Ashton Wenborn | World Finance

Bangladeshi economy: inclusive finance key to real growth

Posted on January 16, 2014February 20, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

Banorte grows in spite of Mexico’s slow economy

Posted on January 16, 2014January 23, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Graph

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LNG exports help to diversify Oman’s economy

Posted on January 15, 2014January 16, 2014 by Ashton Wenborn

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

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

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

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

Oman LNG by numbers (2012)

10.4MPTA

Production capacity

96.9%

Reliability

1,538

Cargoes exported

89.8%

Omanis in national LNG industry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Evolving with the legal industry: JHA advises

Posted on January 15, 2014January 14, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Abidjan builds bridge to support country’s rapid growth

Posted on January 15, 2014January 31, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Adapt or die: Finles’ savvy approach to investment management

Posted on January 15, 2014January 15, 2014 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brazil clarifies its position on transfer pricing

Posted on January 15, 2014July 19, 2019 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For further information email carlosayub@deloitte.com

GDP: an accurate measure of economic health?

Posted on January 15, 2014January 18, 2021 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

GCC region: a global investment hub?

Posted on January 15, 2014February 20, 2014 by Ashton Wenborn

Harvesting fast economic growth, the GCC region has emerged from vast oil and gas wealth, and years of unspent surplus income. In the last decade the GCC nations have developed, with these rich economies adopting similar structures to the west. These economies are dominated by Sovereign Wealth Funds (SWF) that account for approximately 32.6 percent of the global SWF assets, valued at $6trn. According to the SWF Institute, among the GCC states Saudi Arabia’s Monetary Agency (SAMA) holds the prime position in the volume of assets, with an estimated $675.9bn.

This is followed by the UAE’s Abu Dhabi Investment Authority at $627bn; and subsequently Kuwait’s Investment Authority at $386bn; Qatar’s Investment Authority at $115bn; Bahrain’s Mumtalakat Holding at $11bn; and Oman’s State General Reserve Fund at $8.2bn. It is not surprising that the origins of these funds emanate from oil and gas revenues, and four of the funds are all ranked within the global top 10 by country.

Dream results made a reality
It has been widely reported that both the SWF of Abu Dhabi and Kuwait had made sizeable profits of $30m from their acquirement of shares in the UK’s Royal Mail, after the shares surpassed the issuance price by up to 40 percent in October 2013. The Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority (KIA), invested $79m each, giving an immediate return on investment. This is considered an investors’ dream.

It has been widely reported that both the SWF of Abu Dhabi and Kuwait had made sizeable profits of $30m from their acquirement of shares in the UK’s Royal Mail

However, change is on the horizon. The recent instability in western markets, including the downfall in the euro and the US Government Shutdown, have resulted in the GCC shifting its focus of SWF spending to local markets. KPMG reported that this redirection of sovereign wealth would benefit local infrastructure ambitions and accelerate growth and development of local economies. The GCC has initiated mammoth infrastructure development, and it is estimated that by 2020 spending will surpass $142bn on projects in rail, road, sewage and bridge development.

Not only have certain western downfalls contributed to local SWF investment, but the Arab Spring had a very positive impact on three GCC states, as an influx of both local and foreign investors pulled away from affected territories and redirected their investment into other neighbouring states – in particular the UAE, Qatar and Saudi Arabia. This has resulted in property cash buyers in cities such as Dubai creating a rise in property prices, which in turn has resulted in mixed reactions over whether another property boom is imminent or avoidable.

Investing to recoup
Despite speculation that office vacancy rates in Dubai are above 40 percent, Dubai International Financial Centre (DIFC) made headlines as it announced a further AED15bn in expansion over the next 10 years. The attraction of tax free wholly owned entities and being an independent jurisdiction with DIFC laws and regulations written in English and defaulting to English law in the event of ambiguity are all key sellers.

Standard Chartered Bank is one of many to be based in the DIFC area as it moved into a purpose built $140m building. Looking onwards we can expect to see the GCC develop its domestic growth and increase income. Saudi Arabia remains in pole position as the largest Arab exporter, having exported goods and services in the region of $410bn in 2012, accounting for 28 percent of the international total Arab Exports (see Fig. 1).

However, the banking sector raises concerns in regards to short-term stability, as one major issue is the absence of regulated credit agencies. For the last decade both international and local banks have been lending aggressively to consumers without any credit history data.

The UAE proposes to introduce the first credit bureau agent – known as Al Etihad Credit Bureau – by 2015. The UAE Central Bank has been actively working with top banking industry representatives, led by the UAE Banking Federation (UBF) to execute this project.

Once fully operational, it is predicted lending may be at a standstill for up to 12 months, as the banks will be gathering data on the borrowers and their repayment habits. Consumers acquiring up to four credit cards from different lenders, and the absence of credit checks, has historically fuelled a debt driven society.

The use of Post Dated cheques has also caused more moral harm to the economies. Central Banks in the GCC are all actively working to overcome these hurdles. As their economies grow, naturally the banking system requires increased sophistication, however, the west has not given a positive model in regards to banking practices and ethics.

The use of Post Dated cheques has also caused more moral harm to the economies

The rise in domestic lending in Saudi Arabia has been evident in the last few years. In both the first and second quarter of 2012 it added $22.78bn in credit, compared to the whole of 2011, which saw $23.96bn. The local banks have immensely benefited from a retail-spending spree. According to SAMA data, an average of $14.39bn was withdrawn from Saudi ATM’s on a monthly basis over the summer of 2012. The government is determined to heavily develop infrastructure and housing projects.

This will create a national boom for the local financial services sector and the banks will exhibit steady growth in the coming years. With this opportunity, Farazad Investments has the ability to attract institutional lenders to invest into these safe haven economies, as the risk of default is minimal as consumer demand is high.

The UAE has experienced an over saturated banking industry, as more than 50 local and international banks compete in being the best in retail commercial and investment banking to a population of only eight million.

This has impacted negatively on international banks that have cut losses and retreated. In September, Barclays announced plans to sell its retail bank operation in the UAE, as foreign banks cannot compete against cash rich local rivals. The exit of such high profile banks are attractive to local ones, as they are able to increase their retail portfolio – Barclays is not the first UK bank to fall victim. In 2010 the Royal Bank of Scotland retail operations was bought by Abu Dhabi Commercial Bank in a $100m deal. Not only are local lenders on the lookout for buyouts, but international banks such as HSBC Holdings bought Lloyds Banking Group’s onshore retail, corporate and commercial banking operations in the UAE.

Making sacrifices for longevity
Banking worldwide has witnessed bleak times as further job cuts were announced. Unfortunately, these job losses have resulted in major players in Dubai such as Nomura, Deutsche Bank, Credit Suisse and UBS making labour cuts locally. Interestingly, Credit Suisse relocated some of its labour to Qatar, with UBS moving its regional investment banking headquarters to Doha. Morgan Stanley has also moved part of its equities business to Saudi Arabia.

Approximately $3bn of securities were affected in July this year, when Moody’s downgraded 12 GCC banks. The downgrade was necessary to capture the evolving risk of subordinated debt. Within the next few years Basel III will be implemented in all GCC States, and subordinated debt instruments expect to have mandatory loss-absorbing features, triggered by the provision of government support. Moody’s however has noted the government’s in the Gulf have unrivalled support for local banks – in particular State owned – compared to the West, which is not fully supported. In our experience, the best mechanism to provide maximum protection is to combine both subordinated and un-subordinated debt by cushioning the risk rating in the event of a default.

Farazad Investments has introduced a unique in-house formula, which internationally recognised Institutions are in the process of adopting. This formula evolves how traditional funding has been done in the past.

Farazad Investments has introduced a unique in-house formula, which internationally recognised Institutions are in the process of adopting

The possibility of sanctions being lifted on Iran will gravely impact GCC States as oil and gas revenues will deplete. The GCC has profited from the trade embargos on Iran, however, once the veil is lifted it’s every oil state for themselves.

Iran boasts the original location where oil was first discovered in the Middle East, which is now over 100 years old. The Islamic Republic is also the second largest oil producer in the world, and ranked first for largest proven natural gas reserves, with Qatar ranked in third. The UN Conference on Trade and Development (UNCTAD) reported that despite sanctions imposed on Iran, foreign direct investment (FDI) in 2010 exceeded $3.6bn and in 2011 made a new record high of surpassing $4.15bn. The Economist Intelligence Unit (EIU) estimated net FDI would rise by 100 percent by 2014, bearing sanctions in mind. As of 2012, over 400 foreign companies have been reported to have invested in Iran.

These investors include developed nations such as Russia, the UK, Germany, France, South Korea, Norway and even companies from the US – both Pepsi Cola and Coca-Cola have joint ventures with Iranian companies. The UNCTAD positioned Iran in 2010 as the sixth global country to attract foreign investment. Iran has a vision, and by 2025 it aims to attract $1.3trn of foreign investment into the country. Should sanctions be lifted, this vision may become a reality, and Iran’s neighbours will feel the impact.

Many Iranians who have heavily invested in the GCC region have experienced resident visa issues and so those within the GCC States would gladly reinvest back into their motherland. The market in the Middle East in the next few years will undergo a drastic reform – some nations will rise and others may fall. I envisage Saudi Arabia, Qatar and Iran will be among the victors. The change in regime will fuel this positive development and the younger generation will ascend.

For further information email enquiry@farazadinvest.com

BAF supports investment in Latin American agriculture

Posted on January 15, 2014January 9, 2014 by Ashton Wenborn

While much of the attention of the investment community has been focused on Asia over the last few years, Latin America is quietly establishing itself as a serious contender on the global financial stage. Despite a history of turbulent economies, political unrest and financial mismanagement, many global observers believe that the region will offer huge opportunities to investors in the coming years.

Perhaps the region’s most important sector is agriculture, with many Latin American countries producing considerable amounts of food that is then exported to the rest of the world. However, with a lack of modern infrastructure in many countries, as well as difficulties in raising the necessary finances to boost exports, many companies have struggled to translate their potential into international trade.

According to the World Bank, Latin America is set to be a key provider of food for the rest of the world over the next few decades. However, fluctuating exchange rates, stifling tax regimes and restrictive regulations mean many of these agriculture industries might struggle to remain competitive.

Latin America is set to be a key provider of food for the rest of the world over the next few decades

International investors are increasingly looking at providing the finance to help these industries grow. However, there are firms that have provided these facilities for a number of years, including Swiss corporate finance specialists BAF Capital. The company has been in operation since the 1990s, providing finance to many agriculture-based firms from across Latin America.

In 2008 it launched its BAF Latam Trade Finance Fund, which was the recipient of the World Finance award for Best Emerging Markets Fund in Latin America, 2013. World Finance caught up with BAF Capital co-founder and CEO Ernesto Lienhard to discuss the region’s potential, how his firm has successfully built up its operations, and how it is well placed to support the region in the future.

Regulation and customers
Lienhard says that the changes to the banking industry seen over the last decade and a half mean that firms like his are especially well placed to offer the necessary financing to businesses that banks may not be able to fully provide.

“The huge change in the banking industry that has been taking place during the last 15 years – particularly since the crisis of 2008 – led us to take advantage of certain inefficiencies in the sector. Back in the 1980s, while we were still working in the banking sector in Latin America, we realised that the banks as a whole were becoming more bureaucratic year after year. Part of this bureaucracy stems from the fact that the banks have been growing and becoming more standardised. Therefore, more and more time is devoted to complying with regulators rather than to servicing customers.”

It was during the initial stages of the business back in the 1990s that BAF Capital saw the potential for targeting specific regional businesses. “When we started our business back in the 90s as an independent working capital provider we foresaw a very attractive market niche: we noticed the opportunity to become an alternative lender to regional companies that needed higher quality services than the ones provided by the banks. This worked well for several years and became even better for our strategy after the 2008 collapse.”

When the global financial crisis hit in 2008, the problems facing the banking industry were revealed and opportunities for the likes of BAF emerged. “Banks were overloaded with leverage,” says Lienhard. “As a result of this, regulators required additional capital and stricter norms. In this scenario, direct lending became a unique opportunity for investors.”

Despite being headquartered in Switzerland, BAF has affiliates throughout Latin America. “Although the investment management company, BAF Capital, is based in Switzerland, its affiliates BAF Capital SA Brazil, BAF Capital SA Argentina and BAF Capital SA Uruguay are based in Latin America. BAF Capital holds the investment committee.”

The reason, says Lienhard, is to remain in close proximity to its primary clients. “We work very hard to be the best alternative funding source in Latin America. To achieve this goal, we need to be close to our borrowers, understand their businesses and, of course, their financial needs. Therefore, we are present in the countries where all the borrowers are located.”

Direct lending
Typical clients tend to be in the agricultural sectors from across South America. These include “dairy producers, sugar mills, soybean oil crushing companies, slaughterhouses, grain exporters, and juice exporters. All of them are long established medium and large companies with important investments in fixed assets, state-of-the-art facilities and excellent track record as exporters. All of these companies have gone through many political and economical crisis and have managed to overcome them all.”

The fund offers businesses in Latin America direct lending, helping them to boost their exports to the rest of the world. “We have built our own network through many decades of being involved in corporate finance,” says Lienhard. “In a nutshell, we provide pre-export financing of export contracts signed with well-known international buyers. In some instances we take in addition warehouse receipts over inventories or trusts over collection accounts as collateral. In fact, all our transactions are self-liquidating and 100 percent collateralised structured.”

Latin America has been fluctuating since 1492 and in our opinion it will continue fluctuating in the future as well

Because of the unique way the fund has been structured, it is not restricted in the same way as banks in terms of capital requirements. “The group is a niche player, fully focused in a specific region but without the constraints and regulations of a traditional bank,” says Lienhard. “As we do not use leverage we don’t have any restrictions on capital requirements or any ratios to be maintained. The golden rule in our strategy is based on diversification of borrowers, sectors and countries.”

The team of employees the company has built up in recent years has a wealth of experience in corporate finance, as well as in the region.

“BAF Capital’s team has always worked in corporate finance within the banking sector in the region before joining our firm. Most of them worked for institutions like Rabobank, Banco do Brasil, Citibank or Lloyds Bank. We are a team of 64, the majority of us located in the affiliates of Latin America,” says Lienhard.

Through its various fully integrated elements, BAF Capital’s employees focus on deal sourcing, risk analysis, and structuring. While the key team members have been with the company since the beginning and have plenty of banking experience, many of them also have family histories related to the agricultural sector, giving them an advantageous insight into the Latin American industry.

Old fashioned lending
Although there is vast potential in Latin America, many investors are still concerned about the risks posed by the continent. BAF Capital’s strategy is both conservative and old fashioned, says Lienhard. “We apply two key rules regarding mitigation of risk – be close to your borrowers, and diversify. BAF Capital analyses each borrower at the credit committee at least twice a year, and we currently have relationships with more than 100 companies.”

The BAF Latam Trade Finance Fund has enjoyed almost six years of positive returns, defying the fluctuations seen across the continent. The volatility that Latin American economies traditionally see is not a phenomenon of just the last few decades, according to Lienhard. “Latin America has been fluctuating since 1492 and in our opinion it will continue fluctuating in the future as well. Latin America is all about economic cycles. We understand the region from that point of view and try to adapt our strategy to that principle.”

Again, the agricultural sectors are ones that BAF Capital are seeing the most opportunities in. “We are fully concentrated in financing food exporters in the region because this is a traditional activity here, where the comparative and competitive advantages are very clear. The region is the world’s largest exporter of agricultural products. The food exporters that we work with have consistent track records. They have been honouring the export contracts signed for decades.”

The firm’s flexibility also enables it to navigate fluctuations in exchange rates. “Exchange rates and liquidity play a very important role in profitability,” says Lienhard. “The weaker the domestic currency is, the more profitable the export sector becomes. That’s why whenever there is a crisis or volatility that affects the region, our strategy performs so well. Because we are able to provide financing to food exporters that have an excellent business, but are unable to fulfil all their needs from the traditional lenders.”

While the BAF Latam Trade Finance Fund has been the focus of the firm, BAF Capital says it is open to new ways in which it can lend directly to companies in the region. Its focus will remain on the region, and it’s the deep historic ties that the key members of staff have for it that attracts them to Latin America.

“Our families arrived to the region from Switzerland almost 100 years ago. We were born here, so we know the region, the agricultural cycles and their players. In our view it is still an undeveloped market with plenty of potential.”

As Samra wastewater plant expansion continues

Posted on January 15, 2014January 9, 2014 by Ashton Wenborn

The Hashemite Kingdom of Jordan faces significant challenges in its water sector due to a combination of scarce water resources, high population growth and increasing demand. The water sector receives special attention from the government and donors because it represents the backbone for integrated socioeconomic development of the kingdom.

Jordan is the fourth most water-poor country in the world. As per Jordan’s Water Strategy for 2008-22, about four million Jordanians (63 percent of the population) are served by sewerage systems producing about 100 million cubic metres of effluent per year that is reused primarily in agriculture. In fact, in 2011, more than 60 percent of crops in the Jordan Valley were irrigated with treated wastewater.

In the medium-long term, with a growing population and increasing demand, Jordan is unlikely to be able to satisfy the corresponding needs from renewable water resources. Therefore, sustainable patterns of water use are being established to meet the requirements of Jordan’s social and economic development objectives, including basic agricultural production. No single action can remedy the country’s water shortages and the Government of Jordan, with the assistance of institutional donors, has launched coordinated actions to increase overall water availability.

One of these actions is the procurement of an expansion of the As Samra wastewater treatment plant (WWTP) launched in 2009 by the Government of Jordan (represented by the Ministry of Water and Irrigation (MWI)). In 2010, the Millennium Challenge Corporation (MCC), a US Government development institution, committed $275.1m for development projects in Jordan, including substantial grant financing toward the expansion of the As Samra plant, among other projects in the water sector.

Awarded in 2002 through an international competitive tender to a consortium composed of SUEZ Environnement/Degrémont and Morganti/CCC, and completed in 2008, the initial As Samra Wastewater Treatment Plant (phase one) was designed to treat the wastewater of 2.3 million inhabitants of Amman. This modern plant replaced the old polluted system of stabilisation ponds, dramatically improving both the quantity and the quality of water available to the downstream agricultural areas that rely heavily on treated water for irrigation purposes. The equivalent of 4,000 farms (10,00ha) are irrigated with As Samra high quality water.

To address the needs of a growing population, the Government of Jordan decided in 2009 to expand the plant, putting in place a 25-year build, operate and transfer (BOT) contract. The expansion project provides for an increase in treatment capacity from 267,000 to 365,000 cubic metres per day, and includes the refinancing of the project company’s existing borrowing. The expanded plant will be fully operational in 2016 and will serve 3.5 million inhabitants of Greater Amman through to 2025. It came into force on July 12 2012 after a long and challenging negotiation.

As Samra key figures

37,500m³

Total concrete poured

6,100t

Concrete reinforcing steel

270t

Stainless steel pipes

141km

Process cables

6.4km

Underground fibreglass pipes

840people

Peak labour force on site

Investment structure
Investment decisions in the infrastructure sector through private sector engagement, and their implementation, remain a challenge, especially where there is a lack of excludability. Water infrastructures often have high social but an unacceptable commercial rates of return: substantial investments, long gestation periods, fixed returns, etc. It is therefore essential that governments support infrastructure financing through appropriate financial instruments and incentives.

Capital grant as an instrument to make social projects commercially viable is an accepted economic proposition. It can be a challenge though to make it socially acceptable. A diverse mix of financing was required to successfully finance the $270m project:

A total of $27.4m generated by the project company out of the cash flows up to completion is reinvested into the expansion; A $93m grant from the MCC; and
A JD105m (approx. $148m) debt package from a syndicate of local banks led by Arab Bank (including $42m for the refinancing of the outstanding phase one loan).

The sponsors managed to mobilise $175m of debt and equity despite the profound political and social changes taking place in the region and the adverse financial impact these have had on Jordan.

The tenor on the commercial loan is 20 years. It marks the longest maturity Jordanian banks have ever offered for a Jordanian dinar-denominated limited-recourse loan. This loan offers the MWI a natural and efficient hedge against potential devaluation.
The interest rate during operation is a floating rate based on the average of the prime lending rates announced by a syndicate of four local banks, minus 50 basis points, which is again extremely competitive.
The debt-to-equity ratio is 80:20. Cash flows from the phase one operation were securitised to support the sponsors’ equity contribution towards the expansion; i.e. no fresh money is injected by the sponsors, limiting their exposure in Jordan. This unique source of funding is one of the key features of this transaction. It was accepted by the MWI, the lenders and the MCC based on the existing plant’s proven performance and Degrémont’s technical know-how.

While the events of the Arab Spring did not directly impact Jordan, they had some indirect effects, which in turn prolonged completion of the transaction. Additionally, the contagion of the European debt problems and the implementation of Basel III by international banks always threatened to constrain liquidity for the expansion. The politico-economic climate in Jordan changed dramatically between 2010 and financial close in July 2012:

Increased scrutiny of the actions and decisions of ministers and public officials. In Jordan this led, on at least one occasion, to the replacement of the whole cabinet of ministers or a collection of ministers, including the Minister of Water and Irrigation. This inevitably affected continuity in terms of the administration of the transaction.
Interruption to the supply of natural gas from Egypt. This affected profoundly the budget deficit of Jordan, and thus the economic outlook of the country. In November 2011, S&P lowered Jordan’s long-term local currency sovereign credit rating.
Decision of the Central Bank of Jordan to increase interest rates several times in 2012. Significantly, the Arab bank-led syndicate held their pricing as per their 2011 commitment, which meant the sponsors avoided having to reopen discussions with the MWI in the lead up to financial close.

The expansion would not have been possible without the grant funding from MCC. However, the development of a finance structure to accommodate MCC’s funding conditions presented the sponsors and lenders with a significant number of challenges. MCC was created as an independent government corporation by the US Congress in January 2004 to provide grants to developing countries. Unlike an export credit agency or a multilateral donor, MCC is not required to secure a return on its investments.

However, MCC requires strict adherence to its policies and regulations and many of these had a direct impact on the structuring of the project and finance documentation. As the expansion was the first BOT co-financing with the private sector undertaken by MCC, and also because the expansion was not subject to a competitive tender, MCC was closely involved in all aspects of the transaction. This had a significant impact on the timetable for closing the expansion.

Cost analysis
As with many international financing institutions, MCC will typically seek to select the private sector partner through a open competitive bidding process. However, in the case of the As Samra project, the BOT contract between MWI and the project company (the ‘project agreement’) provided for direct negotiation between the parties in the expectation that the plant would be expanded before the expiry of the BOT contract.

[E]ffective stakeholder engagement plays a critical role in the successful completion of all stages of infrastructure projects

Therefore MCC’s teams developed a methodology to complete a cost analysis on the non-competed proposal of WWTP expansion to ensure that the proposed construction price is based on reasonable cost build up and includes a defendable level of overhead and profit.

The financing was also complicated by the inability of the MCC to enter into any direct contractual relationships with the sponsors or the lenders. The challenges included:

Inability of the lenders to enter into any form of inter-creditor agreement with the MCC;
Structuring the project agreement such that the project company has appropriate remedies in the event of non-payment of the MCC grant funding;
Processing and administration of payments in accordance with the MCC’s requirements;
The absence of MCC credit support in the form of a letter of commitment or any other security;
No mechanism for the MCC and the lenders to consult and collectively make decisions, e.g. on matters requiring MCC and lender consent, such as waivers or amendments to transaction documents;
Separate approval paths in connection with disbursements of MCC funding and debt.

Probably the most challenging aspect of the expansion financing were the conditions that had to be be satisfied by the project company for the drawdown of MCC funding. These are strict, even in comparison to some multilateral disbursement conditions. Lenders would be exposed to a very significant funding shortfall in the event any of these conditions were not satisfied and MCC funding is not forthcoming. This necessitated structuring the documentation in such a way as to mitigate this risk to the lenders. Both the MCC and the lenders were reluctant to fund ahead of each other.

As a result, financial close and satisfaction of the initial conditions of the MCC disbursement had to occur at the same time. A creative solution was devised whereby notices, certificates and drawdown requests were simultaneously exchanged on the day of financial close so as to achieve satisfaction of the conditions for initial disbursement of MCC funds contemporaneously with first drawdown of the debt.

Similarly, the MCC’s ongoing obligation to provide its funding is dependent on the funding commitment of the banks. This resulted in the sponsors having to accept the MCC and lender drawdown tests designed to ensure that neither the MCC nor the lenders are ever in a position where they have funded in excess of threshold ratios of debt to MCC funding and other threshold ratios involving equity investment and cash from operations. Despite these challenges, the grant funding enabled the sponsors to offer an affordable tariff, benefiting the government and local ratepayers without subsidising the private sector.

As Samra Plant –

Key Stakeholders

Client:

Government of Jordan represented by the Ministry of Water and Irrigation

Project companies:

Samra Wastewater Treatment Plant Company and Samra Plant Operation and Maintenance Company

Sponsors:

Suez Environment, its subsidiary Degrémont, and the Morganti Group – Consolidated Contractors Company

Donor:

Millennium Challenge Corporation; an innovative and independent US foreign aid agency that is helping lead the fight against global poverty

Grant fund manager:

Millennium Challenge Account; a limited liability company owned by the Government of Jordan. It was established in June 2010 to manage and implement the programmes funded by the Millennium Challenge Corporation in accordance with the compact agreement and international best practices

Lenders:

Lender syndicate led by Arab Bank

Beneficiaries:

Amman, Zarqa and Al Hashimiyya populations, as well as farmers irrigating crops with King Talal Reservoir water and along Wadi Zarqa

Stakeholder engagement
In the long and complex process of designing, financing, building, and operating major infrastructure projects, stakeholder engagement has often been something of an afterthought. The effective stakeholder engagement plays a critical role in the successful completion of all stages of infrastructure projects; the operation of the As Samra plant, as well as the development of the expansion, illustrates the benefits of an inclusive approach. Affordability is a must but represents only one aspect of acceptability.

Stakeholder engagement refers to effective communication and coordination with all the individuals or groups who have a stake – be it commercial, financial, political, personal, or otherwise – in the outcome of an infrastructure project. Owing to its complexity and wide-ranging impacts, the As Samra WWTP has a large and diverse array of stakeholders, ranging from the banks that risk capital to politicians who risk reputation, from those concerned about nature protection to the neighbourhood leader concerned about local economy preservation.

As soon as operations started on the phase one plant, attention was paid to the acceptability of newly built infrastructure. Work on perception and expectations started with local stakeholders aiming to improve understanding and knowledge about the plant. Contribution to local development takes place through site visits all year long; the QHSE department of the As Samra WWTP, the municipality and the primary local stakeholders (mainly farmers), jointly define priorities and develop action plans (treatment of insects, sidewalks etc.)

During the planning phase of the expansion, early engagement with citizens impacted by the project provided the opportunity to build consensus around the purpose of the expansion and its benefits. Participants showed interest in job opportunities created during expansion phases, and asked about the accessibility to these openings. Working opportunities for women were explored with special care, identifying the necessary points in the job advertisement to motivate women to apply.

Construction of the expansion started in October 2012 for a total of 36 months; a workforce of about 1,950 workers and staff will be mobilised on site at the peak period. The emphasis was put on clear communicating, whether with politicians or the public. Additionally, a joint recruitment programme was established with the municipality to promote local employment.

The PPP (public-private partnership)/BOT model is well established and understood. What made Samra different was the role and requirements of the MCC that in many instances conflicted with the expectations of the sponsors and the MWI and, to some extent, with the lenders. However, throughout the whole negotiation period, and even now while the construction of the expansion is underway, the Government of Jordan, the MCC and the sponsors worked together to set up this innovative financing.

This was critical to developing a sustainable project with an affordable tariff for the community and the country while offering high performance service. The MWI and the MCC’s trust in the sponsors’ ability to develop the expansion was a key element to the negotiation, and will make As Samra one of the largest and most modern wastewater treatment plants in the Middle East.

Myanmar: investment soars ahead as economy matures

Posted on January 14, 2014February 3, 2015 by Ashton Wenborn

The investment prospects in Myanmar have taken flight in recent years, and although the burgeoning nation is partway through a phase of economic transition, investors remain guarded in light of the inherent pitfalls of committing to a developing nation. World Finance spoke to Aung Ko Win, Chairman at KBZ Group of Companies, about the investment landscape in Myanmar, the reasons underpinning recent economic growth and the many opportunities to be realised there in the near future.

What is your position within the local Myanmar economy?
KBZ Group is a Myanmar-based and local-owned conglomerate, which was founded over two decades ago and represents market leaders in the fields of banking, insurance, aviation, mining, agriculture, infrastructure, trading, manufacturing, healthcare, hospitality and so forth. Our core business, however, is in the financial and transportation sectors.

We represent Kanbawza Bank (KBZ Bank), which is the largest privately owned bank in Myanmar in terms of capital base and branch network coverage. McKinsey & Company reports that KBZ Bank represents 51 percent of the overall private bank market share, and in 2013 KBZ Bank accounted for 36 percent of loans from domestic private banks, according to the Central Bank of Myanmar.

Due to our charitable activities, people in Myanmar have great trust and confidence in the KBZ brand and, as a result, we are able to leverage this reputation in expanding upon our market share. For example, we also represent Myanmar’s leading insurance provider, iKBZ (insurance Kanbawza), which is the first private insurance company of its kind to exist after 50 years of monopolisation by the government.

In the transportation sector, we have two airlines – AirKBZ and MAI. Established in 2010, AirKBZ (Air Kanbawza) is a domestic airline that spans 30 destinations and represents 30 percent of the domestic market share, according to Reuters, whereas Myanmar Airways International (MAI) is a legacy airline and the national flag carrier of Myanmar. KBZ Group recently acquired a 100 percent stake in MAI, and as a result occupies a dominant position in the region in terms of travel routes and destinations across East Asia.

KBZ Group is also known for its various CSR initiatives and, due to its contributions to various causes in the health and education sectors, along with religious, social and disaster relief, KBZ Group has come to be recognised as the most charitable enterprise in Myanmar. Moreover, the company demonstrate a willingness to strengthen transparency and accountability in Myanmar, and has been recognised as the highest national taxpayer for several years running now.

Myanmar in pictures

A man is seen farming land in Myanmar. The country has a strong agriculture sector ripe for investment.

A gem dealer examines the quality of a jade stone before purchasing it at a market in Mandalay, Myanmar. The country generates considerable income from the mining of precious stones.

KBZ Group employees seen assisting customers in its flagship bank.

Leading by example, I was awarded the first ever State Excellence Award on April 30, 2013 in Myanmar. The award is conferred by the President of the Union of Myanmar for being the highest tax-payer for successive years and the largest contributor to the welfare of its people and societies. This is a very progressive movement from the Myanmar government to encourage the CSR initiatives in Myanmar and acknowledge me as a role model for future generations.

What are the challenges that KBZ Group faces on a daily basis?
At KBZ Group, we uphold an entrepreneurial spirit in the face of adversity, which is why we see challenges as opportunities to excel. On a group level, we need to make sure that our existing businesses continue to be the market leaders in their respective sectors. We also focus heavily on corporate development activities – structuring partnerships into new areas of lucrative businesses; and we are finding ways to create synergies via internal M&A activity and restructuring.

On the portfolio company level, we focus on a few key points, which include how we can maximise our profitability and the interests of our stakeholders. We also look into how we create a good corporate culture, how we build an outstanding management team, and how to create enterprises with strong corporate governance.

We want to serve the interests of all our stakeholders, including our employees, suppliers and customers. We believe doing good for the people is excellent business practice, and will pay dividends in the long run. In order to do that, we want to create a strong corporate culture based on meritocracy, accountability and transparency. With a strong corporate culture we can instil strong corporate governance so that we can institutionalise our businesses and transform them from SMEs to public companies.

What is the corporate culture at KBZ Group?
True to our roots, KBZ Group has always focused on serving the people of Myanmar. Although we have grown in size, we are still very much focused on giving back to the communities in which we work. All of our businesses revolve around a simple core mission, and that is to provide quality services to the people of Myanmar.

We want to serve the interests of all our stakeholders, including our employees, suppliers and customers

The company has a relatively flat corporate structure. Even at our portfolio company level, senior management are actively involved in managing the day-to-day operations of their respective businesses.

On the group level, we also actively monitor the performance of our portfolio companies. We believe such an approach facilitates faster and more efficient decision-making by leveraging the synergies of our diverse businesses and our sector-based specialisations.

At KBZ Group, we consider every one of our employees a part of our extended family, so we go out of our way to show that we care. For example, we provide one of the most comprehensive compensation package programmes in Myanmar, which includes daily transportation, subsidised rent and mobile purchase, educational assistance, meal and uniform allowance, generous pension and healthcare plans, and an annual bonus.

How do you position your firm in such a transitional period?
At KBZ Group we are well aware of the challenges at hand. After being isolated for half a century, we have had to catch up with a lot of things and for this reason our core strategy is to focus on our people. For example, at our KBZ Bank, we have hired expatriates at key positions and our banking executives come from regional banks such as MayBank and United Overseas Bank (UOB), as well as international banks such as UBS, Citi, and Bank of America.

Through our correspondent banking partners such as Japan-based Sumitomo Mitsui Banking Corporation, Thailand-based Siam Commercial Bank and Singapore-based UOB, we have been sending our local executives for extensive training on a regular basis.

We will no doubt continue to depend on foreign experts until the local talent pool is capable of providing services of an international standard, although I believe our progressive hiring practices will allow us to be better positioned to negotiate future challenges.

An equally important component of our strategy is to strengthen our financial position. We believe that it is essential that we be fully prepared to take our portfolio companies for initial public offerings.

As a result, to remain competitive, we will need to raise additional capital to fuel our expansion in the next five years. Taking our companies public will not only provide capital, it will also allow the participation of strategic investors whom we can partner with to take our portfolio companies to the international markets.

We will also be able to structure more competitive compensation packages, which will include performance-based stock options to attract and retain key employees across all of our portfolio companies.

Has Myanmar progressed recently?
A newfound openness in Myanmar is bringing a new breed of traveller. Instead of the regular tourist crowd, we are seeing more businessmen in expensive suits, striking deals in crowded business lounges at various five-star hotels across Yangon. There is good reason for their interest in Myanmar.

This country boasts many green-field investment opportunities across various sectors and, despite the numerous challenges associated with newly developing nations, we are cautiously optimistic that Myanmar will prove a financially rewarding investment proposition in the long term.

This country boasts many green-field investment opportunities across various sectors

First of all, the global investment landscape favours positive development in Myanmar. With China’s transition from export-driven to consumption-based economy, the southeast Asian region as a whole will benefit.

More importantly, ASEAN’s commitment to move towards the integration of one regional market will benefit Myanmar via export opportunities to more than three billion customers in ASEAN countries and markets.

As a newly appointed developing nation, Myanmar harbours huge potential for growth. Between 1990 and 2010 Myanmar’s GDP growth averaged 4.8 percent – still significant growth in a new world order of sluggish global economies hit hard by worldwide recession.

Once Myanmar opened its doors, it grew 5.3 percent, 5.5 percent and 6.5 percent respectively for FY2011, FY2012 and FY2013 respectively. The World Bank estimates that Myanmar will grow 6.8 percent for FY2014 and the Asian Development Bank (ADB) has also reported similar figures of 6.8 percent for FY2014 and 7-8.0 percent for every year until FY2030.

This forecast coincides with McKinsey’s predictions that Myanmar’s economy will quadruple in size by FY2030 (see Fig. 1). We believe, given the rapid and positive pace of reforms, Myanmar could continue to grow in this way, fuelled by a steady inflow of foreign direct investment (FDI). The World Bank previously reported that FDI accounted for 3.7 percent and 5.2 percent of GDP respectively for FY2012 and FY2013, and FDI continues to increase as Myanmar rolls out the red carpet for foreign investors and drafts more investor-friendly laws.

Most importantly, in July of this year, Myanmar acceded to the New York Convention on the Recognition and Enforcement of Arbitral Awards, which was another significant legislative reform. This allows the government to move ahead with ratifying domestic legislation in line with the New York Convention.

We believe that the scale of opportunity far outweighs the challenges associated with developing nations. First of all, Myanmar needs to have the right regulatory framework in place to create a favourable investment landscape and, in the meantime, such changes should not come at the price of compromising the interests of the people in Myanmar.

Capacity building is also another pressing issue in rebuilding the country. Myanmar must take into consideration the required infrastructural developments that so often coincide with economic growth, but most importantly, the country needs to focus on corporate governance and transparency in order to keep on winning confidence from foreign investors.

What type of companies would benefit the most by investing in Myanmar?
In terms of growth sectors, McKinsey has highlighted seven key areas for consideration. These range from energy and mining, manufacturing, agriculture, infrastructure, tourism, financial services and telecommunications.

Manufacturing, agriculture, infrastructure, energy and mining in particular will be the essential catalysts in driving growth, as when they’re combined they represent 85 percent of the total growth opportunity.

Myanmar offers a comparative cost advantage in manufacturing, which is unusual in that high labour-intensive industries are so often relocated to a country with lower labour costs. Therefore, the manufacturing sector will be another key driver for Myanmar in sustaining economic growth and boosting employment.

Currently, the manufacturing sector constitutes less than $10bn in GDP and employs fewer than 1.8 million people. However, if labour intensive companies were to move their operations to Myanmar, manufacturing could contribute as much as $69.4bn in GDP and employ more than 7.6 billion people.

Of the various sectors, we believe that the agriculture sector will continue to play an important part in the development of Myanmar. We estimate that this sector employs more than 52 percent of the total workforce, accounts for a significant share of total exports (see Fig. 2), and contributed 44 percent of the $21bn GDP in FY2010.

The extractive industries also represent an important area for consideration and due to half a century of economic isolation, Myanmar still harbours significant reserves of oil and gas. Of all the country’s exports, natural gas has been the key economic contributor in that it accounts for the single largest export item on Myanmar’s books. Natural gas exports surpassed the $4bn mark in FY2013 and exhibited 14.3 percent growth on the previous year, which accounted for $3.5bn.

The World Bank expects natural gas production in Myanmar to increase significantly in FY2014 as new fields come online. Currently, major offshore oil and gas operations are taking place in Yadana, Yetagun, and Shwe, while Zawtika is in the pipeline. Moreover, major onshore oil and gas operations are centred on Yenangyaung. These resource bases account for 67 percent of Myanmar’s total exports income. Similarly, Myanmar is the world’s largest producer of jade and is also the world’s top producer of ruby and sapphire. For the FY2010, official data shows that a government auction sold $1.7bn in value on jade alone.

The telecommunications, media and technology industries offer tremendous opportunity for growth, being a sector that will allow Myanmar to leapfrog into the 21st century and move towards more sustainable development. The penetration rate of mobile subscribers stands at less than 10 percent of the total population.

However, the government has recently awarded two mobile telecommunication licenses to Norway-based Telenor and Qatar-based Ooredoo, which will pave the way for IT vendors and suppliers to participate in the sector. As a result, this industry could see dramatic changes made to areas of government, banking, health and education.

The infrastructure sector is also promising, yet it is unable to support the current rate of economic growth, especially in accommodating the gross scale of urbanisation. Currently, Myanmar’s urban population remains very low; however, we anticipate a demographic change in the near future, requiring that investment be made in infrastructure to accommodate a growing urban population.

What advice would you give to a firm considering investing in Myanmar?
I believe that macroeconomic and geopolitical factors will make investing in Myanmar very lucrative in the long run. Most importantly, we believe that for many green-field investments, the government is willing to make major concessions (for example extended tax breaks, 50+10+10 land leases), which will ensure investment opportunities are made extremely accessible.

As with any developing markets there are risks, including the operational risks for many firms without the experience of operating in Myanmar. However, a lot of the risks can be eliminated by means of embarking upon a joint venture with a local partner who is reputable, profitable and accountable.

Under KBZ Group, we have over a dozen businesses which have been operating successfully for a long period of time. Our partners can capitalise on our experience and expertise in expanding their presence in Myanmar.

Due to the progressive nature of our group, we have already hired a significant number of foreign executives, including investment bankers, who are well versed in structuring intricate deals that can be mutually beneficial to us and to our partners.

What would benefit the country’s economy?
We believe that it is a classic catch-22 scenario. The regulatory framework is not ready to accommodate all the needs of foreign investors, while at the same time regulators cannot create regulations for industries that are yet to exist in Myanmar. We also understand that it will take a bit of time to come up with a comprehensive regulatory framework.

A lot of critics have been commenting that the changes happening in Myanmar are too slow. In pursuit of economic growth, some of the developing countries have completely ignored political reform, which could have adverse effects on the country as the developing nation transforms into a developed nation.

Within the last 24 months, we have made significant progress with regards to political reform and once we have laid the foundations in our political system, economic reform will become more effective and easier to implement.

What do you think of the Yangon Stock Exchange at the moment?
Other than investing in land, there are no venues to channel investment in Myanmar. This is one of the reasons why the land prices have been skyrocketing in Myanmar. A stock exchange in Myanmar will drive down the land price and make investing in the country more viable for a greater portion of investors. Furthermore, with the availability of capital markets, more SMEs will receive the funding they so desperately need to grow their companies to the next step.

What are your final thoughts for the readers of World Finance?
China took 30 years to become a world-class economy. Due in large part to increased globalisation and technological advancement, Myanmar can cut that time frame by half. For this reason I believe that companies should take heed of the first-mover advantage in Myanmar and take advantage of concessions that may well not be available down the road. Of course there are challenges, but in the case of Myanmar, I do believe that ‘better late than sorry’ might be a questionable judgement.

VTB Capital adapts to changing asset management landscape

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

Russia’s waning economic growth has quite understandably had an effect on financial markets. However, there remain a few players who’ve successfully adapted to the changing climate and now look set to capitalise on an influx of new opportunities. World Finance spoke to the CEO of VTB Capital Investment Management (VTB Capital IM), Vladimir Potapov, about the ways in which the country’s economy has been affected in recent years and how the business of asset management has shifted its focus accordingly.

How have recent changes to the economy affected asset management in Russia?
Changes are inevitable when growth slows and down-to-earth expectations replace trend extrapolations. The most positive of these changes is that the investment management industry is being cleansed of non-committed players and those who survive are becoming more robust, efficient and client-oriented.

Our business strategy has seen a very logical shift from growth to efficiency. The investment process has improved, risk management has become a more integral part of the business, incentive schemes have become long-term oriented, and the focus has shifted from simply selling a product to selling it properly.

How would you describe VTB Capital Investment Management’s position in the Russian market?
VTB Capital IM is one of the key business divisions of VTB Capital, Russia’s leading investment bank. This connection provides VTB Capital IM with unrivalled insight and access to the markets, as VTB Capital holds a leading position in the debt and equity capital markets internationally, as well as in the Russian and CIS league tables.

We believe that our local presence and extensive experience, focusing on Russia and the CIS, combined with the global distribution of our products to a diverse group of investors, sets us apart from our competitors. We offer a full spectrum of investment strategies for active investment in Russia and CIS stocks, bonds, balanced strategies, absolute return, real estate and venture capital vehicles. We are our own product, and our task is to ensure that this product is of the highest quality, so that if an investor – be they an individual, educational endowment or international sovereign wealth fund – is interested in Russia and the CIS, they will choose VTB Capital Investment Management.

In just three years, VTB Capital IM’s total AUM has increased by 1,323 percent from $0.4bn to $6.2bn (approximate figures). This has been made possible by a strong development strategy, a high degree of professionalism from our team and having an optimal risk management structure in place. We plan to further expand our range of investment products, which will offer clients interesting investment solutions and strengthen our market position.

What services do you offer and how do they differ from those of your competitors?
We believe that our on-the-ground presence, research, vast local market experience, and dedication to compliance and risk management set us apart from our competitors. Our main products and services include the management of open-end and close-end funds; investment fund advisory; discretionary managed accounts; as well as venture capital vehicles.

We bet on growing demand for unique technology and innovative business models specifically tailored for different industries

Institutional clients are one of the key segments for us. Our client list includes 30 of the largest pension funds, insurance companies and endowment funds in Russia, making us a top asset manager for Russian institutional clients.

VTB Capital IM offers a diverse line-up of 32 mutual funds with varying investment strategies, including investments in foreign assets. The company offers money market funds, bond funds, hybrid funds, index funds, diversified equity funds and Russian sector funds.

Our venture business has backed over 30 companies, rapidly growing sectors of the Russian economy including cloud technology, artificial intelligence, nanotechnology, energy efficiency, Russian e-commerce and internet consumption. We bet on growing demand for unique technology and innovative business models specifically tailored for different industries.

VTB Capital IM’s award winning Portfolio Management Business has 35 front-office professionals headquartered in Moscow. We take the protection of our clients’ assets very seriously and insist on gaining a firm understanding of their investment goals and restrictions. We thoroughly monitor fund portfolios to ensure we comply with fund regulations, fund-specific investment restrictions and objectives.

Tell us a little about your background in asset management
I started my career in investment management at the beginning of 2003 after graduating from the People’s University of China in Beijing, and the Higher School of Economics in Moscow. I worked at Troika Dialog Asset Management for over seven years as chief portfolio manager and became an associated partner in 2006. I joined VTB Capital IM as global head of the portfolio management business and CIO in 2010, and took on the role of CEO in February 2013. As a member of the Young Presidents’ Organisation, I take an active role in fostering entrepreneurship in Russia.

How have you changed the firm’s strategy?
After I joined in 2010 we developed a three-year strategic development plan for VTB Capital IM, which was successfully implemented. This plan focused on the fastest-growing segment of the Russian and CIS AM industry – institutional money – and also called for diversifying our business, building effective distribution in retail with our mutual funds and launching the first funds for international investors. This was all done based on three steadfast principles of investment management: understanding the needs of our clients, outstanding investment performance, and reliability.

Today, these principles have become the pillars of our business. Our team has the ability to identify and profit from niche emerging market investment opportunities where inherent, exploitable market inefficiencies exist. I believe the strategic development, professionalism and risk management structure at VTB Capital IM have helped transform the company into the leading investment management business it is today.

A new three-year strategic plan is now underway, with a focus on diversifying our client base to international institutional clients and the region’s emerging middle class, offering our award winning Russia and CIS-focused products and mutual funds.

What changes do you expect to see in Russia’s economy in the near future?
We see Russia’s growth slowing down due to softer demand for commodities and a high-base effect coming into play. But for the first time in many years the Russian economy is entering a period of low and stable inflation. We believe this process, which Russia has experienced since 1998, to be the most important macro development yet to be appreciated by financial markets.

Disinflation supports both the equity and fixed income markets and promotes healthy savings and investment processes. Russia has relatively high national (see Fig. 1) and personal savings rates, but only a small fraction of savings are being channelled through the domestic investment management industry.

fig1

The reasons for this are that the industry is relatively young, bank deposits have a preferential tax treatment compared to investments in securities, and deposit rates for individuals are strong in real terms. We expect this to change as the domestic investment management industry develops and banks’ appetite for deposit funding subsides. Another important area of change is the pension system. We hope that the regulatory overhaul of non-state pension funds will result in better industry oversight, as well as a better alignment of investment processes with a view to long-term capital appreciation.

Do you have any plans to expand to new markets or launch any new products in the near future?
VTB Capital IM’s most recent business line is an international strategies platform catering to international institutional investors. The investment team places strong importance on a diversified and fundamental stock and bonds selection process, while focusing on liquidity and preservation of capital. The actively managed strategies offer accredited investors exposure to undervalued Russian and CIS equity and fixed-income markets.

In 2014, VTB Capital IM plans to offer a Russia and CIS Debt Fund in UCITS IV format domiciled in Luxembourg and available to professional investors in Europe. The fund’s investment objective is to achieve medium/long-term capital appreciation by investing in a portfolio of Russian and CIS fixed-income instruments, denominated in local and international currencies. Investments may include fixed income securities issued by governments, local municipalities, corporate and other issuers in Russia or other CIS countries, including Eurobonds and convertible bonds.

The fund is denominated in US dollars and utilises the same portfolio management team of other award winning VTB Capital IM fixed-income strategies, with a total AUM of more than $3.6bn. This Luxemburg-based UCITs fund will borrow the investment strategy of the well known and top performing VTB Treasury fund, which has more than doubled the investment performance of the IFX- Cbonds Index since inception.

Aside from new products, VTB Capital IM has big global expansion plans. To attract large amounts of capital and achieve top quartile investment performance, it was necessary to utilise an institutional approach to investing, with a rigorous investment and risk management process run by experienced individuals. As asset management is a very scalable business, VTB Capital IM’s investment process and team can be utilised to manage additional products with similar strategies, for a wider range of investors in different countries. Now we have preliminary plans for PIFs for Russians, UCITs for Europeans, hedge funds for offshore investors, and mutual funds for US investors.

Now, VTB Capital IM is launching UCITs funds with these same equity and fixed income investment strategies for European clients. Many European investors are interested in the Russian and CIS markets because yields on European and US bonds are at extreme lows, with 10-year yields at 2.85 percent. In the current environment, with the 30-year US bond market rally coming to an end and a slow down in global GDP, we think long/short equity strategies will be able to generate significant alpha. Emerging markets like Russia and the broader CEEMEA region provide much inefficiency to be arbitraged by active traders focused on beta-neutral pair trades.

VTB Capital IM places a higher priority on top quartile performance and risk management than on growth through asset gathering. Growth needs to be managed carefully, and creating value for clients over the long term is the best way to ensure growth.

Serbia sets sights on EU

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

After experiencing an extended period of stagnation, various Serbian sectors are beginning to show promise for the immediate future, with one of the best prospects being insurance. As the country’s second-largest provider and a specialist in various life and non-life sectors, we at Delta Generali Insurance are well acquainted with the country’s many challenges and opportunities in this space.

Given Generali’s presence in over 60 Serbian cities and our 1.7 million customers, the company accounts for a sizeable share of the country’s overall insurance market, and is set to spearhead a stint of expansion in this sector.

The pathway to the EU
Serbia has only recently acclimatised to the economic complications that came with internal conflict, and is setting out to repair its fragile economy by echoing the advances of its closest neighbours and securing EU membership. However, for the country to qualify it must first demonstrate the various ways in which its economy shows promise.

With a seven-million strong population and a land mass that spans 88,000 square kilometres, Serbia is still a scarcely populated country where agriculture accounts for as much as 12 percent of national GDP, which, as of 2012, stands at €30bn. This preliminary data represents the sheer scale of the challenges to come, and serves to illustrate the importance of a stable and sustainable economy if the country is to match ambitious EU targets.

Serbia by numbers

7m

Population of Serbia

12%

Percentage agriculture contributes to Serbia’s GDP

€30bn

Serbia’s GDP (2012)

This past year, just shy of one percent of Serbian GDP has suffered from the economic difficulty, with one of the main sectors affected being the country’s insurance market. Life and non-life combined equate to as little as €600m, and the sector has shown very few signs of growth in the last three years, which at first glance appears to have stagnated alongside the economy due to a lack of insurance culture, an absence of government tax incentives, and low family income.

Having said that, there exist a fair few bright spots in the industry. To name a few, motor third part liability (MTPL) is the main driver of the non-life market and represents 40 percent of total premiums, and life insurance has exhibited a slow but steady eight percent CAGR in the last three years.

Ready for Solvency II
Foreign companies, particularly those of an Italian or Austrian origin, are dominating the Serbian insurance space at present. A recent government decision to dispose of Dunav Osiguranje, a local state-owned insurance provider, is representative of the ruling authorities’ willingness to exit the insurance business. However, with a commitment to capital investment and IT investment accompanied by 15 years of experience in the market, Generali’s position is an incredibly strong one.

Capital and technology are key factors for the future success of the Serbian insurance market, and only large insurance groups with economy of scale, such as Generali, are positioned to comply with soon-to-come Solvency II requirements and negotiate new market conditions.

Provided that this scenario remains unchanged and the few pockets of growth continue to behave in this same way, Serbia’s insurance sector shows promise due to the low frequency of claims, and a high standard of driver behaviour compared to that of neighbouring European markets.

Regardless of these issues, the future for the Republic of Serbia looks relatively bright, and the country is still the go-to destination for those looking to invest in the Balkans. More than €1bn per year have been poured into the country in the last five years, due in large part to government incentives, good logistics and an exceptionally well-trained labour force.

This newfound attractiveness in Serbia’s burgeoning business climate is turning an agricultural-driven country into a manufacturing base. Given time, Serbia will be primed to export industrial products to Europe, particularly to Russia.

This expected inflow of hard currency, combined with developments in sectors including insurance, will see Serbia’s GDP expand in the future, and its prospects for EU membership rise quite substantially.

Morocco must demonstrate commitment to CSR

Posted on January 14, 2014January 9, 2014 by Ashton Wenborn

At 18 years of age, Moroccan-born Miloud Chaabi founded his first business YNNA Holding, then a modest start-up specialising in construction and real estate, though one that would later play host to 20,000 employees and rank among the region’s largest economic contributors to date. Boasting over a half-century’s worth of experience, the group has since diversified its operations to encompass four major divisions, which each align with the conglomerate’s ethos of social commitment.

Spanning industry and construction, property development and hospitality, retail, food and renewables, YNNA’s constituents represent a spread of sectors and specialties united by a distinct sense of social responsibility in all they do. Far from the short-termism that so often typifies major emerging market players, Chaabi has instilled YNNA with a culture of responsibility in order to improve upon the business’s chances of long-term success.

We can no longer focus only on economic performance without paying attention to what is happening around us. It is our responsibility to become involved in social and societal lives by promoting equal opportunities

“We can no longer focus only on economic performance without paying attention to what is happening around us. It is our responsibility to become involved in social and societal lives by promoting equal opportunities, and we have been encouraging that for more than 65 years now,” says Chaabi.

“Our group’s operations are supported by the development of society as a whole, so proceeding with our growth strategy and expanding our business requires consideration of our impact on the global environment and community. By tapping into the kingdom’s immense potential, our group is contributing to a bright and prosperous future for Morocco through its diverse investments.”

Business philosophy
Chaabi is among Morocco’s richest men, second only to Othman Benjelloun, and remains one of Africa’s brightest business minds. However, despite what appearances may suggest, his focus is far from confined to moneymaking, and extends to a great many philanthropic causes.

The 84-year-old, whose fortune stands at $1.9bn, according to Forbes, heads the Miloud Chaabi Foundation, which remains one of the region’s largest and most forward-thinking charitable organisations to date, and one that typifies YNNA’s philosophy of how to do business.

Since its creation a half century ago, the foundation has fought for equal opportunities in Morocco, this being an objective that has grown in both complexity and stature over the years. Historically, the majority of businesses in Morocco have been family-owned enterprises, though the recent introduction of international competition and a higher degree of professionalism has brought with it a need to advance the country’s business landscape beyond what it once was.

For this reason, one of the main aims of the foundation is to improve upon Morocco’s local workforce, particularly in southern regions, where there are very few opportunities for education and training.

The foundation supports approximately 7,000 Moroccan families with subsidies, and in this way affords an acceptable standard of living to those who would otherwise live under threat of poverty. In addition, Chaabi has dedicated 10 percent of his personal fortune to building an American-style university in Morocco. These plans are being conducted in partnership with Indiana State University (ISU) and will see Chaabi contributing financial support, as well as technical assistance and administrative leadership, to the project’s continued development.

Chaabi’s focus on education is one that dates back to 1995, at which time the foundation founded Al Qalam, an educational institution authorised by the Ministry of National Education, Higher Education Staff Training and Scientific Research. The institution exists primarily to prepare future engineers, managers and executives, and to better the overall standard of education in the region, being a cause that remains integral to Morocco’s workforce development.

Although Chaabi’s philanthropic work at first glance appears entirely isolated from the wider dealings of YNNA, the two are in fact linked by a desire to advance the region’s broader economic prospects.

At the dawn of the 21st century, new strategies and styles of management came to the fore, and companies such as family-owned YNNA were believed to be under threat from global players. However, YNNA in particular has since demonstrated a capacity to advance alongside the best in international business, due in no small part to the group’s focus on social development.

A changing landscape
Morocco’s economy has been quite resilient in recent years, with the country’s GDP having expanded 3.2 percent in 2012 and forecast to expand a further 4.6 percent in 2013, according to the African Development Bank Group. Although the country has been impacted by the slowdown in Europe, which remains its primary trading partner, Morocco’s economy is expected to grow further still, driven by internal demand and structural reforms.

Morocco’s market overhaul has seen the gates opened to global players who previously found it nigh on impossible to enter the region. The influx of experienced international players quite clearly poses a threat to local companies, which is why existing players must seek to demonstrate how it is they can benefit the Moroccan economy ahead of new market entrants.

With an impressive portfolio of companies in a number of key industries, YNNA looks likely to spur a series of sizeable improvements to the national economy. “We genuinely strive to accommodate for excellence in everything we do. Our group is ceaselessly contributing to a bright and prosperous future for Morocco through its diverse investments, with the ultimate goal of offering Moroccans quality and wisely priced products,” says Chaabi.

The recent introduction of international competition… has brought with it a need to advance [Morocco’s] business landscape beyond what it once was

One of the key ways in which YNNA has adapted to recent changes is by growing its business overseas and extending its reach to nations as far afield as the UAE, Jordan, Egypt and Tunisia, to name a few. However, YNNA’s efforts go beyond the simple fix of expanding abroad and extend to matters of sustainability.

The group’s focus on this facet has aligned its practices alongside those of the very best in international business. Understanding that sustainability is central to the long-term success of a business, YNNA ensures that each of its holding companies factor this same ethos into their company cultures in keeping pace with wider advances in the Moroccan economy.

Among Morocco’s major domestic contributors is YNNA Bio Power, a clean energy company that is attempting to offset the monumental costs of importing energy from abroad and lessen the environmental implications of dirty energy. The company began construction of two wind-powered parks in 2007, which will produce 70MW of power when they are fully completed.

The plants jointly equate to a MAD 1bn investment in clean energy. The first of the two parks was set up in Essaouria in 2009, will produce 20MW of power and cost MAD 300m, while the second was established in Tangier in 2011, will produce 50 MW and cost MAD 700m in total. The energy produced will be used to power numerous YNNA subsidiaries and also underlines the group’s broader commitment to matters of sustainability.

In keeping with this same commitment is YNNA’s environmental charter, which was first introduced in April 2009 and distributed among employees a year later in order to raise awareness of the group’s environmental aims and initiatives.

However, YNNA Bio Power is not alone in incorporating sustainability into its operations. First opened in 1999, Mogador Hotels is another subsidiary whose approach is representative of the group’s commitment to social development.

The hotel’s strategy, termed the ‘3 Es’, is a three-pronged approach pertaining to energy, water and energy efficiency and is in large part inspired by YNNA’s business philosophy. By using solar and thermal energy to heat water, the hotel effectively does away with 150 tonnes of CO2 emissions each year; furthermore, conventional lighting has been replaced with LED lamps, which has cut CO2 emissions by a further 480 tonnes; and finally, aerators have been installed on faucets in order to reduce water flow by 30 percent, in effect saving energy equivalent to the cost of heating 8,000 cubic metres of water.

Granted, initiatives of this sort can often appear tokenistic, but when implemented across the entirety of a company’s dealings, as is the case with YNNA, they amount to quite a considerable economic contribution. Given local companies’ somewhat precarious position in Moroccan markets, it is important that companies such as YNNA exhibit how it is they can contribute to the country’s social development in a way that new market entrants cannot compete with.