency.

We consider every one of our employees to be a part of our extended family. We provide most comprehensive compensation package programmes, which include daily transportation, education assistance, generous pension and healthcare plan, a lucrative annual bonus, and so on.

World Finance: And how do you position the group in the transitional period that Myanmar’s going through?

Nyo Myint: KBZ Group is the industrial in banking, aviation, and issuance. Our entities are regarded among the people as being the best in Myanmar. Our strong ties with our people, and our domestic reputation, will continue to keep us in a strong position during this transitional period.

We are also exploring various ways to collaborate with reputable international companies through possible strategic alliances or joint ventures, in order to keep our company competitive internationally.

Our aim is to continue as a major player within Myanmar, but also to expand our presence throughout the region.

World Finance: Nyo Myint, thank you very much.

Nyo Myint: Also thank you very much.

Evolving with the legal industry: JHA advises

Posted on by Ashton Wenborn

The US and UK financial and legal landscapes have undergone quite considerable changes this past decade, asking that law firms adapt if they are to adequately serve an ever-evolving and increasingly demanding client base. Gregory Joseph, Managing Partner in New York at Joseph Hage Aaronson and one of the US’ most-respected litigators, points to market changes dating back to the early 21st century, which he believes transformed the face of litigation and sparked a decade-long shift in the practice of law.

New York and London-based Joseph Hage Aaronson was established as recently as September this year, though despite its age the firm boasts an eclectic range of experienced legal professionals and a proven capacity to handle the gamut of complex financial and commercial litigation. Composed of New York-based disputes firm Gregory Joseph and London-based litigation boutique Hage Aaronson, the newly formed practice looks to settle disputes on an international basis and capitalise on exciting new legal opportunities wherever possible.

[T]he newly formed practice looks to settle disputes on an international basis and capitalise on exciting new legal opportunities wherever possible

Speaking on the ways in which his own practice has evolved since 2001, Joseph is pragmatic about developments. “We’ve been asked to represent more law firms and that has become a significant part of the practice, whereas around 2000 or so, that was a much smaller custom. That, I think, is a function of the market for plaintiff lawyers in particular – focusing on law firms as targets. The irony is that a law firm as acting as a litigant – as opposed to an advocate – sits uncomfortably, whereas accounting firms are litigation machines.”

Two heavyweights collide
Joseph told World Finance that one of the biggest changes of recent years is that the number of securities class actions has diminished significantly from where it was at the turn of the century. Believing this to be the beginning of what later emerged as a fundamental change in the practice of law, Joseph recognises the processes that have brought this about. “The practice has been largely decimated by the US Supreme Court in a series of rulings, which are very favourable to the defendant and make it very difficult for a plaintiff to prevail – so they bring fewer suits.” While a shift in the practice of law stems as far back as the beginning of the century, it was in the wake of the credit crunch and the subsequent financial crisis that practitioners such as Joseph were forced to change their services almost beyond recognition.

“Things started changing when the credit crunch hit – in particular in 2007 – and a large number of financial cases started arising that were not securities, but complicated contractual and derivatives based transactions,” says Joseph. “Originally, that had to do with a series of multi-billion dollar leveraged loans that were outstanding at the time the credit crisis hit, consummating in what would later be extremely costly to major financial institutions and give rise to a series of cases.

“When 2008 hit and CDOs [collateralised debt obligations] collapsed, that gave rise to a lot of litigations. One of which we’ve started on just this year, which is a dispute that arises out of the financial meltdown of 2008 between Citibank and Barclays.”

Joseph is no stranger to disputes involving leading financial institutions, having, in 2011, represented Citigroup in a $268m case against Morgan Stanley relating to the contentious issue of credit default swaps.

A company reborn
The new firm has focus and stability. “The practice we have here is primarily concerned with complicated financial litigations and representing major law firms when they are under attack. The latter often – and perhaps almost always – ties to the former; it is the connection with work and financial transactions or representations that gives rise to the claim against the law firm.”

The merger enables both Hage Aaronson and Gregory Joseph access to new markets in the US and European continents, which is especially important when seeking high-value dispute cases of the highest pedigree. When asked if the firm has any intentions to enter any other marketplace, Joseph states that this may well be premature given the age of the firm, adding that the intention for now is to focus on London and New York in particular. “I think having the interaction with the US and UK is crucial. We have top quality people in the UK that we can consult, one example being that we have a dispute between two major financial institutions, which is currently being litigated in New York under English Law.”

The merger enables both Hage Aaronson and Gregory Joseph access to new markets in the US and European continents, which is especially important when seeking high-value dispute cases of the highest pedigree

The establishment of Joseph Hage Aaronson is one rooted to the relationships shared between a select few individuals, with Joseph having worked with litigation advisor Joe Hage and former head of Chambers Tom Beasley on a number of occasions. “These are good friends, on a personal level, apart from working together. When Joe decided to start the firm and Tom decided to take the significant step of leaving Chambers and moving to a law firm, the time to form a firm of our own felt right,” says Joseph.

“We want to work together on international projects. The truth is that we’re very busy in our domestic practices but we’d like to work together and we’d like to work on international litigations and arbitrations, and that’s what we’re looking to focus on. All we care about are interesting cases, the new firm won’t really be changing the US and UK firms and the whole point of the merger is just to come up with some additional kinds of interesting cases, because we both have plenty to do right now. On the most basic of levels, international arbitration and transnational litigations sound compelling and are something we’d like to work on together.”

Arbitration issues
Speaking to World Finance on the business of arbitration, Joseph says that it is flawed in a number of ways, and suggests solutions to what he feels are components of a broken system. “There is a need to have arbitrators act like judges and not like mediators. I think that one tends to find that in the US it is hit or miss and I do think it is a flaw of the arbitration process to the extent that parties that want to have issues decided on merit end up having them resolved in a Solomonic fashion, which is not really what they want.

“You can pick out first-rate arbitrators, you can agree on rules, you can try your case the way you would a regular lawsuit, and yet you harbour a lingering uncertainty about whether the ultimate result will resemble a courtroom determination – an up-or-down, win or lose, on the merits of determination. There are many reasons for that, I suppose, but one that hovers over all the rest is that there is no meaningful judicial review of arbitral decisions. The arbitrators don’t have to look over their shoulders at what a reviewing court will have to say about what they do. With rare exception, whatever the arbitrator decides, whether sound or peculiar or noxious, must be judicially confirmed.”

The solution proposed by Gregory is that parties are allowed to secure a judicial review of an arbitration award if they elect to do so, a measure that is currently precluded in the US. While Joseph acknowledges that the need for this provision may well be unnecessary on an international basis, he says that it is certainly necessary for cases in the US. “This largely removes the sobering virtue of self-consciousness from the arbitral decision-making process,” he says.

A further issue highlighted by Joseph is that those who draft contractual arbitration agreements are generally not litigators and are not really capable of the task at hand. “While they’re extraordinarily sophisticated draftsmen, they don’t know the complicated legal issues that arise in the business of arbitration.”

On reflection, however, the changes to the legal system of late can be considered relatively minor, provided that those participating in legal proceedings are learned in the developments of this past decade and show an understanding of the ways in which current processes can be improved upon. The creation of Joseph Hage Aaronson is testament to the demand for high quality service, and it is firms such as these that will no doubt pave the way for future improvements to the legal system.

Abidjan builds bridge to support country’s rapid growth

Posted on by Ashton Wenborn

Abidjan has one of the fastest-growing populations in the world today, having doubled in less than a decade from three million in 1996, to more than six million today. This fast growing population has put a lot of pressure on the infrastructures of the city, especially on the two bridges on the Ebrié Laguna.

The Houphouët Boigny Bridge was built in 1954 and the General de Gaulle Bridge built in 1967, and both are considered the most important transport infrastructures in the city, as they are key for mobility between the north and the south.

The bridges also connect the rest of the country and the landlocked northern countries to Abidjan’s port and airport, which are primordial in national and international trade.

Identifying the problem Abidjan’s strong development of the north residential area and the growth of a new urbanisation area have spawned dense traffic congestion all around the bridges, which are close to saturation.

An average of 200,000 vehicles cross the two bridges every single day, so shutting down one for rehabilitation would be unthinkable. The government decided to therefore build a third bridge – the Henri Konan Bridge. The project consisted of the 1,500m bridge construction, with 5.2km of access to the highway. The northern section starts from the François Mitterrand Boulevard to the Laguna. It is 2.7km long, in two-by-two lanes on a non-urbanised site.

An average of 200,000 vehicles cross the two bridges every single day, so shutting down one for rehabilitation would be unthinkable

The Laguna section is 2km long, with two by three lanes and a 500 metre long embankment on which a 21-lane tollgate will be built. The southern section is from the Laguna to the Valery Giscard D’Estaing interchange. It is 2km long, with two by three lanes, and is built in an extremely urbanised and industrialised site. The Valéry Giscard d’Estaing (VGE) Interchange is a three level interchange totally financed by the state. In 1996 the government launched the bidding process to select a concessionaire for the construction and exploitation of the third bridge of Abidjan.

The project was one of the first West African Public Private Partnership (PPP) projects. The bidding process led in 1998 to the selection of the SOCOPRIM – a company owned by French construction group Bouygues – as the concessionaire.

Negotiations first took place with a group of lenders that included the IFC, PROPARCO, AfDB, BOAD, Bank of Austria, Caisse Autonome d’amortissement and Fonds de Prevoyance Militaire. The law firms White & Case and Chauveau were also involved in the deal, leading to financial closing in November 1999.

Construction work was about to start when the first military coup in the country’s history happened on December 24, 1999. This led to 12 years of political instability, during which it was almost impossible to restart such a complex project.

Countering political instability
The Ministry of Economic Infrastructure tried many times to restart the project, but it was almost impossible to bring private investors in such an unstable political environment. Even the Islamic Development Bank – which decided to be the lead financier of the project at a certain point – withdrew in 2009 because of the high political risk.

At the end of the economic crisis in 2011, restarting the project was a real challenge as most of the financial institutions were still considering the country to be fragile, and also the cost of the project had significantly increased, by 60 percent.

At the end of the economic crisis in 2011, restarting the project was a real challenge as most of the financial institutions were still considering the country to be fragile

For the project to be attractive again, it was required the state to accept to finance €75m. Accounting for this brought up a large internal debate since the country had to face many other urgent expenses including healthcare, utilities, education and basic infrastructure maintenance.

However, for the government the issue of solving the congestion problem in the capital city was rife, and there was a need for a blueprint project that could help built back trust and credibility to the country. The fact that such a renamed contractor like Bouygues was still interested to continue with the project was a good sign.

In 2011, it was the African Development Bank that took the lead as financial arranger and brought around the table FMO, Africa finance Cooperation, BMCE, West Africa development bank (BOAD), and ECOWAS Bank for Investment and Development (EBID).

The total cost of the project is €268m, out of which €75m was financed by the state in September 2011. After June 2012 the project really accelerated when it reached its financial closure.

Today it employs more than 1000 people on the construction site, out of which 90 percent are locally based. The inauguration of the bridge is expected to take place on December 22nd 2014.

Key milestones and challenges
This major project for the country is today a reality thanks to three important events that made the second financial closing possible. The first event was the return of African Development Bank (AfDB) as a lead arranger.

AfDB was part of the project when the concessionaire was selected in 1998, but when the government tried to restart the project during the crisis, the bank has some difficulties with the country and it could not be a part of the project.

This major project for the country is today a reality thanks to three important events that made the second financial closing possible

The Islamic Development Bank accepted the lead arranger role but withdrew in 2009 because of high political risk, and so the government had to start from scratch once again. We went to meet with the AfDB directors, and tried to convince them.

It was a real challenge to bring this big financial institution back on the project after what happened in 1999, when it had to withdraw from the project after the first coup, and during the crisis when it had to move its headquarter from Abidjan to Tunis. It was even more challenging to convince the AfDB just after the withdrawal of the Islamic Development Bank.

It had asked for some costly due diligence before accepting to be part of the project. Fortunately this was not an issue, and AfDB accepted to support the project. The AfDB team played a very important role, as they recruited most of the lenders we have today onto the project.

The second event that contributed significantly to the financial closure of the project was the €75m paid by the State subvention. When the government launched the project in 1996, it was an entirely BOT project. The State had nothing to do with the financing.
But when we restarted in 2009, construction as well as financial costs had increased, and a population impoverished by 10 years of political crisis could not afford to pay a high toll fee. So the government had to put a subvention to make the project viable.

It was very challenging to convince the Board of Ministers to put €75m on the project. It finally accepted, however, creating a tax on fuel, and to use this to raise the funds from the financial market. At the end of the political crisis, the government had a lot of other priorities, and there was not enough funds.

The Third key event was the end of the political crisis. Lenders were very reluctant to put their money on the project during the crisis, but by the end of crisis, we had more money than we needed which increased the financial closure of the project.

Adapt or die: Finles’ savvy approach to investment management

Posted on by Ashton Wenborn

Focused on hedge fund selection, Finles Capital Management has over three decades of experience in investment management. Established in 1977 as the financial services provider for a labour union, the company has since evolved into a sophisticated independent fund management house, where one of their funds is the Finles Lotus Fund – an Asia-focused fund.

World Finance spoke to Co-CEO and CIO Rob van Kuijk and Portfolio Manager Robert-Jan van Hoorn to discuss the Finles Lotus Fund, and how they manage this successful fund together with a local partner in Singapore headed by Cliff Go of Swaen Capital.

How is the Lotus Fund playing on the current economic environment in Asia?
van Kuijk: The Lotus Fund was set up just before the Asian crisis, in 1996. It was set up as a long only portfolio, with individual Asian stocks. After a year, the crisis hit and we lost close to 30 percent in 1997 and 13 percent in 1998.

The year after the crisis we made a 120 percent return. In 2001 we changed the investment approach into a fund of funds. The reason for doing so was that our analysis of our stock selection showed that actual stock picking skills was around average, but that we were adding significant alpha on our country selection in Asia.

We decided that it was better to select good quality country managers that have been proven to deliver consistent alpha on their stock selection and combine this with our top down country allocation. From there onwards, our total business started moving more and more towards hedge funds. What we have observed is that in Asia volatility can be aggressive, especially downward volatility.

What we observed is that in Asia you need to have a real hands-on approach as things can move rather quickly

What we observed is that in Asia you need to have a real hands-on approach as things can move rather quickly. An example would be political uncertainty. We added hedge funds to protect our left-tail risk and to improve the risk-adjusted performance of the fund. Today we have 75 percent invested in long only funds and around 25 percent in hedge funds.
van Hoorn: Most of the long-only fund managers we have selected are managing their funds with an absolute return mindset. This means that if they have a top-down view of the market that is not completely positive, they can raise their cash balances.

This fits totally with our own investment approach, as we have such an absolute return type of mindset ourselves. In the hedge fund portfolio there are currently three funds: a long-short Japan fund, and two CTAs. The main objective here is to have diversified Asian exposure, to try and capture the growth in Asia, while ensuring downside protection.

What is your current view on Japan?
van Hoorn: At the moment the Finles Lotus Fund has allocated a big share of its assets under management to Japan, at 37 percent. There are two main positive reasons relating to Japan, according to van Kuijk, the first is Abenomics.

The new government, chaired by Prime Minister Abe, has announced unconventional measures to revive the sluggish economy with “three arrows”. These are a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan’s competiveness, turning the stagnant economy and depressed sentiment around. Finles sees this as a game-changer.

Prime Minister Abe has launched the first two arrows, but the third is the most important one in the long-term, as it will bring a lot of cultural changes to the country. We foresee that Japan will be a very good market for stocks in the coming years. The second main reason is that valuations in Japan are still cheap. Japanese companies are becoming more competitive because of the cheaper Japanese yen. We expect this will improve revenues and earnings.

Why are you not investing in hot markets like India and Indonesia?
van Kuijk: We have invested in both countries in the past. Generally we have a longer-term strategic view on markets, but we are also looking at short-term developments and take action if needed. Last spring we decided to sell our investments in India and Indonesia.
van Hoorn: Both countries are facing numerous fiscal issues. Currently both are net importers creating a deficit, which they have to fund. Inflation also remains high and their currencies have weakened considerably after the tapering discussion in the US. On a micro level, valuations are stretched. That is why for us India and Indonesia are not the places to be at the moment.

In what ways have you benefited from Japan’s currency devaluation?
van Hoorn: For our Japanese investments we hedge-out all Japanese foreign exchange risks, so there is no direct Japanese yen exposure. Our underlying investments are profiting from a weaker currency as Japanese companies are getting more competitive. That is clear. If you look at Japanese companies, such as Toyota, their revenues and earnings have improved substantially because of an increase in demand which is actually fuelled by a weaker yen. However, what we have clearly seen in the last few months is that the yen has become somewhat stronger. In the long term we do expect a weaker yen because the reflation actions.
van Kuijk: What we can see is that the policy of the Japanese government and the central bank is to have a weaker yen. However it is difficult to predict how a currency will move as there are many factors driving it. Therefore we hedge-out the direct currency exposure completely.

Do you diversify in order to temper the risk of uncertain markets?
van Kuijk: The funds in which we invest are mostly absolute return oriented funds. Next to that we have a clear value bias at the selection of the underlying managers. This creates a margin of safety.

Arcus is a well-known value investor in Japan, so when the Japanese market was selling it off earlier in the year, its fund was not losing that much money. Next to that we invest in a Japan Equity L/S Fund as well. This dampens the volatility but is increasing the risk-adjusted performance of the Finles Lotus Fund.

Apart from that, what we see in Japan right now is that Prime Minster Abe has the absolute power in politics right now, in both houses

Apart from that, what we see in Japan right now is that Prime Minster Abe has the absolute power in politics right now, in both houses. So he is now able to really take reform decisions to drive Japan forward, like the five new nuclear plants he has announced for next year.

He also promotes ‘Womenomics’, by encouraging Japanese women into the labour market, which is a huge cultural shift in Japan. There are many big cultural habits that need to be changed here.

It has been over 20 years since the big crash of the Japanese equity market, and for the first time since then we see net new inflows into Japanese equities from domestic investors again. They were only net sellers and that is a huge change.

How have you seen asset management change this past decade?
van Kuijk: A lot has changed in the past decade. The biggest differences are coming from new legislation and compliance – at Finles three people are involved with compliance, before it used to be just one. The investment requirements of investors has also changed.
van Hoorn: Clients are looking for more individual custom-made investment solutions. Since 2009, we have clearly seen big investors move away from traditional funds and funds of funds into tailor made portfolios that fit their requirements. You have to be very flexible, and Finles is.
van Kuijk: It’s adapt or die, and we are very good at adapting.

Brazil clarifies its position on transfer pricing

Posted on by Ashton Wenborn

For investors, the economic view of Brazil has always been twofold: on the one hand, there are good opportunities for sustainable growth; on the other hand, there is suspicion and concern about the direction in which Brazil is marching, economically and politically.

[T]here is suspicion and concern about the direction in which Brazil is marching, economically and politically

The latest downturn decreased the country’s growth rates while bumping up inflation – just two of the uncertainties Brazilian investors face. With one of the world’s highest tax burdens, a complex tax structure, a highly bureaucratic environment, and continuous government spending, Brazil is stumbling through a period of high institutional risk and shrinking foreign direct investments.

Identifying problem areas
Brazil only spends one-third of the average amount spent by other countries in infrastructure, even though the need for advanced investments in infrastructure is high. Generally, the country seems to focus more on keeping private consumption high, instead of having a strategic view of market development with a perspective of sustainable growth.

The most urgent problem Brazil must tackle is the steep decline in competitiveness; to do this, it will need private-sector involvement to improve its infrastructure. In spite of these issues, Brazil still offers one of the world’s best investment opportunities.

The country’s GDP growth is no longer thriving as it was five years ago (see Fig. 1), but the economy overall remains solid. It has a clean energetic matrix and a large domestic market. As the world’s sixth-largest economy – it is expected to rank fifth over the next decade – the country also plays a leading role in South American economy and politics, standing out with increased attractiveness on the international scene. Brazil’s major competitive advantage includes social and economic growth combined with stability and environmental sustainability; macroeconomic structure; a strong domestic market; richness of natural and cultural assets; open market; and democratic stability.

These positive factors helped Brazil benefit from sizable foreign investments over the last two decades. South Korean automaker Hyundai in 2012 invested BRL 700m, and established its first factory in South America in Piracicaba, São Paulo, Brazil. The global President of Hyundai, Chong Mong Koo, stressed the compact HB20 was developed exclusively for the Brazilian market. He said the new subsidiary will “contribute to the development of the Brazilian automotive industry and the local economy.” German automaker BMW chose the state of Santa Catarina as the site for its first factory in Brazil. BMW will invest about €200m in the initial installation, which will start operations in 2014.

Driving Brazil’s economy forward
The automotive sector represents about 20 percent of GDP of the Brazilian economy, and the German and South Korean automakers’ investment will attract new companies in the automotive supplier industry. Those companies are often subsidiaries of international conglomerates, and engage in purchase and sale transactions for goods, services, and rights. Those related-party transactions are subject to Brazilian rules of transfer pricing.

These rules can substantially increase companies’ tax burden if not previously considered when making an investment decision, that is, before setting up business in Brazil. The additional costs of higher taxes or double taxation can substantially reduce the expected profit from investment in Brazil. When considering the Brazilian tax and transfer pricing regimes, the most obvious challenge is the fact that Brazil is not a member of the OECD, which often causes misunderstandings and unexpected tax and transfer pricing issues.

The additional costs of higher taxes or double taxation can substantially reduce the expected profit from investment in Brazil

The transfer pricing methods for testing the pricing of intercompany transactions established by Brazilian law vary according to the nature of the transaction – for example, import or export operations – rather than according to the taxpayer’s functional profile. Brazil’s transfer pricing methods establish maximum import prices and minimum export prices.

To avoid transfer pricing adjustments, the import price charged should be lower than the parameter price; conversely, export prices should be higher. Brazilian legislation on transfer pricing has always given rise to discussion and controversy. The law has recently been changed to avoid misinterpretations of the rules and possible uncertainties in the future, reducing controversial topics.

However, the biggest and still remaining difference between the Brazilian approach to transfer pricing and the OECD approach is the consideration of single product prices, whereby offsetting is not possible. In practical terms, this means that as long as intercompany pricing on a single product line meets the transfer pricing requirements, the overall net profit at year-end does no longer play a role from a Brazilian transfer pricing perspective.

Unlike the OECD approach, under Brazilian law market conditions are predetermined and set by the authorities. That is, fixed margins are to be used for transactions, leaving changing market conditions and multiple-year analyses unconsidered. The economic circumstances of an individual company are not taken into consideration to determine whether transfer prices are at arm’s length.

The arm’s length rule
The basis of the OECD transfer pricing guidelines is the arm’s-length principle, taking into account the individual analysis of each company in terms of economic circumstances and market conditions. Companies freely stipulate the structure of their business according to such market conditions. The OECD transfer pricing guidelines seek to achieve a transaction value established between related parties as practiced between unrelated parties under the same, or similar conditions.

While Brazil imposes fixed margins, the OECD transfer pricing guidelines consider variables, such as business risks borne, functions performed, market conditions of the area of operations, and especially profit margins of comparable third-party companies.

Intercompany pricing policies adopted by economic groups are often inconsistent with the Brazilian legislation. Pricing policies adopted globally are generally based on the OECD’s transfer pricing approach and thus not accepted in Brazil, which at times can give rise to high transfer pricing adjustments.

For this reason, many multinational enterprises have set up different pricing policies for Brazilian entities, than those used for the rest of the group. When making the decision for or against business in Brazil, it is therefore important to adjust and align intercompany pricing policies according to the Brazilian requirements.

For this reason, many multinational enterprises have set up different pricing policies for Brazilian entities, than those used for the rest of the group

The alignment of two divergent systems is a challenging task for multinational groups. Sometimes companies accept double taxation, because the creation of an aligned policy would require a high degree of sophistication and professional involvement. For some companies, it might not be worth investing in this legal certainty, if the complexity of an aligned transfer pricing system would generate higher costs than the expected tax exposure.

The current transfer pricing rules have great potential to cause double taxation situations, which in turn would discourage investment in Brazil. One would expect the tax authorities to increasingly adapt to the economic approaches espoused in the OECD transfer pricing guidelines; however, when this may happen remains uncertain. Adoption of the OECD transfer pricing guidelines would facilitate business decisions, and the rates of foreign direct investment could surpass the expected. Moreover, this change would facilitate understanding of the rules and controls for both Brazilian companies operating abroad, and for international companies that invest in Brazil.

Ways to increase investment
High tariffs on imports and the complexity of customs procedures represent another major obstacle to foreign investment. From a Brazilian perspective, a reduction in legal uncertainties and protectionist behaviour may be less effective in the short term, but would certainly increase investment and sustainable growth in the long term. Encouraging foreign investment would render business in Brazil more competitive, especially if commodity prices are unlikely to bail out Brazil’s economy with another growth spurt.

Mergers and acquisitions – as one possible form of foreign investment in Brazil – raise a number of issues in relation to tax and regulatory compliance, assessing and influencing the choice of business structure. The determination of the allocation price of tangible and intangible assets of target companies has a key role in the interaction between transfer pricing and purchase accounting.

Determining an appropriate market price for asset transfers during restructuring operations requires consideration of transfer pricing issues in the countries involved. This includes the choice of financial structure, as well as finding a tax-effective business structure. When pricing assets – especially intangible assets – from a transfer pricing perspective it is usually difficult to identify appropriate market prices. Therefore, a hypothetical arm’s length range of prices – a maximum price that the buyer would be willing to pay and a minimum price the seller would be willing to sell for – may be considered. These can usually be determined using discounted cash flows of expected profits or losses.

The simple relationship between risk and opportunities for investments in the Brazilian economy is easy to confirm. Great potential opposes high levels of bureaucracy and complex tax structures, which in turn increase the risk of failure.

Brazilian transfer pricing regulations are no exception, but stress the importance of local tax and business planning when deciding whether to invest in Brazil. In the years to come, tax practitioners expect further changes to Brazilian transfer pricing legislation and harmonisation with the OECD approach applied in most other countries.

Meanwhile, despite the differences between the Brazilian transfer pricing rules and the OECD guidelines, it is possible for Brazilian taxpayers to mitigate double-taxation issues through proactive transfer pricing planning. Many multinational groups operating in Brazil are succeeding in mitigating transfer pricing adjustments by marrying – to the extent possible – the Brazilian transfer pricing rules to the international transfer pricing standards.

For further information email carlosayub@deloitte.com

GDP: an accurate measure of economic health?

Posted on by Ashton Wenborn

One doesn’t usually think of the late 1970s as an economic boom time. Unemployment and inflation in the US were at record highs. In the UK, the winter of 1978-79 became known as the ‘winter of discontent’ because of its widespread strikes, with union leaders demanding higher pay agreements. But according to a recent report published in the journal Ecological Economics, the year 1978 represented something of an economic peak, the like of which we may not see again for a long while.

As the report notes, the GDP of industrialised countries has roughly tripled since then. But economic metrics can be misleading and viewed through the mirror of GDP, progress may appear larger than it really is. The methodology behind the GDP metric was developed in the US during the Second World War as a tool to plan the enormous expansion in military procurement, while controlling inflation. It simply totals up the amount spent for all final goods and services produced within the country.

The measure was never intended as much more than a useful accounting device. Simon Kuznets, who led the effort, warned at the time that “the welfare of a nation can scarcely be inferred from a measure of national income.” However, it has since been adopted as a kind of totem of economic wellbeing. Forecasters and analysts scrutinise the numbers for signs of where the economy has been, and where it is headed. In difficult times an insignificant shift of 0.1 percent (less than the measurement error) can spell the difference – for writers of headlines, and politicians – between growth and stagnation.

Gross domestic product is certainly a valuable tool. Governments like it, for example, because it correlates strongly with tax receipts. Unfortunately, though, it misses out on a number of effects, which together have an impact that is rather larger than the percentage-point statistical revisions quarrelled over by economists.

Growth and debt
One of the larger problems can be summed up in one word: debt. GDP only deals in positive numbers, so doesn’t subtract out things like future obligations. As the Czech economist Tomas Sedlacek observed in 2012: “when we talk of GDP – and this I find stunning – we’re very happy about two to three percent growth in GDP reached in certain European countries last year. Nobody mentions that in this very same year, they had seven to eight percent deficits. So, in a simplified model, they paid seven percent in debt and got three percent out of it. There is no reason to celebrate! We’re unable to disconnect growth from indebtedness.”

GPD only deals in positive numbers, so doesn’t subtract out things like future obligations

Obviously it is easy to boost the economy by borrowing a lot of money. Another way to do is to borrow it from future generations, in the form of resource extraction.

Consider, for example, the Canadian economy, which is dominated by companies working in energy, materials and financial services. The first two make up about 40 percent of the market capitalisation of the Toronto Stock Exchange, while finance, insurance and real estate contribute about 30 percent. Much of the economic activity therefore consists of taking material such as oil or metals out of the ground; exchanging said materials for cash; and then recirculating the money in the financial system (for example by inflating the property market).

There is a lot to be said for the Canadian economy, including its banking system, which weathered the recent global financial crisis much better than most. But a sound and honest reckoning of economic progress would have to take into account the fact that materials in the ground are an economic asset even before they are extracted. We speak of oil and gas ‘producers’, but the real producer here is not companies, it’s geology.

It does not therefore make sense to count a resource like oil as a form of wealth once it is on a boat out of the country, but not while it is resting undisturbed in the ground. The economic value has simply been borrowed from future generations, for whom it will no longer be available. Another way to look at this is that Canada has always been incredibly wealthy because of its resources, and that source of natural capital is slowly being depleted.

Measuring economic wellbeing
Just as GDP does not take into account our debt to future generations, it also ignores a variety of other affects such as pollution. An economy-boosting project like the oil sands in Northern Alberta looks much less viable when you apply a reasonable cost for carbon emissions, whose effects on the climate will persist for generations. Chinaís meteoric rise in GDP looks less impressive if you take into account the enormous damage to the countryís environment. Being the world’s workshop comes at a price that does not appear in the national accounts.

As the authors Kubiszewski et al. of the Ecological Economics paper note, we need an alternative to GDP to measure economic wellbeing. The one they apply to obtain their somewhat surprising conclusions is known as the Genuine Progress Indicator (GPI). This has been around in one form or another for about 25 years, but has generally failed to catch on with policy makers (though in the US the state governments of Maryland and Vermont recently adopted GPI as an official indicator). There are a number of differences between GDP and GPI, but the chief one is that GPI includes negative effects such as the depreciation of natural capital.

Now, for many people, except perhaps disco lovers, it may seem a stretch to say that 1978 was some kind of peak year for human society. There has been real progress since that time in things like technology and poverty reduction. But how much of that wealth has been earned, and how much has been borrowed from the future? And to what extent has it been counterbalanced by factors such as environmental damage? These are the questions to which GDP is blind, and which require a broader approach.