Author: Ashton Wenborn

Finanz Konzept: masters of the EU asset management market

Posted on by Ashton Wenborn

Asset management is very different now from what it was five years ago. Since the crisis struck Europe, risk appetite has been subdued, which in turn has taken its toll on returns. However, as markets slowly return to form, asset managers are once again emerging as favourites with HNWIs and institutional clients.

Founded in Liechtenstein in 2001, Finanz Konzept quickly evolved into a successful asset management firm operating across Europe. Since 2004 it has been headquartered in Zurich, and its small but efficient team is committed to delivering a personalised service. Today it is an authorised asset manager in Switzerland regulated under the supervision of the authorities.

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A stalwart of the firm’s products is the Triple Fixed Income Opportunity Fund, which benefitted from the slow market and offers phenomenal returns. The increased volatility afflicting the market since 2008 has not been kind to many asset managers playing in Europe, but the firm has persevered with its funds and remained profitable. And while others have struggled to maintain diversified portfolios, Finanz Konzept has strengthened its own funds, and continued to perform solidly. And now that risk appetite is returning to the market, the company is ideally positioned to provide diverse and solid investments for its clients.

It has not all been doom and gloom for fund managers. Low interest rates have meant that borrowing has been cheap, and the stock market has been consistently undervalued. Clever investors and managers have found cheap and efficient ways of keeping their returns up while the market has been down. At Finanz Konzept, managers have been busy investing in bonds and avoiding the liquidity trap that has flooded the market since Basel III was implemented.

For Finanz Konzept, each client’s individual needs are the highest currency, and each portfolio is tailored to measure. But it is the company’s dynamic investment model that attracts discerning clients. Over the years, the experts at Finanz Konzept have become adept at playing the weak European market to the advantage of their clients and have created a variety of asset management products and funds. Lars Oberle, Chairman of the Board of Directors, spoke to World Finance about the current investment landscape in Europe, how his company is taking advantage of the economic environment, and about its two successful funds.

How has Europe’s debt crisis affected the business of asset management?
The crisis deeply affected the business of asset management. The behaviour of investors and the pricing of assets are the main factors that affected the business. Investors are seeking returns comparable to those achieved in the last decade. Considering that central banks worldwide are flooding the markets with liquidity to stabilise the markets – which are already under threat of government debt crises in developed economies – it is very difficult to generate acceptable returns with the same or less risk exposure compared to the time before the crisis. So, many asset managers have increased risk taking to meet the needs of investors. Hence, the pricing of assets is skewed and not reflecting the real risk proportions. If another crisis were to occur in the near future, it would have an even bigger impact on the world economy, causing hyperinflation or an extensive economic recession.

How has Finanz Konzept adapted to negotiate these challenges?
Though from the beginning we have had a strategy that is set up under a long-term approach, some adjustments had to be made to manage these challenges. To avoid unjustifiable risks, the investment focus changed in a profound way. New criteria have been also implemented to our valuation process in order to identify the ‘new’ risks better, especially macroeconomic risks.

Do you foresee Europe’s financial climate improving at any time in the near future?
In order for Europe’s financial climate to improve, the real economy has to be improved. As long as there is no catalyst from the economy, an improvement of the financial climate cannot be expected in the near future. In the long run, however, there will be an improvement due to the nature of business cycles. But the potential is limited as the markets are saturated with liquidity from the central banks.

What is Finanz Konzept’s position in the market and how do your services differ to those of your competitors?
Our strategy is based on different approaches; a top-down as well as a bottom-up procedure is pursued. In addition, an investment decision is taken only if relevant factors meet our stringent criteria. Own methods identify undervalued bonds that contribute efficiently to the success of our portfolio. Undervalued bonds benefit from the recovery in the credit quality and thus provide a useful diversification to the traditional bond portfolio. Our clients benefit from independent high-class asset management with a remarkable risk-return profile, which we are continuously improving.

Which countries and asset classes are you invested in, and for what reasons?
The main investment focus is Europe (see Fig. 1). Within Europe, bonds from companies in countries with relatively low government debt are favoured at the moment (see Fig. 2). In general, it depends on different factors during the investment process so that we can’t say that we invest in a particular country. However, the debt of a country is an important factor as a decrease in economic output would affect the companies in these countries most. Due to the expansive monetary policy, the risk-return profiles aren’t generally attractive in comparison to other companies in countries with lower government debt.

 

Tell us about the investment objectives of the Triple Opportunity Fund
The Triple Opportunity Fixed Income Fund aims to achieve a maximum total return. Although there are no geographic restrictions, the fund invests mainly in European government, corporate and convertible bonds and short-term securities and debt derivatives. A leverage of up to 200 percent of the assets is possible; however, the current leverage depends on market conditions. In this way, the duration can be managed.

The fund is committed to investing in securities that are significantly undervalued, which are identified with our methods and models. The fund seeks a benchmark independently to a target return of between eight and 12 percent yearly on the euro. Therefore, the currency risk is hedged against the euro (see Fig. 3).

How has the fund performed over the past two years?
The Triple Opportunity Fixed Income Fund was issued on May 2011. In 2011, the performance was -3.61 percent, which jumped to 26.58 percent in 2012. Besides a general decrease in euro interest rates in the last year, some recoveries of undervalued bonds contributed to the performance significantly. The fund seeks a yearly volatility of no more than 10 percent. Current data shows that the volatility is within that limit.

Do you have plans to expand to new markets or launch any new products and services in the near future?
We always optimise the methods and models for our funds; innovation is also a main focus in our company. In the near future, we want to offer physical diamonds merged in appropriate portfolios to our clients in addition to the Physical Diamond Fund, which we also manage and optimise. Our clients profit from innovative, independent and professional wealth and asset management.

Lebanese banking thrives in tough economic conditions

Posted on by Ashton Wenborn

The Lebanese banking sector has always been the cornerstone of the country’s economy, remaining resilient throughout the various crises that have shaken the country, the region, and the world over the years, and constituting a solid foundation for an emerging market economy. More specifically, the Lebanese banking sector has been a major source of financing for the Lebanese government, retaining 50.5 percent of the country’s LBP-denominated debt. The contribution of the central bank to LBP-denominated debt, meanwhile, stands at 32 percent, as of the end of July 2013.

[T]he Lebanese banking sector has been a major source of financing for the Lebanese government, retaining 50.5 percent of the country’s LBP-denominated debt

In fact, the Lebanese banking sector continues to garner international attention and remains the subject of praise by renowned rating agencies for its outstanding performance even during rough periods of economic stalemate and instability. Banks operating in Lebanon remain characterised by high liquidity (primary liquidity in excess of 78 percent), strong solvency and solid capitalisation levels, which shield the sector from local or external shocks. In parallel, Lebanese banks are also acclaimed for their rigorous risk management and corporate governance practices, in addition to their impartial internal audit, which altogether play a pivotal role in protecting and shielding the sector’s strength and asset quality.

Lebanese banks are determined to preserve their pioneering role across the globe in terms of abidance by international norms and standards, especially the Basel I, II, and III requirements, enhancing the sector’s image and credibility in the eyes of the international community. During our last visit at the head of the Union of Arab Banks delegation to attend the World Bank Group IMF Annual Meetings in Washington DC, we met with several high-ranking officials from the Federal Reserve System and US Department of Treasury who announced they had witnessed an improvement in compliance functions in Arab banks in general, and expressed comfort towards the compliance of Lebanese banks with international rules and regulations, namely those of AML/CFT.

Lebanese banks are also governed by an extensive set of laws, regulations, and periodical circulars issued by Banque Du Liban (BDL), continuously hailed by international rating agencies for its prudent and scrupulous monetary policy. The central bank is also resolute in combating money laundering under the provisions of Law No. 318, with the SIC bearing the responsibility of investigating suspicious transactions and detaining the exclusive right to lift banking secrecy when deemed essential. The necessary actions and related sanctions are subsequently decided upon by the Higher Banking Commission and the relevant judicial authorities in Lebanon. Moreover, the central bank strives to confine banks’ allowable scope of investments away from exotic and toxic financial instruments. The fruit of that policy was tested during the global financial crisis of 2008, with the sector posting a healthy performance at a time when major international institutions and economies were crumbling. In this context, BDL works hand-in-hand with four committees and commissions, namely the Higher Banking Commission, the Banking Control Commission of Lebanon (BCCL), the Special Investigation Commission (SIC), and the Consultative Committee, to ensure a closer monitoring of Lebanese banks’ operations and the proper implementation of all laws and regulations.

Personnel and services
From a human resources angle, the Lebanese banking sector is renowned for employing the finest personnel, hiring highly qualified university graduates and adopting continuous learning programmes to further sharpen their skills and knowledge. This is mirrored through the ever-increasing efficiency, competitiveness, and quality of services across the sector. Lebanese banks have similarly been devoting great attention to technological advancement, constantly enhancing their IT infrastructure to support all business requirements, employing front-end technology solutions, and renewing their methods and techniques. In addition, Lebanese banks gain a competitive edge by continuously tailoring new products and services that respond to an educated customer base and the market’s ever-changing needs and unique preferences. In this context, it is worth noting that BDL and the Association of Banks in Lebanon (ABL) were behind the launching of several subsidised loan schemes with the objective of stimulating lending activity and spurring economic growth. Said schemes target various factions of society, including members of the Lebanese Army, internal security forces, judges, and small- and medium-sized enterprises (SMEs). Lebanese banks have also displayed throughout the years their eagerness to contribute to the welfare of civil society, offering numerous products that support the environment, education, anti-drug campaigns, cultural and heritage associations and events, among others.

Financial performance of Lebanese banks’ subsidiaries in Syria
Year end

310.1

Total assets

0.526*

Net profit

Sept 2013

462.4

Total assets

10.7

Net profit

% change

49.12

Total assets

1,933.1

Net profit

Source: Syrian Commission on Financial Markets and Securities, Credit Libanais Economic Research Unit

Notes: SYP figures in billions; *Figures as of September 2012

From a rating perspective, the Lebanese banking sector remains constrained by Lebanon’s sovereign rating. Moody’s Investors Service has assigned each of Bank Audi, BLOM Bank, Byblos Bank, and Bank of Beirut with a rating of ‘B1’ with a ‘negative’ outlook, while Fitch Ratings has assigned Bank Audi and Byblos Bank a rating of ‘B’ with a ‘stable’ outlook. Capital Intelligence has also assigned each of Bank Audi, BLOM Bank, Credit Libanais, Byblos Bank, BBAC, and Fransabank a rating of ‘B’ with a ‘stable’ outlook. Most rating agencies cited Lebanese banks’ strong domestic franchise, experienced management, relatively sound asset quality, and resilient profitability, in addition to hailing the central bank’s wise policies and decisions. Nevertheless, the rating agencies had warned that the sector’s significant exposure to Lebanese sovereign debt, in addition to the regional turmoil and governmental void, could constrain any future rating improvement.

From a financial performance perspective, and despite the prevailing local and regional instabilities, the consolidated balance sheet of commercial banks operating in Lebanon has grown by 7.83 percent year-on-year to around $158.56bn as at the end of August 2013 (see Fig. 1), with customer deposits increasing by 8.88 percent to $134.19bn and loans to the private sector expanding by 9.22 percent to $45.57bn. This robust performance can be attributed to depositors’ and investors’ confidence in the Lebanese banking sector, the sustainable flow of remittances from the Lebanese diaspora to its native country, and the continuous promulgation of new subsidies and financing schemes by Banque Du Liban to foster growth. It is worth noting that the Lebanese banking sector has earned a prominent position in the region, ranking third with respect to the number of banks appearing on the top 100 Arab banks list for the year 2012 (10 banks), and fourth in terms of total balance sheet size ($147.52bn).

Growth despite uncertainty
Similarly, Lebanese banks have managed to record a 5.5 percent annual growth in net consolidated profits to $845m in the first half of 2013. One cannot deny, though, that the profitability of Lebanese banks that have a foothold in turbulent markets like Egypt and Syria, for instance, has been hampered by the ramifications of the current uprisings.

Nevertheless, the contribution of the foreign operations of Lebanese banks represents a mere 15 percent of the sector’s consolidated profits, limiting any major repercussions on the sector as a whole. In parallel, Lebanese banks have adopted corrective measures, including full provisioning of doubtful and non-performing loans, the results of which have already been reflected.

More specifically, and notwithstanding the aggravated political uproar in Syria which exacerbated uncertainties and risks surrounding the country’s operating environment, the Syrian affiliates of Lebanese banks managed to reshape their financial standing in the first three quarters of 2013 (see above, right), recording an astounding 1,933.12 percent annual surge in net profits to SYP 10.7bn ($78.19m) as at the end of September 2013. This sizeable rebound in profits is explained by the unrealised gains on our foreign exchange position, which aggregated to SYP 28.26bn ($206.56m). The consolidated balance sheet of Lebanese banks’ subsidiaries in Syria was no exception, soaring by 49.12 percent during the first nine months of 2013 to SYP 462.41bn ($3.38bn).

On the foreign expansion front, Lebanese banks have been eagerly expanding their foothold around the globe over the last decade on the back of fierce competition and unstable political and economic environments. Banks succeeded in obtaining licenses across the Middle East, North Africa and Australia; from Algeria in the West to Iraq in the East. Lebanese banks’ current geographical foothold comprises more than 31 regional and international cities distributed over five continents, added to a wide correspondent banking network covering some 111 cities around the globe.

In this context, Credit Libanais’ corporate priority centres primarily on maintaining and improving its strong retail image in the market, spread over a domestic network of 66 branches, a branch in Limassol, Cyprus, two branches in Iraq (Baghdad and Erbil), a fully fledged bank in the Kingdom of Bahrain, a joint-venture bank in Dakar, Senegal, and a representative office in Montreal. Credit Libanais is also looking to tap new markets, with plans for additional expansions within the Middle East, West Africa, and Europe. Based on the panoply of factors mentioned above, the outlook surrounding the Lebanese banking sector’s future performance remains quite rosy.

On the move: Turkey’s foreign direct investment market

Posted on by Ashton Wenborn

Most economic experts are in agreement that Turkey has been playing an increasingly prominent role in the world economy, redefining itself as an attractive hub for foreign direct investment (FDI). The country is regularly talked about alongside the economically strong BRIC nations and has accentuated its appeal to foreign investors thanks to its resilience during the recent recession.

According to 2012 figures, global FDI inflows declined by 14 percent from 2011 to $1.4trn. High volatility in financial markets, macroeconomic uncertainties, the fiscal gap in the USA and euro crisis have all affected the slump in FDI. In 2012, the FDI projects volume in Europe shrank by 21 percent year-on-year as a result of the global slowdown. By contrast, Turkey expanded its market share and still ranked as one of the top 10 countries in Europe for FDI, with around $12.5bn in 2012 (see Fig.1).

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Although project numbers for the world’s top five industries decreased in 2012, some promising industries – such as natural resources and renewable energy – increased in number. As far as Turkey is concerned, the construction industry is the most booming sector. It produced $1.3bn in 2012; four times as much as in 2011.

Global investors
In parallel with global indicators, Turkey’s FDI inflows have dropped by 23 percent to $12.4bn, a figure dominated by the finance and insurance area (41 percent). Apart from the service sector, manufacturing is the leading industry, accounting for 27 percent of all inflows. FDI real estate purchases, meanwhile, increased by 31 percent to $2.6bn. The UK is at the forefront of foreign investment in Turkey, with around $2bn. Following the UK are Austria, Luxembourg and the Netherlands, which have each contributed around $1.3bn to FDI in Turkey.

Sustainable growth, economic stability, and the improvement of laws and intellectual property rights have created an optimistic outlook for Turkey. The AT Kearney FDI Confidence Index moved Turkey up from 23rd place to 13th in 2012. Furthermore, the WEF Global Competitiveness Index ranked Turkey in 43rd position, whereas it stood at 59th in 2011.

As an emerging market, the Turkish economy is driven by developed countries’ economic conditions. Current financial uncertainties in the US economy resulted in a predicted decline in FDI from that country. In line with these circumstances, a 35 percent downfall in FDI was observed in Turkey in the first five months of 2013. It seems certain that the financial and political instability seen in recent months have been instrumental in retarding the country’s growth this year; however, some large volume transactions are expected to conclude (particularly on privatisations) in the last quarter.

Reasons for growth
In any country and in any economic system, political, legal and financial stability are indispensable in encouraging foreign investment. There are many factors at work behind the growth of FDI in Turkey, including the country’s geostrategic location and its young and dynamic population. However, these assets alone are not enough to attract foreign investors; you also need liberal legislation.

As far as Turkey is concerned, the construction industry is the most booming sector. It produced $1.3bn in 2012; four times as much as in 2011

Turkish financial reforms, which began in 2001, legal reforms made within the frame of EU candidature, and also new regulations in social security, have provided financial stability in Turkey. As a result of these reforms and bureaucracy minimisation efforts, a new FDI Code has been in force since 2003. This code provides a declaration-based system instead of a permission system. As a result, foreign investors do not have to obtain authorisation for the establishment of a company in Turkey. Moreover, the minimum foreign capital requirement of $50,000 has been abolished. Also, the new code does not require the establishment of limited liability or joint stock companies by foreign investors.

In addition to these legal developments, committees for improving the investment climate have been in action since 2001. These aim to bring international interest to the investment climate in Turkey by gathering opinions from other institutions’ representatives. Beyond these factors, bilateral agreements are also a reason for the growth of FDI in Turkey. Bilateral agreements facilitate foreign investments in agreement parties. According to the statistics, Turkey has been a party to 84 bilateral foreign investment agreements as of 2012.

Legal FDI framework
The advantages brought by macroeconomic and political stability are buttressed by the Turkish legal framework, which is designed to augment FDI (see Fig.2). The FDI Code provides several advantages to encourage FDI and protect the rights of foreign investors, all of whom are treated equally with domestic investors. Foreign investors are free to invest in any field of business without any restrictions. There has been increasing demand lately for foreign direct investors in the fields of energy, financial services, chemicals, environmental technologies, infrastructure, machinery and tourism. Foreign direct investments can be done by:

  • Establishing a new company/branch or liaison office of a foreign company. Foreign investors are able to establish new companies even with one shareholder as either joint stock companies or limited liability companies. There is no restriction regulated by law about the nationality of shareholders, so they can be either foreign or domestic.
  • Acquiring shares in a company established in Turkey (any percentage of shares acquired outside the stock exchange or 10 percent or more of the shares or voting power of a company acquired through the stock exchange).

Assets acquired from abroad by foreign investors are capital cash in the form of convertible currency bought and sold by the Central Bank of Turkey, stocks and bonds of foreign companies (excluding government bonds), machinery and equipment, industrial and intellectual property rights. Assets acquired from Turkey by foreign investors are reinvested earnings, revenues, financial claims or any other investment-related rights of financial value, commercial rights for the exploration and extraction of natural resources.

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Foreign investors are able to transfer freely abroad: net profits, dividends, proceeds from sales or liquidation of all or any part of an investment, compensation payments, amounts arising from license, management and similar agreements, and reimbursements and interest payments arising from foreign loans through banks or special financial institutions.

With the FDI Code, corporate income tax was reduced from 33 percent to 20 percent and there are tax benefits/incentives in technology development zones, industrial zones and free zones which could include total or partial exemption from corporate income tax, a grant on employers’ social security share, as well as land allocation.

Future political prospects
The indispensable corollary of investment confidence is the political expectation that investment will take place. Markets value not only economic but also political stability. In that regard, 2014 might seem to be a particularly important year in terms of the political agenda in Turkey. Turkish voters will go to polls to decide on country’s new president and the local elections will decide who is going to rule the municipal governments in Turkish cities. This might seem to be another addition to already burdened Turkish politics after the incumbent government’s decision to suppress the Gezi protests which had started over a controversial decision to build a new shopping mall modelled as a replica of an Ottoman army barracks on the site of a public park in Taksim square. However, the latest polls covering the period between 10-19 August 2013 suggest, despite the widespread protests for Gezi, that Erdoĝan’s AKP party still commands slightly more than 50 percent of the overall votes, which is more than enough for the resumption of single party government.

What unites almost all of the political analysts from different political backgrounds, who rarely agree on anything, is that there is no serious and united opposition in Turkey that can challenge Erdoĝan’s rule. Even though the Kurdish issue is and has always been Turkey’s soft belly, expectations are running high that Erdoĝan might show resolve with regard to the peace process in exchange for the much needed support of the Kurdish opposition party BDP, to garner enough votes for the critical constitutional amendment that would transform the Turkish political system from a parliamentary to a presidential one. This would give Erdoĝan complete mastery of Turkish politics. Turkey will have local elections in 2014 and a general election in 2015, and is highly likely to witness the continuation of AKP rule, and the stable political situation that has lasted for more than a decade. And that is highly favourable for Turkish FDI.

For further information visit www.herdem.av.tr

Tax in Europe: the challenges for HNWIs and companies

Posted on by Ashton Wenborn

Tax regulation has always been a contentious issue within the EU. Various tax regimes in different countries have forced companies to come up with creative tax plans which have left citizens vulnerable to excessive taxation. And as austerity measures endure across Europe, tax bills are on the up and viable alternatives for companies are scarce, making it difficult to operate in the region. There is a lot of national regulation to contend with, but the EU tax framework makes it a doubly complicated environment to navigate.

“Though no one will ever phrase it outright, the aim within the EU is to eliminate tax competition between member countries,” explains Thierry Afschrift, founding and Managing Partner at Afschrift Law Firm, a renowned Belgian firm with bases in Brussels, Antwerp, Madrid, Geneva, Luxembourg, Tel Aviv and Hong Kong. “So far, taxpayers, whether companies or individuals, have the freedom to establish themselves in a country of their choice – after taking into consideration its tax legislation. For instance, one may decide to work in Luxembourg because of bank secrecy or inventive regulations, or might choose to establish in Belgium because, for example, capital gains are not taxed under certain conditions. It is absolutely legal for taxpayers to make such choices, as long as their operations correspond to reality.

What is curious, is that while the EU works hard to protect competition, at the same time, when it comes to taxes, it maintains that competition is not a good thing

“What is curious, is that while the EU works hard to protect competition, at the same time, when it comes to taxes, it maintains that competition is not a good thing. This is not true: as in any field, healthy competition is always a good thing.”

Violations of privacy
Another issue that comes with eliminating tax competition between countries is that it often threatens the privacy of citizens. “Take bank secrecy, for example,” explains Afschrift, “it cannot be disputed that bank secrecy might be able to sometimes protect people who are carrying out illicit activities like fraud; the problem is that new regulation in Europe is too wide-ranging. A US private lawyer once wrote that when dealing with people’s private lives, one should use a scalpel. Nevertheless, this is not really an option chosen by our governments.”

So right now, an individual established in Belgium can be asked – under certain conditions too easy to fulfil – to provide the authorities with every document relating to their account, and if they do not do so, they can break the bank secrecy of your account. “That means that not only does the tax administration gain access to all your transaction history, they can also know how and where one spends his money in private – and that is a fundamental violation,” says Afschrift.

“This is not supposed to happen. And furthermore, once bank secrecy has been broken, and they see transactions between one company or person and another, then they can try to get access to other people’s accounts as well. It is a big problem for citizens because they cannot escape any more. From any point of view, it is evident that people’s rights are being eroded.

“The states’ policies all over Europe demand too much in taxes and social security charges from employers, making it too expensive to hire new employees. There are also charges to cover unemployment benefits, even if companies would rather have more employees. Before going any further, it is useful to be reminded that growth is close to zero, and that public finances are still managed improperly.”

Employer challenges
All over Europe governments are facing the same challenges. The financial crisis has left them struggling for cash, and taxes are a seemingly easy way to raise money. But, as with anything, there is a limit on how much citizens and companies are willing to put up with, as exemplified by the French tax exodus. This makes it hard to predict upcoming trends, but Afschrift is confident that not much will change in the next few months. “The main preoccupation in Europe right now is with information. From a political point of view it is difficult to keep demanding new taxes, so for the time being governments will likely pursue more subtle options,” he says.

The financial crisis has left them struggling for cash, and taxes are a seemingly easy way to raise money

“The idea is not to have new taxes but to broaden the tax base by trying to add concealed revenue. This way most measures taken will concern information, particularly data transmission between countries. We are now going further: at first it was just pertaining to revenues of savings, now we have included other financial products on the list. From 2015 – a bilateral agreement with Belgium will allow transmission of certain information from January 1, 2014 – Luxembourg will have to start transmitting data. Two or three years after that, they have already announced that information pertaining to accounts of residents living abroad will be divulged to the authorities concerned.”

In this context, those who are struggling to do business in today’s tough environment cannot afford to hire new employees, because that costs money… money they don’t have. Unemployed people still need a decent standard of living and are, thus, helped by the state, which also costs money. As a result, the state’s needs increase, yet at the same time the number of taxpayers able to contribute directly to the funding of the state decreases. Consequently, the existing taxpayers will pay more tax in order to compensate for the lack of new sources of income to the state. All these actions mean that most European jurisdictions are facing rising domestic tax bills; the austerity policy adds to the weight of the problem.

Incentivising growth
Speaking of his native country, Afschrift is scathing: “Belgium is a federal country, so there are federal tax rules, then there are regional rules, then provincial, communal… multiple taxations without end.

“This is a tough environment for tax lawyers who deal with businesses facing a number of issues. They increasingly have to get more and more creative in order to find legal solutions to people’s problems. But that creativity has limits. Furthermore, sometimes it is even difficult to foresee the problem that could affect the client. For example, the Belgian government has passed new ‘anti-abuse’ legislation. The new set of rules is so obscure that nobody is certain that authorities have a real sense of how it will be applied in practice. There is nothing worse than nonsense rules that cover every other rule in the tax code. The new anti-abuse rule ensures that while you abide by the strict legal boundaries of the law, if the tax administration feels that the way you conduct your affairs violates the spirit of the law – and here there is a distinction between the text and the spirit – then the operation may be disregarded by the tax administration, and taxed in accordance with the spirit of the law. The rule casts a shadow of doubt over every operation and suggests the tax code is no longer sufficient.”

What Afschrift is keen to emphasise is that there are ways to incentivise growth and boost the services industry without continuously raising taxes

Apparently, the real problem is that instead of trying to “create” new resources, the state’s policy is to draw more from existing ones. What Afschrift is keen to emphasise is that there are ways to incentivise growth and boost the services industry without continuously raising taxes. Asked about the new Fairness Tax on companies, Afschrift said: “This is an additional tax for companies of a certain size. It is true that this is not an additional withholding tax on dividends, but a tax on the benefit of the company: that means that there is actually an indirect effect on shareholders who will pay the same tax but on dividends calculated on a lower benefit.

Thus, additional expense will eventually prevent the company from hiring new people or making new investments. This is a structural problem of increasing taxation,” he explains. “I would prefer if the establishment of a new tax was inevitable, with the option of avoiding the tax if the company were to invest in development and/or employment. Those would be concrete measures, with durable effects. Of course, no authority can force anybody to invest or to hire new people, but they can say, ‘there is an additional tax to be paid, unless you spend an amount equivalent to the tax you should pay investing or creating new jobs’.”

French flight
The facts mentioned above undoubtedly create a challenging environment for companies and individuals operating in Belgium, especially given that the economic forecast for Belgium remains gloomy, with the growth forecast for 2013 remaining stubbornly stuck at zero percent. However, the Belgian tax regime is still appealing to certain companies, especially because of the interest that arises from the so-called ‘Belgian Holding’ regime.

Furthermore, Belgium’s tax regime is also appealing to wealthy foreigners, mainly from France, who flock to Belgium for several reasons. “The tax environment in France is as challenging as that in Belgium, the difference – for the time being – is that we don’t have a tax on wealth,” says Afschrift. “So, wealthy French individuals come here, also attracted to the fact that Belgium does not charge any tax on capital gains from shares.” The French ISF – which stands for Solidarity Tax on Wealth – will continue to drive wealthy French nationals to Belgium looking for fairer taxes. “The moment the French State decides to abolish the ISF, then this influx to Belgium might cease. Some French politicians have recently spoken of abolishing this tax, probably because wealthy people are leaving the country, but, for the moment, there is no official discussion on this subject”.

HotForex’s online platform for binary options trading

Posted on by Ashton Wenborn

The ever-increasing range of tradable online financial product presents traders with a variety of choices. While choice and competition are obviously good for traders, it can lead to a somewhat daunting environment when trying to choose the best way to invest in the financial markets.

An increasingly popular form of trading is that of binary options, which are beginning to rival the forex markets. Made available to the market in 2008, binary options have grown to become a popular financial instrument for traders around the world.

Gathering a core understanding
According to data from Google, binary options took nearly half of the traffic from the traditional forex market in 2013. Although they are rising in popularity, understanding how they work is essential for all traders. With binary options, investors can profit from successful estimates of financial assets during a set period of time. With only two investment possibilities to choose from – up or down – a profitable trade only requires the minimal increment in price movement in the selected direction.

However, with so many companies starting to offer binary options, selecting one that is both trustworthy and experienced is vital. One company leading the field in breadth of product and quality of service is European-based HotForex, an award-winning foreign exchange and commodities broker. A team of industry leading experts caters to individual, corporate and institutional clients around the world, offering innovative and dynamic management of clients’ portfolio investments.

[W]ith so many companies starting to offer binary options, selecting one that is both trustworthy and experienced is vital

HotForex provides this new investment product packaged under the brand name OptionTrade, offering the same high standards of its current products. The internet, technology, mobile devices and advanced online trading platforms continue to be paramount to the widespread success of the online financial services offered at HotForex.

Binary options are a modification of a larger class of financial instruments known as options, classed below exotic options. In the financial markets, binaries are also known as digital options, all-or-nothing options, and are normally traded over the counter (OTC). As with traditional options, the outcome is determined by the price of the underlying asset at the expiry time. With digital options, the trader will never actually take ownership of the asset.

Straightforward trading
While exotic options are by definition known for their complexity, binary options are seen as a simplified version, particularly on the traders’ end in terms of functionality. The broker takes care of all the variables, and the investor is left with one primary question to answer: whether the underlying asset will rise or fall within a specific time frame. Only two outcomes are possible – making these exotic options binaries.

They are securities or types of investments with predetermined fixed returns and limited risk. An investor enters a position knowing exactly what the payoff will be if the trade is successful and the amount of loss incurred if the trade is unsuccessful. For this reason, binary options are also known as fixed return options (FROs). Essentially binary options are an alternative trading method that provide access to global markets with financial products such as currencies, commodities, stocks and indices, allowing for potentially high returns for correct market speculation.

They attract traders because of the way they allow them to make money in both a rising and falling market. Considered to be one of the simplest trading methods, the process of binary options is easy to grasp with high potential yields.

[Binary options] attract traders because of the way they allow them to make money in both a rising and falling market

The investor always knows the exact exposure and potential profit, removing any uncertainty at the time a trade is placed. The specific price movement of an asset is irrelevant for a successful outcome; only the direction is important – the volatile nature of binary options is what attracts many traders to them.

According to HotForex, traders wager on the direction of the market from the strike price by buying either a call or a put. At the time of expiry, the underlying asset will be either above or below the strike price. If a trader speculates the price will be above the strike price at the time of expiry, a call would be bought. However, if a trader speculates the price will be below the strike price at the time of expiry, a put would be bought. As long as the price of an asset is above the strike price, a call binary option is considered to be in the money; otherwise it is out of the money. The opposite is true for a put binary option.

Redefining binary options
While HotForex has been primarily focused on offering foreign exchange trades, it is enthusiastically integrating binary options into its portfolio of financial products. This is being done in line with its business strategy to continually deliver the latest financial products in the industry, as well as elevating the services through advancements in trading technology and innovation, with a strong focus on protecting client information, transactions, and funds.

Binary options at HotForex will be available to traders as a fully licensed and regulated options broker by the Cyprus Securities and Exchange Commission (CySEC), under the registered brand name OptionTrade. Some observers think that the extremely volatile nature of binary options poses too great a risk to investors. However, HotForex maintain that binary options are easily accessible to both novice and experienced traders alike, although they point out that traders should have both discipline and risk management strategies.

Concerns over binary options were addressed last year, when European regulator CySEC officially recognised them as financial instruments. Shortly after, OptionTrade became one of the first options brokers to acquire a cross-border license, ensuring a secure trading environment and the authorisation to provide this new and exciting investment service on a global scale.

Investors looking to diversify their investment portfolio with binary options will be able to trade online via a web-based platform, anywhere, anytime, without the need to download any software.

OptionTrade stands out from the crowd with numerous advantages including transactions, clients’ information and funds security, adherence to strict financial standards, cutting edge technology, dedicated client area for online account management, high liquidity, competitive risk management ratios, fast and secure payment methods and withdrawals at any time,without limits.

HotForex also provides a wide range of additional services to clients, including white label solutions and partnership programmes. The White Label solution is primarily focused for banks, financial institutions and consultancy firms tailored as per the needs of the clients.

They also offer their Introducing Brokers service, which is for both individuals and organisations that want to turn a profit from the forex market by introducing new business to HotForex.

Investors looking to diversify their investment portfolio with binary options will be able to trade online via a web-based platform, anywhere, anytime, without the need to download any software

Everything from trading platforms, transaction execution and settlement – as well as all the administration of the business – is dealt with at HotForex. Introducing Brokers benefits can earn as much as 60 percent of the net spreads based on the volume generated by the clients introduced. As an industry first, HotForex pays its IBs twice a month directly into their accounts.

A full ratio of services
The company is involved actively in a number of charitable initiatives with financial support to those in need. Born out of an intrinsic sense of responsibility, it directs its efforts through humanitarian organisations.

As of late its benefactors included the Rotary Club, the Red Cross and UNICEF who aid the less fortunate around the world. Anticipating the mobile-user of today, HotForex is one of very few online brokerage firms that optimised its trading services and products to the latest smartphones and tablet devices. A client can trade any financial product with one account and on eight different platforms. Utilising MetaTrader4 – the most popular trading platform in the industry – the firm enhanced the trading experience with interbank liquidity and fast trading execution ensuring the best trading conditions possible.

Known worldwide by traders from all walks of life with diverse investment needs and trading experience, the investment firm opens new accounts on a daily basis and is continually building stronger relationships with existing clients. At the heart of HotForex’s drive to offer the best possible trading environment is the steadfast support towards its clients and partners. Excellence in the offering of financial products is achieved through constant innovation, advanced technologies, and research and development.

The company believes this is essential to staying ahead of the curve and delivering products customised to today’s investors. It endeavours to develop ground breaking and exceptional products and services.

Binary options are merely one of the latest additions to the company’s product line-up and are certainly not the last. HotForex aims to design each product highly, with a strong dedication to satisfying the needs of its clients. By understanding the importance of investments, it will continue to aim higher when it comes to online trading, providing a state-of-the-art trading environment with the best trading conditions.

Navigating public private partnerships in Brazil

Posted on by Ashton Wenborn

Despite the sophisticated legal framework currently in place, several Brazilian states and municipalities have been handling public private partnerships (PPPs) in a somewhat clumsy fashion. Addressing the matter of PPPs in Brazil with well thought out legal mechanisms to both securitise receivables and reduce tax impacts has become contentious, especially in the first phases of civil works in a PPP.

Lack of cohesive planning
Some recently released projects and those in the process of being approved by state and municipal governments within Brazil would have caused confusion among investors, and a resulting lack of interest from the private sector.

In that sense, one could argue that Brazil has a cultural issue rather than a structural or institutional one

Brazilian PPP laws – including some recent amendments dated from 2011 and 2012 – have useful, pragmatic and feasible legal mechanisms available to finance any long-term infrastructure concession. Government funds and budget limits have also been broadened. However, some investors still find this legal scenario incompatible with most on-going requests for proposals (RFP), as none utilise the most efficient statutory guarantee mechanisms for long-term debt finance.

In that sense, one could argue that Brazil has a cultural issue rather than a structural or institutional one. Perhaps the true difficulty lies with the Public Administration in accepting its share of risk regarding any project – avoiding due investment in market oriented policy for infrastructure industries.

One example of a legal mechanism that is ready and available to secure any PPP project and make it attractive to private capital is the advance payment of government considerations (as per section six, paragraph two of the Federal Law 11,079/2004, the Advance Payment Mechanism).

That is a kind of public funding associated with the deferral of income taxes throughout the concession term – where income taxes in connection with capital expenditure receivables are due along with equipment – property and plant depreciation and amortisation.

Another useful and safe mechanism is the possibility of state and municipalities to incorporate autonomous legal entities with the sole purpose of securing high liquidity assets as collateral for PPP projects (as per section eight, part V of Federal Law, 11,079/2004, Independent Guarantor Mechanism).

Well-constructed finance
If a project comprises of both mechanisms mentioned, all finance thereupon would, for instance, be easily structured, both from a Capital Expenditure (CAPEX) standpoint – which is the money spent on the improvement or purchase of fixed assets – and from an Operational Expenditure standpoint (OPEX), which is money a company spends on an ongoing, day-to-day basis, in order to run a business or system.

Therefore, if both CAPEX and OPEX are secured, interests would be lower, profits reasonable and public services would be available faster and more efficiently.

Considering that there is a direct correlation between OPEX and the value of the enterprise (when the OPEX decreases, while maintaining the same level of production and quality, the overall value of the enterprise increases) it’s questionable why Brazilian governments would even consider not applying such legal mechanisms which are so attractive to private capital – especially when the public sector greatly needs it.

We understand that the main reason for this apparent paradox is rather prosaic: public administration fears to take the risk. Governments prefer to use mechanisms that have no impact on their balance sheets, and let all finance risk with the private partner’s special purpose vehicle.

Governments prefer to use mechanisms that have no impact on their balance sheets, and let all finance risk with the private partner’s special purpose vehicle

For example, instead of incorporating an independent entity and capitalising it with high liquidity assets – the independent guarantor mechanism – most RFPs are limited to the receivables securitisation.

Usually these receivables are derived from the Federal Fund of Participation of States and Municipalities (FPE and FPM respectively), including monies that are not statutorily bound to any public service, as for example, import and export tax credits that are transferred from the federal government to state and municipal governments, as a compensation for tax exemptions.

By electing the FPE as the main source of security for PPP projects, governments seem to disregard the unconstitutionality and determination declared by the Brazilian Supreme Court (STF) to modify individual coefficients of each state receivable in the FPE.

If any or all projects used the advance payment mechanism or the independent guarantor mechanism, changes in the FPE coefficients would not threat the liquidity of securities provided thereupon – even if the resources anticipated or capitalised were to be paid in from the FPE.

Sharing the risk for greater gains
The concept is simple and old: project finance, either in PPPs or any other debt capital intensive project, depend on cash flow, hence fluctuations must be hedged. Both advance payment mechanism and the independent guarantor mechanism work this way – hedging the FPE securitisation.

Brazil has the legal tools necessary to attract private investment and deliver powerful infrastructure projects, and public administrators should make effective use of these existing mechanisms.

On the other hand, the private sector must take the lead and show the way, by helping and demonstrating why projects are more interesting and efficient when the public sector shares the risks with them.

Despite the hurdles associated with PPP projects, Brazil’s dynamism and forward-thinking characteristics have consistently provided investors with new opportunities to do business. That is also the case with respect to the recently enacted legislation regarding the pre-paid industry.Until the enactment of such new legislation, several electronic payment services, including pre-paid cards businesses, mobile payment solutions and digital currencies (or coins) were not subject to solid and specific laws or regulations in Brazil.

As from October 9, 2013, Federal Law 12.865/2013 put an end, to a certain extent, the legal controversy applicable to payment services in Brazil and formally recognised that all of those services and the legal entities responsible for their execution, including services rendered by the Brazilian payment card industry, are part of the Brazilian Payment System, as defined by the existing legislation.

As one may appreciate, Law 12.865/2013 established that the Central Bank of Brazil (BACEN) will have to shortly issue new rules to authorise, regulate and control the organisation and operation of payment businesses in Brazil based on the Brazilian Monetary Council (CMNs) principles and guidelines.

This is a unique opportunity to assist not only the private players within the pre-paid industry but also the regulators, and we trust that our company’s strong knowledge of the legal system applicable to the payment card industry, including its application regarding pre-paid cards, to be an asset and of utmost importance to help current players, as well as newcomers.

For further information visit www.agaadvogados.com.br

Creating leverage in the Brazilian tax system

Posted on by Ashton Wenborn

Running a company in Brazil is a challenge that comprises a wide range of different aspects, from cultural diversity to logistical trials, if we consider the country continental in extent. There are some other quite interesting challenges – among them its tax system. By considering it a federal republic, specific taxes are ruled by Federal Government, others are under the rules of the 27 states that form the country and then there are those related to the municipality.

With this structure, a particular aspect must be paid attention to: the tax burden is not equally charged all over the country, reporting important variations between states or cities. For those who are unfamiliar with the Brazilian tax system, it is worthwhile to take a look at the statistics below:

Main federal taxes

34%

Income tax + social contribution
VAT Federal (PIS+COFINS)

Main state tax

17-19%

VAT State – charged on goods and products sold (ICMS)

Main municipal tax

5%

VAT State – charged on goods and products sold (ICMS)

But avoid getting enthusiastic. The figures are just a broad-based summary of a complex system with many overcharges and with many distinguished rules. Various tax aspects that are repeated in most countries do not occur in Brazil. For example, consider federal and state VAT, which, with some exceptions, considers physical credit. In other words, the system allows the deduction of some materials physically added to the products or goods sold and some services consumed in the productive process. A long list of special situations is addressed separately and is under very careful analysis when admitting the purchase deductions.

In addition to this list we have the fact that VAT federal and VAT state taxes utilise a gross-up criteria where one is added to the basis adopted to calculate the other, as a kind of “tax cascade”. As an example, in São Paulo, the biggest state in Brazil’s economy, the VAT rate is 18 percent and this is added to the VAT federal basis rate, which is 9.25 percent. At first the result could be 27.25 percent, but according to the gross up criteria, it becomes 37.45 percent. Yet, if we take a look at the tax on services, a municipal duty, the rate is five percent, but with a cumulative peculiarity; adding taxes to each chain stage, and even worse, it becomes unrecoverable when the service is applied to any production process.

Easing complications
It is obvious that, regardless of what the Brazilian tax system comprises, it applies, with all its particularities, to all market competitors equally, in a way that it doesn’t give advantages to certain bodies, at least theoretically. This scenario could lead investors to think that the Brazilian tax system is not competitive because the conditions are equal to all competitors.

It is advisable to keep an eye out for the existence of two other taxation models: Lucro Presumido (assumed profit) and SIMPLES (national simplified tax system). Both of these systems charge taxes in a different way when compared to the mechanism described in the figures above and in certain market segments they do cause difficulties to competitors. They are optional taxation mechanisms, since the two can be used by companies reporting annual revenues of €26m and lower, for the first model and revenues of about €1.2m and lower in the second model.

Some other duties run in parallel: the great majority of the ancillary obligations that are linked to the taxes and the necessity the companies have in managing them raises the costs outrageously, mainly due to the head count required.

According to The World Bank’s Doing Business Group, those in other countries do not spend as much time dealing with tax bureaucracy as they do in Brazil. The average national business requires about 2,600 hours of form filling, registering entries in general ledgers, looking for consultancies, waiting in lines, and so on. For comparison purposes, in Switzerland the average time is 63 hours and in France 132. Because of this unaware investors believe that they need five times as many people to manage their taxes in Brazil as they do in Europe.

[I]t is important to remember that many non-tax aspects should get greater analysis, such as deciding between buying supplies in the local market or getting them abroad

And it is exactly this point that companies like Sevilha Contabilidade – Accounting and Consulting play a remarkable role, by offering efficient solutions and consulting to those investors wishing to get established in Brazil, but are not willing or can’t afford an oversized head count.

Clever economics
Last but not least, it is important to remember that many non-tax aspects should get greater analysis, such as deciding between buying supplies in the local market or getting them abroad: should we have the goods imported and distributed, or produced in Brazil? Or should we export services to Brazil or set a working team locally and have the services rendered there?

A misleading investor may perform an excellent analysis on a specific market, may develop excellent sales and distribution channels, and may have an excellent production cost, but without studying the tax implications of his decisions, there is a great possibility of jeopardising the investment feasibility.

For more than 25 years Sevilha Contabilidade has assisted many companies from many different countries in getting adjusted with the reality of doing business in Brazil, leading our clients to achieve better tax results, as well as to the whole accomplishment of the bureaucratic demands. The main objective is to provide opportunities to the investors, focusing their business needs and as a result, saving 2,600 hours or more unnecessary red tape.

For further information tel: + 55 11 2879 6682 or + 1 646 403 9670, email: sevilha@sevilha.com.br, or visit www.brazilianaccounting.com

China: IMF must empower emerging markets

Posted on by Ashton Wenborn

China has entreated member nations of the IMF to give more power to emerging markets. The request was brought about after US lawmakers blocked the IMF’s move to reorganise power structures in favour of emerging markets. The change would give countries such as China, Brazil and India more weight in relation to the emergency lender’s operations.

Such restructuring has been in the pipeline for over three years and the US remains the only country not to have authorised the necessary changes. The Obama administration has continually pressured Congress to sign off on these changes, but Republicans have refused to cooperate.

Hong Lei, spokesman for the Chinese Foreign Ministry, indirectly criticised the US for its lawmakers’ inability to agree upon funding measures need to move forward. “Quota realignment is a significant decision made by the IMF,” said Hong in a press conference held on Wednesday. “Members of the relevant organization should step up efforts to implement the plan for quotas and governance reform and give greater representation and bigger say to emerging markets and developing countries in international financial institutions.”

In challenging the long-standing power structure of the US and Europe, China could be looking to create new alliances with developing markets

“I think the whole issue with the reform is political rather than economical,” said Managing Director at Global Intelligence Alliance UK, Aleksi Grym. When asked what the short term effects of such quota reforms would be, he replied, “none probably. It’s effect rather than cause. It’s really just a power play between the US and China.”

Developing nations have historically been suspicious of the IMF. In the early 1990s, the fund promoted privatizations that made the transition from communism more difficult and a few years later it cut budgets, worsening the debt crises in Latin America and Asia.

Such structural reforms are being discussed now that would position China as the third largest IMF member, while loosening the US’ tight hold on the fund’s voting shares. China’s championship of emerging markets might reach beyond an immediate increase in power for itself. “If you think about the IMF and its role, it’s all to do with crisis management. This is about how much influence China will have on emerging markets in terms of crisis, development and aid,” said Grym. Although the quota reforms have not yet been ratified, China has already begun exercising influence in future markets.

“China has offered selfless assistance to Africa mainly in the fields of economic and social development,” said Hong. “[China has] helped Africa earn development fund and promoted Africa’s ability of self-development and ability of bargaining in the international market.”

Greater say over the IMF’s quotas could have much larger implications in the future. Though China’s objectives seem clear, there could be another driving force. In challenging the long-standing power structure of the US and Europe, China could be looking to create new alliances with developing markets.

Hollande affair: The final blow to France’s socialist dream?

Posted on by Ashton Wenborn

Just when this avowed socialist is belatedly taking steps to resurrect a moribund economy and save his presidency, he attracts the wrong kind of publicity by having a clandestine affair with an actress while living in the Elysee Palace, official home of the head of state, with his mistress.

Inevitably, the revelations of the dalliance with Julie Gayet – and the hospitalisation of the president’s shocked first lady Valerie Trierweiler – brought the spotlight back on to a largely ineffectual 18 months in office. London business newspaper City AM derided Hollande’s management of the world’s fifth-biggest country while citing “awful social problems” and “frighteningly high taxation”.

Je suis désolé? Francois Hollande looks sheepish yesterday at a press conference where he was quizzed about his alleged affair with French actress Julie Gayet. The allegations are likely to harm his already flagging popularity
Je suis désolé? Francois Hollande looks sheepish yesterday at a press conference where he was quizzed about his alleged affair with French actress Julie Gayet. The allegations are likely to harm his already flagging popularity

And then after the French ambassador in London responded with an angry letter accusing the paper of “French bashing”, it brought down further opprobrium on the nation’s leader. The president “seems to manage his country’s finances as well as his personal affairs”, wrote Brooks Newmark, a Conservative MP and member of the parliamentary treasury committee.

Never a surplus
Both of them have a point. The latest Global Competitiveness Report by the World Economic Forum ranks the home of “liberty, equality, fraternity” at a disastrous 130 out of 148 for its “regulatory burden”. As for the flexibility of its labour market, the country comes out at well over 100 on all counts.

Finally, on quality of government spending, it rates a poor 83rd. Since Hollande’s government spends 57 percent of GDP – over four percent more than the revenues it takes in, the implications are obvious, as they have been for years. In 60 years no French government has managed to achieve a surplus or seemed in the least interested in doing so.

As most other objective international organisations such as the OECD and IMF have long pointed out, France is a punitive tax-gatherer and a profligate spender. They have repeatedly warned Hollande to do something about it. And despite being known as the “president of high taxes” as well as the “imprudent president”, as L’Express magazine headlined after the latest bedroom revelations, he has against all predictions taken heed.

France is a punitive tax-gatherer and a profligate spender

Assault
Although Hollande remains an unabashed fan of big government – “I am a socialist. I am not won over by liberalism, in fact quite the opposite because it’s the state that takes the initiative”, he said in January, he has listened to big business and quietly launched an assault on his country’s problems.

He’s taking the axe to crippling social contributions by business – this year they will pay €30bn less. And, incroyablement, he is committed to cutting public spending by €15bn in 2014 – and by a total €50bn between now and 2017, much to the fury of the more militant unions.

Simultaneously, an attack on red tape is supposedly under way. Hollande has promised to reduce the mountain of regulations under which French businesses labour. But, as Le Monde points out, he proposed something very similar – the still-awaited “shock of simplification” – back in 2012.

Also purportedly in the offing is a concerted attack on direct and indirect individual taxes, but nobody’s waiting up. Currently, France’s best and brightest spend more than half the year working for the government. Hence the stampede by wealthy French people to lower-taxed Switzerland.

Start-ups
And yet France has the foundation for a recovery, if Hollande has the will. Despite the red tape, France attracted more foreign companies in 2012 than any other European nation. Indeed the US is one of its biggest investors. To boot, it’s a particularly favourite location for start-ups, in fact heading Germany.

Tourists don’t care about economics – France is the third-most attractive country for visitors after the US and Spain. And many shop at the five-star stores on the Champs-Elysees, showcase for a home-grown luxury sector that claims around a quarter of the industry’s annual global sales of €210bn.

Finally, far from spending half the day over cafes au lait while discussing football or cycling, French workers are, well, workers. They are officially the second-most productive in the world. Only Americans beat them, according to the OECD. Deeply family-minded, the French might have more days off but they more than catch up when they’re on the job.

Given that work ethic, the “imprudent president” may still have time to save the nation.

Driving the change: Cyprus pushes for economic growth

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

Cyprus in numbers

31st

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

35%

25-64-year-olds with tertiary education

26.8%

EU average

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

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

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

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

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

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

A brief outline of Cyprus’ tax framework

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

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

No withholding tax at all times on:

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

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

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

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

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

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

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

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

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

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

Cyprus

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

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

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

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

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

Emerging markets key to high returns, says Argo

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax in Europe: what corporations need to know

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Malaysian insurance market looks stable, says Etiqa

Posted on by Ashton Wenborn

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

Figure 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Using collaborative intelligence to grow the telecoms industry

Posted on by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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