World Finance

Fed seeks to calm markets after discount rate rise

Posted on February 19, 2010 by

US Federal Reserve officials moved to calm speculation that a surprise rise in its emergency lending rate could bring forward broader policy tightening, saying borrowing costs in the economy would stay low.

Fed Chairman Ben Bernanke flagged the move last week, saying the US central bank aimed to widen the spread between its main policy rate that remains pegged near zero and the discount rate at which banks can borrow from the Fed.

However, no one in markets expected it to act so soon and the timing of the move – well ahead of the March 16 policy meeting – prompted investors to price in a greater likelihood of a rise in the benchmark fed funds rate late this year.

The dollar jumped and government bonds and bank stocks fell after the Fed raised the discount rate by 25 basis points to 0.75 percent even as it cast it as a response to improved financial market conditions and not a change in monetary policy.

“This is a significant and likely symbolic move that will impact on market sentiment,” Robert Rennie, a strategist at Westpac in Sydney said in The Dealing Room, a Reuters Messaging chat room.

“The emergency easing cycle began with discount rate cuts – it was all about easing liquidity to banks. So the move to raise the discount rate means the long journey towards normalisation has begun.”

Thursday’s move is the first increase in any of the Fed’s lending rates since the financial crisis blew up in 2007 and the first rate change since December 2008.

“The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,” the Fed said in a statement.

Overblown expectations
While investors initially brushed aside the Fed’s assurances that no tightening for the broad economy was on the cards, warnings from a senior Fed official that markets have gone too far in their tightening bets finally did sink in.

St. Louis Federal Reserve Bank President James Bullard said investors belief in high probability of a rise in the Fed’s benchmark rate this year was “overblown” and that the discount rate rise should not be seen as a policy signal.

“The discount rate move is part of a normalisation process which is akin to our discontinuing many of our liquidity programs,” Bullard, who votes on the Fed’s interest rate-setting panel this year, told reporters in Memphis. “It does not indicate anything one way or the other about what we might eventually do with the federal funds rate,” he added.

The dollar pared gains and treasury futures trimmed losses, after Bullard’s comments and reminders from fellow Fed officials that cheap credit was still the order of the day.

“Monetary policy – as evidenced by the fed funds rate target – remains accommodative,” Dennis Lockhart, Atlanta Fed president, said in a speech. “This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile.”

Still, share markets in Asia were on the defensive as the Fed’s action, which follows China’s moves to curb lending, served as a reminder that the period of cheap cash that fuelled last year’s stock market rally may be slowly drawing to an end.

Return to normal
Before the financial crisis, the discount rate was typically a full percentage point above the federal funds rate. Thursday’s decision begins to move it back nearer to its traditional premium and it said it would assess over time whether it needed to further widen the spread between the two rates.

The central bank’s view of the economy has brightened in recent months as job losses eased, consumer spending strengthened and businesses stepped up purchases of equipment and software. The Fed has warned, however, that recovery from the deepest US recession since the 1930s will probably be sluggish and has said it expects to keep the federal funds rate near zero, where it has been since December 2008, for “an extended period.”

In its statement on Thursday, it said the economic and policy outlook remained broadly unchanged from late January, when its policy committee reiterated that low-rate pledge.

Some other central banks around the world have begun to tighten policy. Australia led the way last year and its central bank chief signalled on Friday more rate increases in months ahead while China surprised markets twice in the past two months by lifting banks’ mandatory reserves.

In the US, however, the Fed has said record low interest rates are still warranted with the unemployment rate near 10 percent.

“I don’t think the Fed dares (to) increase the fed funds or policy rate in the face of unemployment at double-digit type of levels,” Bill Gross, the manager of Pimco, the world’s biggest bond fund, told reporters after the Fed announcement.

Other changes announced on Thursday included shortening the typical maximum maturity for primary credit loans to overnight from 28 days, effective March 18, and raising the minimum bid rate for the Fed’s Term Auction Facility, another scheme put in place to foster market liquidity.

MTFs look to new markets for growth

Posted on February 18, 2010 by

On the face of it Europe’s new exchanges had a pretty good year in 2009. Aggressive fee cuts helped these new trading venues, known as multilateral trading facilities, take business from traditional exchanges, which all lost market share.

However, following early success some in the business are now pondering what MTF 2.0 might look like, as they fight to prove to shareholders that they can translate gains in market share into profits.

A year ago Europe’s four main entrants – Chi-X Europe, Bats Europe, Turquoise and Nasdaq OMX Europe – shared 14 percent of the European market, according to data from Thomson Reuters. In January, they had more than 20 percent.

Their growth was partly down to a price war instigated by the various platforms as they sought to undercut the incumbent exchanges with lower tariffs.

The strategy paid off in pure market share terms but the cuts meant the firms’ modest revenues were under pressure and by the end of the year questions were being asked about their commercial viability. These concerns were realised late in December when Turquoise, the most high-profile of the MTFs, agreed to sell up to its main exchange rival, the London Stock Exchange.

Turquoise’s market share may have fluctuated last year but it was the top-performing MTF after Chi-X Europe until it was overtaken by Bats Europe in November, according to Thomson Reuters.

The withdrawal of Turquoise, despite its decent market share, has focused attention on these platforms and their plans to move into sustained profitability.

Only Chi-X Europe, which has averaged a European market share of 13.5 percent over the past three months, can lay any serious claim to having broken even.

MTF sources said the break-even point, depending on overheads, is estimated to be about 14 percent market share.

Geographic expansion is an option and one that Nasdaq OMX Europe is pursuing. Its chief executive Charlotte Crosswell said last week the system would offer eastern European equities as soon as the necessary changes are made at clearing houses. However, regional expansion is complicated.

Of the four main MTFs, only Turquoise is not part of a larger, international group – at least until the LSE deal goes through, subject to an Office of Fair Trading inquiry.

Chi-X Europe is twinned with Chi-X Global, which has interests in Canada and Australia among other markets. Bats Europe is part of the highly successful US franchise Bats Exchange and Nasdaq OMX Europe is owned by the transatlantic exchange giant.

Furthermore, expansion outside Europe is risky given the absence of regulation equivalent to the November 2007 Mifid trading reforms that allowed the MTFs’ proliferation in Europe. Diversification by product is another alternative, according to exchange professionals.

The US equity market, where the Bats Exchange plans to launch before the end of this quarter its first equity derivatives trading platform, may offer a precedent.

But new asset classes pose a different set of challenges to those the MTFs faced when they were setting up in the relatively standardised European cash equities market.

Herbie Skeete, the managing director of specialist trading consultancy Mondo Visione, believes new products represent “an opportunity and a risk for the MTFs”.

He said: “There is potential for them to expand into other asset classes but they need to do this with their eyes open. For them to be successful in new products, such as derivatives, they are going to invest heavily in research, product development and marketing – functions they have not focused on historically.”

The MTFs have been successful in equities largely because they have been able to undercut the exchanges by charging fees in line with their relatively low overheads.

However, derivatives on those equities are traded in a different way and the relative lack of standardisation places the onus on the trading venue to develop and market these contracts, which requires up-front investment the MTFs did not need to break into cash equities.

Skeete said: “The MTFs have grown up keeping their costs to a minimum but to move into new asset classes they must invest in a range of products knowing not all of them will be a success. They will have to take on additional staff and their costs will inevitably rise.”

Constantinos Antoniades, a former Goldman Sachs bond trader who has launched Vega-Chi, the first convertible bond MTF, said: “In equities there are relatively simple and low-cost off-the-shelf solutions whereas in more specialised products, such as convertible bonds, we had to use our knowledge of the market and work together with our clients to develop the specific solutions that suit their requirements.

“This applied to everything from technology to the post-trade services structure. These are some of the issues that MTFs need to face when entering new asset classes.”

Vega-Chi is outsourcing the clearing and settlement function to BNP Paribas Securities Services, the custody arm of the French bank that has built the post-trade infrastructure for the fledgling bond platform.

The lack of post-trade standardisation in non-cash equity asset classes is the main barrier to product diversification for Bats Europe, according to its chief executive Mark Hemsley.

He said: “We have thought about other asset classes among other things, but the truth is the US market is very different to Europe. In the US there is a single established clearing mechanism and the contracts are fungible but this is simply not the case in Europe.

“Our platform is well suited to options trading but we’d need to see a clear path towards a resolution of the clearing issue for European equity options before we would start to consider seriously expanding into this asset class.”

Another challenge, according to Antoniades, is to understand the commercial dynamics at play between the buyside and the brokers, which are often different to those in share trading.

He said: “Outside equities, MTFs have to be more specific about their target client base, without of course being discriminatory. You will find that sometimes the interests of the buyside and the sellside operating on an MTF could be in conflict given that sellside firms also often operate closed and opaque crossing networks relating to such asset classes without any pre-trade or post-trade price transparency.

“Also, will the benefits of better pricing be passed to the end-clients or will the MTF be used as a tool for broker-dealers to enjoy higher margins with little of the benefit being passed to the end-clients?”

Bats Europe and Nasdaq OMX Europe said they were watching the market for signs of demand for new asset classes but planned to stick with equities for the foreseeable future. Chi-X Europe and Turquoise declined to comment.

The challenges of expanding into new asset classes are great but it is likely only to be a matter of time before one of the MTFs seeks to appease frustrated shareholders by moving into newer, higher margin markets.

A case for corporate governance

Posted on February 18, 2010 by

The corporate governance agenda has received great prominence during the past two decades. Many think of this as the next best thing after international accounting standards. But why is good governance so important?

Share ownership structures and management structures have changed dramatically over time. Moving from family owned businesses to public companies, and the separation of ownership from management, we are now more familiar with the model of large and dispersed shareholder bases (dispersed ownership) working with accountable management teams. The need of safeguarding shareholder rights is greater than ever before and this is where corporate governance applies.

Taking this a step further, corporate governance principles and practices can affect a company’s shareholder structure, as they can either attract or repel investors and shareholders. The investment community is cautious when it comes to the protection of shareholder rights and they will most certainly opt for the friendliest habitat.

Moreover, the case of Enron showed us how the lack of good corporate governance can bring down a mighty company. Compliance to the letter of the law will ultimately protect us from ourselves. Man needs guidance and control by those who know best, as Hobbes would argue.

One should not ignore companies’ desire to improve efficiency. Institutional guidelines and reforms are known for enhancing performance, so sticking to the rules and following best practices will ultimately take businesses forward.

Good corporate governance draws on corporate responsibility: does this mean that companies embracing corporate governance principles are just committed to being good? Is it possible that good governance practices are the making of feelings of responsibility and business ethics?

Corporate governance map
Depending on background/geography, business genre (family owned vs public company, small cap vs large cap), different economies, societies or mentalities, it’s getting hard to even come up with one definition of corporate governance these days.

Moreover, in many cases companies are publicly listed in more than one country and are, by default, required to operate in compliance with more than one set of rules and standards. By standards one refers to key areas of focus (some corporate governance issues featuring more than others), practices and procedures, levels of transparency, accountability etc.

Yes, there are variations of every form. And any transition from one model to the other in most cases involves substantial reform in the systems. The interaction, however, of different corporate goverance systems and sets of rules, provided they don’t work to undermine or contradict each other, ultimately drives companies forward. Bilingual kids: they tend to outsmart their peers in activities.

OTE
OTE SA (Hellenic Telecommunications Organisation SA) is Greece’s telecom’s incumbent and a large capitalisation company listed on the Athens, New York and London Stock Exchanges. Consisting of the parent company OTE SA and its subsidiaries, the OTE Group offers fixed-line (voice, broadband, data and leased lines) and mobile telephony services in Greece and Romania, as well as mobile telephony services in Albania and Bulgaria. The Group is also present in Serbia through its 20 percent stake in the country’s incumbent operator, Telekom Srbija. OTE Group is also involved in a range of activities in Greece, notably in real-estate, satellite telecommunications and professional training.

Due to the fact that the company is listed on the Greek as well as on the USA and UK stock exchanges, OTE operates in compliance with applicable domestic and international capital markets and corporate governance rules.

Against this background and with a dispersed shareholder base comprising of more than 100,000 shareholders, the Greek incumbent has always had more than enough to chew on in terms of compliance and adaptability.
Compliance to Greek law is by default top priority and requirement as a result of OTE SA’s country of establishment. Greek legal requirements must be met first, and this means that OTE has to comply with a body of national corporate law which determines the framework of operation of societe anonymes, as well as a number of acts that have been introduced over the last decade, demonstrating regulatory authorities’ commitment for best corporate governance practices by all businesses.

Following its listing on NYSE and LSE, OTE was required to adhere to further sets of laws, rules and regulations. As a result, the company proceeded with the incorporation, within its operations, of all necessary practices that would enable the company to comply with applicable legislation, placing special emphasis on three key objectives: the protection of its shareholder rights; the setting up of consistent control mechanisms over its operations; and its management and disclosure of information to all stakeholders. One of the first company initiatives was to implement procedures that would address matters of control over management as a means to safeguard shareholder rights.

Applicable national and international legislation provide rules with regards to the board of directors. They address areas such as the designation of board members, their capacities (executive, non-executive and independent non-executive) and define criteria of independence. OTE implements procedures for the assessment of board members’ independence.

OTE’s Audit Committee supports the company’s board in the exercise of the latter’s supervisory authority and in its obligations towards shareholders, the investment community and third parties, especially with regards to the financial reporting processes. The committee also supervises the operation of the company’s Internal Audit team.

The Compensation and Human Resources Committee of OTE sets the principles of the company’s human resources policy and defines the company’s compensation and remuneration policy.

Both committees work closely with the board, and in essence act as partners as well as control agents for the company’s top administrative body.

With regards to the entire management team, a series of acts that were introduced in the context of capital markets legislation between 2005 and 2007 work jointly to ensure management control and transparency over their practices. These Acts address issues of inside information abuse and market manipulation, and require that OTE implements procedures such as the disclosure of inside information and the prevention from inside information abuse, the disclosure of financial transactions and the examination of cases of financial activity between OTE managers/directors and any of the company’s main suppliers/contractors or customers. Since 2005 when the specific acts were introduced and through well-set-up procedures, the company’s knowledge of persons with access to inside information, and the list of these persons created thereby, has increased tenfold.

Moving from management control mechanisms to operations’ control, the Internal Audit team at OTE assists the company’s management team with decision-making related to the optimisation of the various auditing mechanisms. These mechanisms aim to ensure the efficiency of operations and activities as part of OTE’s business plans. This is an independent business unit which reports directly to the board, is supervised by the Audit Committee and operates under a strict code of conduct. The internal audit operation is considered a key control mechanism aimed not only to enhance efficiency but also protect shareholder rights.

Having also established a code of ethics and business conduct, the company abides by a set of rules (and practices) which aim to achieve the smooth operation of the company and the appropriate business conduct of its employees. The code is in line with applicable legislation and defines the manner in which the company should interact with employees, suppliers, shareholders, competitors and other third parties as a means to enhance performance and protect stakeholder rights.

Legal requirements also provided the platform for the adoption of an Internal Operations Regulation (IOR), which sets out the applicable procedures in OTE across all operations. An extremely efficient enhancement tool, the IOR covers issues relating, amongst others, to the company’s decision-making bodies, its organisational structure and responsibilities, the recruitment and evaluation of executives, the internal committees and the regulatory framework. In essence, the IOR works as a GPS, identifying the company’s bodies and tasks, describing procedures and how they all coexist.

Since 2007, Greek law, via a specific act, requires the disclosure of information relating to changes in companies’ shareholder structure and share holdings. This information was referred to as regulated information. In compliance with this law OTE established a regulated-information disclosure process which aims to inform the investment community and all interested parties of any significant changes in the company’s participations (whether acquisitions or disposals) in a timely and accurate manner. The law and its requirements apply both for the legal entities/companies that buy/dispose of stakes in companies and for companies whose shares are being acquired or sold; enhancing disclosure of info and interaction between parties. As a result of this law, in the case of OTE which experienced significant shareholder changes over the last two years, disclosure of information has increased tremendously.

Apart from institutionally derived procedures that ensure transparency, OTE adopts a number of other practices that enhance the disclosure of information to all interested parties, such as:
– Consistent posting of company-related information on the OTE investor relations website as well as the OTE corporate home page, so that all interested parties can have fair and timely access to that information
– Regular release of corporate publications (presentations, annual reports) thereby enhancing the continuous flow of information on issues relating to the company’s strategy, targets, operation and performance
– Enhancement of AGM (Annual General Meetings of Shareholders) related literature (releasing agenda clarifications for shareholders prior to the event)
– Establishment of a two-way communication channel between company representatives and the investment community through meetings, conference calls, roadshows
– Codification of internal bylaws and consistent reporting on corporate governance issues (via the IR website, the corporate governance report and a quick response system to corporate governance info requests)

OTE has come a long way with regards to corporate governance. The company’s understanding of corporate governance principles and practices grew within the Greek and international institutional context. This journey has been a significant learning experience as it involved compliance with basic legal requirements as well as exposure to international best practices; a mix of responses to external stimuli and personal commitment and effort. For OTE, today, this all translates into a solid understanding of corporate goverance concepts which trickle down to all company operations.

By reinforcing its procedures and organisational make-up over the years, in adherence to corporate governance rules and practices, OTE operates in compliance with the regulatory framework and enjoys a special corporate culture, founded on business ethics and committed to protect the rights of the company’s shareholders and all stakeholders.

For more information tel: +30 210 611 1121/7880/7236; e-mail: nkozanoglou@ote.gr, eagoglossak@ote.gr

Advancing the FX platform

Posted on February 18, 2010 by

The majority of transactions have traditionally been made by phone, but the development of the internet and sophisticated trading software means that more and more people now have access to the world of forex trading from the comfort of their own homes. World Finance spoke to Nick Bang of ACM about the challenge of redefining traditional financial markets

As one of the world’s leading brokerage companies, how has ACM challenged and redefined the industry and how have you maintained your competitive edge?
ACM was built, quite literally, by traders for traders. From the beginning the firm has focused on quality and timely execution. From this starting point, the company focal point has been the wants and needs of our FX traders. By continually updating our software, we have been able to remain at the forefront of retail trading technology. If it’s a good idea and our clients want it, we make it happen.

In the future, how does ACM plan to keep evolving as a company in order to keep ahead of the competition?
Simply stated: growth, technology and service. ACM has grown from a Geneva-based brokerage to one of the largest FX brokerages worldwide. We will continue to nurture growth, new products and markets as the demand for our services increase globally. Further, ACM is committed to working with regulators to ensure a safe and fair market for all participants.

What can a trader expect in terms of certainty of execution?
An ACM client can expect that we will do our best to provide them the execution they deserve. No market is perfect, but ACM’s execution system is unmatched in the retail FX market. Our clients trade with instant execution, one-click dealing, expanded intraday margins and guaranteed fills on limit and stop orders. By removing much of the uncertainty from financial trade execution, our clients can focus on the directions of the assets, not the market for them.

How do you ensure that the client is getting the best execution conditions?
To our knowledge, our firm connects to more FX liquidity than any other European brokerage. Our relationship with liquidity providers and our streamlined execution through them is actively managed by ACM during market hours.

Why is it so important for ACM to be transparent in everything you do?
Transparency is important for credibility and serves as an honest check for our clients. By remaining open to scrutiny, ACM clients know that their brokerage is sincere and forthright about how the firm generates revenue and how client’s trades are processed and executed. Total transparency is the financial model of the future – after the 2008 equity market burn due to a lack of transparency and oversight – it’s my opinion that few investors in the future will tolerate secrecy and vagueness from their financial institutions.

ACM is in the process of becoming a Swiss bank, in accordance with new regulations. How long will this process take to be completed and is this process something that you feel will benefit the company and its clients?
The ACM family will most definitively benefit by our transition to an online Swiss bank. From the company’s standpoint, becoming a bank allows us to offer a vast new array of products and services. ACM was built around spot FX trading, but the future license provides the ability to offer new investment vehicles and Swiss banking services. Our clients will continue to benefit as ACM grows larger financially. As we become larger, the rates we secure will become more completive and ultimately the savings and benefits will be passed on to the clients.

As a company, what technology do you offer?
ACM provides access to the world FX market for investors of all sizes. Our software was developed in house and provides direct access to the market via the internet. We currently offer two desktop applications, Advanced Trader and MetaTrader 4. Access is further available through any internet browser with Web Trader. We provide a telephone dealing desk for investors unable to access the internet and a mobile application compatible with all Smartphones. We actually just rolled out a new iPhone app, which I have here on my phone. It allows individuals to sign up for a practice trading account directly from their iPhones and provides real-time market data and execution.

Can you explain the advantages of working within the FX market?
The FX market is the global market. The capital volume, liquidity, market hours and online access make the forex market available to all investors and speculators. With equal access to information and no entities holding power to outright set prices, the market itself determines pricing and approaches perfect market conditions in economic theory. For these reasons, there has been a steady influx of investors from traditional markets like equities and fixed income into the realm of FX. Unlike in the past, currencies are now widely accepted as a separate asset class and therefore necessary for portfolio diversification.

What does the future hold for ACM and how do you see the company moving forward?
One year from today, I believe ACM will only be bigger and better. The firm will continue to grow financially and offer new and improved investment products and services. Hopefully the company will acquire its Swiss banking license in the near future and this will help catapult ACM forward as an online Swiss bank and brokerage.

Nick Bang is managing director of ACM. For more information: www.ac-markets.com

Engineering growth

Posted on February 18, 2010 by

Change and innovation has been Walmart de México’s trademark since 1958 when it opened its first discount store, then known as Aurrera. It was the first company to introduce the concept of one-stop shopping, barcode scanning, low prices and many other innovations in Mexico.

Today, the company has operations in six countries, with four different retail formats, membership warehouse clubs, an apparel chain, a restaurant chain, a commercial bank, an agribusiness operation, an efficient logistic network and annual sales above $25bn.

More than 200,000 associates work in 2,000 stores and units throughout Costa Rica, El Salvador, Guatemala, Honduras, Mexico and Nicaragua.

Three tier growth
Walmart de México’s remarkable growth stems from its strict commitment to three strategic pillars: continuous profitable growth, talent development and engagement, and corporate social responsibility.

While growth has been constant since 1958, the last five years have been remarkable: the number of units in Mexico went from 694 in 2004 to more than 1472 in 2009. With units in all 31 states of Mexico, in addition to Mexico City, it has established a presence in over 265 cities and towns.

More importantly, Walmart de México has developed a successful multiple format structure of discount stores, supermarkets, hypermarkets, warehouses and membership clubs. In addition, its Suburbia apparel stores, Vips restaurant chain and Walmart Bank – present only in Mexico – address new population targets and provide a wide array of services to its customers, enhancing the overall experience and increasing the acceptance of the company.

During 2009 Walmart de México served 1,219 million Mexican customers, 13.8 percent more than during 2008. Customer count in comparable stores increased 3.3 percent, meaning that every Mexican visits its units at least ten times a year.

Talent development is a significant element of Walmart de México’s value proposition. Growth is linked to its ability to find talent that excels in customer service. With 175,000 associates in México, the company is the largest private-sector employer in the country and allocates millions of hours a year to training.

Social responsibility is a comprehensive part of Walmart de Mexico’s business. Families that have the most need to save – primarily in rural areas – end up paying the highest prices. Consequently, Walmart de México considers its activities of providing goods and services at low prices not just a business strategy, but also part of its corporate social responsibility to these same families. Moreover, the Walmart de México Foundation supports assistance programmes for communities with severe nutrition needs, either through food banks, self-help agricultural and manufacturing projects, or volunteer work. Over 3.4 million Mexicans and more than 200 NGOs benefit from this support.

Walmart de México has also placed special interest in sustainable projects to eliminate wastes, reduce water and energy consumption, and integrate more environmentally-friendly products to its catalogue. Some 390 water treatment plants have allowed for the saving of more than 300 million litres of water in a single year. It has stores using solar energy produced by placing cells on the roof tops, and in 2010 over 300 units will operate with wind energy from a facility located in southern Mexico.

Innovation
After opening its first store, the company sought to continuously grow with new markets and services. Its Vips restaurant chain and Superama Supermarket date back to the 60s, the Suburbia apparel stores and Bodega Aurrerá austere discount store to the 70s, and the 90s included the launch of Walmart hypermarkets and Sam’s Clubs throughout the Mexican market.

More recently, Bodega Aurrera has developed new business concepts for mid-size cities through smaller-sized Mi Bodega Aurrera units and for heavily populated urban areas with the much smaller but rapidly growing Bodega Aurrera Express convenience stores.

Walmart de México became the first Walmart business in the world to offer banking services, via Banco Walmart. The bank provides services through more than 200 branches located in stores and Clubs, and 20,000 POS in all its businesses throughout the country, by means of the recently enacted banking correspondent legislation in Mexico.

This infrastructure turns the bank into one of Mexico’s most widely available financial institutions, offering services to Mexico’s largely unbanked population.

It is this drive to move into new markets and cities, adapt its formats to new customer needs, and develop new venues of business that have characterised Walmart de México’s continuous growth.

Central America
In November 2009, Walmart de México integrated Walmart’s operations in Central America to its business, creating new growth opportunities for its shareholders. This is a historical transaction for Walmart de México, not only because it will become an international retailer with operations beyond Mexico, but more importantly because it is the first time that Walmart Stores Inc, entrusts a subsidiary with the responsibility of running the operation of the business in another region. This strategic alliance will allow the company to focus on addressing the needs of 138 million people with demographic similarities – a largely young and dynamic population – many of whom still lack access to modern retail services at low prices.

By integrating Central America, Walmart de México increased its installed capacity by 19 percent, sales by 17 percent, EBITDA by 11.6 percent, and net income by 7.6 percent (as of September 2009).

Walmart Central America has 519 discount stores, supermarkets, warehouse stores, hypermarkets and membership clubs targeting specific consumer groups.

With a structure similar to that of Mexico, there are opportunities for synergies regarding the operations and growth of the company’s presence in the region. There are 310 cities and towns from Mexico to Costa Rica where Walmart currently has no presence. The market size amounts to $241bn dollars and an estimated 33 million new consumers will be added during the next 15 years.

Financial conservatism
Just as Walmart de México has been successful in its commercial value proposition, it has been relentless in pursuing a conservative financial policy.

From the beginning, Walmart de México has had a sound financial position, a matter of special relevance when considering credit and liquidity restrictions that have often prevailed in the Mexican market. The company has no debt and, in accordance with its corporate governance standards, it does not deal in derivatives. Its cash represents more than 10 percent of its assets and is wisely and carefully invested following highly conservative standards, always based on the security, liquidity, and yield criteria established by the Finance Committee.

Its board of directors oversees the management of the business, with all members appointed on a yearly basis by the shareholders at the annual meeting. The board appoints and works actively with the CEO to develop general corporate strategies for the company. It also approves all information policies and communication with shareholders. Independent directors must comprise a minimum of 25 percent of the total number of board directors.

The board of directors, with the support of the Executive, Audit and Corporate Practices Committees, periodically reviews company results and keeps a close watch on control mechanisms and sound practices, including the proper use of assets, thus further strengthening the confidence of its shareholders.

Walmart de México operates with the highest quality standards and is seeking to become more competitive through innovation and process improvements. Walmart de México’s financial and administrative processes obtained ISO 9001:2000 certification from the British Standards Institution (BSI). Its policies of transparency and operating efficiency have a positive effect on its relationships with customers, suppliers, shareholders and government agencies.

A new beginning
As 2010 marks a new beginning in Walmart de México’s history – now an international company – it maintains the same vision: to contribute towards improving the quality of life of its customers’ families. As its operations have transformed over time, its foundations of retail innovation, solid finances and commitment to help people save money and live better, remain unchanged.

Lisbon firm achieves top billing

Posted on February 18, 2010 by

What were the firm’s beginnings and how has it grown since?
Since 1962 Mateus Andrade Dias has acted in and outside court for a large range of clients related to shipping matters, such as: P&I Clubs; ship-owners; insurance companies; cargo owners and worked as a consultant to banks involved in ship finance, mainly representing foreign clients especially Anglo-Saxon based clients. The firm also represented Portuguese clients in all shipping matters. In 1982 António Labisa joined this office and so did, in 1991, Teresa Andrade Dias. In January 1994 the law firm Mateus Andrade Dias & Associados was founded by Mateus Andrade Dias and by two other partners, António Labisa and Teresa Andrade Dias. Despite Mateus Andrade Dias’ death in 1994, the firm maintained the same high level of quality of service rendered to clients which continue to request the services of the firm. The firm subsequently changed its name to Andrade Dias & Associados − Sociedade de Advogados. Maria Andrade Dias then joined in 1998 and became a partner in 1999. In the same year António Labisa left the firm and Pedro Andrade Dias joined, and became a partner in 2004. The lawyer Mateus Andrade Dias (Jr) joined and became a partner in 2004.

In 2006 the law firm changed its legal structure to a limited liability partnership changing its name to Andrade Dias & Associados − Sociedade de Advogados, RL.

Despite of all the changes and transformations that have happened throughout the years the soul of the firm did not change and the essential principles of work, professionalism and full dedication to clients’ interest were maintained.

Through the years the firm tried to keep principles of organisation based upon the responsibility of each lawyer to contribute to the firm as a whole but at the same time amenable to change whether economical, legal or social.
The different features and background experiences of the actual four partners contributes to team work in the most complex and complicated matters leading normally to good results for the client because the group’s vision is widened and enriched by the contribution of each lawyer.

What makes Andrade Dias & Associados different from other law firms − what qualities does the company possess and what practices do you follow?
The actual partners belong to the same family. This fact allows a strong level of communication and cooperation between all partners which usually work as a team in the most urgent and complex client matters. It is a principle of this organisation to keep the client fully informed in due time about its pending matters in order to decide what are the best options for their protection. The aspect of communication between the lawyer and the client is a key factor of this organisation. The client is involved in the strategic decisions of its protection because he is informed in advance about what are his chances and the eventual outcome of his matters. The firm tries to adapt itself to the economical and social global evolution. As an example, in term of fees, the firm works on hourly time basis rates which have been adapted taking into consideration the economical situations. The firm has different rates, each rate is applied according with the difficulty of the matter, time spent, value of the claim, and economic capacity of the client but, in several occasions, the partners have the freedom to reduce their fee rate or their invoices. This flexibility and client orientated billing structure is only possible because we are a small firm where the costs are not as high as in larger law firms. The lawyers seek to increase their individual skills, knowledge and efficiency. The firm has an annual budget to invest in knowledge (technical books; magazines; conferences etc.) which is one of the most important factors in the development of the organisation because society and the law are constantly changing and the only way to be updated is through the improvement of each lawyer and the firm’s staff. This task can only be done trough continued investment in knowledge.

You cover many areas of law. What would you say are you main areas of expertise and why are they important?
The firm’s main area of practice is maritime law. It renders legal assistance in all types of shipping maters, acting in court and out of court, in any type of disputes or negotiation of contracts connected with vessels’ interests or the maritime activity. The firm advocates in cases related to: arrest of vessels and other injunctions over cargo or bunkers; enforcement of maritime claims; labour, criminal and administrative offences related to the maritime activity; Protection and Indemnity (P&I Clubs); marine insurance; limitation of liability; collisions and all types of navigation accidents or incidents; salvage; pollution; wreck removal; ship sale and purchase; ship registration; ship finance; ship’s mortgages; charter-parties; carriage of goods by sea; general average; multimodal transport; freight forwarders; ship’s agency; harbour and customs law; seaman labour law and social security law; non judicial detention of vessels at Portuguese harbours; port state control and all maritime administrative proceedings related to the maritime safety. The firm is also involved in disputes related to road carriage contracts (CMR), contractual liability, liability in tort, vicarious liability and in the negotiation of contracts and representation of clients in disputes related to other areas of law, mainly commercial law.

Why should people invest in the Portuguese shipping market and do you think now is a good time for that investment?
A report with findings about the hyper cluster of the sea has been recently presented by a well known economist where a careful assessment was done to the present status of the sea-related economic activities and where several measures were implemented by the Government in order to enhance sea carriage, ship building and many other sea related economic activities. Inter alia it was detected that the present income tax system in force within the Conventional Registry impedes the growth of the Portuguese merchant fleet and therefore it should be replaced by a tonnage based tax system. The findings noted that this should be done in alternative to the present annual discretionary state aids that are given to Portuguese owners that operate their vessels within the legal frame work of the Conventional Registry.

Under this sea-related momentum Decree-law no. 8/2009 changed in favour of mortgages the ranking of priorities of claims over ships sailing under the Portuguese flag. The legislator’s aim is also to enhance the competitive positioning of the Portuguese merchant fleet and to increase the crewing of ships with Portuguese nationals. A new wording of article 578 of the Commercial Code was published moving the mortgagee claim from position 15 (below, inter alia, court costs; salvage awards; wages; repairs; cargo damage) up to position no. 3 (below only court costs and salvage rewards). A mortgagee will be then inclined to allow registration of ships in Portugal where it had a financing intervention.

Under the same token a draft navigation law has been prepared by Government and sent to Parliament for consultation, modification and approval. The draft navigation law is yet to be voted in Parliament and published and hence it is merely a sketch of what can be expected. The draft navigation law revokes however several old provisions of the Commercial Code and compiles the dispersed and separated extensive legislation applied to the shipping sector in one combined and unique law being therefore generally speaking not something new to what already existed but a codification of what existed in a dispersed form. It does however inter alia widens the list of claims that can base an arrest application under the Portuguese Civil Procedure Code (e.g. insurance claims) and releases the creditor of the burden of proof of the existence of the well grounded fear of losing security for its claim. This will facilitate the arrest of a ship in Portugal and will put the Portuguese internal regime in line with the 1952 Arrest Convention.

The Port Unique Window which is implemented in most of the main Portuguese shipping ports allows the entire process of ship and custom clearance of goods to be done online in a state of the art online platform where authorities and ship agents can upload and download information and / or requests and / or permissions in respect of the ship and her cargo. This was aimed at facilitating trade and vessel traffic within Portuguese territory.

The International Shipping Register of Madeira is a competitive ship register offering safe, swift and attractive conditions to ship owners, charterers and / or mortgages. The ship-owner operating within the International Shipping Register of Madeira will be exempt of corporate income tax and social security dues in respect of seafarers income (if the latter’s and the ship-owners agree on a voluntary social security protection regime). The seafarers will also be exempt of income tax. The International Shipping Register of Madeira is Port State Control white listed and is managed by a competent technical commission.

It has been reported that you refuse to follow the path of mass production; why is it important to you that your company supports smaller production methods?
In the area of maritime law each client and his pending legal problem is unique with his particular circumstances deserving adequate legal advice. Usually, in these matters the client needs a lawyer’s full availability to reply in quick time. The success of the firm is based upon the trust relation that was constructed along the years with the clients in this field of legal services. The mass production method is only possible with a team of junior lawyers working by goals supervised by senior lawyers that are mainly focused on the quantity of work instead of the quality of work. Generally, clients communicate and are assisted by junior lawyers overbooked by cases. At Andrade Dias & Associados we are of the view that the full availability and full concentration on the client’s problem is only possible with the personal relation of a lawyer who is not concentrating on the quantity of the work but the quality of the work achieved for his client.

As a maritime law firm, who would you say your main clients are?
The firm’s leading clients are the major Protection and Indemnity Clubs (P&I Clubs or Mutual Insurance Associations), most of them Members of the International Group of P&I Clubs that provide liability cover for approximately 90 percent of the world’s ocean going tonnage. The firm also acts on behalf of banks and other ship finance institutions; insurance companies; recovery agents; shipyards; ship-owners; ship-operators; charterers; ship-managers; ship-chandlers; foreign maritime authorities; port operators; ship-agents; freight forwarding agents; carriers and maritime constructions companies.

In what respects to the remaining areas of practice, Andrade Dias & Associados acts on behalf of foreign or national companies (or investors) in their corporate or commercial matters. The road, rail and insurance areas are dealt mainly by representing insurance companies or underwriters. In what relates to the aviation practice, the firm has represented start ups undertaking passenger and / or cargo air carriage.

To date, what has been your biggest achievement as a firm?
To be recognised as a leading shipping law player both locally and internationally for more than forty years and to be able to run a family based firm in an utmost professional manner.

What has been the feedback from clients about your work?
Andrade Dias & Associados’ base clients have praised the professional nature of the firms work. The aspect of the quality of our advice and of our results has also been highly recognised by clients.

In terms of reporting we have been highly regarded, especially by foreign clients. Indeed, to have an internal translator allows Andrade Dias & Associados to report in full all developments in the client’s case and also allows the latter to take full informed decisions and instructions.

A full breakdown of the time spent with matters, that is being prepared and sent to clients since the outset of the practice, was seen as breakthrough in the law practice market when adopted but is still highly appreciated.
Andrade Dias & Associados pre dispute opinions have been seen as truthful, professional and accurate by clients even when they represent the dropping of a claim by clients and the taking of no further instructions with the matter at hand.

What is the current state of the Portuguese shipping market?
The Portuguese shipping market suffered the impact of the international economic crisis. We noticed that in 2009 the clients procured to reduce their expenses and exposures so clients preferred mainly to negotiate and settle their legal disputes at an early stage of the dispute instead of maintaining court litigations. According to official data already available, the evolution of the number of ships that called Portuguese mainland ports (Lisbon, Sines, Setúbal, Leixões, Aveiro, Viana do Castelo and Figueira da Foz) was globally positive for the period between 2004 / 2006, in 2007 it was stationary but in 2008 there was a slight global reduction of -1 percent but with an increase of the gross tonnage 5.9 percent. This reduction in 2008 is not uniform in the movement of the type of vessels: it was noticed a growth of cruise ships (24.3 percent); container ships (19.8 percent) and a reduction of general cargo ships (-4.3 percent), liquid bulk carriers (-3.8 percent) and solid bulk carriers (-13 percent) calling the Portuguese ports. Between 2004 and 2008 the movement of container vessels calling Portuguese mainland ports increased by 49 percent (global accumulated values) and in gross tonnage by 101.4 percent. The movement of cargo in the main mainland Portuguese ports, after an annual consecutive growth from 2004 to 2007, recorded a negative variation of –2.4 percent in 2008 before 2007 which is not uniform: container traffic by 10.7 percent and the roll on /roll off by 1.4 percent that minimises the effect of the reduction of movement of other cargos (solid bulk cargos (-8 percent) liquid cargo (-2.6 percent) and general cargo – 6.6 percent). The container movements recorded a positive growth of + 9 percent in 2008 before 2007. In our opinion, although subject to confirmation by official data, the tendency of the reduction verified in 2008 was aggravated in 2009.

When it comes to the future, what plans do you have for your firm and do you plan to expand your business?
We have recently received several proposals of cooperation from important Portuguese and international shipping players that are currently being evaluated and if accepted will for sure expand the business. We are studying the possibility to expand into other specialised areas of law due to our client’s requests for assistance in other areas of legal services but for such purpose we need to invest in other lawyers specialist knowledge in those areas and we are currently searching the market.

Upwardly mobile

Posted on February 18, 2010 by

What are Magyar Telekom’s strategic priorities and why are they the company’s main concern?
Our strategy is composed of five key elements. In response to intensifying competition, our goal is to position Magyar Telekom as the only ‘3Screen’ company among residential customers with the ability to offer services across three infrastructure platforms. We currently offer voice, internet and TV services on our fibre/copper, cable and mobile networks. With our business customers we put strong emphasis on our integrated IT–telecommunications products. Our goal is to further strengthen our ICT leadership by extending both our product range and client base. Concerning our regional presence, we are strongly committed to our current operations as well as looking for future acquisition opportunities. At our subsidiaries in Macedonia and Montenegro, our primary focus is on growth areas such as fixed line broadband expansion, customer acquisition and retention in the mobile markets.

We believe it is important to focus on service innovation to offer our subscribers enhanced customer experience. Finally, let me mention our ‘one company’ corporate approach. Despite the number of subsidiaries we operate and the wide range of services we provide, we always look at the group as a whole. This is how we want to be seen by our partners and how our internal operations are structured in terms of IT and management approach.

What major industry-related strengths does Magyar Telekom possess, compared to its competitors?
At Magyar Telekom we are proud of our market leadership in all three core Hungarian markets we operate in. These positions, coupled with the strategy supporting their achievement, are the primary foundations of our strong competitive position.

In the Hungarian mobile market we have maintained our clear market leadership in both voice and broadband markets thanks to our high-quality 3G network and attractive customer propositions.

In the Hungarian fixed line market we aim to position Magyar Telekom as the fully integrated service provider. In addition to being the primary fixed voice telephony provider, we also have the highest market share in the broadband internet market. Furthermore, as TV service is the most attractive customer proposition in the fixed line product portfolio, at the end of 2008 we launched a nationwide satellite TV service to complement our existing cable and IPTV offerings. As a result, we were able to almost double our share of the TV market within one year. Exploiting this unique position as the only provider of internet, TV and telephone services nationwide, we aim to position ourselves as the leading triple play company in Hungary.

Finally, we became the leading IT and system integration service provider in 2008 by capitalising on acquisition opportunities and our in-house capabilities. Our full-scale service offering allows us to provide bundled IT−telecommunications products creating additional synergies for the group and further strengthening our leading position in the market.

What opportunities does Magyar Telekom offer its customers and shareholders?
We are the only provider in Hungary offering “double triple-play” services, i.e. television, internet and telephone on both fixed and mobile networks. Besides, we also provide full range of ICT services to our corporate clients. We put great emphasis on customer satisfaction and providing superior customer service. Through our call centre, website or T-Pont shops, customers can obtain information about our products and services, have their enquiries answered or request modifications to their service. In addition, we regularly conduct customer satisfaction surveys, which are an important indicator of corporate performance in different customer segments.

At the same time, we put strong emphasis on shareholder remuneration, a key consideration among our investors. We plan to maintain our focus on free cash flow generation going forward to be able to offer investors attractive dividend yields.

We also plan to further strengthen our position in the key areas of corporate social responsibility, including sustainability, environmental protection, closing the digital gap, sponsorship of culture and arts, and charitable donations.

What are Magyar Telekom’s corporate governance principles and to what extent are those principles implemented?
The professional sphere and investors require public companies listed on the stock exchange to state clearly what governance model they use and how this is applied in practice. Being a company listed both on the Budapest Stock Exchange and the New York Stock Exchange it is highly important for us to meet this requirement and the relevant statutory and stock exchange requirements. Magyar Telekom is governed by four separate bodies: the General Meetings of Shareholders, the Board of Directors, the Supervisory Board and the Audit Committee. Their roles are defined by law and by the company’s memorandum and articles of association.

The General Meeting is the highest decision-making body of Magyar Telekom, comprised of all of the shareholders. The Board of Directors is responsible for managing the company. Among other measures, it approves the Company’s strategy and business plan, organisational restructuring actions of major impact, as well as the conclusion of major transactions, decides on the employment and remuneration of the CEO and other Chief Officers. The Board of Directors is also required to ensure appropriate risk management within the corporation and to establish an adequate internal control system. Our Board of Directors, however, is not a management body; day-to-day operations are conducted by the CEO and other Chief Officers.

The Supervisory Board oversees the activities of the management for the General Meeting. It acts as an independent body, elects a chairman, and passes its resolutions by simple majority.

Certain tasks are assigned to the Audit Committee which oversees the work of the company’s independent auditor and the Group Compliance Director, who evaluates the operation of the financial reporting system and the efficiency of the internal audit function. Magyar Telekom has also established two other committees. The Disclosure Committee ensures that our disclosures are made in a timely manner and in line with the requirements of the laws, while the Remuneration Committee performs compensation functions and certain functions of a nomination committee.

It is Magyar Telekom’s policy that all disclosures made to our security holders or the investment community should be accurate and complete, and fairly present our financial condition and results of operations in all material respects. The controls and procedures currently used are designed to ensure that information required by regulatory bodies as well as all other written information that we disclose to the investment community is recorded, processed, summarised, and reported accurately and on a timely basis, as well as that the information is collected and transferred to the management to ensure that timely decisions are made on the disclosure.

As the telecommunications industry undergoes a major change globally, the Hungarian Telecom sector is beginning to get more competitive.
– How does Magyar Telekom intend to compete?
– How is Magyar Telekom adapting to these changes?
Our strategy is aimed at addressing competitive challenges and while our leading market positions make us well placed to fight the competition, we have implemented a number of changes in the past few years to further strengthen our long-term competitiveness.

Reflecting the significant structural changes underway in the telecommunications industry, Magyar Telekom realigned its operational structure in 2008, supporting an even greater focus on customer needs. Consequently, we now have leaner and more efficient business units serving our residential and corporate clients. Following the implementation of the new operational structure, we also rebranded our fixed line services to T-Home, bringing all of our residential fixed line services under one brand name. With these steps Magyar Telekom’s objective was to better meet future customer needs, making our company more attractive to our clients and investors.

With telecommunications being a technology-driven industry we are continuously improving our network quality and introducing new state-of-the-art technologies. Our 3G mobile network was named the best quality network among 268 mobile operators worldwide in a survey published by ARCChart in 2009. In the fixed line segment we have commenced a five-year new generation network rollout programme aimed at covering one third of households with ultramodern fiber-to-the-home or upgraded hybrid-fiber-coax networks by the end of 2013. These networks offer bandwidths of up to 100Mbit/s, allowing customers to enjoy multiple bandwidth-demanding services.

What impact has the credit crisis had on the company overall?
Thanks to our balanced financing structure, the credit crisis did not jeopardise either our short term liquidity or the long term financing needs of the company. The low liquidity and elevated interbank rates and credit spreads had only a limited negative impact on our financing conditions, thanks to the quality of our debt portfolio remaining unchanged.

In your opinion, what could the future hold for Magyar Telekom?
We are committed to further strengthening our operations both in Hungary and the region by providing our customers with state-of-the-art services through the best available telecommunication network at home or on the move. Our goal is to deliver real broadband access with attractive services and content through TV, computer and mobile screens. As such, we are strongly committed to new generation network rollouts and upgrades. In addition, we consider customer care and product innovation among our highest priorities. Our strategic goal is to leverage our existing competences whilst investing for the future to safeguard our market positions and enhance customer experience.

Christopher Mattheisen is Chairman and CEO of Magyar Telekom

Fund manager rides out the crisis

Posted on February 18, 2010 by

Last year was pretty dicey for many businesses. For some it was even an out-and-out nightmare. Not so for NCB Insurance. Pension fee income climbed almost 50 percent and overall profits soared almost 140 percent from JM$711m to JM$1.692bn. While the Jamaican pension market looks set to consolidate further, 2010 gives every sign it could be another bumper year for NCBIC. Strong cost management is keeping overheads down – good for operational profitability and lower client fees. And considerably beefed-up market regulation is also positive reinforcement, supplying much-needed confidence in this very competitive market. NCB’s own underlying assets are robust and clearly transparent.

How long have you been established, how many people do you employ and what makes you different?
NCB Insurance Company Limited (NCBIC), formerly OMNI Insurance Services Limited is a subsidiary of the financial giant, National Commercial Bank Jamaica Limited: a company that has maintained roots in Jamaica for over 170 years starting as the Colonial Bank of London in 1837.

2010 will mark 21 years since NCB Insurance Company opened its doors. Under our original name, OMNI Insurance Services Limited, the first bancassurance product was introduced to the Jamaican market in 1989 with the launch of our flagship long term savings and investment insurance product – OMNI.

NCBIC entered the pension funds management business in 2007 through the transfer of the pension portfolio from our sister company, West Indies Trust Company Limited (WITCO) who up to this point had provided this service to the Jamaican market for over 40 years. We are the largest segregated pension funds manager in Jamaica with pension funds under management of approximately JM$42.5bn at the end of our last financial year, September 30, 2009.

In addition to pensions and bancassurance products, NCBIC offers annuities, creditor life insurance, group life insurance and other individual life insurance products.

We currently have 122 employees including sales representatives.

We are different from our main competitors in that we primarily offer a premium service through our focus on segregated funds management (both on a credited interest rate and unitised funds bases). The main competition offers mostly pooled pension funds management.

NCBIC also offers a personalised service to our pension funds clients through dedicated client relationship officers who are highly knowledgeable on pension regulations and pension administration in general.

How has your pension portfolio and company profit growth performed in the last year, and why?
NCBIC’s pension portfolio performed well in the last financial year. Our fee income increased by 46 percent from the year before and was 26 percent better than budget. The pension business line (including annuities) contributed approximately 23 percent to the company’s overall profit of JM$1.7bn for the year.

Overall company profits grew by 138 percent from JM$711m at the end of September 2008 to JM$1.692bn at September 30, 2009. This performance was largely driven by:
»    significantly improved interest income from our bancassurance business
»   significantly improved pension fee income
»   strong cost management

Tell us about the pensions market in Jamaica generally – how developed is it?
Based on recent data from our regulators, assets under management for superannuation funds (both Defined Benefit and Defined Contribution) currently stands at approximately JM$215.5bn (this represents pension funds that fall under the Pensions Act 2004). Unfortunately this represents pension benefits for less than 10 percent of the workforce. This means that most of the employed labour force in Jamaica has no formal retirement plan in place.

Having said that, with the introduction of Approved Retirement Schemes (ARS) early in 2009 we expect this to change gradually, as more persons will have the opportunity to take advantage of a formal retirement plan. Under the new regulations, individuals can now save up to 20 percent of their income in an ARS. This has created a flurry of activities including launch of several new products from a number new entrants to the pensions planning market, to public education programmes sponsored both by providers and the regulators. This has raised the level of awareness to a much higher level than existed a mere 12 months ago.

For Jamaicans, what brand values does NCB Insurance communicate to them?
NCBIC is the company that helps you to meet your needs. We help our clients to prepare for life by providing sure money at the right time; whether this be to satisfy a long term investment need; for a child’s education; for retirement income; financial support for critical illness or life insurance coverage.

How competitive a market place is it?
The market has always been highly competitive as all the main life insurance companies offer pension funds administration and investment management services. In addition, prior to 2006 when the Financial Services Commission (FSC) introduced regulations to govern the pension funds industry there were many self managed funds. Convincing sponsor companies that we (professional, pension fund managers) could do a better job of administering the business for them was always extremely difficult as they preferred to retain control.

In early 2009 the FSC started to approve individual retirement plans (an alternative to superannuation funds) and this has made the market even more competitive still, allowing a much wider range of institutions to take part in the pensions business. With the introduction of ARS, not only are we competing with other insurance companies but securities dealers and credit unions can now obtain licenses to offer both pension administration services for superannuation funds and ARS.

Of course, from the client’s perspective this is a good thing as they now have a wide range of options to choose from.

Typically what is a good example of a product from your own pension portfolio? How popular is it proving?
Currently superannuation funds are the main products available and Defined Contribution (DC) plans are now the preferred option. Sponsor companies have moved aggressively away from defined benefit plans in recent years with the industry seeing several windups in favour of conversion to DC plans.

Though early days, we expect that ARS products will become more popular even for companies, as many smaller firms are likely to take this more cost effective less complex approach to providing pension benefits for their employees.

What about fees – how are you keeping these down for clients?
For NCBIC our fee structure is generally based on fund size, contribution levels and activity levels. We believe that we provide a premium service at a very competitive price and we review our fees every two years.

Of course we practise strong cost management which ultimately means less cost to pass on to our customers.

Do you employ a network of IFAs to support you – or is commission/sales- based?
Currently we rely on a small team of salaried business development and client relations officers to seek out new business and maintain relations with our clients. We constantly monitor the market for opportunities to tender for new business. These sometimes come to us through direct requests from employers, newspaper invitations to bid and we also leverage our NCB Group network for referral opportunities.

With the upcoming introduction of our ARS we will be utilising our insurance advisor sales team located in approx. 40 locations island-wide (in conjunction with our business bankers from our parent company) to identify opportunities for new business from individuals and small companies.

What about legal or regulation hurdles or challenges for the pension fund industry in Jamaica. How evolved are these? Do you envisage more legislation en route?
Prior to 2004 the pensions industry was largely unregulated. However with the introduction of the Pensions Act in 2004 and the Pensions Regulations in 2006 the entire landscape has changed. The industry is now highly regulated requiring licensing of pension administrators and investment managers as well as registration of superannuation funds, retirements schemes, trustees, appointment of actuaries and auditors etc.

This was a welcomed change and while there have been teething pains in implementation the overall governance has improved dramatically.

Yes, additional regulation is anticipated particularly in relation to locking in contributions in superannuation funds and vesting. As well, further synchronisation between the Pensions Act, the Income Tax Act and the Banking Act is expected in respect of tax exempt income and limits for foreign currency investments for pension funds, respectively.

How do your clients ensure they choose the right product for their own circumstances?
In our context the client’s choice would be mainly applicable to an ARS. We expect that once we enter this market a client’s choice of what type of fund to invest their pension contributions in and in what proportion will be based on their risk profile, planning horizon and retirement income needs. Our sales team has been trained to advise customers based on these factors, providing illustrations on projected returns for a proposed portfolio mix and therefore will guide customers through these decisions.

In case of superannuation funds in Jamaica, product type (DB/DC) and investment portfolio mix are purely determined by the trustees and investment managers, hence the plan member has no real discretion in this regard.

You must be aware of the pension mis-selling scandals that have tainted other countries – what safeguards do you put in place to ensure your customers are not mis-sold a pension?
Well, we feel strongly that the marketing collateral which regulations require must be provided to prospective clients will guard against this. Also the threat of penalties which can be imposed by our regulators, including revocation of license, dictates that we must constantly monitor marketing/sales conduct of our sales team to ensure that customers are sold according to their real needs.

In addition our offerings and the possible underlying assets are a lot less complex than some of those offered in other territories and this alone makes this potential less likely.

What new products are you introducing in the next 12 months?
All systems are in gear for the launch of a new ARS in the coming weeks. This product will be targeted at persons who do not have the option of a superannuation scheme. We also anticipate that small companies will find this a more affordable option as the administration costs associated with employer sponsored superannuation funds can be quite high and the regulatory reporting quite onerous.

We also plan to develop at least one other insurance product targeted at the employee benefits market. This will be good for bundling employee benefits. Since the 1990s the Jamaican market for insurance products (especially for employee benefits products) has become very focused around two main insurance companies. Employers are now actively looking for options.

Where do most of your assets tend to be invested? Europe? Asia? Property? Blue chip stocks? Growth or value stocks?
We operate on a segregated fund basis therefore each pension portfolio is tailored to the particular client’s risk appetite and their pension liability profile. In determining the recommended asset profile for each pension fund we would examine the historic and projected membership data and test for an appropriate yield/term tradeoff. Our clients mainly consist of local companies which are governed by the Jamaican pension regulations and this limits the investment arena for those clients.

In general, most of our clients opt for a mix of risk-free bonds (40-60 percent), local blue chip stocks (20-40 percent) and local real estate (15-25 percent). Overall, our aggregate portfolios reflect a larger than 70 percent holding in long-term government bonds and other fixed income instruments (mortgages, leases) with real estate and quoted stocks more or less evenly sharing the remainder.

How financially strong is NCB Insurance?
We would say that NCBIC is very strong financially. From a regulatory solvency point of view, NCBIC has for the past five years maintained solvency ratios in excess of two times the regulatory requirement. We have also maintained a high level of earnings growth and high profitability ratios. We would say that, while we are a fairly small insurance company we are also one of the most profitable.

What opportunities do you envisage seeing in the next year?
We see increasing opportunities in extending our service delivery to our pension clients, we have been working very hard at improving our internal efficiencies and we see significant potential still untapped in several areas related to that line of business. On the insurance side we are looking at more vigorous marketing of our annuities and credit insurance products, we also see market potential in our “instant issue” life products which are attractive to persons seeking lower coverage without the time delay that traditional underwriting presents for the customer.

Further we expect to launch our new ARS product targeted at the self employed, professionals and others who are not members of superannuation schemes.

What about your corporate governance structures – how robust are they?
As an insurance company regulated by the Financial Services Commission and being a subsidiary of a commercial bank governed by the Banking Act, supervised by the central bank and publicly traded, NCB Insurance is compelled to practise strong corporate governance. This means we have in place a number of regulation mandated Board Committees including:
– Conduct Review and Corporate Governance Committee
– Audit Committee
– Investment and Loan Committee

These are constituted in accordance with regulatory requirements (e.g. a specific number of external vs. internal directors) and supported by management committees (e.g. Asset Liability Committee, Investment Management Committee). All committees operate in accordance with documented policies and procedures and terms of reference, and are required to report to the board on a quarterly basis.

NCB insurance is further supported by a strong parent company (NCB Group) structure with oversight from different areas including risk management, group treasury, group compliance, general legal counsel etc.
The conduct review and corporate covernance plays a strong role in monitoring issues like related party transactions to ensure that these are in accordance with regulations and can stand the test of sound corporate governance.

How many assets do you have under management?
As of September 2009 our pension assets portfolio was approximately JM$ 42,557bn. At the same date our corporate investment portfolio was approximately JM$22,435bn.

Where will NCB Insurance be in five years time?
NCB Insurance’s bancassurance products (OMNI and OMNI Educator) are household names. In five years we expect to achieve this same dominance for our individual retirement product which will be launched shortly and in fact for all products offered by NCBIC.

We also expect to continue our profit trajectory year on year, continuing to build a company known for its strength, expertise and innovation.

Gaming growth

Posted on February 18, 2010 by

When the going gets tough, the tough get innovative. In a recession, there is a time to batten down the hatches, but those companies best placed for survival are those that utilise these turbulent times as a breeding ground to exploit new opportunities. The e-Gaming industry is no stranger to innovation and, despite being a young industry having never faced the challenges of recession before; on the whole, it seems to be coping better than other sectors.

When it comes to the Isle of Man, the new business pipeline over the last year, of companies looking to relocate was of course impacted by a reduced availability of investment funding, particularly for start-up ventures. Having said this though, the Isle of Man saw the contraction in new enquiries last only a few months during the summer. The recession, however, has resulted in only the sounder and robustly funded projects getting as far as thinking seriously about relocating.

Of the companies relocating to the Isle of Man in the last 18 months there has been a number of success stories. Most recently, Mahjong Logic was accepted for a licence in the Isle of Man. Mahjong Logic is a leading software developer of the real money player-to-player mahjong network, and is one to watch closely as the current market lends itself to this type of game. In addition to Mahjong, there have also been a number of Asian-based businesses that see the Isle of Man as the best place to base themselves to move into new markets in the surrounding area and time zones. These include online sports books 188bet and SBOBet (Celton Manx’s European sports book operation).

Innovation and creativity have been a regular feature of the businesses that the island has formed relationships with over the last 18 months. The convergence of technologies and use of social media have been major developments. The mobile marketplace has moved forward significantly as a whole with the introduction of the iPhone and similar devices which are really the first generation of handsets that are user friendly enough to encourage wide-spread use for many applications, including gaming.

The most exciting developments however have been those which break the mould and bring something brand new to the industry. Concepts which are hybrids of what might be seen as ‘traditional gambling’ and more leisure-based games are the ones which won’t have to compete with the existing punter’s pound but will attract new customers into the e-gaming arena. Customers are savvy about using bonus-led promotions to get as much free as possible so ultimately as the industry matures, operators have to look beyond short term price led acquisition and concentrate on developing product and brands which customers share some affinity with, really want and are prepared to pay for.

Live Casino output from studios has also been growing in popularity and in 2009 SBOBet was granted approval to launch a ‘Live Dealer’ casino by the Isle of Man Government’s Gambling Supervision Commission (GSC) – the first on-island operator, Asian or otherwise, to do so. However, from Live Casino has now grown a new format of dealing − live dealing as a TV feed from terrestrial casinos. This is more of a challenge to regulate but it will be interesting to see how it evolves in 2010.

The Isle of Man’s close public/private cooperation also means that new innovative ideas or developments in gaming from companies already on the island or those looking to relocate can be quickly considered and actioned. The island’s flexible approach in terms of regulation means that complex legislation can be amended, where appropriate, to accommodate a new business that may be wishing to licence in an area the Isle of Man’s secondary legislation does not presently cover.

Outside of this, companies wishing to relocate also recognise that being on the OECD ‘white list’ is a stamp of approval for the island and further highlights that the island meets the OECD’s international standards on tax transparency and co-operation. The Isle of Man has now also signed 18 tax agreements with other countries that meet OECD standards, and are committed to continuing this program of engagement as well as entering further agreements. This along with its membership of the World Trade Organisation and strong links into the City of London are of particular appeal to e-Gaming businesses.

Over the past 12 months some companies in the e-gaming sector have certainly experienced challenging times with loss of share capital and some major rights issues. However despite the economic downturn the e-gaming industry has shown little signs of slowing and we have been witness to this in the Isle of Man where companies that innovate, seek new developments and move into new markets have prospered.

Garth Kimber is head of e-Gaming development at the Isle of Man Government

Considerations on the Greek economy

Posted on February 18, 2010 by

Greece has been in the spotlight recently following its weak and derailed fiscal position. The consolidations of public finances have become the number one priority of the government and measures to tackle the ballooning budget deficit and rising government debt have been scrutinised by the investment community. The Investment Bank of Greece, the leading brokerage arm of Marfin Popular Bank Group, is cautiously optimistic on Greece’s macro outlook for 2010.

The main concerns for the Greek economy relate mainly to the consolidation of public finances and the fiscal position of the country. More specifically, the increasing budget deficit and the constantly rising government debt have been in the spotlight of attention, as well as the necessary structural reforms required for the enhancement of the economy’s competitiveness. Moreover, the sharp slowdown in credit expansion, the fall in consumer confidence and relatively high inflation, could lead to a further slowdown of domestic demand in the coming quarters. Looking forward, a successful implementation of the government’s plan to tackle fiscal imbalances and de-escalate government debt, as well as proceed to the necessary restructuring of the public finances, would restore the country’s credibility towards the investment community and the market’s players and ease increasing concerns on the possibility of the country defaulting. Nonetheless, the time lines are very strict and the pressures by the markets extremely high for immediate results and specific initiatives, implying that the coming quarters will be an important milestone for the effectiveness of the proposed measures, as outlined in the Stability & Development Programme. One should take into consideration that in 2010 Greece would be the first Eurozone country to enter the second stage of the Excessive Deficit Procedure (par9 article 104 of the EC treaty).

Market players seem to welcome government’s targets to reduce the deficit but appear concerned with respect to the effectiveness of the measures. The main point of concern relates to the fact that a large portion of the deficit contraction will be based on rising revenues. The bears argue that measures which are based on increasing revenues might prove ineffective, as economic activity is projected to continue its contraction this year. Moreover, market players seem to ask for more specific and bolder measures by the Greek government in its efforts to sustainably reform public finances, and basically they put pressure on cost cutting, as they consider this action would be more effective and a permanent measure in reducing government spending.

Indeed, revenue enhancement in a contracting economy seems very difficult to achieve. However, having a closer look at the state’s finances could prove the opposite. In more detail, the FinMin has revealed that 94 percent of Greek citizens reported that their personal income level was below the Ä30k mark in FY08 and that Greece’s total taxation revenues (as a percentage of GDP) stood at the low end of its peers, coming in at just 19.8 percent vs. 26.2 percent of EU27 average. This was the case despite the fact that Greece’s individual and corporate tax rates are at the same level of the EU average. In other words, given the high level of tax evasion, revenue enhancement could be achieved, even in a declining economy, if measures to tackle the problem of tax evasion are successful.

As a result, we believe that the measures, announced so far are in the right direction as processes and attempts that are based solely on “cost containment” (wage reductions, increase in taxation, etc), could hurt the economy’s growth path and consumption, ultimately leading to lower revenues for the state. Hence, measures that aim to reduce spending without altering the growth path of the economy should be viewed as positive, in our view.

In terms of political and economic conditions, we believe that the relatively newly elected government (the current government was elected in October 09), has a fresh mandate and an ample parliamentary majority, that allow itself to take advantage of the emergency conditions and tackle the structural problems of the economy. One should also bear in mind, that in implementing long-term reforms of structural character, the government has to seek support from social partners, guarantee social cohesion and try to prevent unrest from discomforted income groups, such as wage-paid employees and pensioners. To that extent, the new government has a comparative advantage, as it is closer to the labour unions.

From another perspective and despite the gloomy outlook on the Greek economy, we highlight the fact that European economic authorities, which constitute the responsible counterparts of the Greek government (and not the rating agencies), have repeatedly expressed their confidence that the new Greek government will proceed to the necessary reforms in order to improve its public finances. The European Commission and the European Council have already indicated that Greece will face a higher surveillance and more detailed controls than other countries under the second stage of the Excessive Deficit Procedure, where it would be very difficult for the government to diverge from budget’s targets. In addition, the Finance ministry has not excluded the possibility of submitting a supplementary budget within 2010, in case this is needed.

GDP
Having experienced a decade of strong growth of four percent on average, the Greek economy has contracted in 2009 for the first time in 16 years, marking a negative growth rate in every quarter, with estimates for FY09 ranging from -1.1 percent to -1.7 percent. According to the latest data from the National Statistical Service (NSS), Greek GDP in Q309 shaped at Ä45.7bn, posting an annual rate of decline of 1.7 percent (vs.-1.2 percent year on year in Q209 and -0.5 percent in Q109). Regarding the upcoming period, Q409 economic contraction is seen at around one percent, according to our estimates, while for FY09 and FY10 many international organisations as well as the Greek government estimate that the economy will suffer negative growth rates, before recovering gradually in 2011. More specifically, according to the Finance Ministry’s December forecasts, the decline in national income could reach the rate for 1.5 percent for 2009, decelerating to 0.3 percent this year and rebounding to positive grounds in 2011 (+1.5 percent). The recession in the Greek economy has not been and is not projected to be as deep as in other European countries, but the period of economic contraction − albeit at low levels − is expected to last longer compared to other European peers.

Budget deficit
According to the December 09 forecasts of the Finance Ministry, budget deficit amounted to 12.7 percent of GDP in FY09 or over Ä30bn (vs. 7.7 percent of GDP in 2008), with the government aiming to reduce the relevant ratio by 4pp to 8.7 percent of GDP in 2010, and by c. 3pp for each year from 2011 onwards (below six percent of GDP in 2011, and below three percent of GDP in 2012), following the suggestions of the BoG to gradually lower the relevant index to below the three percent EU benchmark in a period of three to four years. The increase in budget deficit is attributable to the lag of revenue collections compared to initial targets, as well as to higher government spending. More specifically, data show that revenues declined by c.4.3 percent year on year in FY09 (while initial targets forecasted an increase of 18.5 percent) and spending (primary expenditure + public investment expenditure) increased by c.13 percent year on year (against a target seven percent increase).

Government debt
Addressing the issue of the rising government debt is another challenge for the Greek economic authorities. According to the December 09 FIMIN forecasts, the overall figure amounted to c.Ä300bn, 113.4 percent of GDP in 2009 (vs. 99.2 percent of GDP in 2008, +14.2 percent year on year), with the Greek government estimating that the ratio would reach 120.8 percent of GDP in the current year, thus maintaining its number one ranking among its European peers in terms of indebtedness. Accordingly, FY09e interest spending is seen amounting to c.Ä12.3bn (i.e. 5.1 percent of GDP) and is forecasted to reach Ä13bn this year (i.e. 5.3 percent of GDP), while compound interest should lie to Ä20bn levels.

In terms of funding needs, the Finance Ministry has said that borrowing requirements for 2010 will reach Ä53-54bn (vs. c.Ä66bn issued in FY09, exceeding initial targets by c.Ä20bn). In the long-run, the government plans to stabilise government debt to c.124 percent of GDP in 2011 and 2012, and start reducing it by 2013 to 121 percent of GDP. On the positive side, we have to underline that Greece has one of the highest maturities in its debt (among its peers), meaning that it will have no problems funding itself in 2010, in our view.

Michael Andreadis is Deputy General Manager at Investment Bank of Greece

Yuan-sided argument for change

Posted on February 18, 2010 by

While today, BOCI is truly a well positioned leading investment bank in the China and Hong Kong markets, Bank of China’s investment banking efforts have come a long way since being a small player just a couple of years ago.
Marshall Nicholson, MD and Global Head of Equity Capital Markets at BOCI, says new leadership at BOCI has brought those changes – and the benefits are clear to see: the bank has fine-tuned its strategy and core product offerings. “The new leadership, headed by CEO Wang Yan “Max”, along with parent support from BOC, made significant changes in strategy, personnel and product offerings adding to areas like structure finance, private equity, derivatives and private banking. BOCI has worked very hard to upgrade our entire platform to follow a strategy of building a fully integrated investment bank with lending and advisory capabilities like Deutsche Bank or JP Morgan.”

And while many of its competitors were wheeling from the impact of the financial crisis during 2008 and 2009, BOCI – with little exposure to the sub-prime mess – was able to continue to build and thus consolidate its business model further.

“Its taken time of course,” says Nicholson. “With no ECM transactions in 2005, we started with and executed only IPOs in 2006 and then, in 2007, we added equity placements to our ECM platform capabilities and combined with our strong IPO capabilities, finished #4 and #5 for ECM overall in Hong Kong and China respectively. From an institutional sales distribution perspective, in 2007, we’ve started to look increasingly like a Western bank, developing very strong investor relationships not just in China and Hong Kong but also in the UK, Singapore, Europe and the Middle East and then the US markets.” It should be noted many of the largest US institutional investors are already located in Asia, particularly in Hong Kong and Singapore, which BOCI already covers.

BOCI clearly takes a diversified approach to its sales efforts: institutional funds (Western and Chinese); corporate investors (Hong Kong and China), an award winning private bank and very large Hong Kong based brokerage arm. There also remains a lot of Chinese money held offshore, for which BOCI is a natural repository.

Building relationships
Strong corporate relationships are essential to BOCI’s revival. Nicholson says BOCI has the strongest corporate relationship access of any Chinese investment bank due to its parent’s stature as one of the largest commercial banks in China. This access is useful for IPO issuers as well as global institutional investors.

Although 2008 was a bad year for many banks due to the global financial crisis, BOCI’s consistency of building its platform and offering a wide range of services for its clients, positioned BOCI well when markets came back. “While the markets have been volatile over the past years, in the Hong Kong market, we have remained consistently ranked for IPOs (#3) and combined, IPO and placements (#4) over the past four years. Also, over this same time period, BOCI clearly became the leading Chinese investment bank for ECM in Hong Kong, surpassing its leading historical rival, CICC not only in capital raising but substantially executing more transactions (BOCI (47) vs CICC (18)). And, as the financial crisis starting to end, BOCI ECM in 2009 ranked #5 overall for proceeds raised and #3 in terms of overall transactions handled. We were in the right position so everything really came together for us. It clearly helps that we have a big sales distribution platform that is both English and Chinese backed up by dual language research report system capability for Hong Kong and China listed equities– not everyone provides that.”

BOCI’s renaissance path is all the more impressive considering it didn’t have to let go any staff during the global credit seizure. So this Chinese investment bank has much reason to feel confident. “People trust us,” says Nicholson, “we have a fine investment bank with top tier ECM capabilities and offer a full range of other services; we know how to leverage our strengths. While we don’t win every deal, we are a leader executing successful deals including many large IPOs and equity placements on a sole basis. The old saying use to be ‘hire a Chinese investment bank for restructuring or PRC work and one or two international banks for sales distribution’. Today, we don’t need the international banks as we have built in some cases, an even larger equity sales distribution platform capability than the international banks. We’re truly successful at what we do.”

Flexibility, speed and privacy
There’s no issue about BOCI’s future place in the market either says Nicholson. “We are absolutely relevant. We have a lot to offer. We’re very smart about the way we use our relationships and allocations, for example. Our sales distribution platform is extensive and we are now #2 for trading volume in the Hong Kong market. That’s impressive.”

A key strategy is BOCI maintaining large trading volumes in all size companies. That’s really a benefit, explains Nicholson. “For many it’s much better for our clients to trade through BOCI to achieve better average buying or selling costs as an investor wants to trade through a firm that has a lot of volume. With BOCI having one of the largest platforms of sales and trading, it is easier to hide your movements. “Our size protects you as an investor. Essentially better average buying or selling costs for that institution or individual,” says Nicholson.

BOCI has assiduously worked hard at reaching out for new institutional relationships asserts Nicholson. “Our CEO made it a priority to be a lot more Western in terms of overall advisory and execution capabilities. To truly be a top tier ECM house in Hong Kong, you need to bring more deals to market and you need a strong sales distribution platform; the combination is a circular process that makes us stronger.

Winning deals is a relationship and/or capabilities assignment and our investment bank and capital markets units usually take the lead. Our market share continues to grow and all areas of our investment bank and diversified sales distribution platform benefit.”

Looking ahead
The pressure is on though for places like Hong Kong. Shanghai may well open an international board for companies like China Mobile and HSBC in future. And while Hong Kong is under pressure, Nicholson believes progress with a Chinese international board will go slower than many people think. “Priorities may be given to HK-listed Chinese companies”, predicts Nicholson. Companies with large China exposure or operations, like HSBC – which has 144-year-old roots in Asia – will inevitably return home to China, keen to raise its profile with retail investors. For companies that don’t have a China angle to play, “it could be many years from now when that happens and priority would naturally be given to high quality large cap global names,” says Nicholson.

Hong Kong’s future
Marshall Nicholson says that Hong Kong has an assured future as a financial and investment centre. Nicholson says, “While Hong Kong has to be concerned about China, it’s also about the opportunity to go out there and continue to build itself as Asia’s leading regional stock exchange. Hong Kong has an established infrastructure base of institutional investors, private equity, investment and commercial banks, lawyers, accountants and research support. This is not easy to replicate.”

“Hong Kong is an international investment hub. There are plenty of companies and opportunities out there − a strong Chinese business, an Asian angle or even a global business (commodities, shipping, etc) will find Hong Kong attractive” Nicholson says. “But Hong Kong will have to work hard to capture these opportunities. I am quite positive both China and Hong Kong can co-exist.”

That’s born out by the figures. In 2009 $100bn was raised in IPOs globally – but almost 50 percent of that amount was raised in Hong Kong and Shanghai stock exchanges. An impressive achievement at a very uncertain time.

Although much of China money flows internally, what does go offshore goes mostly into Hong Kong. “While there are plenty of other stock exchanges, Hong Kong, due to its proximity to the mainland, its large stock exchange and breadth of services, tends to attract more business than other Asian stock exchange,” says Nicholson. “I truly believe Hong Kong and BOCI have a very solid and exciting future ahead.”

BOCI in brief:
– Experienced financial professionals with a broad institutional and retail sales distribution network
– Comprehensive global management operation
– Offers a genuinely wide range of investment banking services to clients including…
– Securities underwriting, mergers & acquisitions, financial advisory
– Equity securities sales trading and research, equity derivatives, fixed income, asset management
– Wealth management, private equity investments, leveraged & structured finance

About BOCI
BOCI, headquartered in Hong Kong, specialises in investment banking and is a wholly owned subsidiary of Bank of China Limited (“BOC”). Founded on 10 July 1998, its presence can be traced back to 1979 when China Development Finance Company (HK) was established to offer investment-banking services to its clients in Hong Kong. BOCI has subsidiaries in China, Hong Kong, London, New York and Singapore.

For more information contact: marshall.nicholson@bocigroup.com; tel: +852 2230 8205

Europe’s new gas supply on track

Posted on February 18, 2010 by

Nord Stream is a pipeline that will transport natural gas from the vast gas fields of northern Russia to the EU. A project familiar to regular readers of World Finance, Nord Stream is a project of four major companies, OAO Gazprom, BASF, Wintershall AG and E.ON Ruhrgas. Once completed, Nord Stream will consist of two parallel lines that run for 1,220km on the seabed of the Baltic Sea making it Europe’s longest underwater pipeline and one of the continent’s most important infrastructure projects of recent decades.

2010 will be a pivotal year in the history of the project with construction of the first line due to commence in early Q2. Transport capacity of the first line will reach around 27.5bn cubic metres a year (bcm) with completion due in 2011. The second line will double annual capacity to around 55 bcm per year providing enough energy to meet the demand of more than 26m European households. World Finance takes a close look at the recent progress of the project as Nord Stream gets set to build a new gas supply route for Europe.

A successful end to 2009
The final few months of 2009 saw Nord Stream achieve significant success with permits for construction being awarded to the project by Denmark, Sweden, Finland, Russia and Germany. There is currently only one permit remaining – the water permit, which is issued by the Western Finland Environmental Permit Authority. The permits obtained were the result of many years of hard work invested in planning the pipeline and mean that the national authorities are satisfied that the project fulfils the stringent environmental and economic conditions of the five countries whose waters the pipeline will pass. Estonia, Latvia, Lithuania and Poland were also involved in the international consultation process setting a new benchmark for international cooperation. In fact, detailed surveys and research of the potential environmental and socioeconomic impacts of the Nord Stream pipeline started back in the 1990s. In total, Nord Stream has invested more than Ä100m into environmental impact studies to ensure that the routing of the pipeline is environmentally safe and sound.

Whilst permitting processes are time-consuming and demanding, all the permits have been granted well within schedule. The Russian and German permits were granted in the final weeks of 2009 meaning that all the basics are in place to allow for the start of construction in April 2010 according to plan. The second and final German permit granted on December 28, 2009 leaves only the second Finnish permit outstanding. The consortium has already received the Finnish EEZ permit and the permit for the 50km section of the pipeline in German territorial waters and landfall in Lubmin near Greifswald.

As far as the water permit is concerned the Western Finland Environmental Permit Authority will take into account the Uusimaa Regional Environment Centre’s evaluation of the Environmental Impact Assessment, along with the additional information provided by Nord Stream. According to the Western Finland Environmental Permit Authority, the decision for the water permit will be granted by the end of January 2010. The Munitions II permit application for the anchoring corridor will be submitted in time to ensure the permit will be received well before related activities start.

It is important to note that construction will only begin once all necessary permits have been issued. Nord Stream assumes it will receive the final outstanding permit to allow for construction to begin as planned in spring 2010. Renowned and experienced technical sub-contractors, who have already been commissioned, will continue the intensive preparation of construction activities as scheduled to enable construction to begin as planned.

Financing
Financing for the project comes from Nord Stream’s shareholders who are investing 30 percent of the Ä7.4bn (£6.7bn) required for the pipeline through equity contributions proportionate to their shares in the joint venture. The budget figure is calculated on the basis of the contracts for pipe production, logistics and pipe laying.

Some 70 percent will be financed externally by means of project financing from banks with substantial export credit agency support. Phase 1 of project financing is coming to an end – to date 27 banks have confirmed participation in the financing for about Ä3.9bn meaning that contracts should be finalised within a short time.

The timetable for the Nord Stream project is consistent with a project of this magnitude, with a Request for Proposals (RFPs) being issued to interested banks back in August 2009. It is clear from the response to Phase One funding that investors see Nord Stream as an excellent investment opportunity in spite of tough economic conditions. Indeed, there is genuine enthusiasm in the investment community about a truly pan-European project that will provide jobs and supply Europe with a reliable and secure supply of energy for many years to come.

Nord Stream will seek additional funding for Phase 2 in 2010. Yet, it is important to note that the construction contracts and the contracts with Saipem (for pipe-laying) and EUPEC (for the pipe-coating) are for both pipelines. The coating yards (covering both phases) are already built and operating and the steel order for the second pipeline (Phase Two) is planned for Q1 2010. Nord Stream foresees that the work done to develop documentation for Phase One will greatly shorten the financing process for Phase Two meaning that all the financing will be wrapped up by the end of 2010 at the latest.

Challenges ahead
The main challenges for 2010 lie in the construction phase, which will be the project’s primary focus this year. In preparation, Nord Stream has hired an experienced Deputy Director of Construction to oversee pipeline installation in close cooperation with the relevant authorities and in accordance with permitting requirements. In fact, preparations for construction began back in August when the first transshipment of pipes from Mukran to Karlskrona took place. Now the majority of the pipes needed for the first line of the pipeline are already in storage at strategically located marshalling yards.

Importantly, Saipem will start pipelaying activities in April 2010 with the Castoro Sei pipelay vessel; the Solitaire pipelay vessel will start working in September 2010. It is foreseen that the laying of the first line will be completed in 2011 – the laying of the second line is scheduled for 2011 and 2012.

Munitions clearance operations began at the end of November in Finnish waters and take the project another step closer to construction. Approximately 70 munitions in Finnish, Swedish and Russian waters were identified within the security and anchor corridors of the pipeline route. To mitigate any potential risk to the pipeline, Nord Stream together with BACTEC (a leading UK-based explosive ordnance and mine action company) and international and relevant authorities, has developed an environmental and safety management plan that establishes monitoring and mitigation measures related to munitions clearance in Finland and Sweden. In Russian waters, it will be the responsibility of the Russian navy to clear the munitions following their standard procedures for clearance. Mine clearance in the Baltic Sea is nothing new – since 1996 around 1,000 munitions have been cleared by navies of the countries bordering the sea.

Energy contribution
The prospect of additional and secure gas supplies through the Nord Stream pipeline comes at a good time for Europe. Currently, Europe is facing an acute energy shortfall as indigenous energy supplies run short and renewables are yet to be fully exploited. For example, additional gas supplies are particularly welcomed in the UK as gas reserves in the North Sea have dwindled changing the country’s status as a net producer of natural gas to become a net consumer. Significantly, the UK remains Europe’s largest gas market, a result of its heavy use of gas in electricity generation and it is estimated that the UK will need to import three quarters of its gas supply by 2015. By the time that both lines are operational in 2012 the UK will be piping gas directly from Russia for the first time. Already more than 4bcm of gas per annum has been booked for the UK market through Nord Stream equivalent to more than four percent of total UK gas demand of about 94 bcm per annum. The gas would be piped to Britain through the Netherlands and Belgium across the North Sea to a gas storage centre in Norfolk. As far as the European market is concerned natural gas delivery contracts have been signed between European and Russian companies through to the year 2035.

With all permits bar one received and crucial Phase One financing coming to a close in the next few weeks, 2010 will mark a crucial year for Nord Stream. With construction of the first line due to start in April, Nord Stream is on time and on track to supply Europe with gas from 2011.

For more information email: press@nord-stream.com; tel: Jens D Müller +41 79 295 96 08

More for less

Posted on February 18, 2010 by

Time was when more than a few executives banked their salaries and lived off their corporate expenses. Not any more – such times are long gone.

The recognition that travel and associated expenses represent most organisations’ second-largest controllable expense is driving the quest for the vast opportunities for savings that can be found through a properly defined and controlled expenses management system.

There is now an acknowledged need for comprehensive Management Information (MI) systems that can spot and highlight out-of-policy spend.

Diners Club’s Global Vision MI tool provides spend information at the highest level yet can also drill down into subsidiary, cost centre, or individual cardholder spending data, highlighting non-compliance in class of travel, size of car rented or use of non-approved hotel chains. Some businesses are now only allowing so-called ‘revenue-producing travel’.

The use of low-cost airlines rather than scheduled carriers, the pro-active seeking of lower hotel rates and stricter control of the per diem spend related to meals and other services are all being targeted as means to lower overall costs.

Many of these controls now being put into place will certainly continue going forward as they represent sound business practice. Sooner or later the economy will pick up and business will regain its health. Companies will have to get their people back out on the road to meet customers but the present demand for increased control over expenses will not diminish.

The current situation is nothing new. Since World War II there has been a rolling cycle of recessions and recoveries. When it comes to business expenses, economically-driven changes have been seen at the time of the outbreak of both Gulf Wars, in the immediate post-9/11 period, and during the SARS outbreak.

What has changed dramatically is the reaction time, which has accelerated enormously thanks to improved MI systems that can direct management to where cuts can be made and steer them towards the stricter controls that can be put into place.

It’s a vital element of succeeding in today’s ever more competitive business world. Companies have been forced to trim waste, to get more from less.

Corporate travel and procurement departments have had to reduce staff and make more efficient use of technology.

This has driven Diners Club’s increased number of joint projects with its clients, which aim to automate back office information feeds of card data into automated expense reporting tools and ERP systems.

Says Tom Edgerton: “Because of our global reach, ideas for improvement flow all the time from one country to another. What are emerging as ‘best practice’ strategies, involve such things as improved client communication, better and more highly automated customer service and new tools for the cardholder and the programme administrator. We also get very useful feedback from our client meetings and forums that help us keep on track with where we should be going with our products and the associated technology.

“For our global clients, customer service is performed at both the headquarters and subsidiary level.

“This provides the local subsidiary with local product knowledge language support while providing the same information tools that all other subsidiaries of the company can access.”

It is certain that the strong trends, towards global consolidation of spend data across international companies, will continue apace. This will put them in a stronger position when it comes to negotiating vendor agreements with major airlines, hotel chains and car rental operators.

The need for businesses to have a consistent card programme across all the countries in which they operate will narrow the field as to which global expense management companies they can work with.

Diners Club’s aim is to continually improve its products and services to ensure the client has a viable choice when considering changing from their current supplier to a different one or when planning the implementation of a new expense management programme.

Says Tom Edgerton: “We are in a state of constant evolution. The greatest challenge to us has always been in keeping up with the myriad regulatory changes that impact the services we offer. Taking on-board the suggestions of our clients, we have taken the tack of working directly with the regulators to anticipate these changes and keep ahead of them.”

The first credit card on the market – they launched in 1951 – and with more than 25 years of corporate credit card experience, Diners Club today can offer corporate payment solutions in more than 50 countries.

Adds Tom Edgerton: “We operate a Corporate Card programme that provides unmatched service from our dealings with the client’s headquarters right down to individual cardholder level.

“Our set of services is consistent across all the countries in which we operate. With more than 100,000 multinational, corporate and SME clients we offer a truly global solution.”

Big Pharma strikes again

Posted on February 18, 2010 by

After a year of disappointment, news of a massive merger in what was once regarded as a key sector to stoke investor appetite has to be welcoming news. On January 4, Swiss pharmaceutical giant Novartis agreed to take full control of eyecare company Alcon in a deal worth nearly $40bn. Novartis will spend $28.1bn on raising its stake in the company to 77 percent, up from the 25 percent stake it bought from Nestle in 2008. It then plans to spend a further $11.2bn on buying the remaining 23 percent stake it does not own.

The acquisition is expected to help Novartis diversify its business away from prescription drugs. Several large drug companies have been eyeing acquisitions in other areas of healthcare as they begin losing patent protection of their own drugs. “The addition of Alcon will strategically strengthen our healthcare portfolio and our position in eyecare, a sector with dynamic growth,” said Daniel Vasella, chairman and chief executive of Novartis. He added that the two companies would be able to combine research and development operations, potentially saving them $200m over three years.

Even with the credit crunch, the pharmaceutical sector has been one area of massive investor interest. Between 1995 and 2009 an astonishing 11,207 deals took place in the sector, worth a total value of nearly $2trn. And mergers and acquisitions remain an integral part of Big Pharma’s strategy, contributing almost two-thirds of peer-set sales growth until 2014 according to market analyst Datamonitor.

The past decade has seen a wave of major M&A activity in the sector, from the creation of AstraZeneca and GlaxoSmithKline to the merger of Pfizer and Wyeth and Merck and Schering-Plough. To quantify how much sales growth has been driven by M&A versus how much has been self-produced through organic growth, Datamonitor analysed a 20-year sales dataset comprising 14 years (1995–2008) of company reported sales and six years (2009–2014) of forecast data. According to the data, Big Pharma’s sales were $84bn in 1995 and, based on organic growth only, are forecast to increase to $195bn by 2014. Furthermore, the analyst believes that M&A activity will lift 2014 sales to $381bn. As a result, between 1995 and 2014, M&A activity is expected to account for 63 percent of absolute growth. Datamonitor also notes that the mergers may help Big Pharma maintain its share of the total prescription pharmaceutical market.

Drug drug druggy
But the performance of some pharmaceutical and biotech company stocks has been mixed at best. G Steven Burrill, CEO of Burrill & Company, a San Francisco-based merchant bank specialising in funding for life sciences companies, says that the performance of some blue-chip biotech firms weighed down the sector’s performance on the stock market. He points out, for example, that both Amgen and Genzyme saw their share values decline and finish in negative territory to close the year down 1.7 percent and 26 percent, respectively. Amgen’s shares took a hit in the final quarter after the US Federal Drugs Agency said it wanted more information on the potential osteoporosis treatment Prolia. Genzyme shares were impacted as manufacturing problems slowed sales of its drug Cerezyme used to treat Gaucher disease.

“On the plus side, several companies saw their share values increase dramatically,” added Burrill. “Leading the charge was Affymetrix whose share value almost doubled, benefiting both from an improvement in its quarterly sales performances and a general resurgence of interest in genomics and tools companies during 2009.”

“The spectre of personalised medicine is gaining traction thanks to Big Pharma adjusting their business models from discovering blockbuster drugs to developing targeted medicines. Advanced tools to uncover genetic information will be central to this new strategy,” says Burrill. “The drive to slash the cost of genomic sequencing to $1,000 has also focused attention on advances under way in next-generation sequencing, which is one of the reasons why the share values of companies such as Illumina, Life Technologies and Helicos BioSciences, who provide various sequencing tools, performed so well during the year.”

Helping pad these gains was the dramatic year-over-year share increases of companies such as Human Genome Sciences (1,370 percent), Compugen (1,000 percent), Athersys (821 percent) and Targacept (524 percent), whose share values were driven by positive clinical trials data and/or the signing of lucrative partnerships with pharmaceutical companies.

Burrill also points to corporate fundraising levels as a positive indicator for the sector in 2010. He says that despite the tough economic environment, the biotech industry in the US raised, through public and private financings and partnerships, over $55bn in 2009 – setting a new record. “Partnering was on a tear through much of the year with the industry raising almost $37bn in total deal values – a record for the industry. With $55bn raised, this will go down in history as our industry’s largest financing year, albeit during one of the most difficult financing environments ever,” says Burrill. “The message is: when companies have to raise capital, companies do, even when the cost of capital is unfavourable.”

“It also reflects the urgency that Big Pharma’s place on accessing biotech innovation as their ‘patent cliff’ gets ever closer,” says Burrill. “The number of deals inked in the year is unprecedented. What did come as a surprise to many was that they did not acquire biotech companies at the rate that was predicted,” he adds.

Pondering property owners
As a wave of patent expiries on major products approaches Big Pharma’s shores, industry observers are calling 2010 the year of the patent cliff. Companies will continue to look for partners and purchases, both big and small, to offset the looming decline in sales.

Among the drugs facing generic competition this year are Pfizer’s Alzheimer’s treatment Aricept, Merck’s hypertension medicine Cozaar, and Sanofi-Aventis’ breast cancer drug Taxotere. And by 2012, several firms will have lost protection on their most lucrative products, including Eli Lilly (Zyprexa), Bristol-Myers Squibb and Sanofi-Aventis (Plavix), and AstraZeneca (Seroquel). Most critically, Pfizer will face competition on Lipitor, the cholesterol-lowering drug that raked in nearly $13bn in 2008.

Companies are using a range of tactics to stem the pending revenue drain. Last year brought three high-profile deals meant to buttress portfolios and pipelines: Pfizer paid $68bn for Wyeth, Merck bought Schering-Plough for $41bn, and Roche forked over $47bn for the 44 percent of Genentech it did not already own.

Yet even with this latest round of merger and acquisition activity, no single firm commands more than eight percent of the global prescription drug market, notes Burrill. “That would generally indicate that we have a ways to go on consolidation,” he says. “There’s definitely a couple of large M&A events left in Big Pharma,” agrees Simon King, senior analyst at Datamonitor.

King points to two companies that sat out the merger frenzy of the past decade. Managers at Lilly and Bristol-Myers focused on smaller biotech acquisitions and swore they were not interested in bigger deals. However, they are now the smallest of the top-tier players, and King sees a potential shift in strategy going forward.

Throughout the year, big companies will continue to mine the pipelines of small biotechs to help sustain growth. In a positive twist for Big Pharma, the challenging funding environment for small firms will create some bargains.
Burrill notes that 2009 turned out to be the second-largest financing year in biotech history. Still, gloomy markets meant that small firms, unable to raise cash from stock offerings or venture capitalists, were forced to accept less favourable terms from partners or acquirers. In 2010, those harsh realities will persist. Also this year, drug companies will continue to look to emerging markets for growth, Datamonitor predicts. In addition to India and China, where many firms increased their stake in 2009, Latin America, Central and Eastern Europe, and Turkey are to be important acquisition locales for Big Pharma.

In December last year GlaxoSmithKline (GSK), the world’s leading vaccine producer, said that it plans to outpace its rivals in the race to emerging markets as revenue from traditional Western pharmaceutical markets continues to slow. Abbas Hussein, London-based GSK’s head of emerging markets, said that the company will pursue acquisitions and alliances in the region, although he cautioned that targets are scarce and prices being demanded by some businesses are unreasonable.

Hussein said that GSK is focusing on a combined pool of branded generics, vaccines and traditional patented medicines to beef up its exposure to emerging markets, which currently account for 13 percent of group sales. “I think it’s very, very reasonable to say that my ambition is that we will beat the market growth rate,” he told reporters ahead of an analyst and investor briefing.

Healthcare information group IMS Health has forecast 13 percent to 15 percent growth in pharmaceutical demand in emerging markets over the coming decade, compared with just one percent to three percent for mature markets. For example, China’s domestic vaccine production market is expected to expand quickly in the years ahead as investors look to capitalise on the nation’s healthcare reforms and enhanced public awareness about inoculations.

Analysts expect that the country’s vaccine sector will grow, up to 25 percent annually, according to a report from Zero2IPO, a Chinese venture-capital firm. In 2012, the size of the market will reach “8bn yuan”, the report says. Attracted by the growing vaccine market, “investors from home and abroad will be piling into China”, said Zheng Yufen, senior manager for healthcare at the investment banking division of Zero2IPO.

Talk of foreign investment in the country’s growing pharmaceutical industry has already spurred rallying of some companies’ share prices. For example, at the start of this year shares of China’s Sinopharm Group jumped on fund buying fuelled by hopes for more merger and acquisition deals as China’s largest pharmaceutical products distributor moves to expand its revenue base. “We have a very bullish view on the stock as the company is in one of China’s booming, high entry barrier industries. More M&A deals are expected as it grows through acquisitions,” says William Lo, analyst at Ample Finance Group. “Since it is the market leader in this low-risk distribution segment of the medical industry, we don’t expect to see any competition from rivals and that also fits the appetites of many investment funds,” Lo says.

Reforming China’s healthcare
China is the world’s largest vaccine manufacturer, and most of the companies in the sector are privately owned. The local vaccine market has enjoyed strong growth worldwide, but vaccine sales accounted for only less than one percent in the nation’s healthcare industry, according to figures from CITIC Securities. “That number is comparatively low considering China’s large population base,” said Zheng.

Ongoing healthcare reform is giving the vaccine sector a boost because the Chinese government is expected to spend 26bn yuan on improving public healthcare services before the end of 2011. According to Zero2IPO, the gross profit rate for vaccine companies on average is 70 percent. But challenges do exist. “Compared with their foreign counterparts, Chinese vaccine makers lag behind in innovation and management,” Wang said.

Nationwide, China has over 40 vaccine manufacturers. Other than state-owned companies like Shanghai-listed Tiantan Biological Products and US-listed Sinovac Biotech, many of China’s vaccine makers are private and still small in size. “Money is their biggest concern when they plan to expand,” said Zheng.

Drug companies are battling to win a large piece of the pie as they look for substitute revenue in the face of increased competition for patented drugs in the US and Western Europe. Drug sales in emerging markets are expected to double by 2015 from the current $81bn thanks to a number of factors, including a high birthrate and a swiftly increasing middle class. “By 2020 you are looking at emerging markets in size being equivalent to the US market and the major five in Europe,” says GSK’s Hussein.

In 2009, a batch of international pharmaceutical firms entered the vaccine sector through mergers and acquisitions. In late 2009, Novartis International, the world’s sixth largest pharmaceutical company said it agreed to acquire an 85 percent stake in a Zhejiang-based private vaccine producer. And last year GSK wrapped up two deals in China to establish vaccine manufacturing joint ventures with two local firms committed to researching and developing vaccines in various categories. “We have great confidence in China,” says the firm.

Increasing GSK’s reach in the region would provide a key “third leg” to its existing US and European businesses, he added. Hussein said that GSK remained alive to acquisitions and tie-ups in the region following its purchase of assets from Bristol-Myers Squibb Co., Belgium’s UCB SA, and alliances with South Africa’s Aspen Pharmacare Holdings Ltd and India’s Dr Reddy’s Laboratories Ltd.

Hussein said that alliances were a “great way to go as you are sharing the risk, and it makes good financial sense,” while acknowledging they can be more complicated than a straightforward acquisition. GSK expects operating margins in the region to remain at current levels of around 35 percent of sales. But he adds that GSK is unwilling to pay over the odds for any potential deals. “I think the pace will continue,” says Hussein. “On the other hand, I think it’s fair to say there are very scarce targets and some of the valuations of the promoters are very unreasonable.”

Predictions for 2010
G Steven Burrill, CEO of Burrill & Company, a San Francisco-based merchant bank specialising in funding for life sciences companies, outlines his thoughts on what is likely to happen in the pharmaceuticals sector over the coming year.

Biotech consolidation to continue
The large universe of small public companies and private companies looking for venture capital will still face challenges as they try to find ways to extend their runway and stretch out their remaining funds. Expect to see further consolidation in 2010 although at a slower pace that we saw in 2009.

Capital
Over $15bn will be raised by US biotechs; partnering/M&A will again trump financings and in total $35bn will be raised. The industry’s market cap will grow from its present level of $350bn to $400bn, despite significant consolidation and attrition as valuation is lost through M&As. There will be significant funding available for public companies through secondary financings and registered direct offerings, especially after they report good news.

Partnering
To deal with their impending patent cliffs, Big Pharma will continue to keep a robust pace of partnering deals. Both Big Pharma and Big Biotech will compete for companies with advanced product pipelines, as well as important land grabs of technology. There will also be new players competing for technologies – such as major medical devices, instrumentation and healthcare IT companies, and even generics companies will be acquirers. The traditional sector lines of pharma, biotech, devices, diagnostics, healthcare IT, services, and generics/biosimilars will blur as we see converging technologies (and companies) responding to new market opportunities that present themselves as we move a system focused on treating sickness to one that seeks to maintain wellness.

Mergers & Acquisitions
Big Pharma consolidation will continue as these companies position themselves for the new market realities and competitive pressures from the generics world. Pharma will also start to adapt from a vertically integrated business model to one that reflects virtual integration. Companies will build dedicated business product units with their own management structures and decision making processes.

Healthcare reform
President Obama’s State-of-the-Union address in January reported on his new healthcare reform bill. The reform would stimulate ways to move the system from one based on cost to one based on value. Providers will look for ways to reduce costs by improving healthcare delivery and rewarding behaviour that promote healthier lifestyles. But most of the impact of this healthcare reform bill will be on reforming the insurance industry and who pays for a largely dysfunctional system. Healthcare reform II will begin immediately, trying to fix what still remains as a broken system.

Of olive oil and transmission fluid

Posted on February 18, 2010 by

Tucked away along the eastern mediterranean coastline, nestled at the crossroads of three continents, Syria has steadily covered ground on its ambitious development journey. Over the last decade or so, economic reforms have begun to pay dividends and the country has demonstrated that it can nurture natural growth, relying less on it’s dwindling oil revenues and more on the actual substance of an economy that was far behind on its own people’s needs.

Economic initiatives were implemented that carved out enclaves of liberalisation and created room for private sector development after decades of central planning and stagnation. In the early stages, there were very few Syrian institutional players and the majority of businesses were more casual operations than structured corporations. For the most part, families created informal structures that performed the functions of whatever business endeavour was at hand and morphed effortlessly depending on the requirements of the economic landscape.

Within such a molten framework, it is quite the challenge to both adapt to a changing legal environment as well as to understand how to best capture the opportunities presented by a country’s liberalisation process. By actively pursuing new ventures as the supporting regulatory foundations are laid, local companies facilitate the very development process such new laws aim to achieve; different sectors and industries begin to evolve and grow as they are targeted by reforms from one end and brought to life by actual brick and mortar businesses from the other.

The Khwanda Group has thrived in this respect, consistently negotiating the changing economic terrain of Syria and seeking voids to fill with investment and creativity. As the name suggests, this family-operated venture has grown to become a group of companies with diverse interests spread over differing levels of the economy.

Despite its agrarian roots of working the lands of the Syrian coast and pressing olive oil in a traditional mule-driven mortar, the Khwanda Group made its name as the exclusive distributors of Mazda automobiles in Syria under the patronage of its founder, Mehran Khwanda.

Once Investment Law number 10 was passed in the early 1990s, the one office operation transformed into a trans-national presence affecting the lives of thousands of Syrian families. The law, allowing foreign co-ownership of companies and providing tremendous tax-breaks, paved the way for the Kadmous Transport company to be formed. Today, this passenger transportation business has evolved into a cargo, freight, and money transfer service that employs over 2,500 staff.

From that critical point of Syria’s economic history, the Khwanda Group ventured into a wide array of activities ranging from agricultural farms to phosphate mining, from private banking to restaurant management, even investing in one of Syria’s first holding companies. Importing everything from air conditions to heavy construction machinery, this company began to complement its import activities with forays into Syria’s emerging private sector. As Syria’s economy began to change, the makeup of the companies that the group managed also began to change. Where the economy and the nation’s reforms allowed the private sector to satisfy a certain demand, Mr Khwanda would oftentimes see possibilities and opportunities to positively affect both the company’s bottom line as well as the relevant stakeholders of Syria’s population.

The fundamental idea was to pursue activities that enable the business community and the people it serves to move hand in hand towards a better standard of living. Often, companies in emerging markets may lead economic growth on a macroeconomic level but do not speed up the process in which an increase in GDP eventually leads to an amelioration of a country’s lower class economic and living situation.

“Our focus is on businesses that have a development angle to them; we try to target opportunities that benefit and provide a service to the country and hopefully improve the average Syrian’s standard of living,” explains Mr Khwanda’s son, Ahmad. He offers the transportation and money transfer company as an example of this: “The margins are lower but Syria’s large lower economic class benefits. We offer our clients services that they would otherwise not be able to afford.” Kadmous Transport’s services are significantly cheaper and considerably less bureaucratic than the alternatives. Compared to formal financial institutions, transfers are made virtually instantaneously with no account setup necessary and for a fraction of the cost.

By being a low-cost leader while remaining competitive on the products and services offered, Khwanda Group has demonstrated how a company can directly affect positive change in the economy in which it operates.

Providing harvest refrigeration and low-cost automated olive oil pressing services for rural farmers are but two examples that may seem miniscule compared to other investment opportunities but do in fact make a significant difference to the clients whose livelihood is directly hinged to such affordable options.

On a larger scale, the group has made every effort to maintain its own expansion pace at the level at which the Syrian economy is mutating. With banking reforms being implemented, substantial investments in the private financial sector were made alongside investors whose aim was to establish the monetary backbone that would support Syria’s development.

The group’s dedication to development does not stop with the goal of job creation and operating within the Syrian economy. Its support extends to cultural and educational endeavours in the community as well as other charitable causes. As part of its socially responsible ethos, the Khwanda Group has supported local emerging musicians, the Syrian National Children’s Orchestra, as well as an annual Syrian Jazz Festival. The group works closely with the Syrian Trust for Development in identifying and tackling important social and cultural issues that need the support of the local community in order to progress. In the past, the group has provided the financial backing necessary for local schools to stay open in the summer time in an effort to provide additional learning opportunities for rural residents and even implemented a programme that offered the necessary materials and assistance for coastal villagers to dig their own water wells.

As firm proponents of various civil society efforts within the country, the group continuously supports organisations that aim to connect expatriates with their local counterparts. In this capacity, the group is a recurring sponsor of the British Syrian Society’s conferences and activities and has contributed positively to the message the outside world receives about Syria.

The Khwanda Group is a prime example of how one can achieve their own business objectives while extending a hand to others around them as part of an intentional effort for everyone involved to benefit and progress. Its successful participation in multiple sectors of the economy as well as its positive effect on Syria’s social and cultural landscapes are undeniable and demonstrate how local efforts can become catalysts for nationwide development. It is these initiatives that effectively take economic development reforms from regulatory theory to real-world practice and translate them into an actual positive difference in the everyday lives of the average citizen.