Author: itsupport

When two cultures collide – how to ensure M&A success

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The first big milestone of any merger or acquisition is ‘day one.’ It’s important from this day to have a clear blueprint of how the business will operate which everyone buys into, including how the newly formed organisation will work together. Every detail is important and needs to be well communicated. Getting ‘day one’ right is an important step in creating momentum and credibility, and signalling the future culture.

It’s worth therefore also spending time during the merger and acquisition process assessing the two cultures of the organisations to establish how to knit them together. One way to do this is through a steady cadence of visible acts of change or ‘symbols of change’ such as sharing joint success stories, co-creating a new vision and purpose together or creating a joint set of communications.

But don’t feel you have to resolve every culture difference or issue immediately. It’s impossible from a leadership perspective, and situations inevitably evolve and change over time.

Finally, invest time in building great relationships with the organisation that’s being acquired. This can pay dividends later and will ensure the transition is as seamless as possible. Too often, leadership teams turn inwards and fail to build relationships with their new colleagues. Settling leadership roles early on is key so leaders can help stabilise the rest of the organisation.

Mergers and acquisitions are always a challenge from the perspective of people. But organisations that pay close attention to the culture aspects greatly increase their chances of the deal achieving its full potential.

The current global landscape surrounding mergers

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Early in the Coronavirus pandemic, the European Commission (EC)’s Directorate-General for Competition sent the daunting message to businesses that parties should delay their merger notifications where possible. Despite initial obstacles, legislators responded quickly, adapting to the challenges of the pandemic by making merger notification submissions electronic and simplifying procedures to fast-track the review process. In March 2021, the EC launched an impact assessment on policy options for further simplification of merger procedures.

In a September 2020 speech, the European Commissioner for Competition, Margrethe Vestager, covered the pressing issue of EU notification thresholds, a hot topic in competition circles, as national competition authorities had begun advocating for and adopting value-based notification thresholds. The goal of these new mechanisms is mainly to catch so-called ‘killer acquisitions’ — incumbent firms acquiring innovative targets to preempt future competition before the targets are big enough to reach turnover-based thresholds.

Vestager confirmed that value-based thresholds would not be among future measures to prevent this type of deal. Instead, the EC’s Article 22 EUMR new referral policy, effective from March 2021, might be used to address this perceived enforcement gap, as it allows member states to refer to the EC transactions that raise potential competition concerns when the EU notification thresholds are not met. In September 2021, the EC published the policy brief ‘Competition Policy in Support of Europe’s Green Ambition,’ which flagged a particular concern about ‘killer acquisitions’ of companies active in green innovation and suggested the use of the new Article 22 referral policy to tackle the issue.

The EC also appears to be increasingly stringent when it comes to the enforcement of procedural rules. Decisions such as Facebook/WhatsApp, Canon/Toshiba Medical Systems Corporation, GE/LM Wind and Altice/PT Portugal have been characterised by the imposition of hefty fines for procedural violations such as gun jumping or the provision of incorrect or misleading information.

European national level
At the national level, the activity of the French Competition Authority (FCA) and of the German Federal Cartel Office (FCO) provides a good example of the developments in competition policy and enforcement. The FCA has recently shifted the focus of its merger control activity toward digital issues. One particularly innovative example is the novel approach of modernising its market definitions to consider the development of online sales in the retail sector. This trend was unequivocally confirmed in the new FCA merger guidelines introduced in July 2020, which now contain a specific section dedicated to online sales.

As for the German FCO, recent practice has shown a trend to extend Phase II proceedings, leading to a significantly longer total review period than the four months German law currently stipulates.

Meanwhile in the UK, the Competition and Markets Authority (CMA), has taken a rather interventionist approach to merger control. This is evident from its approval of Roche’s takeover of Spark, in which the CMA found that the share of supply test was met, despite the fact that Spark did not have any sales in the UK.

The US focus
On the other side of the Atlantic, antitrust agencies have largely adapted to the challenges created by COVID-19. The US Federal Trade Commission (FTC) and DOJ have continued to be active in merger investigations and successfully introduced a Hart-Scott-Rodino (HSR) Act e-filing system. In the first quarter of 2021, senators from the Republican and Democratic Parties introduced legislation to alter existing antitrust laws. While from different ends of the political spectrum, the new bills share many similarities. Both create rebuttable presumptions of illegality or harm based solely on the size of the acquirer and increase the focus on enforcement of vertical mergers. While it remains to be seen whether these bills will become law, there has been increased debate on Capitol Hill about overturning existing antitrust laws, exacerbated by the current discourse on under-enforcement in dynamic industries like big tech and pharma.

Nevertheless, both the FTC and the DOJ began 2021 with heightened merger enforcement activity. In January, Visa and Plaid abandoned their planned merger following a DOJ lawsuit alleging Visa had nefarious incentives for the acquisition. The new administration’s first vertical merger enforcement move occurred in February when the DOJ issued Second Requests to Slack and Salesforce. The US agencies have demonstrated a continued focus on transactions involving nascent competitors, as evidenced by the FTC’s challenges to Edgewell Personal Care’s acquisition of razor manufacturer Harry’s, as well as the life sciences merger between Illumina and Pacific Biosciences.

These cases reflect that the agencies are still focused on killer acquisition theories, with the DOJ alleging that Sabre’s acquisition of Farelogix was an attempt to neutralise or eliminate an innovative competitor. Despite the pandemic, the US agencies also released new vertical merger guidelines, which reflect the agencies’ approach to investigating the competitive impact of vertical mergers. Although COVID-19 has been at the forefront of people’s minds, the development of merger control policy and rules worldwide shows that companies looking to take advantage of the disrupted economic environment need to make sure they are abreast of the changes to navigate their way through the uncertainty that still lies ahead.

The transition to sustainable construction

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After many years of stagnation, the construction industry is finally expected to grow significantly in the next decade according to the Future of Construction, a report published by Marsh & Guy Carpenter. The report envisages a solid rebound from the COVID-19 outbreak this year, with worldwide construction production increasing by 6.6 percent. Construction spending contributed to 13 percent of global GDP in 2020 and this is expected to rise steadily over the next few years. By 2030, global construction output is expected to increase by 35 percent from today’s levels.

Thanks to governmental measures aimed both at reaching environmental targets and kick starting the economy, construction, which has always lagged behind other sectors from a growth perspective due to critically low margins and consequentially low R&D spending, is seeing a renaissance. Italy, for example, has a commitment to reduce CO2 emissions by 55 percent by 2030, and to zero by 2050 within the European ‘green new deal.’ The construction sector will be pivotal in achieving this goal, as the built environment must be upgraded to be more sustainable.

Meanwhile, the European Union’s ‘next generation EU’ fund will help support recovery of construction in Western Europe with growth forecasts suggesting the sector will expand by 7.9 percent in 2021. Italy will benefit from over €196bn, and 48 percent of this will be spent on construction projects. For example, €68.9bn is destined for ecological transition and 40 percent of this sum (€29.3bn), is intended for energy efficiency and the upgrade of existing buildings.

On the other side of the pond, the US have established the ‘build back better’ programme, which is a projected $7trn COVID-19 relief and stimulus package designed to accelerate economic recovery and for investment in large infrastructure projects proposed by President Joe Biden. It is projected to create 10 million clean-energy jobs.

Sustainability and the circular economy
Climate change and the race to net zero are arguably the greatest challenges that the construction industry is facing. The building and construction industry as a whole is responsible for 40 percent of worldwide greenhouse gas emissions and produces 30 percent of Europe’s waste.

The industry is finally waking up to the importance of proactively addressing climate change concerns and embracing responsibility for its direct and indirect carbon emissions. The major contributors to these emissions are the materials used, as well as the heating, cooling and lighting of buildings and infrastructure. Sustainability is not just a matter of corporate responsibility, but it is good for business – and many companies are investing heavily in sustainable practices not just to be good global citizens, but also because it makes great financial sense.

As construction entrepreneurs, we have a responsibility to lead our industry’s evolution towards the practice of maximum respect for the environment, both in terms of construction methods and the life cycle of the built environment. To achieve this goal, the sector must focus on innovation, sustainability, and the circular economy.

The impact of sustainable objectives
To meet sustainability objectives, it is important to positively impact the life cycle of each project as well as improving building methods. There are many construction techniques available that are less damaging to the environment, and technology and materials choices that make long-term management of an asset more sustainable. The circular economy, for example, is creating added value in the construction industry. According to data from the Italian ‘national association of building constructors,’ the transition to the circular economy system is increasingly becoming a fundamental value for construction companies, with 81 percent of respondents to a recent poll stating that it is key to their future goals.

In Italy, the 110 percent super-bonus is giving a positive boost to the industry as it encourages the private sector to invest in energy efficiency by funding upgrades to existing buildings at no actual cost to their owners. In addition, the use of eco-friendly materials as a standard practice is hugely beneficial in the long term as they do not have an adverse impact on the environment when used and can easily be recycled.

Finally, the use of technology is essential for reducing emissions and preserving the ecosystem. The sector has responded to the COVID-19 outbreak by focusing more heavily on innovation as it is fundamental to respond to the evolving needs of the construction market to ensure the industry’s transformation. The sector will have to adapt to a changing environment and create resilience to the serious effects of climate change. For its part, the construction industry has all the credentials to meet this challenge, enhance its evolution to a green economy and contribute substantially to the revitalisation of the global economy.

Opportunities abound in open banking

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The pandemic unleashed unprecedented disruption, a level of global disorder not seen since the Second World War. To put it simply, without the internet, the global economy wouldn’t have survived the pandemic. During all of this, financial services have been at the forefront of a transformation of everything from payments to banking and commerce, as businesses have moved or deepened their online presence.

In our latest research report, The open banking revolution, we found the attitude of European financial executives mirroring this shift, as positive sentiment towards open banking increased from just over half (55 percent) in 2019, to 71 percent in 2021. Its impact at this point should not be understated – 82.8 percent of financial executives also believe that open banking is causing ‘a revolution in the industry.’

But there should be equal parts uncertainty and confidence at this time, as it still remains to be seen how the future will shake out. Many institutions are struggling to implement open banking initiatives at pace. While nearly a quarter (23 percent) believes their business will have completed its open banking objectives within the next five years, the most common view is that it could take up to a decade (39.9 percent) or even beyond (36.9 percent). Institutions that can translate open banking into concrete strategy will be in an optimum position to start realising its benefits sooner. So how can financial institutions best embrace the open banking revolution?

Improving the customer experience
There has never been a better time than the present for businesses to move their open banking strategy beyond compliance efforts. With a revolutionary opportunity at hand, the risk of doing the bare minimum may perhaps be bigger than the risk of experimenting, failing and trying again. Enhanced banking through external APIs can optimise existing product offerings and is the safest and most strategic direction a financial institution can take beyond compliance.

The risk of doing the bare minimum may perhaps be bigger than the risk of experimenting, failing and trying again

Third-party providers (TPPs) continue to play a crucial role in this area – many have developed specialist solutions for micro-segments along the customer journey, from customer acquisition to loyalty. They can therefore provide ample inspiration for banks looking to embrace open banking and strengthen customer experience, whether solo or through working with technological partners.

Stop looking for the killer app
I’ve said multiple times on industry panels and I’ll say it again: the killer app that will disrupt the industry as we know it doesn’t exist – don’t waste time looking for it. The killer app that will drive the adoption of open banking use cases won’t be an app, it will be a collection of services that will enable intuitive and strong customer authentication journeys. Using open banking for a wholesale reinvention of a process or the launch of a new product can be risky, and shouldn’t be the first port of call for financial executives looking to take the plunge.

Tried and tested use cases like automated onboarding, income verification and personal finance management have already been proven to help accelerate and streamline decision-making processes, risk analysis, and the verification of identity, assets and liabilities. Taking advantage of these use cases will ensure that businesses can unlock more value, before pursuing riskier and lengthier use cases that have a longer lead-time for companies to reap the rewards.

Embrace smart partners
The open banking journey is one that financial institutions and fintechs have embarked on hand in hand, and there has already been so much progress. However, it’s not guaranteed that the industry will continue along the same vein. That’s why institutions must continue to partner with specialist fintechs rather than seek solely to develop new competencies in-house. These partnerships can serve a strategically important role for both partners, so it’s important that they are done right. A potential technology partner needs to be carefully scrutinised to ensure they can be onboarded smoothly and securely.

Open banking’s core values of empowering choice, competition and innovation by democratising access to data across financial services are now something the financial services industry has begun to embrace with both hands – whether out of necessity or otherwise. Over the coming decades, it’s safe to assume that these conversations will continue and open finance and open data will become more topical – producing a tailwind for open banking and innovation. We are still at the beginning of the open journey. The institutions set to prosper are those able to translate the open banking opportunity into concrete strategy. Only then will this have been a successful revolution.

The rise of Banking-as-a-Service

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For years, we have witnessed the steady rise of fintech companies and neo-banks as financial services are increasingly becoming digitalised. Demand for open banking is growing as more people discover how free access to their banking data can generate innovative embedded finance solutions. Tier one banks that hold pride of place on the high street remain at the heart of financial services. Yet with the commoditisation of banking services, other players can now operate within the space once reserved for these giants.

There is no shortage of firms that want to offer ‘greener banking,’ entrepreneurs that want to build more innovative banking apps, or retailers that want to explore novel ways to lend money to buyers and simplify the customer journey.

The appetite for digital transformation is strong across financial and non-financial businesses alike, and the realisation of these bold plans no longer needs to be constrained by regulatory hurdles. This is where Banking-as-a-Service (BaaS) providers come in. They can build bridges between banks and businesses while negating the need for the two to compete with one another. But while opportunity has come knocking, there are important points to consider as banks, brands and BaaS providers form new partnerships.

Don’t sleep on BaaS
The technology behind digital banking is complex, and developing it from scratch is prohibitively expensive for many businesses. This, along with the difficulty of obtaining a banking licence, is a key obstacle for those trying to embed financial services into their digital channels. BaaS allows businesses to develop sleek, customisable financial products that suit their users, and leave the balance sheets and regulatory considerations to the licensed banks. This way the customers get what they need, the innovators are free to pursue their ideas, and the banks benefit from the value chains created. Everybody wins.

The best BaaS providers have the capacity and modular architecture to offer totally bespoke products to different clients

One benefit of this shift is that banking services become more engaging to the end user. Businesses with strong customer loyalty can offer credit during the purchase journey, improving both the experience and the customer’s relationship with the brand through embedded banking services. Demand for these services is being driven in part by the rise of ‘buy now, pay later’ (BNPL) services that are growing at a staggering rate – 39 percent a year – with almost 10 million shoppers in the UK stating they avoid retailers that don’t offer split payment options at checkout. The demand for these services is clear, and it’s up to BaaS providers to keep up momentum.Solutions like no others

A misguided concern with BaaS is that it will eliminate differentiation from the market – that constant intermingling of partnerships and white-label solutions will homogenise all banking products into one. This couldn’t be further from the truth: while third-party solutions enable anyone to offer banking products, the innovation of competing brands and the varying demands of users will lead to a boom of novel products tailor-made for every corner of the market. The best BaaS providers have the capacity and modular architecture to offer totally bespoke products to different clients, cherry-picking the functions they need to meet the demands of their own unique customer base.

This is why now is the time for BaaS providers to shine – those with the best functionality and most agile solutions can fuel major change across multiple sectors. They must be designed to offer easy access to the bank’s critical functions while remaining scalable and extensible. Onboarding clients, creating financial products, and thereafter orchestrating and servicing these products must all be easily achieved through the core banking system. Giving businesses the functionality they need while carefully protecting the bank’s data and adhering to strict compliance requirements is a tight line to walk, but the best BaaS providers are equipped to do it. The industry is crying out for smart, scalable solutions, and BaaS is the tool that will power innovation well into the future.

Closing the digital gap to empower a generation

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My mandate is simple: we need to take older people with us into the digital future. I feel that this is a mission that we hold a responsibility to fulfil as a society. What may sound theoretical at first glance has a practical background. Consider how we take for granted many everyday tasks that now require the use of a smartphone, things such as ticketing, banking and retail shopping. We now live in a world that is hard to navigate without a smartphone and as the Internet of Things (IoT) expands, the adoption of smart tech will continue to grow exponentially in all scenarios, leaving those without the use of such devices increasingly excluded.

Further impacted by lockdowns
Across Europe, there are more than 50 million over-65s who are excluded from this new form of always-on communication, and it is our socio-political responsibility to close this widening digital gap between the young and old. The impact of lockdown on this demographic further demonstrates the need for us to do so. As countries across Europe fell into chaos from the pandemic, older people were left feeling isolated and disconnected. Without the right tech and know-how, simple things that are ingrained in everyday life for the younger generations – such as video calls – were not accessible to this important group. The absence of smart technology also meant that when in-person contact was out of the question, online shopping for groceries and ordering prescriptions was not an option for a large segment of this age group. That was a real tragedy.

From my past experience and my journey at emporia I have developed a formula for success. The first step to ensuring continual success is to regularly question your company, its products and services. This is the only way that you can be certain you are serving the end user to the highest standard. My second driver is to set out clear goals and stick to them. This prevents me from ever losing track of my mission. I’ve also found it is so important to be brave and to believe in yourself and your company. For example, before the COVID-19 crisis, I said that we would have a turnover of €100m in 2023. I also repeated this during the crisis. And now, as we start to move forward from the pandemic, I’m holding on to this target. My final step is to define and work to a core set of firm values. I lead emporia on three key principles, which I believe are essential to achieving success: respect, discipline, and competence.

Know your market
In line with this, I am committed to continuously improving our products in ways that will work towards my mission of closing the digital divide. We are committed to research and have numerous collaborations with universities and international academic institutions including Cambridge University. We also invest heavily in local market consumer and behavioural research in all the areas in which we operate. This allows us to better understand the ever-changing wants and needs of our target audience and identify any issues that we need to address.

It is our socio-political responsibility to close this widening digital gap between the young and old

In addition to creating the products best-suited for older users, the emporia strategy also includes training and support. For five years now, we have been developing training methods such as our training books, which are included with every product, and the smartphone driver’s licence to introduce older people to new technology. Prior to the pandemic, 1,000 training courses were held in Germany on a single day by emporia and our retail partners – how amazing is that? We also work with several large banks across Europe to share best practice in training this audience to adopt digital channels such as banking apps.

I feel that I hold my own in an industry that is largely dominated by men. There are few female CEOs and business leaders, especially within the telecommunications space. However, in Europe I am in good company with two amazing women: Ursula von der Leyen, President of the EU Commission, who is the political head of over 447 million EU citizens, and Christine Lagarde, head of the ECB, who is responsible for a balance sheet volume of €569bn.

The global population continues to grow and age. This means that by the year 2051, around 10 billion people will populate this planet, of whom more than two billion will be over 60 years old. I believe that communications technology will leap further forward, and it is possible that smartphones will no longer exist, with our transactions and dialogues made via wearables or other such gadgets. Nobody can foresee the future, but at emporia we are confident of closing the generational digital divide. And I believe we will do so. My motto for life and business is: ‘failure is not an option.’

Robot wars

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It was in 1921 that Czech writer Karel Capek coined the term ‘robot’ when writing his play Rossum’s Universal Robots. It is perhaps from these early beginnings that we have developed a general wariness towards technology and a fear of things created in our own image, for in the play, and now a common trope in science fiction, the machines rise up against their masters and bring humankind to the brink of extinction.

We marvel at robots and AI that can mimic lifelike behaviour, but also find them just a little bit disconcerting. Capek’s play, set around the year 2000, was a vision of the future that did not come to pass, though industrial robots were in widespread use by then, having first appeared in the early 60s. It is only in recent years that we have been edging closer to more nuanced applications of robotics and its associated field, AI, that lean towards the kind of mimicry that Capek envisioned.

Holding up a mirror to the face of human existence is fine, so long as it’s not the side of it that engages in war or ethnic cleansing

In June 2020, Boston Dynamics, under ownership of SoftBank, offered up its first commercial product, Spot, a four-legged inspection robot, capable of navigating terrain with ‘unprecedented mobility, allowing you to automate routine inspection tasks and data capture,’ according to the promotional material. A majority stake in the company was then purchased by car manufacturer Hyundai in December that year, so there is a lot of jostling for position in an industry that has the potential to influence a great many markets.

Over a year later, in August 2021, when introducing the Tesla Bot as part of the company’s AI day, Elon Musk said: “Tesla is arguably the world’s biggest robotic company because our cars are like semi-sentient robots on wheels.” He goes on to make the case that the work his company has done to provide his cars with the ability to understand and navigate the world is transferable to a humanoid form, joking to a reception of nervous laughter that the Tesla bot will be designed so that “you can run away from it” and “most likely overpower it.” It introduced just the slightest hint of apprehension when stepping into a future that could be right out of those well-trodden sci-fi storylines. If life does imitate art, then I would hope that artificial life does not imitate us.

A trip to the uncanny valley
For just as we are aware of our capacity for benevolence, we are aware of our shortcomings. Perhaps we are fearful that we will unwittingly teach these to an AI. In building robots we are holding a mirror up to ourselves and to the world. Therefore, when we see four-legged robots moving around as an imitation dog, or Boston Dynamic’s Atlas, a humanoid bipedal robot, perform parkour in a pre-programmed sequence, or even observe the ‘muscles’ of a robot arm flexing, we get a sense of the ‘uncanny valley’ – that feeling of something eerily similar to us, but not necessarily frighteningly so. Because holding up a mirror to the face of human existence is fine, so long as it’s not the side of it that engages in war or ethnic cleansing.

When Spot is mounted with a tactical assault rifle, or when the parkour performing Atlas robots are suited up with Kevlar, then perhaps we might start worrying. Because then, it is less uncanny, and more the stuff of science fiction nightmare.

Prof Stuart Russell, the founder of the Center for Human-Compatible Artificial Intelligence at the University of California, Berkeley, speaking to The Guardian newspaper said; “The use of AI in military applications – such as small anti-personnel weapons – is of particular concern” because “those are the ones that are very easily scalable, meaning you could put a million of them in a single truck and you could open the back and off they go and wipe out a whole city.”

Perhaps any anxiety about the machines taking over is premature, but a lean towards adapting robots for military use does set alarm bells ringing. Boston Dynamics has stated in its ethical principles that it is firmly against weaponising robots, but it is not the only robotics company to have built a robot dog. In October, Ghost Robotics unveiled its version with a special purpose unmanned rifle (SPUR) affixed to the top of it, making the unnerving case that dogs are not necessarily a man’s best friend. The module, designed specifically for these robots, comes courtesy of a company called Sword International and has an effective range of 1,200 metres. Of course this does not prove that we are moving towards a future of autonomous killing machines, but it is a worrying development.

The Biden administration has proposed an increase in R&D spending for the Department of Defense to the tune of $112bn, according to figures in the Pentagon’s fiscal year 2022 budget request, the largest such increase on record. A total of $874m would go towards development of artificial intelligence to keep up with its adversaries.

And this is where I believe the crux of the problem lies. Government defence agencies are engaged in a never-ending game of one-upmanship in order to maintain the edge in any future engagement. Many envision robot labour transforming the economy and rendering physical labour a choice for us.
I’m certain that those enthusiastically enlisting for this future hope that it ultimately wins out against our innate predisposition for self-destruction.

Free your mind: mastering psychedelic chemistry

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Evidence for the use of plant-based psychoactive drugs can be found in texts spanning hundreds, if not thousands, of years. In book IX of Homer’s Odyssey, Odysseus’s scouts eat what is described as the fruit of the lotus and experience not just a release from all their troubles, but a strong desire to remain where they are, absconding from all sense of duty on their return home from Troy. Over 2,000 years later, Thomas De Quincey’s Confessions of an English Opium-Eater, in which he documented his opium addiction following a bout of toothache while studying at Oxford, said of the drug, that it took him to a place where “the hopes which blossom in the paths of life” are “reconciled with the peace which is in the grave.” Since the ripe seed pod of the opium poppy “resembles the pod of the true lotus” according to the Encyclopaedia Britannica, it is possible that both the people of ancient Mesopotamia and De Quincey were experiencing the effects of the same narcotic.

In 1970, President Nixon signed the Controlled Substances Act, which labelled psychedelic drugs such as lysergic acid diethylamide (LSD) and Psilocybin (both of which can be derived from fungi) as Schedule I, which defines them as having ‘no currently accepted medical use and a high potential for abuse’. Opium remains a Schedule II drug, the difference being that while still being highly prone to abuse it does have accepted medical uses. The act brought to an end a leading component of the counterculture movement of the 1960s and effectively closed the door on the psychedelic research that started with LSD in the 1940s and 1950s. The revival for research into the uses of those illicit Schedule I drugs began two decades later and it is only now that we are looking seriously at the potential for the regulation of administering psychedelics for the treatment of depression and post-traumatic stress disorder (PTSD).

Psychedelics are set to have a major impact on neuroscience and psychiatry in the coming years

In the past few years, clinical trials, such as those that have taken place at Imperial College London, and that involve testing the effects of synthetic forms of Psilocybin, MDMA and LSD, have increased in number as interest from scientists and investors alike has taken hold. What was once considered a scourge on society and what Nixon described as “public enemy number one” is now enjoying something of a renaissance in the field of psychiatry.

In April 2019, Imperial College London opened the world’s first Centre for Psychedelic Research. The centre is led by Dr. Robin Carhart-Harris, who said of the opening: “This new Centre represents a watershed moment for psychedelic science; symbolic of its now mainstream recognition. Psychedelics are set to have a major impact on neuroscience and psychiatry in the coming years.”

Buying back in
The vaccine heroes of the global pandemic, AstraZeneca and Pfizer, among others within Big Pharma, were once more heavily invested in neuropharmacology, helping to bring antipsychotics to the market, which, coincidentally or not, coincided with the first revival of scientific interest in psychedelics in the 1990s.

Large pharmaceuticals may have shied away from central nervous system (CNS) drugs in the past, but according to a report by S&P Global referencing CB Insights, investment in CNS has been on the rise in the last decade: “The second fiscal quarter of 2019 saw $321m in funding toward mental health and wellness companies, a quarterly record for the therapeutic area.” I wonder whether the renewed interest in psychedelics will provide an investment path back into this broad area. Dr. Kaitin, a professor at Tufts University, is quoted in the report, saying: “A better drug for depression or psychosis, or the first real drug to treat Alzheimer’s, that’s going to be a mega, mega blockbuster.” The findings of clinical trials exploring the use of Psilocybin as an effective treatment for major depressive disorders (MDD) suggest that we might be quite close to this.

A research article titled The Economic Burden of Adults with Major Depressive Disorder in the United States (2005 and 2010) by Greenberg, Fournier, Sisitsky, Pike and Kessler has estimated the economic burden of MDD in 2010 at $210.5bn, up from $173.2bn in 2005. This gives some indication of the effect of the 2008 global financial crisis, though of course this is difficult to quantify and one can only imagine what the global pandemic has done for our collective mental health. With MDD estimated to affect over 300 million people worldwide, it might be considered a pandemic within a pandemic. A report on the findings of a randomised clinical trial by Davis, Barrett and May entitled Effects of Psilocybin-Assisted Therapy on Major Depressive Disorder states that: “current pharmacotherapies for depression have variable efficacy and unwanted adverse effects. Novel antidepressants with rapid and sustained effects on mood and cognition could represent a breakthrough in the treatment of depression.”

I’m tempted to conclude that maybe the ancient Mesopotamians were on to something, though perhaps it would be wise to exercise caution. After all, De Quincey suffered with addiction for the rest of his life and Odysseus’s scouts had to be dragged back to their boats. But my concerns are less about regulation or abuse, and more about the mechanisms by which our brain chemistry is altered. As Kaitin said: “the crux of all this is, we don’t have an understanding of the basic mechanism… of a lot of diseases…there are no good models.” This is why continued research and renewed interest and investment from Big Pharma is so important, but I’m quietly optimistic that these new therapeutic drugs could be the mega blockbuster that MDD sufferers are looking for.

The future role of AI in finance

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The general consensus appears to be leaning towards the idea that artificial intelligence can replace the role of human financial advisors and therefore, those in the industry must adapt or risk getting left behind. But before jumping to that conclusion, it’s worth exploring some important questions: what’s next, what is needed and who needs it? And, perhaps crucially, whether AI will ever remove the need for human advisors in the financial industry.

AI transforming financial sector
Business leaders have revealed that the use of technology including AI plays a significant role in filling gaps within financial services offerings. Jim Pendergast, Senior Vice President and General Manager at AltLINE by The Southern Bank, has said that AI can improve the consistency of financial advice. “AI is inherently consistent, so it can provide a much narrower picture of what will work and what won’t based on previous information. When it comes to investing, having this level of consistent understanding of the market can help investors make the right choices.”

Cliff Auerswald, the President of All Reverse Mortgage, said in a recent interview that AI could solve questions about potential financial problems and solutions. “While human financial advisors do have some of the best options for financial solutions based on past experiences, AI can provide more research-based information on how people can succeed financially,” Auerswald said. It’s clear that with advancements in technology, even the financial sector has become less human dependent. Personal mobile applications powered by AI and machine learning algorithms have started flourishing in the market, providing additional value over traditional approaches.

AI use cases in finance
As highlighted by Pendergast and Auerswald, the rapid expansion of AI application areas is having a huge impact in the environment that firms are operating in, both externally and internally (see Fig 1). Externally, AI is making it possible to carry out tasks faster and at a lower cost. Internally, AI is shaping companies’ relationships with their customers, other firms and society at large. Pendergast said that some of their clients rely on AI to improve their finances. “We work with small and mid-sized businesses, so we often recommend software that will help them keep track of their finances successfully,” he elaborated.

Auerswald mentioned that his own company occasionally uses AI for their financial advisory. “We don’t know any major organisations that rely solely on AI. Other organisations should give it a shot since they can likely improve their metrics and customers’ experiences over time.” Of course, the pandemic has further accelerated digital transformation in the banking sector, with several financial firms racing to adopt cloud-based technology to deliver a much better service for their clients. An increasing number of financial companies use various different technologies to offer digital online services that have traditionally been provided by mainstays of the financial industry. According to Pendergast, many financial services firms are using AI to detect fraud, predict cash-flow events, create invoices, fine-tune credit scores, conduct cost and benefit analysis, as well as for account creation and goal setup. Other uses include recommendations for investing, rebalancing of portfolios and retirement planning, communication between users for mutual investments, and trading and investing in stocks, bonds and ETFs.

Robo-advisory helps to simplify customers’ user experience and make advisory services accessible to both wealthy customers and investors with lower investable amounts. Robo-advisors are increasing investment activity, especially with the low-budget investor, who generally doesn’t have access to investment advisors.

Continuous 24/7 accessibility, automated rebalancing, and monitoring differentiate robo-advisors from traditional investment advisory services. Customers can access their accounts via user-friendly websites or smartphone applications and make adjustments to their portfolios any time of the day and recalibrate their investments.

Robots can’t replace human interaction
There has been lots of hype about AI and its potential application in the investment advisory process, but implementing such a service model must be evaluated in strict terms that take ethical questions about transparency and responsibility into account. Both Pendergast and Auerswald admitted that the use of AI for personal finance and planning is gaining in popularity and is seen as more accurate as a forecasting tool. However, when it comes to things close to people, they disclosed that financial firms still prefer human financial advisors – this includes buying a house, buying a car and planning for retirement.

Pendergast asserted that AI will likely never truly replace financial advisors. He stated that financial advisors have tools to help increase finances and often explore routes that most people don’t consider, and AI often won’t have the ability to make those distinctions.

Auerswald appears to be in agreement on this point, explaining that human advisors are better able to adapt than AI, though machine learning is narrowing that gap. “Even with all the research that goes into AI, human intelligence can make decisions that are not based on previous activity in the market, making them invaluable,” he stated. In other words, the industry experts don’t believe that AI can replace the role of human financial advisors. They agree that human financial advisors continue to play an important role in counselling individuals about managing expenses in accordance with their income and ways to increase their savings for better investments.

For instance, Pendergast stated that technologies such as AI are better suited to handling day-to-day functions such as opening an account or executing trades than giving advice to clients. AI advisory systems are currently based on products that require little or no active portfolio management. An example of this is ETFs, which do not require active decision-making by portfolio managers, thus making their cost structure more manageable. Despite the cost savings that AI services provide to customers, such services seem to struggle with customer adoption.

Customers appear to prefer hybrid models where they can search for information and compare products online, but are still able to contact human advisors before completing the final investment. AI advisory services do have some value, and the proof of this is measured by those willing to test out a robo-advisory service when they discover that one exists. They just aren’t willing to use it to make actual investments via online platforms. Pendergast and Auerswald admit that this is an area in which more work is needed in order to design AI so that the end result is more accessible for customers.

AI can support human advisors’ success
For now though, the industry experts believe that human financial advisors will still be needed alongside AI, both now and in the future. Pendergast said that AI is vastly more efficient than most other techniques, and therefore it can help financial advisors save a lot of time. Auerswald agrees that time delays when it comes to market analysis can be solved with AI. “One of the problems with the traditional way of working is the time it takes to analyse information. AI can make information more reliable, but the resources will be easier to see overall,” he stated.

Typically, a financial advisory role is a pretty hectic job. Accounting for clients’ income, expenditure, loans, taxes, and investment is not a straightforward task for a financial advisor. The calculations, and therefore the results, can be imperfect at times. All the above shortcomings can be easily overcome by using a mobile application backed by AI. In other words, financial advisors should be supported by technology – AI could be used to make sense of the research and other data that advisors don’t have time for. The very best technology is that which acts as a natural complement to our lives. That is what AI can do, because breaking down a variety of product options is a mammoth task that we are not necessarily best equipped to carry out.

Auerswald signalled that AI is likely to take over many organisations, as many people may choose this option over a paid financial advisor, since it’s much easier. He did mention, however, that people who don’t know how to make the correct financial decisions are destined to fail, even if they do use AI metrics. “Remember that AI is not exact, so it’ll become more popular, but coupling it with human financial advisors will continue to be the future of artificial intelligence,” he stated.

Healing the economic scars of the pandemic

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The global finance industry may have survived the pandemic more or less intact, but now it finds itself in the forefront of a long recovery as gaping economic scars heal. And the wounds are deepest in those regions that were struggling even before the pandemic for what the International Monetary Fund describes as “strong, sustainable, job-rich and inclusive growth.” By general consent, the hardest-hit were the Middle East, North Africa and central Asia, most of which are burdened by large, relatively inefficient state-owned enterprises (SOEs) that were idled throughout the pandemic, draining state coffers and raising compelling issues for governments. Some countries in these regions have hundreds of SOEs while at least one, Azerbaijan, with a population of 10.25 million, has several thousand.

As global output collapsed by roughly three times more than during the financial crisis of 2008 (as well as in a much shorter period), the banks also found themselves supporting millions of privately owned companies, notably those in smaller tourism-dependent economies. As these regions fight back from the economic ravages of the pandemic, the finance industry has a huge window of opportunity. These institutions will be expected to back sovereign loans as governments raise money to restore their nations to a more secure footing while also providing finance for privately owned firms that, it is hoped, will emerge from the wreckage to take over the SOEs’ role and do it better. As an IMF study released in September points out, the recovery provides a golden opportunity to reform SOE-dominated economies. “These organisations are used for a wide range of purposes, including supplying basic goods and services, advancing strategic interests, addressing market inefficiencies, and meeting social objectives,” the IMF explains. “They are also involved in a wide range of activities that are often carried out by private firms in other regions – and they often act as the employer of first and last resort.”

An absence of information
In short, many of these sprawling organisations suffer from bloated staff numbers, endemic inefficiencies, poor corporate governance and confused functions, causing considerable damage to public finances. Overall, argues the IMF, the absence of proper information about non-financial SOEs, which is most of these organisations, means it is difficult to know whether “they contribute to economic development or impose a drag on the economy.”

But reform can start now. Starting with a forensic examination by each country of the role, functioning and cost of its SOEs, a consensus of economic organisations such as the IMF, European Bank for Reconstruction and Development, World Bank and OECD recommend a wholesale spring clean of these unwieldy organisations. ‘Know what you own,’ is their collective advice.

As individual functions of SOEs are hopefully hived off to private enterprise, banks will be in a better position than government to provide start-up credit. And, given the vast sums of public money unconditionally sunk into support for SOEs, the banking industry will also be better placed to manage them out of debt.

Thus the industry faces nothing less than a societal mission in these regions. By rescuing SOEs and funding privately owned alternatives, the scars are forecast to heal more quickly. “Without resolute measures to address a growing divide between advanced and emerging economies, COVID-19 will continue to claim lives and destroy jobs, inflicting lasting damage to investment, productivity and growth in the most vulnerable countries,” fears IMF economic counsellor Gita Gopinath.

The most vulnerable countries are those with the least resilient economies. The numbers tell the story. The average fiscal deficit in the most advanced economies – generally, those that can tap cheap credit – rocketed to 9.9 percent, to 7.1 percent for emerging ones and to 5.2 percent for low-income nations. Yet, the most indebted countries will bounce back the soonest. Indeed they already are.

As a governor of the US Fed, Lael Brainard, rejoiced recently; “The economy is reopening, consumer spending is strong, and hundreds of thousands of workers are finding jobs in the hard-hit leisure and hospitality sector each month.” But the US can tap the cheapest credit and boasts the highly resilient, private sector-dominated economy that SOE-burdened countries lack. That’s why India, Malaysia, Taiwan and Thailand all announced an extra fiscal stimulus towards the end of 2021 that must be paid back eventually.

More vulnerable countries have been given lifelines. The IMF handed emergency funding of $117bn to 85 countries and another $50bn is speeding up lagging vaccination programmes, the essential first step to economic recovery. The Next Generation European Fund is boosting struggling EU member states with a further €750bn. And in August, $275bn out of the IMF’s general allocation of $650bn in Special Drawing Rights, the largest in history, was earmarked for emerging and developing countries. In the long run though, there is only so much that these lifelines can do without root-and-branch reform of many thousands of SOEs.

Is cancelling debt the right thing to do?

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Just a few years ago, the idea would send shivers through the market. Raising the debt ceiling prescribed by the Stability and Growth Pact, a set of rules governing the eurozone, from 60 percent to 100 percent of GDP would spark a new round of questions over the solvency of highly indebted countries such as Greece and Italy. And yet, it came from the most unlikely source: the European Stability Mechanism, an institution tasked with supporting eurozone members under financial distress.

Faced with a pandemic that sent debt levels to unprecedented heights, the eurozone has launched a consultation process to revise rules hitherto seen as sacrosanct, particularly among fiscally frugal northern members. However, the idea of overhauling the debt ceiling still faces an uphill task to be adopted. “It’s a politically ‘feel-good’ measure, but it would change neither the existing level of debt nor the fact that interest rates have to remain low for it to be sustainable,” said Rui Soares, an investment analyst at FAM Frankfurt Asset Management.

Europe’s debt conundrum
Eurozone budget rules were suspended during the pandemic to offer governments some leeway to deal with the impact of lockdowns, but will come back into force in 2023. However, the crisis has brought even more radical ideas to the table. In November 2020, Riccardo Fraccaro, an aide to the then Italian Prime Minister Giuseppe Conte, suggested that the European Central Bank (ECB) should cancel government bonds it bought during the pandemic, effectively writing off a large chunk of sovereign debt. The idea was picked up by a group of prominent economists and politicians who argued in an article published by Euractiv that debt forgiveness of ECB-held sovereign debt would provide fiscal space for a quick and green-orientated recovery. “The post-Covid era must not be a return to what was ‘normal’ before the crisis, but a profound transformation that the current stimulus programmes do not guarantee,” Jézabel Couppey-Soubeyran, an economist at Panthéon-Sorbonne University and one of the article’s signatories, told World Finance.

Proponents of debt cancellation invoke the massive bailouts of private banks during the global financial crisis in the early 2010s as a precedent that justifies a sovereign debt write-off of similar magnitude. However, it is another crisis that still haunts European policymakers. Those who still remember the long saga of Greece’s near default in 2015 fear that opening up such a politically fraught debate would be a distraction from Europe’s more acute problems. When ECB President Christine Lagarde was asked about the prospect of debt forgiveness, she starkly dismissed it as a violation of EU treaties: “I don’t even ask myself the question – it’s as simple as that,” she said. Many analysts also note that investors are more worried about historically high levels of private debt, with highly indebted ‘zombie companies’ becoming increasingly vulnerable after the end of pandemic relief programmes. “The problem is not public debt, but high levels of private debt,” Soares said. “Even if you restructure public debt, you can’t normalise monetary policy. If interest rates were to increase significantly, many private borrowers would collapse.”

One reason why debt forgiveness remains controversial is the risk of moral hazard. Europe’s fiscal hawks fear that it would incentivise debt-addicted countries such as Italy, whose public debt surpassed 154 percent of its GDP in 2021, to keep borrowing without implementing necessary reforms. “You have some pressure for the system to reform, which is better to do without debt restructuring. You see it in Greece, Spain and Portugal, whose economies are structurally on a better footing compared to 2010,” Soares said.

Even if you restructure public debt, you can’t normalise monetary policy. If interest rates were to increase significantly, many private borrowers would collapse

At the centre of the debate is the key tool of central banks in tackling growing debt levels: quantitative easing (QE). During the pandemic, the ECB launched a €1.85trn bond-buying programme that is due to expire in March. Its critics argue that QE is a form of indirect financial assistance to states that creates social tensions, as it benefits rich asset holders and causes asset price bubbles. Debt cancellation would help governments increase public investment and allow central banks to taper off QE harmlessly, according to Couppey-Soubeyran. Sceptics retort that extreme times require extreme measures. “The solution is quantitative easing at infinity – keep low interest rates forever,” Soares said, adding: “What is ‘back to normal’? Why wouldn’t the ECB be able to keep quantitative easing forever? Japan’s had quantitative easing for over 25 years and is not going back to the so-called normal.”

Another line of criticism of debt cancellation focuses on its practicality. In an article published last March, several prominent French economists argued that cancelling sovereign debt would be a form of accounting gimmickry that would change little, since it would cancel sovereign bonds already held by national central banks. Governments, they argued, should instead gain fiscal room by taxing high-net-worth citizens and multinationals. “If you were one of the wealthiest people in Europe, you would be happy to see that policymakers want to cancel debt, rather than tax you,” said Anne-Laure Delatte, an economist and researcher at Paris Dauphine University.

America’s student debt crisis
In the US, the pandemic has added a new twist to a debate that has been raging for several decades: what to do with the over $1.7trn of student loans owed by 43 million Americans. The Biden Administration has approved over $9.5bn of student loan relief, allowing borrowers to skip payments, accrued interest and default for approximately two years, with payments expected to restart in February.

However, critics claim that this does not go far enough. During his campaign, Biden supported the idea of student loan forgiveness, but so far he has resisted calls from leftwing Democrats to cancel student debt up to $50,000, stating that he will only support cancellation of loans up to $10,000. Other government officials, including the Secretary of Education Miguel Cardona, have signalled that broader debt forgiveness is still under consideration. Blanket debt forgiveness would be counterproductive, according to Sandy Baum, a senior fellow at the Washington DC-based Centre on Education Data and Policy and author of a book on student debt: “Borrowers with high levels of education generally worked remotely through the pandemic. They are not the people who are struggling economically now. Most borrowers can and should repay the money the federal government gave them to help finance their educational expenditures.”

What makes student debt a political hot potato is its correlation with another issue dominating US politics over the last two years: race. African American graduates owe on average $25,000 more than their white counterparts. “The burden is disproportionately borne by borrowers of colour, especially women who are paid less for the same work and frequently have to drop out of the workforce to provide care. The Biden Administration has also given up on offering free community college in its ‘Build Back Better’ agenda, which could potentially halve the cost of a college degree,” said Elizabeth Shermer, an academic at Loyola University Chicago and author of Indentured Students: How Government-Guaranteed Loans Left Generations Drowning in College Debt.

A tool to tackle climate change
Strangely enough, the pandemic is putting to rest the idea that rising public debt is a problem that has to be addressed at all costs. Many hope that higher inflation will slowly kill it off, as happened with massive levels of debt following WWII. The healthcare crisis has also rekindled the debate on whether there is a specific debt/GDP ratio over which public debt is not sustainable. Although this was assumed to linger around 120 percent during the European sovereign debt crisis, many economists point to massive increases of public debt during the pandemic as proof that chasing specific debt targets is a chimera. At the height of the pandemic last year, eurozone government debt ballooned from an average of 86 percent to close to 100 percent of GDP (see Fig 1); France’s debt is approaching the 120 percent threshold, while even traditionally fiscally prudent countries such as the UK have come close to surpassing 100 percent. “Financial markets are short-sighted and have very short-term memories,” said Delatte. “In the past, many countries have quickly recovered from credit events. There is no empirical evidence about the level of debt/GDP ratio above which public debt is not sustainable.”

What makes the idea of debt restructuring more appealing to those who were until recently opposed to it is the battle against an enemy deemed more dangerous than COVID-19: climate change. The Brussels-based Bruegel think tank found in a recent study that EU countries will need to sacrifice up to one percent of their annual GDP to meet EU goals to cut carbon emissions, justifying changes in EU rules that would exempt green projects from debt calculations. The bloc is also considering a plan to grant developing countries relief from bilateral debts in reward for green investment, including an initiative to forgive $8.5bn of South African debt on the condition that the country will close most of its coal plants. “The world is not getting back to normal,” said Delatte. “We will need more public spending and investment in green innovation to protect citizens against climate change. So the main risk is not taking up more debt, but not spending enough.”

The price of pandemics

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In April 2020, as the impact of the coronavirus crisis took hold, the IMF predicted “the worst recession since the Great Depression.” It stated that “the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around $9trn,” forecasting a global economic contraction of three percent over the year. Two months later, the World Bank said we could expect a 5.2 percent contraction across the world.

In the UK, GDP ended up declining 9.8 percent in 2020, the steepest plunge since records began in 1948, and the biggest in more than 300 years, according to estimates. In the US, the economy shrank by 3.5 percent, marking the worst year since 1946. The average unemployment rate in the country meanwhile hit 8.1 percent – the highest annual rate since the wake of the financial crisis in 2012.

Hope on the horizon
Thanks in large part to vaccine rollouts, the outlook has improved significantly since 2020; in a Global Economic Prospects report in June 2021, the World Bank projected global growth of 5.6 percent this year, indicating the fastest post-recession rebound in 80 years.

Unemployment in the US fell to 4.8 percent in September, and businesses are fast recovering; for the first time since July 2004, half of respondents in a recent McKinsey Global survey said they expected their company’s workforce to grow over the next six months. Those businesses also anticipate being more resilient; nearly three-quarters said their organisations were more prepared for future crises now than they were before the pandemic.

Countries will need to work together to get trade back up and running and deliver vaccines to a larger portion of the world if the global economy is to recover on a more even scale

And the world has learnt a few lessons too, according to Dennis Carroll, Senior Advisor in Global Health Security at the University Research Co. (URC). “The COVID-19 response has shown us that in order to prevent future pandemics, we need to embrace as a core guiding principle the idea that a threat anywhere is a threat everywhere,” he told World Finance. “Only through a coordinated global response will we be able to ensure a newly emerged threat can be stopped before it becomes a pandemic. Addressing issues of trade also cannot be solved at the national level.”

It’s far from over, of course; recovery is unevenly spread, swayed towards countries with greater access to vaccines (90 percent of advanced economies are expected to regain their pre-pandemic per capita income levels by 2022, according to the World Bank report, compared to only a third of EMDEs).

Countries will need to work together to get trade back up and running and deliver vaccines to a larger portion of the world if the global economy is to recover on a more even scale. It’s also difficult to predict how the virus will fare in the coming months and beyond. “The recovery is not assured,” reads the World Bank’s report. “The possibility remains that additional COVID-19 waves, further vaccination delays, mounting debt levels, or rising inflationary pressures deliver economic setbacks.”

How exactly things pan out remains to be seen – but while coronavirus might be the biggest pandemic we’ve experienced in our lifetime, it’s not the only one history has witnessed. So what can we learn from previous outbreaks and the economic effects they’ve brought about? From Spanish Influenza to Zika, SARS to Swine Flu, we’ve sought out some of the biggest epidemics and pandemics from the past century, and explored just how much they cost national and global economies at the time.

 


Spanish Influenza
Timeline: 1918–1920
Origin: Unknown
Considered the deadliest pandemic in history and claiming an estimated 20–50 million victims – while infecting a third of the world’s population – Spanish influenza didn’t only devastate lives; it brought down cities across the globe in a way not dissimilar to COVID-19, with many public places shut down in the US and beyond in early 1919.The pandemic caused widespread labour shortages, exasperated by the fact a disproportionate number of its victims were of working age (15 to 44). Manufacturing output in the US fell by 18 percent, while real GDP per capita dropped 6.2 percent across the globe.In the US, grocery sales fell by a third and sales at merchants and department stores dropped 40–70 percent, according to an article in the Arkansas Gazette in October 1918. A report in the Commercial Appeal meanwhile found that coal mine production in Tennessee had dropped by half.Spreading in three waves in 1918 and 1919, and accelerated by the return of First World War veterans from overseas, the effects on both lives and economies were to last for many years. While the exact numbers are hard to quantify, partly due to a lack of historical data and partly its convergence with the war, the pandemic has since been called the fourth most adverse macroeconomic shock since 1870, after World War II, the Great Depression and World War I.

 


SARS
Timeline: 2002–2003
Origin: China
Roll on nearly a century – via the Asian Flu of 1957 and the Hong Kong Flu of 1968, among several other outbreaks – and SARS was born. When the virus emerged in China in 2002, rapidly spreading to Australia, Brazil, Canada, China, Hong Kong, South Africa, Spain and the US, concerns over its impact on both lives and economies were immediate. While it was contained within a year, registering around 10,000 infections and less than 1,000 deaths in total, the economic costs were stark. The outbreak reduced global GDP by $33bn, according to the World Bank, while China alone is estimated to have lost around $14.8bn, the US more than $7bn and Canada around $5bn.Airlines were among those hardest hit, with Asia-Pacific airlines losing $6bn on the back of a dramatic drop in the number of business and leisure travellers flying, according to the International Air Transport Association (IATA), and North American carriers registering $1bn in losses. Tourism was another victim; net revenue of Park Place Entertainment, which owns Las Vegas’ Caesar’s Palace and other hotels, tumbled more than 50 percent year-on-year in the second quarter of 2003 as the Asian market slumped, while bars, shopping centres, cinemas and other indoor public places closed in Beijing amid a country-wide lockdown.A 2008 study; The economic impact of SARS: How does the reality match the predictions? concluded that China lost out on an estimated $3.5bn in domestic tourism that year, while Hong Kong’s restaurant sector saw estimated losses of $260m.But authors of the study, Marcus Richard Keogh-Brown and Richard David Smith, are cautious of over-estimating the impact of SARS alone, pointing to other influences at the time that added to the economic burden – not least the conflict in Iraq – and noting the rapid recovery seen after the outbreak ended. “SARS did have a notable effect on certain sectors of some East Asian and the Canadian economies,” they wrote. “However, these losses correspond only to the relatively short period of the disease outbreak, after which consumer confidence returned and many stocks that had diminished were replenished and some purchases which were forgone at the height of the outbreak were made after the perceived risk was reduced.”

That presents some hope for a post-Covid recovery and one that’s already being seen; in June, the World Bank forecasted “the most robust post-recession recovery in 80 years in 2021,” with global growth expected to accelerate 5.6 percent this year thanks to the loosening of restrictions and reopening of venues across the world. How reality plays out in the coming months and years remains to be seen, however.

 


Swine Flu
Timeline: 2009–2010
Origin: North America
If SARS taught the world lessons in how to mitigate a potential global pandemic, H1N1 – or Swine Flu, named for its origins with North American pigs – was the ultimate test. First documented in Mexico on March 17, 2009, the virus quickly spread throughout the country and the US, circulating the globe in two waves before officially ending in August 2010. The last disease to have been declared a global pandemic by the WHO before the coronavirus crisis, it gave economists a brief insight into the damage COVID-19 could cause – albeit with a less fatal profile, killing an estimated 150,000 to 575,000 people and infecting between 700 million and 1.4 billion across the world.While its convergence with the financial crisis makes its real impact hard to quantify, data from the World Bank estimates that global losses likely totalled somewhere between $45bn and $55bn. Those costs stemmed from multiple factors, including direct costs as well as significant declines in several industries, including food, transport and tourism. Mexico alone registered a million fewer visitors in 2009, according to the data, leading to more than $1bn in lost tourism, while stock markets crashed and economists feared an extension to the global recession. In Canada, the virus is estimated to have cost the economy $1.6bn, according to a 2010 report by the Canadian Institute for Health Information, including $162m in care of hospitalised patients and $40m in emergency department visits. Other estimates put lost GDP in affected countries at between 0.5 percent and 1.5 percent.But preparedness, sparked partly by SARS, helped in containing the virus; the US, UK and Australia closed schools, while Canada witnessed the biggest vaccination programme in its history, investing $400m in buying 50 million doses of the H1N1 vaccine. Those school closures might have been costly – a study in New York found that closures meant at least one adult had to miss work in 17 percent of households – but they likely paid off.Research early on in the outbreak by Warwick McKibbin, a senior fellow at the Brookings Institution, found that a worst-case ‘ultra scenario’ could shave $4trn off the global economy. Thanks in part to efforts against contagion, that didn’t happen. But researchers Patrick Saunders-Hastings and Daniel Krewski warn against complacency. “Overall, the 2009 H1N1 pandemic was a mild, albeit costly, global virus,” they wrote in a study, Reviewing the History of Pandemic Influenza: Understanding Patterns of Emergence and Transmission.“While it has reinforced optimism about pandemic preparedness, it should not necessarily be seen as predictive of future pandemic severity.” And indeed it wasn’t; estimated losses from COVID-19 have already reached the trillions, at least rivalling the ‘ultra scenario’ feared for Swine Flu, and it isn’t over yet. But if it wasn’t for the lessons taught by outbreaks like H1N1, the world might be in a far worse position still.

 


Ebola
Timeline: 2014
Origin: Guinea
In October 2014, the World Bank said the Ebola outbreak – concentrated in Guinea, Liberia and Sierra Leone – could cost the economy $32.6bn by the end of 2015 in a worst-case scenario. The following month, forecasts had been reined in to $3–4bn, and the following year, total losses were estimated to have been a significantly smaller $2.8bn.But a study published in the Journal of Infectious Diseases in 2018, taking into account social effects and longer-lasting impact as well as the direct losses, put the figure up to a staggering $53bn. It found the biggest losses were for deaths caused by other diseases as Ebola took healthcare resources and hospital beds. Healthcare costs totalled $26m, while mitigation measures came in at $67m.Among the biggest blow, though, was the loss in trade as borders closed (totalling $2.8bn, according to the study). Guinea’s trade with Senegal and Sierra Leone – which relies heavily on cocoa exports – was shut off, while Liberia’s trade with the Ivory Coast was also curtailed. International border closures, flight restrictions (many countries suspended flights to the three worst affected countries) and declines in exports, taxes and business exacerbated the impact. Sierra Leone’s mining industry – the mainstay of the economy, accounting for 75 percent of the country’s 20 percent growth in 2013, according to the IMF – was meanwhile dealt a blow due to restricted movement of workers.While direct costs were clearly unavoidable, what’s interesting is that mitigation measures, restricted movement, border closures and other behaviours driven by concern caused the biggest financial drain, according to the World Bank. “The analysis finds that the largest economic effects of the crisis are not as a result of the direct costs… but rather those resulting from aversion behaviour driven by fear of contagion”, reads a statement in September 2014. “This in turn leads to a fear of association with others and reduces labour force participation, closes places of employment [and] disrupts transportation.”

That’s the central crux of almost every epidemic – the World Bank attributes 80 to 90 percent of the economic impact of recent epidemics to behavioural factors rather than to the diseases themselves. More than 11,000 lives were lost to Ebola, but many more were impacted by its devastating economic toll. That’s a story that clearly rings true in the coronavirus crisis, and striking the balance between saving lives and saving the economy has been one of the biggest debates of our time. Governments will likely need to continue walking a very fine line for years to come.

 


Zika
Timeline: 2015–2016
Origin: Brazil
In February 2016, the World Health Organisation declared the Zika virus – which began in Brazil and is mosquito-borne – a public health emergency of international concern. The virus, which can cause microcephaly and other congenital conditions in babies of pregnant women, soon spread to the surrounding region and beyond, leading the World Bank to foresee an economic impact of $3.5bn in Latin America and the Caribbean that year. But adding in social impacts, researchers from the John Hopkins Carey Business School put the figure somewhere between $7bn and $18bn.It wasn’t only Latin America and the Caribbean that had cause for concern – a study published in the journal PLOS Neglected Tropical Diseases by Dr Peter Hotez looked at the potential economic toll on the US if the epidemic were to spread. It concluded that costs could range from $183m to more than $1.2bn depending on infection rates in Florida, Alabama, Texas and other southern states at risk. In response to concerns, Obama requested $1.8bn from Congress in federal funding for prevention, $1.1bn of which was authorised.While loss of worker productivity, public perceptions of Zika and the costs of action needed were all taken into account in the World Bank’s estimations, by far the biggest portion once again came from its potential impact on tourism – the analysis predicted a 1.6 percent drop in GDP for countries reliant on overseas visitors, explaining why Mexico, Cuba, the Dominican Republic and Brazil stood to lose the most ($744m, $664m, $318m and $310m respectively, according to the forecasts). Many feared its impact on the Rio Olympics, but the WHO rejected a call to postpone the games on the grounds that it would “not significantly alter” the spread of the virus (and it didn’t; no cases of Zika were reported by foreign visitors following the event). The impact on tourism was smaller than expected as a result; 410,000 foreigners still came for the games – falling only slightly short of the 480,000 originally projected by the Olympic Committee – accounting for seven percent of the country’s annual tourism volume.Tourism to the Caribbean was also less heavily impacted than feared, according to Travel + Leisure magazine editor-in-chief Jacqui Gifford, who put it down to the fact that only a small sector of the market was affected by the virus. “There was a little bit of a dip when it came to the Caribbean and Brazil,” she told CBS News in 2019. “But we’re really talking about a specific market and a specific type of traveller – pregnant women obviously and couples that were thinking of conceiving.”

In the end, the number of cases was significantly smaller than initially feared; from 2015 to 2018, the Americas registered 220,000 confirmed cases and 580,000 suspected cases, according to data from the Pan American Health Organisation and the WHO. That’s compared to initial forecasts of up to four million cases in Latin America and the Caribbean, and up to 117 million globally. Mainland US registered 224 cases in 2016 and only seven in 2017, while Europe escaped unscathed. If that proves anything, it’s that epidemics can be as financially unpredictable as they are potentially devastating – and weighing up potential risk with reality is where the true challenge lies.

The start of a rail travel revolution

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Boasting traffic of 750 trains and 25,000 passengers on a typical pre-pandemic day, the city of Salzburg’s award-winning central railway station is a symbol of the revival of rail that promises to gather speed in the next few years. The beneficiary of a massive, 15-year reconstruction project that only ended in 2014, Salzburg Central has been transformed from an impressive but unsuitable monument of mid-19th century, steam-powered rail into a modern transport hub that encourages citizens to jump on a train.

A connection point for long-distance and commuter trains, the station is spread over 18 tracks serving points north and south. Covered mainly by glass roofs, the atmosphere is airy and light. Passengers can while away their time until their train departs in nearly 4,000 square metres of shopping area. And there’s plenty of space, a pre-requisite of the new era of rail. As passengers steadily return to rail travel following the pandemic, the entire rail industry is engaged in a fundamental reform that is transforming stations into people-friendly hubs, applying low-emission technologies and slashing ticket prices in a looming battle with aviation.

And hubs like Salzburg Central are pivotal to the recovery of rail. Authorities all over the world are pouring public funds into stations – many of them historic – that draw people to trains. Turkey’s transport ministry, for instance, has just called tenders for the reopening of a rail link that will take passengers into the historic European terminus of Sirkeci near the Topkapı Palace in Istanbul. Opened in 1872, it was closed in 2013 but will now have a new lease of life. Among many other examples of the revival of great stations, in Paris the long-neglected Gare du Nord, Europe’s busiest station, has finally been approved for a €587m renovation that will bring it into the 21st century. Serving 700,000 passengers a day before the pandemic, the station has been overdue for a remake, but locals, including the city, blocked the rail authorities with a series of legal actions arguing that the project would spoil the surrounding ambience by turning it into a giant shopping mall.

In truth, the Gare du Nord project embraces a fresh view of rail stations that sees them as hubs for the community as well as for transport. The renovation will provide spaces for concerts and rooftop gardens as well as for shopping and offices, along similar lines to Frankfurt and other top-rated hubs like the central stations in Leipzig, Vienna, Amsterdam, and Moscow’s Kazansky.

However, it’s a race against time to have the work done before Paris hosts the 2024 Olympics. It’s a comment on the belated change of attitude towards rail that second-placed St. Pancras in London is housed in a towering historically protected building that would have been pulled down a few years ago and replaced by apartments but for a campaign by conservationists.

Better than air
Driven by concerns about climate change, authorities in many countries are taking unprecedented measures to encourage travel by rail rather than by air. In an action that is certain to be followed by other governments, France is moving to ban flights under two hours, a step that will provide a massive boost to domestic rail travel. The ban is justified by overwhelming evidence of the ecological benefits of rail – numerous studies show that emissions from long-distance rail journeys – approximately two hours or more – are 20 times lower than the average commercial flight. The European Commission would certainly approve of the ban – it declared 2021 to be ‘year of the rail’ and is backing a wide range of projects that are designed to restore trains to their glory days of the early 1900s when the coal-fired steam locomotive, followed by diesel-fuelled trains, transformed travel all over the world. One of the most loved rail journeys of yesteryear, the night train, is making a comeback in Europe on routes between capital cities. Austrian Railways is increasing its Nightjet trips with affordable fares and a wider choice of accommodation including private cabins, while a French start-up, Midnight Trains, plans to open routes from 2024 under the slogan ‘hotel on rails.’

Next stop: hydrogen trains
A technological revolution underpins the revival of rail. Pittsburgh’s Wabtec group has rolled out a battery-electric, hybrid-powered train that reportedly slashes emissions by 11 percent. Hydrogen-powered trains that emit only warm water vapour are already being trialled with promising results – two of them have carried passengers for 180,000km in Germany. In regular operation since 2018, the hydrogen train is the 150-seat Alstom Coradia iLint. Combined, the fuel cell and batteries can power the train to a maximum speed of about 90mph for a range of up to 500 miles.

In the coming years hydrogen fuel cell trains will appear on 10 railways around the world

Zero-emission is the holy grail of rail travel. As Railway Age reported in early 2021, “based on emerging technologies in batteries, hydrogen fuel cells and renewable natural gas, zero-emission is a possibility.” In fact, it could be inevitable. The powerful US Environmental Protection Agency (EPA) and the EU have both mandated much tougher future standards for trains and locomotives. From 2025, the EPA’s tier-5 would force emissions of nitrogen oxide to almost nothing and emissions of particulate matter to absolutely nothing. This is not pie in the sky. “Already today, prototypes and many production locomotives have been manufactured that meet these requirements,” Railway Age reports. “In the coming years hydrogen fuel cell trains will appear on 10 railways around the world. Most of these have already been contracted.”

Taking all the developments into account, it looks inevitable that the major stations will welcome low or zero-emission fleets of trains within the next two to five years as more polluting technology is phased out.

But will the passengers come back in the aftermath of the pandemic? Mobility experts, who are watching developments closely, believe that this is a near certainty, though not as before. Although passenger levels have been creeping up, they remain well below pre-pandemic levels in New York, whose routes were some of the hardest-hit anywhere. The New York Metropolitan Transportation Authority estimates passenger numbers on its two commuter lines in September were down by as much as 70 percent on weekdays. If numbers stay this low, it would be a financial disaster.

But US authorities are working on allaying commuters’ fears by introducing a variety of measures that reduce congestion, such as making thoroughfares one way and managing crowds better on platforms. Many transport-watchers predict that the days of peak commuter congestion could be over as office workers pick their time to go into the city in a trend that would make rail travel more enjoyable. However, fears that commuter travel faces a long-term decline look to be wrong – British research finds that around 70 percent of people expect to return to the office.

Logical logistics
Invisible to the general public, many of the great ports of the world are rapidly adopting rail to shift goods off the wharves as a cleaner alternative to lorries. The booming Port of Valencia in Spain, for instance, sees more than 4,000 trains a year at a rate of 80 convoys a week, all transporting a wide variety of goods in and out of the country. But that’s not good enough for the port authorities. Under a policy called ‘intermodality,’ Valencia is following Rotterdam, Barcelona and other maritime hubs in switching rapidly to rail in order to slash lorry movements, especially for delivery into the hinterland.

“The railway is key in our present and future strategy because it allows us to reduce costs in the logistics chain, to improve the services we offer in the terminals, and to take loads off the roads and put them on the railways,” explained the port’s president Aurelio Martinez, citing trains as crucial in the decarbonisation route targeting zero emissions by 2030. The ports’ transition is backed by shipping giants such as France’s CMA CGM, which has adopted a fundamental strategy called ‘switch to rail.’

Faster than a jet plane
Already rapid before the pandemic, the rate of innovation in rail travel is accelerating. What’s next? Although it’s still an experimental technology, hyperloop travel at speeds of 1,200km per hour could be around the corner. A company called Nevomo in Poland has raised funds to take the first step that would carry passengers at over 400km per hour as early as 2023, slashing the travel time from Gdansk to Krakow, a distance of nearly 600kms, from the current six hours and 10 minutes to little more than 90 minutes. Based on magnetic technology applied to existing tracks, ‘magrail’ is seen by some as the future of all rail transport.

But this may not be what rail travellers want. New research suggests that commuting by rail is good for us and even improves passengers’ work ethic. A project by University College London and the rail industry has found that taking the train significantly improves a passenger’s workday, including their productivity, motivation, cognitive performance and wellbeing. Released in September just as seasonal and peak travel in Britain was on the rise, the study bodes well for rail in the long run.

TikTok made me buy it

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Move over, millennials: Gen Z is here, and is ready to spend. Generation Z – or those born between the years of 1997 and 2012, for the uninitiated – now account for a staggering 40 percent of consumers worldwide, wielding a mighty global spending power of $200bn a year, according to research carried out by Bloomberg. And with many Gen Zers still living at home, they also influence what their parents are spending money on – to the tune of a cool $3trn per year. No wonder brands are desperate to win over this lucrative new audience.

Every generation is different to the one that came before it, with new characteristics and spending habits. Members of Gen Z are arguably among the first generation of true digital natives, having been exposed to the internet from the very moment that they were old enough to hold a smartphone. But it’s not just their ease at using digital channels that sets Gen Zers apart from generations past – they are also unique in where they choose to spend their time online. Showing far less interest in ‘traditional’ social media sites such as Facebook, members of Gen Z are much more likely to be found scrolling through 15-second videos on TikTok.

All of those 15-second clips quickly add up, however, with 20 percent of Gen Zers reporting that they spend more than five hours per day on the app, according to research carried out by Joy Ventures and getWizer. With young consumers investing so much time into TikTok, the app is fast becoming one of the most potentially lucrative marketing tools that brands have at their disposal, representing a new way to engage with a spend-happy audience.

Gen Zers are now spending more than they did pre-pandemic, with many of these purchases fuelled by online trends and viral videos. Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales – but what is the secret to achieving this coveted 15 seconds of fame?

The TikTok effect
Just four years on from its international launch, TikTok’s influence is undeniable. Even those who are unfamiliar with the app itself will have perhaps felt its impact in the offline world. If you have visited a book shop lately, you may well have seen a stack of books neatly arranged in a designated ‘as seen on TikTok’ section. Or perhaps back in March of this year, you may have found yourself suddenly unable to get your hands on any feta cheese at the local supermarket – well, blame TikTok. A viral ‘feta pasta’ recipe was said to be responsible for causing a global shortage of the popular Greek cheese, as TikTok users quickly cleaned up the dairy aisle in their rush to recreate the dish.

Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales

From feta cheese and books to eye cream and cleaning products, TikTok has the power to make everyday products ‘cool.’ While the app might be best known as the home of funny comedy skits and viral dance routines, there is also a strong consumerist element to TikTok.

Clothing hauls and in-depth product reviews regularly amass millions of views and many thousands of likes, with all of this online engagement very quickly translating into real-life sales. Indeed, 49 percent of TikTok users have confessed to purchasing a product after seeing it reviewed, promoted or advertised on the app, according to a 2021 Adweek survey on consumer behaviour. This gives TikTok users – approximately one billion of them, at the last count – an incredible spending power, and an ability to propel a business to record-breaking sales. Take trendy mochi ball company, Little Moons, for example. After going viral on TikTok, the company saw its sales shoot up by 700 percent in a single week at UK supermarket Tesco, leading its founder, Vivien Wong, to give credit to the app for helping the company to reach sales of £26m in the year to June.

Elsewhere, skincare company Peter Thomas Roth was forced to ramp up production of its eye cream after a product-testing video racked up over 50 million views, causing a surge in demand across the globe. In the fast-moving viral video world, views mean sales, and sales mean success. Simply put, brands can’t afford to dismiss TikTok as just a fad. The video-sharing app is here to stay – even toppling tech behemoth Facebook from the top of the official list of most-downloaded apps for 2020 (see Fig 1). If brands are able to successfully harness the power of TikTok, then the rewards are both plentiful and immediate.

Tapping into the Gen Z mindset
Of course, success is by no means guaranteed for brands seeking TikTok fame. For years now, companies have thrown vast sums of money at social media marketing campaigns, with rather mixed results. When it comes to social media platforms themselves, some have fared better than others – advertising has made Facebook into a trillion-dollar company, for example, while Twitter has famously struggled with monetisation. It has taken much trial and error for social media companies to get their advertising strategy right, and even today, many sites still have much to learn. In just four short years, however, TikTok has managed to establish itself as the social media marketing tool of the future.

According to research carried out by Kantar, users are less likely to perceive ads negatively on TikTok compared to other social media platforms, and find ads on the app to be more trendsetting than those featured on other sites. Significantly, 72 percent of those surveyed said that they felt that ads on TikTok were inspiring, while a further seven in 10 research participants said that they found adverts on the platform to be enjoyable to watch.

But to understand why TikTok ads are seemingly so successful, we first have to consider the app’s main user base: Generation Z.

Firstly, as digital natives, members of Gen Z are familiar with online marketing tools and tactics, and have been from an early age. As such, they are unlikely to be drawn in by ‘traditional’ social media ads, and have a low tolerance for anything that feels hackneyed, derivative or unoriginal. In many ways, Gen Z has seen it all before, and are drawn to fresh takes on advertising – such as the high-energy, informative and experimental ads that can often be found in TikTok feeds.

The second key to success is also linked to Gen Z’s unique position as true digital natives. Coming of age in the internet era, Gen Zers are used to the constant distraction that digital devices offer. It’s no secret that our smartphones are having an impact on our attention spans and our ability to concentrate. In 2015, Microsoft released a study concluding that the average human attention span has shrunk to just eight seconds – down from 12 seconds in the year 2000, making us more distracted than the famously forgetful goldfish.

Increasingly, social media companies have sought to exploit our desire for distraction, designing their feeds to be deliberately addictive to users – the ‘pull-to-refresh’ feature common on many social media apps has been compared to a casino slot machine, in the way that users will pull the metaphorical lever in hopes of a reward. The very nature of TikTok’s platform, which rolls from one short-form video straight into the next, appeals to users accustomed to distraction. In keeping ads both attention-grabbing and, more importantly, short, brands can use TikTok to successfully tap into the splintered attention spans of the permanently online.

The third, and perhaps most important, factor behind TikTok’s marketing success is the way in which ads on the platform successfully appeal to Gen Z’s desire for community and connection. As the most connected generation in history, it is perhaps unsurprising that Gen Zers place a priority on their relationships with others – both offline and online. More than any generation before them, Gen Z are hyper aware of their identity, and are keen to find a tribe with which they belong.

For Gen Zers, products and brands are another way in which they can express their identity and show their belonging to a particular community, making them particularly susceptible to TikTok trends. Viral products and TikTok-famous brands can quickly amass a cult following online – with users quick to purchase any item that will make them feel part of the trend. It doesn’t matter if that trend is cooking, cleaning or reading: the important part is that the purchase brings the user closer to a coveted sense of community.

If brands were ever in any doubt over the influence that TikTok has over consumer behaviour, the evidence is simply overwhelming: videos with the hashtag #TikTokMadeMeBuyIt now boast over 4.6 billion views and counting. For an app that is still so early in its lifespan, it has completely disrupted the world of social media marketing. It’s high time that brands sit up and pay attention to the TikTok phenomenon – well, for 15 seconds or so, at least.

Can hybrid finance unburden Africa’s shaky SME sector?

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It is tough being a small and medium enterprise (SME) in Africa, a continent where the SMEs sector is quite fragile. Nothing has exposed the apparent quicksand foundations of the sector more than the COVID-19 pandemic. With the crisis dragging the continent into its first economic recession in 25 years, SMEs bore the brunt with a majority sinking into oblivion. For those that have survived the pangs of the pandemic, rebuilding is bound to be torturous.

“COVID-19 had a knock-on effect for SMEs, forcing many to close or curtail operations,” says Manuel Reyes-Retana, International Finance Corporation (IFC) director for Africa. He adds that although the sector has demonstrated a zeal for resilience with many SMEs finding ways to stay in business, the damage has been substantial with a majority struggling to regain momentum.

For SMEs in Africa, the one challenge that has remained constant, and one that COVID-19 has yet again blatantly exposed, is how lack of access to finance makes the sector vulnerable. In fact, it’s been obvious that SMEs with relatively weak financial muscles have faced the most risk. Experts believe that for the sector to recover and build shock absorbers for long-term survival, adequate access to stress-free financing is paramount.

Hybrid finance is emerging as the ultimate solution in offering to achieve this. In Africa, the concept of combining debt and equity features into a single financial instrument is yet to set down roots. However, on a continent where SMEs are in desperate need of recovery and growth capital, hybrid finance has the potential to accelerate recovery of the sector and offer it a strong foundation going into the future.

“Hybrid financing is a more flexible tool for SMEs,” states Conor Savoy, senior fellow, project on prosperity and development at the Centre for Strategic and International Studies. He adds that development financial institutions (DFIs) have the ability to lead the way in creating financial instruments through which SMEs can access hybrid financing, thus giving the sector a more solid backing to pursue growth. DFIs have proved they can be an important source of equity in developing countries. Some are already investing as much as half of their portfolios in equity. “In exchange for a certain degree of ownership, equity investments provide an essential source of capital for firms without burdening them with loan repayments,” he notes.

Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation. Ironically, they face significant financing gaps that stifle innovation and growth. The World Bank estimates that across emerging markets and developing economies, over 21 million SMEs constitute 45 percent of employment and 33 percent of gross domestic product (GDP). Despite their importance, they are grappling with a $4.5trn credit gap.

In Africa alone, according to the African Development Bank (AfDB), SMEs account for more than 90 percent of businesses and almost 80 percent of employment. Yet, the sector is facing a $421bn financing gap. In retrospect, this means that roughly half of small businesses on the continent cannot access the financing they need. The situation is even worse for micro enterprises, which are mostly informal.

Addressing the SME finance gap
Over the years, bank financing has been the traditional source of external financing for SMEs. Though to the extent banks have tried supporting SMEs, their rigidity in providing credit means that only a few qualify. Banks still cling to the mantra of SMEs being riskier than large firms. In Rwanda, for instance, a country where SMEs face a finance gap of $1.2bn, the share of total bank lending to SMEs stands at 17 percent compared to 60 percent for corporates. What makes this statistic more startling is the fact that SMEs comprise 98 percent of businesses in the country. In other countries like South Africa, Nigeria and Kenya, banks are more comfortable lending to the government, a strategy to stay away from risks associated with SMEs.

“Financial institutions will be more reluctant to provide additional credit to SMEs under the current conditions of COVID-19 given how cumbersome it will be for them to determine the extent and adequacy of collaterals, identify which borrowers are facing longer-term financial difficulties and be able to adequately cover monitoring costs,” states an AfDB report.

In effect, this means that COVID-19 has made it even more difficult for SMEs to access bank financing. Hybrid finance, however, can fill the vacuum. In the developed world, the concept has been instrumental in offering SMEs the lifeblood that has made the sector vibrant and given it the ability to withstand shocks. Instruments like subordinated loans/bonds, silent participations, participating loans, profit participation rights, convertible bonds, bonds with warrants and mezzanine finance provides SMEs with financing packaged in the form of debt and equity.

For SMEs, the packaging of products that are essentially debt with equity-like features comes with many benefits. First, the products are ideal because they allow SMEs to borrow long term and with limited or no collateral. This is because they align the profile of the debt repayments to the profit of the borrower.

Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation

Second, the products include clear mentoring that is crucial in helping SMEs successfully run their businesses. For SMEs in Africa, lack of technical capacity is a key factor in the high rate of mortality. Third, and equally important, is the fact that they provide SMEs with stability. This is because the products are better suited for SMEs that have reached a high growth phase.

“We want to make this model replicable and expand it across Africa because of the products’ many benefits, which include diversified sources of funding, lower financing costs, greater flexibility compared to traditional bank loans and improved loan terms and conditions,” notes Reyes-Retana. The need to drive growth of hybrid finance aligns well to IFC’s commitment to being at the forefront of helping SMEs access financing. As of June 30, the financial institution’s committed SME finance portfolio was over $12.3bn worldwide, which represented a growth of 42 percent from financial year 2010. Of this amount, Africa’s portfolio stood at $2.6bn.

The right environment to thrive
Unlike other parts of the world, Africa is facing a herculean task in creating an enabling environment in order to attract hybrid finance. Top on the list is the need for SMEs to formalise their operations. It is near impossible for hybrid finance to flourish in an environment where businesses lack sophisticated financial records and proper governance structures. The fact that a majority of SMEs on the continent are family-owned means that the majority continue to pay lip service to accountability, transparency and governance.

“Making SMEs in Africa more formal is key in helping the sector become more sustainable,” avers Savoy. He adds that formalising the sector is critical in building a wider pool of businesses with the right capabilities to attract hybrid financing. Under the current setup, the available financing is competing for a limited number of companies. The companies become even more unattractive because other credit providers like banks, private equity and microfinance institutions among others are also courting them.

The continent must also resolve the challenge of lack of early stage financing. Hybrid finance is not really designed for startups. In essence, it means that governments and policy makers in Africa must provide financing to SMEs in their early stages and help them get to a point where they have the right structure to attract a blend of debt and equity. This is important considering the high rate of SMEs mortality. In South Africa, Africa’s second largest economy, research has shown that over 70 percent of SMEs fold within the first five to seven years of inception. In Uganda, about a third of new business startups do not go beyond one year of operation.

Another important factor is providing exit channels. Injecting capital in a business for an equity stake is undoubtedly a complex process. Exit opportunities are among the complex factors that investors must consider when assessing the viability of deals. In Africa, however, the tragedy is that the continent does not offer many suitable exit opportunities. Lack of well-developed and vibrant financial markets means that equity investors cannot take the option of an initial public offer (IPO) to exit from a business that has hit the maturity stage.

Work to be done
The state of the financial markets in Africa does not inspire confidence. According to the Absa Africa Financial Markets Index (AFMI) 2021, financial markets across the continent’s 23 top economies continue to score poorly across fundamental pillars like market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic opportunity and enforceability of financial contracts.

“A vibrant capital market is one of the primary issues with equities,” explains Savoy. He adds that foreign investors are often reluctant to take up equity stakes in Africa’s SMEs because stock markets are relatively underdeveloped. This makes it hard to float an IPO and exit. “Deepening of the financial markets is critical because it creates opportunities for equity investors to exit,” he notes. An important aspect of making financial markets more vibrant is building the capacity of local investors, particularly retail investors, to participate in market activities. In a majority of the countries in the Absa index, foreign investors dominate about 70 percent of trading.

It is evident that it will take years before hybrid finance can take root in Africa. However, the enormous financing gap means that SMEs in the continent are in desperate need for additional financing solutions. Given the importance of the sector, it means the continent has little option but to create an environment for debt and equity instruments to thrive.