Saudi Arabia has made remarkable progress in the past decade: heavy investment in social development, reduced public debt and relaxed investment regulations and tax laws are just a few of the initiatives put in place by the government to encourage a climate for private investment.
The young population is better educated and more willing to accept change than it previously was, and Western social values are not seen in the same negative light they once were. Nowhere in the country has this social progress been more visible than in the healthcare sector, where new hospitals and clinics have sprung up across the country, answering the needs of a growing, multifaceted workforce.
Humble beginnings
Back in 1922, when a young doctor by the name of Mohammed Said Tamer established the Kingdom’s first pharmacy in Jeddah, there was an acute need for medicine in the city both for residents and for the hundreds of thousands of pilgrims that passed through it on their way to the holy cities of Mecca and Medina. Dr Tamer established the pharmacy to fill this void and provide a service to the community.
Over nine decades later, that modest pharmacy has expanded to become the leading conglomerate operating in the fields of pharmaceuticals manufacturing, medical instruments and supplies, high-end third-party logistics services, pharmaceutical retail, and the distribution of nutrition, wellness, beauty and prestige products. The group’s companies include joint ventures with some of the leading pharmaceutical companies in the world.
For instance SAJA, the Saudi Arabian Japanese Manufacturing Company, is a joint venture with leading Japanese pharmaceutical companies Astellas and Daiichi Sankyo, which are the second- and third-largest pharmaceutical companies in Japan, respectively.
Tamer Group has continued to outpace the healthcare market in the last five years, increasing its business an average of 25 to 35 percent per year
Tamer Group companies invest in state-of-the-art medical facilities such as the JCI-accredited International Medical Centre (IMC) in Jeddah, and in Arab Company for Pharmaceutical Products (ARABIO), an emerging niche in biopharmaceuticals – the first biological manufacturing facility in the Gulf Cooperation Council (GCC) medical sector.
Partnership is an area of focus for the company. In today’s complex business environment, cooperation and synchronisation of strategies is important in reaching desired objectives. Partnership provides a better model for collaboration and ensuring satisfied customers. The company’s principals are its partners, and together they are one team.
Looking forward, the Tamer Group is focused on partnering with local and international firms to expand its drug manufacturing business. The company recently purchased 500,000 square metres of land on which to build logistics and manufacturing facilities. It is also working to increase its footprint in the retail sector, and has established a joint venture with two large pharmaceutical distribution companies to invest in a chain of pharmacies in the Kingdom and neighbouring countries.
Tamer Group’s third-party logistics company has established an efficient 3PL that was selected by major international companies like Nestlé and Kraft (Mondelez) to be their third-party logistics services provider across the Kingdom.
Healthcare in Saudi Arabia
Tamer Group has continued to outpace the healthcare market in the last five years, increasing its business an average of 25 to 35 percent per year. As the market has matured, it has evolved from a simple product distribution company to a full-scale healthcare institution, which imports, manufactures, distributes and promotes products, as well as providing after-sales service to the healthcare community.
Healthcare in Saudi Arabia
$5bn
Estimated worth of the Saudi Arabian pharmaceutical market
4,000
Pharmacies
6,000
Registered and generic medicines
4.3%
Amount of GDP spent on healthcare
The Saudi Arabian pharmaceutical market is estimated to be worth over $5bn, and is growing. Over 4,000 pharmacies distribute around 6,000 registered and generic medicines, making Saudis the largest consumers of pharmaceutical products in the GCC and MENA region. Annual health costs are estimated at over $600 per capita, and the Saudi Arabian government spends 4.3 percent of its GDP on healthcare, making it the biggest spender in this sector.
There are over a dozen pharmaceutical plants producing mainly generic drugs, but with 1.6 doctors per 1,000 population, and a dearth of beds, the market is underdeveloped: the Kingdom still imports over 80 percent of its medicines.
The government has encouraged increased private sector engagement in healthcare and, recently, the Tamer Group has worked with several prominent institutions to establish ARABIO, a vaccine factory to supply vaccines to Saudi and neighbouring countries in the MENA region. The government considers this a strategic commodity that will be available in the event of a crisis or pandemic, and the ARABIO has taken the lead by opening the first vaccine production facility in the Middle East.
Human capital development
But growth and prosperity has not distanced the Tamer Group from the spirit of philanthropy and service to the community that characterised it from the very beginning. That spirit continues to this day and pervades all aspects of the group’s operations, as Tamer recognises that human capital is vital to its prosperity. As such is at the centre of its attention, from its commitment to developing its employees to its community, environmental and social programmes.
“Empowering, training, developing and matching the skills and competencies of the Saudi nationals to the requirements of the job market is key to the success of the economy of this country and of the Tamer Group’s future. The private sector needs to focus its efforts to support the government’s programmes of nationalisation and to strive to cover the mismatch in competencies between the educational offering and the practical skills and specialisations required in the private sector, particularly when it comes to healthcare.
“The shortage of Saudi pharmacists in the Kingdom, which is estimated at 30,000 plus, is one of the examples of this mismatch,” said Ayman Tamer, Chairman and Managing Partner of the group.
Hiring and training women is also a priority for Tamer Group, and it aims to increase the number of female employees from 60 at the moment to 300
The Tamer Group takes it upon itself to train its employees on the job. Having set up training academies, the group enhanced the overall performance, job satisfaction and retention rate of new employees thanks to its carefully designed intensive training programme, which is co-sponsored by the Human Resources Development Fund. Hiring and training women is also a priority for Tamer Group, and it aims to increase the number of female employees from 60 at the moment to 300, or 10 percent of its staff, and to encourage them to participate and compete for leadership positions in the organisation.
Furthermore, the group’s strategy to develop its human capital capabilities includes a scholarship programme to enable employees to pursue higher education and agreements with various universities in Saudi Arabia to recruit trainees and permanent staff. Ongoing workshops on topics like healthcare and safety, and initiatives like staff exercise and health assessment programmes complement the educational and training offering.
All these reflect the fact that employees are indeed at the centre of the group’s endeavours and help to explain why last year Tamer Group was voted as the second best work environment in Saudi Arabia in Al Eqtisadiah’s newspaper annual ranking. While the group does its part to contribute to community-building in the Kingdom, it would like to see a more concerted effort among private companies in this area.
A platform for CSR
“It is the duty of every leader to have dual responsibility, one for the performance and success of his organisation and the other for his contribution to the community,” said Tamer. The initiative that perhaps best illustrates Tamer Group’s engagement with the community is its corporate social responsibility platform, SA’AID. The name of the programme means ‘forearm’, which symbolises the part of the body that connects the ‘community’ to the hand, which symbolises ‘the company’.
Three generations of managers have lead Tamer Group since 1922. The group is committed to developing human capital and CSR initiatives
In English, ‘SA’ is an abbreviation of Saudi Arabia, while Aid represents reaching out and collaborating. SA’AID is structured to address five main areas or arms: namely, health awareness and education; art and culture; environmental conservation; workplace wellness; and women’s empowerment.
As a leading healthcare group in Saudi Arabia, Tamer Group understands that health education and prevention is a service of utmost importance to the community, given the prevalence of lifestyle-related diseases among the youthful population. As such, the group engages with the Saudi population through holistic approaches that incorporate technology, social media, and school and community activities.
Partnering with the Ministry of Health, schools, universities, malls and other pharmaceutical companies, Tamer Group works to raise awareness about the effects of lifestyle-related conditions like obesity, diabetes, and hypertension by building sustainable programmes such as health education films, through which SA’AID aims to build a digital library that will be uploaded through social media and distributed to all public and private hospitals and healthcare centres.
“I would like to see the group on the path to continued growth, all the way acting as an agent of social development in Saudi Arabia,” said Tamer. “And, thinking outside the box, I envision the possibility of branching out into additional business lines to address the needs of the Saudi society, such as the establishment of training centres aimed at developing soft skills.”
While there is uncertainty as to whether banks can be trusted once more on an international scale, Morocco’s banking sector fulfils its role as a responsible lender to the economy as well as funding the country’s various reforms and structural projects, providing support to large companies and SMEs.
A number of key indicators are testimony to the strong growth momentum seen over the past decade. Banks in Morocco have had total assets tripled while shareholders’ equity has quadrupled. Resources have grown by 123 percent and loans to the economy have risen by 225 percent over the same period. The country’s net banking income has doubled against a backdrop of improved risk management with the non-performing loan ratio declining by 14.2 percentage points.
Another indicator underlining the banking system’s commitment is the proportion of loans to the economy in the GDP, which is currently standing at 87 percent, having risen by more than 30 percentage points in just five years from 56 percent. The Moroccan banking system continues to demonstrate its strong fundamentals. In the first half of 2013, banking institutions listed on the Casablanca Stock Exchange saw their consolidated net income rise by six percent to $702m.
The source of growth
The search for profitability has not been undertaken at the expense of risk provisioning. In the first half of 2013, loan loss provisions rose by 16 percent to $380m. At the same time, the non-performing loan ratio of 5.4 percent in June 2013 is altogether manageable given Morocco’s economic potential. Similarly, banks have continued to expand their branch networks across the entire kingdom with more than 1,750 new branches being established. The percentage of citizens with a bank account currently stands at 55 percent versus 24 percent in 2002.
In 2014, there will be a greater demand for Moroccan products, resulting in a stronger export growth
Over the medium term, the future development of Morocco’s banking sector naturally lies in its expansion into other African countries. Already in 2012, the continent contributed almost 16 percent to the net income attributable to ordinary shareholders of Morocco’s three leading banks. The latter themselves account for two-thirds of the deposits and loans of Morocco’s banking system.
Another indicator of this solidity is the fact that Morocco’s central bank, Bank Al-Maghrib, has strongly encouraged credit institutions to implement the new international capital adequacy requirements under Basel III. The deadline for implementing measures that included raising the required level of shareholders’ equity and complying with short-term liquidity ratios was the second half of 2013.
Meeting solvency requirements
In order to measure the impact from implementing the Basel III regulatory measures, banks have already conducted impact studies in association with the central bank, which show that they are already capable of implementing these new measures. The required solvency ratios, nine percent for Tier One capital and 12 percent for the total solvency ratio, have already been met.
In economic terms, the Kingdom of Morocco has benefited from the state’s ability to respond immediately to its need for inclusive and balanced social development. The political stability in Morocco – which is highly valued by the investment community in a region characterised by political upheaval – has underlined the country’s attractiveness. Initial data for 2013 suggests that Morocco is once again the leading recipient of foreign direct investment into North Africa.
The Moroccan economy continues to grow in line with the trend established over the last 10 years, at an average annual rate of more than 4.6 percent. By implementing a series of sector-based plans in agriculture, industry, renewable energies, tourism and offshoring, and by increasingly diversifying its trading partners to include emerging countries, the Moroccan economy has continued to deliver robust growth and increasingly diversifying its trading partners to include emerging countries. The rest of the world – excluding Europe – now accounts for 40 percent of the country’s trade versus 30 percent in the early 2000s (see Fig. 1).
Source: IMF. Post-2013 figures are IMF estimates
For 2013, household final consumption expenditure was expected to rise by six percent, taking over from government spending due to budgetary constraints, while non-agricultural activities are likely to register, once recorded, an increase in added value of more than three percent. In 2014, there will be a greater demand for Moroccan products, resulting in a stronger export growth thanks in part to the eurozone’s recovery and sustained demand in emerging countries. This means non-agricultural growth should rebound by almost four percent.
Revising the Moroccan banking sector
One of the government’s longer-term objectives is to progressively reduce the budget deficit to below three percent of GDP by 2016. The country’s various sector plans should increasingly bear fruit and, in contributing to a reduction in the balance of payments deficit, further boost the Moroccan economy.
Morocco’s banking sector
1750
New branches
55%
Citizens with a bank account
In 2014, additional measures are likely to be adopted and aimed at enhancing the ability of the Casablanca Finance City to attract and capture new foreign investment. This multi-sector investment hub will be a catalyst for the further development of Morocco’s capital markets.
The Kingdom of Morocco benefits from a rich political legacy, strong spiritual and cultural historical ties with Africa, and is a logical connection for entering the sub-Saharan African markets. With this in mind, BMCE Bank will continue to work towards delivering sustainable growth and creating value. In Morocco, by reorganising BMCE’s branch network through territorial divisions, its decision-making process will be decentralised in the interest of customers. The range of products and services will continue to be adapted to meet the specific needs of local customers and the bank will endeavour to provide banking services to as many citizens as possible.
The successful transaction of an international bond issued by a private sector Moroccan company further underlines BMCE’s international ambitions. Overseas expansion will result in the bank generating an increased share of its revenues from foreign currency sources and diverse geographical regions. BMCE’s expansion in Africa, through the Bank of Africa Group, will be central to its strategy in 2014. The long-term objective is to cover virtually the entire continent over the next 15 years.
The second largest country in Latin America and the eighth at global level, Argentina has an estimated population of around 40 million. Its developing economy is based mainly on primary exploitation and the manufacturing of natural resources, through local employees trained for that job. Argentina’s growth potential can be related to the non-conventional hydrocarbons field (shale gas), which is known locally as ‘Vaca Muerta’ (Dead Cow). It is considered the second biggest field in the world regarding non-conventional hydrocarbon gas reserves, and fourth in terms of oil. It is estimated that the appropriate exploitation of this field could, in the future, place the country as a global player for oil and gas in an approximately 10-year horizon.
The country is one of the few that possess abundant reserves of lithium, which is fundamental for the production of electric batteries. Together with Bolivia and Chile, these three countries represent more than half of the global reserves of the strategic mineral. In an estimated total of 40 million worldwide, Argentina has six million lithium tons reserves.
A new contender for BRICs
The appropriate development of these natural conditions means Argentina may join a new generation of BRIC countries, defined by a high level of political stability, high growth rates, a great amount of natural resources, and a highly qualified workforce that also has favourable conditions to increase trade.
Already in 2006, Takashi Kadokura, researcher of the BRICs Research Institute of Japan, developed the VISTA concept, which included Vietnam, Indonesia, South Africa, Turkey and Argentina, as the new emerging generation to consider in the worldwide scenario. Currently, Argentina’s economy sustains its growth through the exportation of agricultural products, such as soya, wheat, seed corn and its derivative manufactured products. In that sense, Argentina is in third place as global exporter of soya, behind the US and Brazil.
[T]his situation of high tax pressure has contributed to take away competitiveness from Argentine companies
The country also possesses a manufacturing sector oriented to the local market, and a strong services sector with high added value – software, audio visual content – that contributes to a considerable flow of export.
In terms of GDP, over the last decade Argentina has grown around seven percent annually. However, there were significant distortions in matters of taxation. Firstly, there has been a growth insurgence of the state related to the economic development of the country.
To finance the state’s growth, tax pressures have been noticeably increasing over the last decade. This has converted Argentina into a country with the highest tax pressure of Latin America, according to CEPAL – displacing Brazil from that position. In this sense, the tax pressure has increased 20 points, going from 22 percent of GDP to approximately 42 percent.
Regressive tax factors
This significant growth of public spending has been accompanied by the increase in the relative importance of non-sharing national revenues, from the national government to provincial governments (See Fig. 1). This fact received a contribution by the creation of taxes over the exportation of goods and over bank account transactions.
The decrease of the relative weight of public resources in local government hands has resulted in the increase of tax aliquots of certain regional taxes such as stamp tax and turnover tax – both of which are collected by local governments.
From the origin of the state incomes point of view, Argentine tax collection is fundamentally based on income and VAT, which represent approximately the 14 percent of the GDP of the country. By definition, the VAT is considered a clearly regressive tax, as it affects each individual equally, independently of a person’s contribution capacity. This tax represents a collection of eight percent of the GDP, and the income tax the remaining six percent. The percentage of this last tax in respect of the GDP results quite inferior to international standards, due to, mainly, the existence of a portion of the informal economy still high in relation to the total country economy.
Even though the income tax considers the contribution capacity of the individuals, in Argentina, the lack of actualisation of deductions and tax scales in accordance with the increase of the general price index, means in practice, income tax has become regressive as a result of the payment of nominal incomes tax affected by an inflation rate around the annual 12 percent. Certain distortionary taxes such as exportation and importation right and bank transactions tax represent approximately the five percent of the GDP of the country.
As we previously mentioned, total tax pressure represents approximately the 42 percent of GDP. We arrive to this figure adding to the national taxes mentioned before (income tax, VAT, exportation and importation rights and bank transactions tax), provincial taxes such as turnover tax and stamp tax.
Within the last decade, Argentina has transformed a good tax system into one based on regressive and distortionary taxes that affect individuals
It is clear that this situation of high tax pressure has contributed to take away competitiveness from Argentine companies opposite the companies from the rest of the economies of the region and globally. Within the last decade, Argentina has transformed a good tax system into one based on regressive and distortionary taxes that affect individuals and the competitiveness of companies, interfering with business development and employment. In view of this scenario, a comprehensive tax reform should be put together with a sustainable and viable administration of public finance.
Therefore, the pillars of that reform should include applying the tax adjustment for inflation and the actualisation of deductions and tax scales that could stop the income tax payment over fictitious incomes. It should also include the reduction of distortionary taxes such as the bank transactions tax, letting its calculation be a payment on account of other taxes – specifically income tax in regards to exportation rights. Finally the setting-up of tax incentives to SMEs, as well as the reduction of informal economy should also be a factor.
The horizon of reforms
At Grupo GNP we believe that in the medium term the necessary reform of the tax system will occur, so as to generate the desirable convergence of Argentine tax pressure to more reasonable levels regarding international standards.
Meanwhile, companies based in the country and foreign investors who wish to invest in Argentina should, in view of the preponderance of tax factor in business, give a hierarchical structure to the analysis and decision-making in this business aspect. The focus for Grupo GNP is to perform efficient administration on outstanding tax matters in Argentina, and the rest of the countries in Latin America, as well as the strategic and business focus that has distinguished the organisation since it was founded, resulting in strong growth over the last few years.
Strongly specialised in tax and business consulting, the company offers high quality services and commitment, supported by a profound technical knowledge and focus on business, at a national and international level. The professional team is highly adept in the industry, working to the best tax strategies that allow clients to maximise the result of their business, with quick answers adapted to their needs.
Over the past 25 years, the commercial aviation industry has seen significant change thanks to the introduction of what are known as ‘open skies’ agreements. They have deregulated the industry, allowed for increased competition on routes and thereby reduced prices. In contrast, private aviation is still stuck in an era where charter prices aren’t usually displayed on a broker’s website and when a rate is given it is up to the customer to find out whether all costs are included and who the operator is. The problem is magnified by the bewildering array of aircraft ranging from size and seats to speed and range. Fittingly, it isn’t governments that are opening the industry to competition, but the private sector, and one company is leading the way.
The current number of turbo-prop and private jet journeys taken to, from and within Europe is over 600,000 per year. Only three of the top 20 city pairs in Europe are pure leisure routes – 17 of these are dedicated to business travel. The company is Victor, and transparency is the hallmark of its online private jet charter service. It is a pioneer in a number of ways. Crucially, Victor does away with the middleman and connects customers with the aircraft operators. Clive Jackson, the company’s CEO, is championing transparency and regulations in the air charter broker industry. But rather than simply wait for legislation to come, he has elected to lead by example.
Transparency and pricing
Membership of Victor is free and no prepayments are required. Members get access to over 600 aircraft, which operate from 40,000 airports worldwide. But the company’s scale is just the start. The really unique trick that fuels Victor’s system is the pricing structure. There are no hidden charges and quotes give an all-inclusive price, along with actual photographs and age of the aircraft being booked. Members can compare quotes from leading, named operators, book and pay online.
This transparency puts power back in the hands of private aviation customers
This transparency puts power back in the hands of private aviation customers. This creates a price-point that is driven by supply and demand. Not only can members see the supplier, they can see how many suppliers are available to offer them a jet, to fly from A to B at any point in time. If there are several, they can expect to pay a good price, and if there are only a few, they can expect to pay a premium. In contrast, the usual business model can be used to maximise profit for the intermediary as commissions can vary widely.
“The way private jet charter is sold is unregulated. This is not financial services,” says company CEO Jackson. “There is no regulation about the amount of commission you can make, there is no regulation about the disclosure that you have to make as to how much commission you’re adding on or creaming off, and in fact there is no disclosure or obligation to say that you can’t get commission from the client and then also commission from the supplier.”
With Victor, buyers complete their purchase online and the cost comes to no more than five percent over the cost of the jet charter, rising to 10 percent with a bespoke travel planning service. That’s all made absolutely clear upfront to the customer. And customers aren’t the only ones who benefit from this unique company. Typically, when single journey legs are booked through brokers, the plane returns from its destination empty, unless customers have been found who want to travel on the returning aircraft. In this case it has always been necessary to charter the whole aircraft, but through Victor, members can also buy empty legs and offset their charter costs.
It is hardly surprising that many owners of private planes are concerned about reducing the running costs of their aircraft, particularly in the current uncertain economic climate, and as a result list their jets on Victor’s website. “Our clients are often highly educated individuals with successful track records in business, many of whom have created wealth by making sensible investments and business decisions. At the same time, nobody wants to feel taken advantage of,” says Jackson. In fact, it is this line of thinking which led to him coming up with the idea for Victor.
Flight captain
Jackson has the polished look you would expect from a frequent private jet traveller. He is a serial entrepreneur in the online space and in 1993 founded digital marketing agency Global Beach. It became one of the leaders in its sector, working with many Fortune 500 and FTSE 250 companies including Bentley, Canon, HP and Unilever. In 2001, he spun out AutoTorq.com, a new business providing bespoke dealer marketing and services to car manufacturers and their dealer networks, across 53 countries.
Victor offers access to:
110
International operators
663
Aircraft
20,000
Airports
400m
Route combinations
Like many good ideas, the company was borne out of personal need. Jackson owns a second home in Mallorca and used to travel between there and London on BMI. The service was cancelled in 2009 and on the last flight he sowed the seed that became Victor. Frustrated that the airline was closing the route, he quickly polled his fellow business-class passengers to see how they intended to get to Mallorca in future. He left the flight with eight business cards and the idea of setting up a service which coordinated jet charterers on the island in order to offer a more luxurious way to travel there.
He was driven by the mantra of enabling customers to get more hours out of their day through the flexibility of private aviation. The service was initially offered through his website flyingmajorca.com but by the end of 2010, the destinations had expanded well beyond one island, and a name change was due.
Victor may sound like an unlikely choice but, in fact, the name is closely connected with the aviation industry. It is part of the NATO phonetic alphabet, but that isn’t the whole story. It is a name that works in 23 different languages and means the same thing. It really personifies the type of member that’s using the company’s service. The company recently secured a further £5m of Series A funding, with the main cornerstone investor being Jackson. His presence, along with the strength of the core product and plan, led to the funding drive being over-subscribed. Additional investors are understood to include a cross section of high-net-worth individuals, leading entrepreneurs and businessmen, investment bankers and hedge fund owners.
The company plans to use the funds to grow its team, invest in the technology behind its platform and expand the business beyond Victor’s original territories of the UK and continental Europe to Russia and the US.
“Europe, Russia, CIS and US are our priority markets for now,” says Jackson. “We recently joined the Russian United Business Aviation Association and signed a Russian cooperation agreement with Dexter (strategic partner of Vistajet in Russia), paving the way to launch our jet charter services on the Russian mainland.”
The company is also noticing a surge in the number of aircraft in Africa, so this may also provide opportunities for growth over the next five to 10 years. To take advantage of this, and fuel further international expansion, a Series B fund raising is planned within the next 18 to 24 months.
Up and running
More than 4,400 members – including large corporates and governments, live event customers, high-net-worth individuals and the who’s who of the entrepreneurial and sporting world – are currently using the company’s services. In just 24 months, Victor has generated in excess of 1,000 jet charter bookings and was ahead of forecast growth for 2013.
42 percent of genuine quote requests result in a booking, and 50 percent of all first time jet charterers book again within 90 days
42 percent of genuine quote requests result in a booking, and 50 percent of all first time jet charterers book again within 90 days, unseen in any element of e-commerce before. This is no exaggeration, as the typical conversion rate – the proportion of visitors who make a purchase – is reportedly only thought to be between four and eight percent for an internet giant like Amazon.
To further drive sales, the company is capitalising on the flexibility of private aviation by operating pop up services for travellers attending events like the World Economic Forum, the TEFAF art fair and Lamborghini’s Super Trofeo – the world’s fastest one-make motor racing series. Victor has also been confirmed as the private aircraft partner to Ryder Cup Travel Services for the 2014 Ryder Cup in Gleneagles, 23-28 September.
Unsurprisingly, these services allow travellers to pop up at the destination, often at very short notice, without having to divert from the fastest route or spend a night in a hotel. It suits the company to a tee and gives the traveller more time to enjoy the event.
In an unregulated private aviation industry, this impressive company is setting the benchmark for creating a fast, transparent and trustworthy service that challenges the status quo of the existing broker monopoly.
The growth of credit card use in emerging economies signals continuing development of these markets. But how can we understand what different countries need when it comes to financial inclusion? Ann Cairns, President of International Markets for Mastercard, sheds some light on the subject.
World Finance: Well Ann, obviously Mastercard is growing five times faster in emerging economies as it is in the United States. So what does this mean for emerging economies in terms of spending patterns and also development?
Ann Cairns: Well, obviously there’s a big secular shift that’s going on from cash into electronic payments, and that’s why you’re seeing some of these growth rates in some of the countries in the world. Sometimes governments are driving that shift, and they see that it’s very good for their economy to reduce the amount of cash, because not only does it save them money, sometimes up to 1.5 percent of their GDP, but it also increases transparency, and it really allows commerce to flow.
World Finance: Why is financial inclusion so important for emerging economies, and in turn the world economy?
There are actually 2.5bn on the planet today who don’t have access to any type of financial products
Ann Cairns: There are actually 2.5bn on the planet today who don’t have access to any type of financial products, and interestingly there’s something like 93m people in Europe, and if you’re actually excluded from the financial system, how do you do things that we would expect to do in everyday life? Particularly in places like Europe, where you might want to buy something on the internet, you may want to buy an aeroplane ticket, or a train ticket, and all of these things start to happen electronically now, so if you don’t have access to that it has a big impact on your life.
World Finance: Well we will talk about emerging economies, but just staying with Europe for the time being, and how are you addressing financial inclusion in this area?
Ann Cairns: One of the best examples is actually Italy, because 20 percent of the population who could have bank accounts don’t have bank accounts in Italy. And what the Italian banks have done, they’ve got together and created a pre-environment where they’ve put actually account numbers on pre-paid cards, and you can spend on the card, you can receive money on the card, and so they’ve created effectively a light bank account which really helps population.
World Finance: So now what markets are Mastercard focusing on in terms of credit cards and why are you choosing these markets?
We’re in over 210 countries and territories, so we’re pretty much focused on the whole world
Ann Cairns: Well we’re actually in over 210 countries and territories, so we’re pretty much focused on the whole world, but we look at some countries that are going through major change cycles, such as for example India, that’s rolling out its national identity program, Nigeria that’s doing a similar thing, countries like Mexico where you have a lot of different companies now trying to reach the small business providers, countries like Brazil where you are starting to see a revolution going, from card to telephone payments, and we work in all of these areas with partners on the ground to just try and reach the consumer in any way that works for them.
World Finance: So how do you approach the different markets, do you have a one size fits all approach?
Ann Cairns: We definitely couldn’t do a one size fits all philosophy because obviously there are big cultural differences, there are big timeline differences between where a country is and its development. I think, though, you could say that a tremendous amount of people have mobile phones now, and so the level of mobile phone readiness is high practically everywhere in the world, and that’s why we’re not just working with one or two mobile operators, we’re working with them across the whole world. So people like DoCoMo in Japan, Telefonica in Latin America, Deutsche Telekom, and Weve here in the UK, because what we’re trying to do is keep pace with what the market is demanding in the various countries.
So, for example, here in the UK you’re seeing things like, you can get on buses now, London transport, and just tap with your card. You’ll be able to do that with your telephone, because near-field communication is being rolled out here. In some of the more emerging economies, you’ll probably see mobile phone be used much more often than point-of-sale machines because the infrastructure isn’t there in the first place, so those economies can actually leapfrog and go to mobile more quickly.
World Finance: Is it more difficult then in emerging economies, because obviously they need to catch up in terms of financial inclusion, but then you’ve also got the rate that technology is advancing, so does that cause problems?
I think that the rate the technology is advancing actually helps the situation
Ann Cairns: No, I think that the rate the technology is advancing actually helps the situation, because when we start to roll out capability in Africa, there weren’t the landline infrastructures that we would have piggybacked off in previous geographies, so we started to roll out satellite technology to actually hook up to our global network. So these things actually advance what’s happening.
World Finance: Well how do you approach countries such as China, for example, where companies might have the monopoly in that country? Obviously China has UnionPay.
Ann Cairns: We’ve been working with UnionPay for a number of years, if you were in China you would see actually cards that are co-branded Mastercard and China UnionPay, and what happens is the Chinese cardholders can use our network when they’re travelling and UnionPay network isn’t available to them. So we actually have quite a good coexistence on the cross-border side. Obviously we’re very keen to do more things domestically in China and were thrilled that the Chinese have actually agreed with the World Trade Organisation that they will open up to foreign companies to play in the local arena, but we’re just not sure exactly when that’s going to happen.
By now most individuals have heard of ‘big data’ in some shape or form at a business level, and key decision makers have been busy determining what value they can derive from an organisation’s data, and how much budget should be allocated to manage this task. It’s not whether big data is important, but how the data should be managed and prioritised.
Big data was originally a conversation that began within IT teams, struggling to manage and store the mass of information as a result of daily business operations in a more online and connected world. Since the phrase was originally coined, it has now been cemented as a priority among boardroom agendas as executives realise the potential business value that an organisation’s data contains.
This is particularly true for financial institutions – a big data sector that arguably stands to gain more from the data explosion than any other industry. According to a recent study commissioned by New Vantage Partners, the conversation is further along with financial services organisations (FSOs) than most other industries in making use of predictive analytics.
Deciphering terminology
The management of big data and predictive analytics go hand in hand. Traditionally, and certainly for banks and FSOs, data storage has been purchased on an initial cost basis (CAPEX) with little regard being paid to the annual costs of items such as support and maintenance, IT staffing, power and the hardware and software needed to accommodate growth.
Big data by numbers
60-80%
Of all data in the financial services industry is unstructured
71%
Of FSOs are already using big data and analytics
Now, we are seeing numbers of organisations move beyond the hype, implementing big data analytics that help answer real business questions. Earlier this year, Intel made some noise about how its early forays into the space had resulted in as much a $8.94m payout, and the New South Wales government was noted for having rapidly adopted analytics as a result of its data centre consolidation programme.
In order to benefit from big data, organisations first need to better understand their unstructured data, and how and where it functions within the company. Typically, it is found in silos, and across multiple applications and platforms.
Looking to address this issue, ‘Data Defined Storage’ is an emerging category that unites application, information and storage into a single architecture, placing data at the centre of the equation. This enables data to define the architecture rather than vice versa. Users, applications and devices can access a repository of captured metadata. Once this data is available and transformed into information, the organisation can access actionable business insights, supported by an infrastructure that is both flexible and can scale in parallel with data volumes.
Banks and other FSOs are turning to big data, using insights taken from daily transactions, market feeds, customer service records, location data, and click streams to carve out new business models and services to transform their go to market strategies. Between 60 to 80 percent of all data in the financial services industry is unstructured, which causes major cost and compliance challenges, increasing business risk and making it difficult for organisations to gain value from their data.
These challenges can be resolved by implementing an infrastructure based on data defined storage – empowering organisations to look at their data as an asset instead of as an ongoing cost centre.
Knowledge into power
By recognising data defined storage as a new approach to managing, protecting, and realising value from large amounts of data, users and applications can gain access to a central repository of captured metadata and data.
In order to benefit from big data, organisations first need to better understand their unstructured data
With this knowledge, organisations are empowered to access, query and manipulate the critical components of the data, transforming it into business-ready information that can answer vital business questions, as well as deliver new insights not previously possible. Data defined storage also provides a flexible and scalable platform for storage of the underlying data.
Aside from providing answers to important business questions, there are many other benefits for FSOs, particularly when it comes to compliance, information governance automation and unification of data. By improving and automating information governance processes such as the indexing of data, data classifications, tagging and improved corporate compliance, FSOs increase their effectiveness.
This is realised through streamlining business processes to improve search capabilities, conducting early case assessments and other enterprise data-centric activities. The availability of regulatory compliance reporting allows organisations to stay one-step ahead of regulatory requirements and ensure transparent communication with teams, offices and relevant stakeholders.
As financial data flows into organisations, users can automatically separate the different log data that is generated by the trading platforms as flat text files, and dynamically assess content and type. Then, based on its business value, they can automatically separate and tag data types such as trade log data, relevant market data necessary for best execution retention, relevant market ticker data, and generic ticker data from irrelevant markets.
Each of these different data types have various business values, and can be deployed for multiple purposes, ranging from tracking and processing trading activities and satisfying regulatory demands to driving predictive analytics for future trading. The data can either be saved for long-term retention on tape, or destroyed if it is useless, like generic ticker data from irrelevant markets.
FSOs often overlook the ability to monetise unstructured data within the business. This data contains the sum total of all knowledge within the enterprise, which holds value to third parties as well as improving processes internally. By implementing a data defined storage infrastructure, FSOs are able to mine the net worth of their data and manage through data-in-place dash boarding and analytics. This creates potential cost savings and increases a competitive advantage.
The benefits of big data
For the last few years, there has been a lot of talk about big data and its potential value to business. Looking ahead in 2014, we will begin to see true success stories emerging as organisations begin to make good on their quiet preparation and investment to uncover the value of their data.
3 big benefits
Improved business efficiency
Reduced business risk
Enhanced business agility
Delivering mission-critical business value is most certainly linked to advanced data strategies that can address the spectrum of challenges and opportunities that are dictated by unstructured data. According to a survey by the University of Oxford and IBM’s Institute of Business Value, a massive 71 percent of financial services companies were found to already be using big data and analytics. As a result FSOs have realised that data is critical in delivering a competitive advantage in an industry that continues to rebuild after a worldwide financial crisis.
As businesses of all sizes look to optimise data as a strategic asset, the goal is to make data management invisible to end-users. To use an analogy, most car drivers are not interested in how the engine functions, but rather are only concerned with what happens when pressure is applied to the gas pedal. With a data defined storage solution, the equivalent of the car is an application that provides a unified approach for compliance and search while enabling security – and all at the data level – not the device level.
By embracing data defined storage, FSOs and other organisations will be able to benefit from three core business benefits. Firstly, improved operational efficiency for reduced total cost of ownership by up to 80 percent over time; secondly, reduced business risk by addressing data security and information governance challenges. Lastly, it will enhance business agility and decision making for improved revenue growth.
The data-driven world we live and work in today demands a new way of managing and storing data. Following the financial crisis, FSOs must also adhere to a changing regulatory environment that looks to better protect businesses and their customers from data privacy and security threats. Organisations must better utilise available technology to help improve operational business efficiencies and maximise knowledge gained from critical business data.
Smart CEOs, CIOs and the new emerging role of Chief Data Officer are already working on how they redefine the way in which they hold data within an organisation. Whether they look to build in-house or work with a trusted partner, they need a technology solution that can be deployed with their existing technology infrastructure and applications, grants access for various access levels and enables a dashboard of real-time, data-in-place analytics.
With a true visualisation of business data, FSOs will be able to offer more tailored services, based on better insights and understanding of the industry and their customers. Designing storage with data at its heart also lowers the total cost of ownership for FSOs.
At a time when IT budgets are being squeezed across the board, investing time and budget into a data defined storage infrastructure will resolve many challenges and provide a sustainable competitive advantage, all in one simple implementation. On-track CEOs will ascertain who they can identify to help them better manage and gain value from data.
Energy means development, evolution and growth. This has been one of the reasons why throughout my professional career I have been involved in energy-related topics, and today more than ever, I am certain of the importance of the sector in any country in the world.
An example is the fact that over the 117 years of its history, Empresa Energía de Bogotá (EEB), parent company to Grupo Energía de Bogotá, has played a fundamental role in the progress and development of the energy sector, not only in Colombia, where it is based, but in other Latin American countries where it operates, such as Peru and Guatemala.
We have invested in these countries armed with our long-standing knowledge and expertise in the energy chain (generation, transport, distribution and commercialisation). That expertise has seen us recognised as a sound corporate group, and also demonstrates the faith we have in Colombia, and the Americas.
Our energy projects do not only contribute substantially to development in the countries where we operate, but they also contribute to competitiveness, reducing poverty levels and improving the quality of life of the entire population. But we are aware that this is not enough. We strive to become a model of global responsibility under which we base all our endeavours alongside our main stakeholders, such as communities, vendors, clients and workers.
One of our most significant challenges is strengthening ourselves as a corporate group, always working with the highest quality standards, with a high regard for the community, respecting the environment and acting as a fundamental growth pillar in the areas where we have presence.
Grupo Energía de Bogotá
$7.9bn
Total assets, Q3 2012
$8.2bn
Total assets, Q3 2013
68.1%
Percentage Grupo Energía de Bogotá owns of TGI
We take pride in knowing that EEB is among the 54 world companies that are part of Global Compact Group Lead; that as of January 2014 we will be part of the board of directors of such a select group; and that in 2013 we were ratified in the Dow Jones Sustainability Index (DJSI), under the category of emerging markets. The DJSI is the main world benchmark measuring the contribution companies make to sustainable development and economic, social and environmental performance.
Similarly, we were the first company in Colombia and among the first in Latin America to receive certification regarding efficiency and responsible use and consumption of energy. This acknowledgement was awarded after the external auditing company Bureau Veritas Certification successfully completed the ISO 50001 certification process.
Another relevant fact relates to corporate transparency, carried out by Corporación Transparencia por Colombia, which improved our rating from 86 to 94 in 2013. At the same time, we were selected in the fourth round of sound corporate practices by the business integrated planning model.
Partnerships and holdings
Over the years, we have been regarded as one of the leading groups in the energy sector in Colombia. Through EEB, we transport electricity to the largest market in the country with the highest demand rates, and further participate in the distribution of electricity through our affiliate company, Empresa de Energía de Cundinamarca (EEC).
Likewise, we own 68.1 percent of TGI, the largest gas transport company in Colombia, which services the fastest-growing market in the country and operates 3,957km of gas pipelines, with a transport capacity exceeding 730 MPCD (million cubic feet day). It is of the utmost importance that we participate in the sale of the 31.92 percent of TGI’s stocks currently in the hands of the financial company, Citigroup.
Should this operation be successful, Grupo Energía de Bogotá would be the owner of almost the entire stock of a sound and growing company, which would further increase revenues for the corporation.
In addition, we hold significant stocks in companies such as Emgesa (energy generation), Codensa (distribution and commercialisation of energy), Promigas (transport of natural gas) and Gas Natural Fenosa (distribution and commercialisation of natural gas). Although we do not hold control over these companies, we do receive significant revenues from their operations.
[W]e own 68.1 percent of TGI, the largest gas transport company in Colombia, which services the fastest-growing market in the country and operates 3,957km of gas pipelines
We have consolidated our portfolio in countries that we deem significant to our dividends. Thus, in Peru, our affiliate Contugas has a 30-year concession contract to transport and distribute natural gas in the Department of Ica and our affiliate Cálidda (also a 30-year concession) is in charge of distributing natural gas in Lima and Callao. In that same country, together with ISA, we participate in REP and Transmantaro, which operate 63 percent of the electric power transmission system in the country.
In Guatemala, our affiliate company Transportadora de Centroamérica (TRECSA) is in charge of the construction of the largest energy infrastructure project in the country and it is predicted that it will be ready to begin electricity transmission services in 2014. We constantly strive to become one of the largest energy groups in the Americas.
Therefore, we would like to continue to expand to other countries such as Brazil, Chile, Ecuador, Panama, Mexico and Canada. Our commitment saw results when we were appointed to the Presidency of the Regional Energy Integration Commission (CIER – by its Spanish acronym), which aims to achieve energy integration in South and Central America and the Caribbean.
It is worth highlighting that CIER comprises companies and entities in the energy sector of South America and related members of the Americas and Europe, which seek to foster regional energy integration by developing technical cooperation activities and the exchange of knowledge and experience among member countries.
Grupo Energía de Bogotá’s appointment to CIER reinforces the company’s reputation as a strong entity, with a portfolio including controlled and non-controlled companies, allowing it to become one of the most important energy corporations in Latin America. This trust constitutes a new challenge that must be answered with hard work, loyalty and, above all, commitment to strengthening the energy sector in the region.
Bidding war
We have set out to achieve an ambitious goal: to take over the third-largest energy generation company in Colombia, Isagen, in which we already hold a stock of 2.5 percent. We are aware that to achieve this, we will be bidding against very prestigious companies, but we will be forthcoming and will prepare ourselves in the best way possible to win the bid. Through the acquisition of Isagen, we would also secure one of the country’s largest energy generation projects – the hydroelectric plant in Sogamoso – with which we would hope to revamp electric power export and supply to neighbouring countries.
In addition, we are currently developing five projects in different areas of Colombia, which were awarded by the Energy Mining Planning Unit (UPME), an entity attached to the Ministry of Mines and Energy. These initiatives are of increasing importance, as they are aimed at ensuring that electricity services reach the main cities in the country. Also, as part of our growth strategy we would like to participate in the next UPME tender offers, which will strengthen national expansion and development with projects amounting to $2.2bn.
As shown, to achieve our purpose we do have in place an ambitious investment plan for the next four years amounting to $7.5bn, which will ensure our growth as a corporation. In this regard, I must state that our results have been acknowledged by national and international companies. Accordingly, Fitch Ratings ratified for a second consecutive year EEB’s corporate credit rate in local and foreign currency, maintaining grade BBB – with a stable outlook.
On the local scale, Fitch also confirmed EEB’s ratting as AAA, the highest in terms of credit quality. Likewise, Moody’s and Standard & Poor’s ratings qualified EEB’s corporate credit rate with grade Baa3 (with stable outlook) and BBB- (with stable outlook), respectively.
Today we are an international point of reference in the public utilities market, in large part due to our dedication to upholding the institutional nature of the company as defined by the relevant regulatory and legal frameworks. We operate with legal assurance and apply the knowledge and the experience we have acquired.
This overview clearly evidences our constant growth, which means that we have a great responsibility not only to our shareholders, but also to our clients, vendors and, in general, with all the communities and stakeholders with whom we work. We are mostly a public stock company from Bogota, but now have significant undertakings in the wider country and abroad. Together with our main stockholder, the District of Bogota, we have committed to growing in a responsible and sustainable manner.
This strategy has received the support of our minority stockholders, evidenced by the fact that EEB’s share negotiated in the Colombian Stock Exchange was the leading valued stock during 2013, growing around 20 percent (see Fig. 1). I am convinced that we still have a lot of energy for growth. Energy as a driver for work – generating value for our country and anywhere in the world.
This year, the European Central Bank will conduct stress tests in an attempt to prevent against future banking failures. Gerard Lyons, Chief Economic Advisor for the Mayor of London, discusses whether this year’s stress tests are doomed to fail, whether lack of transparency threatens global recovery, and if being exempt from the tests gives London an advantage
Europe’s banking system is headed for an overhaul, with the European Central Bank set to supervise the largest banks in the Eurozone later this year. The move is aimed at preventing another round of banking failures that were said to contribute to the global financial crisis. I’ve come to speak to Gerard Lyons, Chief Economic Advisor for the Mayor of London, to see how the ECB supervision and stress test will affect the recovering banking sector.
World Finance: Well Gerard, the ECB will be conducting stress tests to gauge how the banks would fare if economic conditions deteriorated. Do you think the ECB should step in, or should there perhaps be greater demands made by shareholders?
Gerard Lyons: This whole process I think is a real positive development, a step in the right direction, not just in terms of Europe, but in terms of the global economy. The financial crisis was in many respects a banking crisis, and it became global, so there are many different aspects to that banking crisis that are being addressed and some that still need to be addressed. So what was seen here is the European Central Bank really addressing the issue head on.
This whole process I think is a real positive development
World Finance: How will these tests differ from previous ones, as Europe’s stress tests in 2010 and 2011 were said to have failed on all fronts?
Gerard Lyons: We have to bear in mind here that the European and indeed the world economy was in a very different shape a couple of years ago. The good news is that the economies are turning a corner, policy is being seen to work. The European Central Bank in terms of Europe I think has done an incredibly good job to basically prevent the self-feeding downward spiral that we saw a few years ago and to actually turn the European economy around. There are still problems, as the IMF pointed last week, in terms of demand and inflationary risks, but in terms of the banking sector itself this stress test is different, because there’s really two parts to it. There’s the first part that we had before, the actual stress test, how would the banks perform under different adverse economic scenarios. But the difference this time, the second part, is the asset quality review, the ability to actually see what the assets are worth.
World Finance: Well Europe’s economy depends on banks for credit much more than that of the States for example, making strong balance sheets vital for the banking system. Do you think there is enough transparency when it comes to balance sheets in Europe?
Gerard Lyons: The capital markets play a far bigger role in the States compared to Europe, and indeed one of the ongoing issues in recent years is whether Europe could benefit from moving more towards that US capital markets approach. But in terms of transparency, I personally don’t see an issue here. I think the real issue is not only the state of the European economy, and included within that the UK economy, but also the future role and the financial role in particular the banking sector plays.
[I]n terms of transparency, I personally don’t see an issue here
World Finance: Well as you just said, European bank tests are different than those applied in the United States, where do you stand on the argument that universal standards should be put in place?
Gerard Lyons: As we saw in the crisis, to coin the phrase of the former governor of the Bank of England, in life banks are international, in death banks became national. It was the taxpayer, the domestic economy shall we say, that became the backstop for the banks, not just in Britain but in terms of other countries. So it’s important from a domestic perspective that individual taxpayers, people, businesses, and policymakers are confident about the strength and the resilience of their own banking sector. But more particularly, in reference to your question, it was a global crisis, and we saw that banks were international. Therefore, ideally we want to have a global response.
World Finance: Obviously the UK is not part of the Eurozone, what does the UK have in place that’s similar to the ECB stress tests?
Gerard Lyons: The Bank of England put out a discussion paper at the end of last year about the whole stress test issue, and they were taking responses. The idea is to have an annual concurrent stress testing here in the UK, but given that we have a very strong financial regulatory environment in place, we’ve had big changes put in place here in Britain in the last few years, very much highlighted at The Bank of England. We now have a financial policy committee, we already had different institutional frameworks in place, with the same aim to make the financial sector resilient, and indeed as transparent as possible. But further annual stress tests look likely I would argue, or suggest, here in the UK.
World Finance: And will not being part of the ECB stress test give London, as a financial capital, an advantage over the rest of Europe?
Gerard Lyons: The UK being outside the Euro has led to this issue in the last couple of years about the Eurozone versus the non-Eurozone. But those challenges I think have been addressed in the last couple of months, and so London is Europe’s financial sector, it’s important that the UK in my view stays part of the EU, but we clearly in the UK will not join the Euro, so that relationship that seems to be working well at the moment between Eurozone and non-Eurozone members needs to work well in the future as well.
I think the key thing is…to make sure that the recovery continues to gather momentum
World Finance: Well if the perception of EU banks is weaker following the test, how will it affect Europe’s competitiveness on the world stage, and will this have a knock-on effect for the UK banking sector?
Gerard Lyons: I don’t think it’s about just the banking or financial sector, I think it’s about the economy overall, and the world economy is changing quite significantly. The world economy has grown pretty strongly in the last few years, we now have multi-speeds in terms of the speeds at which different countries are growing. Some of the emerging economies are slowing down, the US economy is picking up speed, the UK and European economies are also picking up speed at different rates. So I think the key thing is, from a policy perspective, to make sure that the recovery continues to gather momentum.
Corporate governance is important to non-financial corporates. But it is far more important in the financial services industry (FSI), as poor governance may disturb the stability of the overall economy of a nation, as well as its financial system. In particular, an efficient allocation of financial wherewithal through banks is a task of national significance that determines the competitive strength of a nation and the wealth of its people. In that regard, to ensure an equitable resources allocation, most countries restrain industrial capital from dominating the banking sector.
In the early 1980s, as part of the privatisation of the banking sector, the South Korean government introduced a policy that limited a single investor’s shareholding in banks lest any large company should use a bank as its own till. There were many changes to policy since then, and eventually the Banking Act limited the investment ceiling in a nationwide bank to 10 percent. This led to a dispersed share ownership which, in turn, gave rise to the absence of controlling shareholders. Thus, the role of the board of directors in supervising a company on behalf of its shareholders has become far more important in the FSI.
Corporate governance in South Korea
It was not until the Asian financial crisis in 1997, when some badly managed financial institutions with poor corporate governance went bankrupt, that a consensus was reached on the need to improve managerial transparency and the efficiency of the Korean FSI.
The effort to improve the corporate governance of the FSI is one of the buzz topics in South Korea
Since the crisis, corporate governance in Korea has improved a great deal in terms of its institutional framework. Alongside the release of the OECD’s Principles of Corporate Governance in 1999, Korea announced its own ‘Corporate Governance Standards’ that prescribed “improved rights of minority shareholders”, “bigger proportion of outside directors in the board”, “stronger independence of board”, “tighter disclosure”, and so on. In 2000, the “outside director requirements” were made mandatory.
In institutional terms, FSI boards began to be operated around outside directors. At the initial stage, however, some outside directors were not up to providing checks against and presiding over banks’ executive teams, as they lacked technical knowledge in bank management. As more sessions of orientation and education are given to outside directors, coupled with tightened qualification criteria, the original idea of “checks and balances” will gradually be satisfied over time.
Another issue concerns the independence of outside directors. This has already been addressed to some extent, as any element that might affect outside directors’ independence has been included in disqualifying criteria. Furthermore, their independence will be reinforced when the publication of corporate governance reports is made obligatory in the future.
The effort to improve the corporate governance of the FSI is one of the buzz topics in South Korea. The Financial Services Commission (FSC) is in the process of legislating on corporate governance for financial companies. The soon-to-be law sets out the basic principles in bare minimum with respect to corporate governance to take into account diversity and flexibility at individual company level. If passed, this law will make it mandatory for financial companies to disclose CEO appointment processes and publish annual corporate governance reports.
Corporate governance disclosure is sure to improve board operation, as it requires companies to make specific descriptions of the activities engaged in by the board to increase enterprise value. It also recommends the setup of the executive committee to ensure managerial transparency by requiring financial companies to take minutes during their major decisions, comparable to those of board meetings.
Besides, the law propounds bigger roles for the audit committee and improved rights for minority shareholders through the adoption of rights of shareholder’s proposal and less stringent requirements for filing class action suits. All these components clearly show that corporate governance in the Korean FSI has made great strides, not only in form but also in substance.
Leading the industry KB Kookmin Bank is the largest affiliate of KB Financial Group (KBFG), which was established in September 2008 to cope with the changes in the financial climate, such as capital market growth and the increased need for integrated financial services. KBFG comprises 10 domestic subsidiaries and 16 overseas networks.
KB Kookmin Bank
21,600
Staff
27.42m
Customers (as of March 2013)
1,190
Sales outlets
$252bn
Assets (as of June 2013)
KB Kookmin Bank, a combination of two former state-owned banks that specialised in retail finances and home mortgage respectively in the 1960s, has grown into Korea’s leading bank. It has maintained a commanding lead in retail banking, which is a result of the merger of former Kookmin Bank and Housing and Commercial Bank, which had contributed immensely to the spectacular development of the Korean economy.
The remarkable feat of having been ranked first in the National Brand Competitiveness Index for the 10th consecutive year and in the Korean Industry Brand Power for the 15th consecutive year (both compiled by two different brand research firms) attests to the fact that KB Kookmin Bank, with its staff of 21,600, is leading the pack in brand power. The sheer size of its customer base also makes it a leading bank in Korea. As of the end of March 2013, 27.42 million customers, more than half of the Korean population, are banking with KB Kookmin Bank, which boasts of approx. 1,190 sales outlets and the biggest asset size in the country at $252bn (as of June 2013).
KB Kookmin Bank has the largest market share in deposit-taking and retail lending, and has developed a commanding lead in fee incomes from investment funds, bancassurance and trust products. Its strength is not confined only to retail banking. Trade Finance awarded KB Kookmin Bank an honour by selecting it as Korea’s Best Trade Finance Bank for three years running. It has also had the biggest market share of custody business for the past 10 years.
KB Kookmin Bank proved itself as the preferred bank of the Korean people by becoming the first Korean financial institution ever to have obtained the top position for eight consecutive years in the National Customer Satisfaction Index co-developed by Korean Productivity Centre and the US National Quality Research Centre of Michigan University.
Balance and appraisal
KB Kookmin Bank’s board of directors comprises a total of 10 members, six of whom are based outside the company. Its outside directors are specialists in the areas of economy, business management, law, etc., and are independent from either KB Kookmin Bank or its shareholders. To ensure transparent board of director activities, outside directors are subject to self-appraisal, peer and upward appraisal annually and the board of directors also makes a self-assessment of its activities every year.
KB Kookmin Bank has also separated the CEO post from the chairmanship, thereby reinforcing the independence of the board. Furthermore, it caps the tenure of outside directors at five years, even though the Banking Act does not prescribe the tenure of outside directors, on the supposition that long directorship may mar the independence of outside directors.
For the sake of efficient director operations, it commissions outside educational institutions such as KIOD (Korea Institute of Directors) to administer education to outside directors in addition to orientations given to them upon appointment. Workshops are held twice a year where directors can exchange views on management issues with the executive team.
A new breed of Korean banking
Good corporate governance contributes to the long-term and stable growth of a company and helps build mutual trust between the company and its shareholders and for that matter between the company and its customers. In order to support corporate governance in a company, a consistent culture must be embedded across the organisation.
In that sense, Mr Lee Kun-Ho, President and CEO of KB Kookmin Bank, upon his inauguration referred to a “great KB Kookmin Bank” as his management vision, “maximisation of value for customers” as his management target, and adopted “banking with story” as the bank’s methodology for realising his vision and targets.
‘Story’ here signifies the depth of customer relationship formed through interactive communication with customers. ‘Banking with story’ means providing products and services customised to its customers in a law-abiding and ethical manner based on a proper understanding of and long-term trusting relationship with its customers.
The idea is to go beyond the mere numerical information gleaned from a customer relationship management system to gain a broader and more in-depth understanding of customer needs by engaging in close communication with them. The very core of KB Kookmin Bank’s ‘banking with story’ is to have branch staff think how they can help customers achieve financial success instead of thinking how much they can make by foisting more lucrative products on them.
Instead of settling for just profit maximisation, KB Kookmin Bank is establishing robust corporate governance at its highest level, while introducing ‘banking with story’ to lay the foundation for achieving its management targets. KB Kookmin Bank is working to help build public confidence in the banking industry by inducing it to compete in terms of value proposition and to provide a more satisfying banking experience to customers.
Despite significant damage to infrastructure and agriculture at the hands of Typhoon Haiyan, one of the deadliest storms in history, the Philippine economy is expected to continue growing. In November last year, Typhoon Haiyan killed 6,100 people, displaced 4.1 million and damaged 1.14 million homes. The short-term effects of Haiyan are impossible to ignore. Economic Planning Secretary Arsenio Balisacan estimated that the typhoon could knock as much as 0.8 percent off the already depressed GDP, significantly slowing growth in the fourth quarter of 2013.
Furthermore, the currency reached its lowest point since 2010 at 45.25 pesos to $1 in January. Yet these impediments bear little importance in the longer term. Looking at the broader economic trajectory, the Philippine economy has continued to grow. In 2013 alone, its GDP growth rate stood at 7.4 percent, compared to 6.7 percent in 2012. The country’s economic growth rate has remained at a seven percent average since the third quarter of 2012, making it the second fastest-growing economy in Asia behind only China. Moreover, the Centre for Economics and Business Research forecast predicts that the country’s economy “will rise gradually from 42nd position in 2012 to 28th in 2028”.
In the months leading up to Haiyan, the Philippines suffered a series of other setbacks, including a 7.2-magnitude earthquake and political confrontation between Muslim rebels and government forces. Nevertheless, it has started the year strong, moving up eight places on the 2014 Index of Economic Freedom to 89th. Economic forecasts also remained positive, predicting growth of seven percent in 2013 and 6.7 percent in 2014.
Owing to the storm, however, the World Bank lowered its 2013 and 2014 forecasts to 6.9 and 6.5 percent respectively. The typhoon has marginally lowered these estimates for the time being, the reconstruction following the devastation is expected to boost the country’s economy in as early as 2015. Regardless of shaky economic forecasts for 2014, predictions for the country’s long-term economic success remain enviable.
Impacts on the larger and local scales
Although central areas of the Philippines have suffered catastrophic damage at the hands of Haiyan, economists believe that the financial impacts will be minimal. “Without doubt, the typhoon will have a negative impact on the country’s economic growth, but as callous as it sounds, the impact will probably not be all that big,” said Global Intelligence Alliance Managing Director, Aleksi Grym.
Despite the fact that many areas of the country were reduced to rubble, the economy’s strong structure remains intact
“The long-term outlook for the economy remains more or less unchanged. Investments into emerging markets like the Philippines are made with very long time-horizons in mind, and the risks, whether coming from natural disasters, political stability, or other sources, are more or less understood.”
Despite the fact that many areas of the country were reduced to rubble, the economy’s strong structure remains intact. For decades, the Philippines was dismissed as having little to no economic potential, yet under the governance of President Benigno Aquino III, the country has increased spending, decreased deficits and improved political administration, and emerged as a favourite destination for foreign investment.
The future of the Philippines still seems bright. Analysts say that these natural disasters could be an economic blessing in disguise as efforts to rebuild resilient infrastructure is a long-term investment could ultimately boost the regions hit the hardest by the typhoon, as well as the GDP.
Speaking to foreign correspondents in the wake of Haiyan, the governor of the Philippines’ central bank, Bangko Sentral ng Pilipinas (BSP), Amando Tetangco, said “as many analysts and other government officials have said, the economic impact is expected to be mild.”
He then continued to say that Haiyan could provide greater opportunity for government spending while also increasing remittances from Filipino workers abroad – already a significant source of income for the Philippine economy. With greater financial aid from family abroad, consumer spending is likely to increase. The government is injecting funds into the economy through relief and reconstruction. It is expected that Haiyan will not have a significant impact on inflation in the long-term, however, today limited supply has cranked up prices of even simple products; an egg, for example, costs twice as much as it did prior to the storm.
A vendor is reflected in the mirror of a motorcycle in Manila, Philippines. Shop owners are taking to the streets to continue commerce
Additionally, the country’s changing demographic shows great economic promise. Previously, the Philippines had a large non-working population. With one dependent for every working-age Filipino, the country struggled.
“From 2013 to 2050, on average, there should be two working-age Filipinos for every dependent,” HSBC Asian economist Trinh Nguyen wrote in a report published at the end of 2013. “This should give the country a chance to significantly save and invest.”
Haiyan caused approximately $700m worth of damage to infrastructure and agriculture, while obliterating more than half a million homes. The typhoon has had more acute implications for local business, with not only people’s houses being washed away, but also their livelihood. Many people who lost their income and have resorted to selling produce, in particular fruits, on the street.
Relocating – or staying put – has also become a business decision.
“More than 90 percent of the city has cleared out now, the people around are all journalists, aid workers, people from other places trying to get relief handouts, because it is easier in Tacloban. All the businessmen are gone,” Ronnie Ramirez told reporters at the Wall Street Journal.
Ramirez previously owned a successful computer sales and repair business, and despite suffering heavy financial losses, he believes that by staying put he stands to gain more in the future.
“People are coming back, I guarantee and when they do, they will realise it is great to do business here—we need everything, from power, to construction, baked goods and fruits.”
Before returning to his technology business, Ramirez sustains himself – and his 40 employees – by selling leafy greens and red chillies on the street.
Natural disasters like Haiyan test multinational corporations’ relationships with local communities such as these, which in turn can strengthen or weaken big businesses’ image, explains Grym. In the Philippines, most large multinationals have “provided financial aid and actively participated in the recovery effort”.
Commodities trading
“Reconstruction and disaster recovery usually affects the trade balance of a country in a negative way, as the country requires more imports,” said Grym referring to the typhoon’s impact on trade. The Philippine Stock Exchange (PSE) – the country’s sole market institution – has held plans for commodities trading until ample infrastructure is built, focusing instead on deepening the capital market.
“I think right now that particular [commodities trading] project is put a bit at the backburner,” said PSE president and CEO, Hans Sicat. “We will make sure we have the full platform and infrastructure. Then it might be easier at that point to look at commodities.”
The effects of Haiyan have significant implications for agriculture output. The super typhoon damaged approximately 600,000 hectares of agricultural land, while destroying an estimated 1.1 million tonnes of crops, previous employee of the Department of Agriculture Arsenio Balisacan told the Wall Street Journal. The agricultural region affected by the storm produces commodities such as rice, sugarcane and coconuts, accounting for 12.7 percent of the Philippine GDP. The rice subsector alone suffered $53m worth of damage.
In 2008, the Philippines were the world’s biggest importer of rice, buying over two million tonnes from abroad. Investing in rice seeds and irrigation, the country had hoped to achieve self-sufficiency, but in light of the typhoon’s recent damage this dream has been put further out of reach. It would require 19.03 million tonnes of rice to become self-reliant, but being particularly prone to natural disasters, it is unlikely that it will achieve this goal as soon as originally expected.
While fruit has become widely accessible since the storm hit, rice remains somewhat of a rarity. “There was significant damage to rice stock here. Rice in the warehouses has been damaged and [is] wet,” a spokeswoman for the United Nations’ World Food Program, Silke Buhr, told the Wall Street Journal.
Source: International Monetary Fund. Figures post-2012 are IMF estimates
Even if the Philippines were to achieve self-sufficiency, it would still be required to import rice to fulfil its international trade agreements. Previously it was cheaper for the Philippines to purchase rice from Thailand, Vietnam and Cambodia than to produce it locally (see graph). Under World Trade Organisation and Association of the Southeast Asian Nation trade agreements, the Philippines is required to import a minimum of 350,000 tonnes of rice to meet its access volume. Thailand and Vietnam both offered bids to supply the Philippines with its requested 500,000 tonnes. In the November tender, Vietnam beat Thailand’s offer of $475 per tonne with its bid of $462.25 per tonne.
Unforeseen factors
So far, the Philippine government has appeared in control of the country’s repair, while the future of the economy seems relatively stable. The planned costs of reconstruction were put at $2bn for this year. However, it is now more likely that the figure will reach $3.1bn, as steps are being taken to safeguard against future disasters. In the next four years, it is likely that the costs will near $8bn.
The road to recovery
$2bn
Planned costs of reconstruction for 2014
$8bn
Estimated cost of reconstruction over the next 4 years
As well as building typhoon-resilient structures, the government is building temporary bunk houses to accommodate those displaced not only by Haiyan, but also the earthquake the month before. Though it cannot be known for certain, it is likely that such unforeseen costs will have adverse effects on the country’s finances.
While it is true that crises often result in a period of reform and revival, the government’s inability to factor in the extra 10-30 percent monetary investment needed for resiliency seems almost careless. The Philippines is hit by approximately 20 typhoons annually. Building resilient structures is a long-term investment, and one that the government initially overlooked.
Despite making four-year reconstructions plans, Aquino will leave office mid-2016. “We can say that we are doing our best to complete whatever we can do in the remaining two and half years,” Public Works and Highways Secretary, Rogelio Singson, said at a press briefing.
Moreover, Aquino’s popularity has been faltering recently due to allegations of corruption and oligarchic structures. Demands for proactive leadership are being made, and Aquino’s success with the Philippine economy is starting to be overlooked. Plans for the Philippines’ future are contingent on its government, and with $8bn in the air the fragility of the political situation could mean big changes to economic strategy.
The greatest risk to the Philippine economy, however, is not posed by monstrous typhoons or changes to political leadership, but regional foreign relations. After the Philippine coast guard shot a Taiwanese fisherman dead in disputed waters, Taiwain’s government threatened to close its borders to Filipino migrants. Similarly, Hong Kong Chief Executive CY Leung threatened the Philippines after eight Hong Kong tourists were killed after being taken hostage by a former Manila police offer. Hong Kong is a big employer of Filipino migrants, who constitute 1.9 percent of the population.
With overseas workers underpinning the country’s economy, these simple threats serve to highlight the country’s vulnerability. The Philippines may be susceptible to the devastating effects of typhoons and other natural disasters, but the true threat to the economy’s success story is down to the decision making of its people – political, migrant or otherwise.
The ECB will soon carry out a stress test in order to see how well the banking sector has reacted to the financial storm of the last few years. Other regulators around the world are also , but with different targets in mind.
US Federal Reserve The Fed Res announced in November the scenarios it would be testing the 30 banks with over $50bn of assets, as part of its Comprehensive Capital Analysis and Review (CCAR). The results will be announced in March, including supervisory projections of capital ratios, losses, and revenues.
Monetary Authority of Singapore
The Annual Industry-Wide Stress Testing exercise usually takes place during the first quarter of every year. This time, Singapore’s regulator is looking at ways in which it can safely deflate its soaring housing market, which have surged 60 percent since 2009. It is thought that property prices might dip between ten and 15 percent in 2014.
China Banking Regulatory Commission
China’s regulator uses the CARPLES risk indicators framework, which was implemented in early 2012. This year the CBRC is ordering some of the country’s smaller banks to set aside more funds in order that they avoid shortfalls, after reports that a number of smaller institutions might be hit by higher borrowing costs and a slowing economy.
International Monetary Fund
Every year the IMF conducts its own stress testing of various countries banking sectors, with the aim of giving an independent overview of bank solvency. The Financial Sector Assessment Program (FSAP) was established in 1999, and insists that key financial sectors conduct a stress test every five years. This year it will focus on Barbados, El Salvador and Canada.
European Central Bank
This year will mark the first set of stress tests to be overseen by the ECB, with a focus on whether Europe’s leading banks can prove the strength of their balance sheets. This will included an eight percent baseline scenario, as well as a 5.5 percent in an adverse scenario. The review will be conducted alongside the European Banking Authority (EBA). According to Zach Witton of Moody’s Analytics, the ECB’s endeavour is “unprecedented in scope and scale”.
The euro crisis dominated the 2013 investment market in Germany and throughout Europe. Economic instability in Europe, continuously low market interest and the prospect of an ongoing financial crisis led to a comparably slow investment market at the beginning of 2013. In spite of this, Germany remained economically stable, which led investors to start their investment engines again, causing a further significant increase in the overall transaction volume of the German ‘big seven’ (Hamburg, Frankfurt, Düsseldorf, Co-logne, Stuttgart, Munich and Berlin).
At the end of 2013, the German real estate investment market not only fulfilled but outperformed its market expectations. The real estate transaction market for commercial real estate in the German big seven increased by 7.8 percent from €15.2bn in 2012 to €16.3bn in 2013 according to German Property Partners.
The German real estate investment market saw less big scale transactions than in the boom years of 2006-07, but several multi-billion euro transactions were still made (GBW, GSW, Karstadt etc.). An increased interest in club deals became apparent and mezzanine financing became more important. All in all, 2013 was a positive year for the German real estate investment market and fostered an appetite for an even better 2014.
2014 investment environment The economic signs and indicators support the vision for 2014 as an interesting and successful year for the German transaction markets, especially in the real estate sector. Although discussions continue about the still unresolved euro crisis, the German economy is growing continuously. Germany (along with Sweden) is expected to be one of the few major economies in Europe with an accelerated growth rate, according to Patrizia AG and Reuters. France, usually an important supporter for the stability of the European economy, is currently losing momentum.
The real estate transaction market for commercial real estate in the German big seven increased by 7.8 percent from €15.2bn in 2012 to €16.3bn in 2013
Market interest will remain very low, although perhaps not quite to the historical levels seen in 2013. The possibility of a slight increase in interest rates cannot not be excluded. The unemployment rate will also remain low, especially in comparison to various troubled European partner countries. All of which should clear the path for a booming and healthy investment market in Germany.
Outlook for German real estate
In 2014, Germany will remain one of the most attractive real estate investment markets in Europe, and throughout the world. The German market offers investment opportunities for all categories of investors: large and small; institutional; semi-private or private; fund of funds or funds; all either domestic or international.
Despite the positive economic indicators and the country’s continuously increasing rents, the German market is still challenging and requires educated and experienced investors and advisers. Investors with a comprehensive understanding of the market and the regional specifics will have clear advantages.
Core+ investors will continue to find attractive investment opportunities in the big seven, although it will become more difficult to generate attractive returns if inflation increases in the course of 2014.
We expect a significant increase in value added investments in order to allow for sufficient return. Foreign investors will stay with the German big seven or big six (without Stuttgart) and avoid B or C cities. Domestic investors continue to realise that attractive investment opportunities are available in B and C cities if the homework is done and regional knowledge is available or hired. Opportunistic investments may be found, for example, in development projects in rural areas. Mezzanine financing and club deals will become more and more important.
2014 may be seen as an investment year that clearly separates the wheat from the chaff. The high levels of interest in the German market and the increasing complexity of transactions – due, for example, to regulatory requirements and financing restraints – require a very educated investor type with an excellent knowledge of investment and an intelligent and individual strategy for each investment. The ‘one size fits all’ investor is clearly passé.
Germany is and remains a hot real estate investment market. In 2014, it will be open to all types of investors, foreign or domestic. The transaction volume will most certainly increase – again. The increasing challenges inflicted by the complexity of the regulatory environment and the demanding financing environment clearly play into the hands of experienced and/or creative investors with a sophisticated and individual vision for each investment. These investors demand comparable standards from their advisors, i.e. experience, individuality and creativity.
The A cities, especially Berlin, will remain the core focus of foreign investors. Domestic investors, meanwhile, will take advantage of their more intimate outlook on B and C cities. In summary, 2014 will be seen as an interesting and successful investment year.
