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Sustaining success

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For a number of years, Cyprus has been considered a popular location for foreign investment. Its status as a former British colony and its stable tax system has proved to be an attractive opportunity for overseas investors, but there’s much more to this island than investment opportunities.

An array of important factors contribute to the island’s success. In addition to a European environment, low cost of living and low crime rates, investors in Cyprus benefit from its double taxation treaties and the lowest tax rates in Europe. Cyprus has also previously been commended for the stability of its tax laws and is well known for having the most attractive European tax regime.

Secret to success

Deloitte is one of the largest and fastest growing professional organisations in Cyprus and have recently celebrated 50 years of operation in the country, providing tax, audit, consulting and financial advisory services to both public and private clients.

Pieris Markou, tax practice leader for Deloitte Cyprus, believes there are a number of secrets to Cyprus’ success and explains the island’s appeal when it comes to attracting foreign investors.

“I think in terms of history, Cyprus has always had a friendly approach towards the foreign investor. Historically it’s hard for us being an island and having to rely a lot on tourism and services. Certainly tourism is an area which Cyprus is investing but we’re also encouraging direct foreign investment to the island as a route for investment in the regions.”

“Over the last 30 years, Cyprus has shown that it is a country that foreign investors can rely on, with a market which is stable and reliable. The confidence that the country shows to the international investor has been a main contributor to the years of growth in the Cyprus economy.”

Mr Markou is clear to point out that Cyprus’ well publicised low taxation rate of 10 percent is not the only reason it has been popular with the foreign investor.

“It’s not just the low tax rate; having a low tax rate is not enough. This has been proved through other European countries that also have a low tax rate, trying to attract foreign direct investment and failing. We have succeeded because we have the combination of many factors which appeal to the investor; a stable economy, reliable tax system, our exchange of information agreeements, as well as low tax rates and double taxation treaties.”

Appealing tax systems

Cyprus has both the lowest income tax and VAT rate in Europe and an extensive network of double tax treaties.
The double tax treaty network extends to 45 countries and ensures the investor is protected from double taxation on income earned in any of the two treaty countries. Cyprus also allows tax exemptions in certain circumstances, for example, profits from foreign branches of Cypriot companies, profits from the disposal of shares and interest paid from Cyprus are all exempt from taxation.

This appealing system received a further boost in 2004 when Cyprus became a member of the EU and in 2008 when the euro was introduced. This provided a turning point for the island, thrusting it into the common market and alerting European investors to the country’s tax stability.

Pieris Markou believes, “Joining the European Union proved that investors can invest without any fear of unexpected changes in both the tax and legal framework because being part of the EU there are certain commitments that you need to adhere to.

“EU membership has built investor confidence as they are entering a country that is subject to monitoring by the EU. It is again an indication of the stability of the system as we cannot really do anything without reporting what we are doing to the EU.”

Structured banking system
The requirements from the EU are followed strictly by the industry, encouraging an efficient and influential banking system.

As a former British colony, the Cypriot banking, political and legal systems are based on those long established in the UK, continues Mr Markou, “Because of the 30 years of promoting this type of overseas investment, Cyprus has managed to build a good banking and financial services industry whereby we are following the EU and British standards in terms of banking and financial services. We follow the directives within the EU and our central bank is an independent body which looks after the banking system.

“We have managed to keep the good things inherited from the UK, which means we have a legal system that people can trust, are familiar with and because of political stability the legal framework ensures consistency without unexpected changes.”

Legal restructuring
Recent changes in taxation law have brought amends to the system which will, according to Pieris Markou, further cement investor confidence and make the island an even more attractive investment opportunity. “There was a discussion which took place between the Cypriot government and the private sector and we decided to make some changes in the tax legislation so that a fund which is registered in Cyprus will take advantage of the Cypriot tax law and at the same time will be able to use the double tax treaties.

“This is a new approach taken by Cyprus and we are hoping these changes will encourage the use of Cyprus in fund transactions.”

The Freedom of Information influence
The recent changes with respect to the exchange of information has further improved the relationship between possible investor countries and has kept the system consistent with other nations.

The new law has lead to increased business and investments from countries that had previously declined to invest and has also seen Cyprus’ removal from some countries’ blacklists.

Pieris Markou explained: “both the government and the private sector have agreed that the way forward for Cyprus would be full transparency through the exchange of information. The government took the decision to change the law and allow the exchange of information between tax authorities when there is a specific condition that needs to be satisfied under the double tax treaty.

“This has helped Cyprus remove itself from blacklists in various countries including those in Italy and Russia. We now have a law that allows us to have full transparency, to exchange information and are taking a very serious approach to it.”

Pieris Markou also highlighted a benefit for Cyprus from the changes with respect to the exchange of information because without a law change, the country may not have been able to sign any new treaties and may even have lost some existing treaties.

From blacklist to whitelist
The changes with respect to the exchange of information ultimately lead to the island being removed from Russia’s blacklist which improved relations and removed any uncertainties between the two countries. 

The Cyprus government together with the private sector battled for more than 12 months to get Cyprus removed from the blacklist, which was creating uncertainty for Russian companies investing on the island.

 “Russia is a big market for Cyprus and its good both countries have agreed on the protocol which will remove Cyprus from their blacklist.”

Changes in legislation have also added to the OECD’s decision to include Cyprus on their whitelist in 2009 for implementing internationally agreed tax standards.

In 2002, Cyprus changed its legislation to coincide and satisfy requirements to join the European Union and at the same time, make sure no harmful tax practices were being exercised.

“It is very beneficial to be included in a list of countries that were considered by the OECD to be serious about tax transparency. Cyprus has proven that it has a serious attitude towards the foreign investor and we are a country who is committed to be considered one of the serious players in international tax.”

However, the future is an emerging market, with Cyprus potentially becoming a much bigger player in international taxation and with Deloitte aiming to attract investment from the emerging markets of China and India, the whole face of the financial world could be set to change and according to Pieris Markou, Cyprus could be set for a further investment boost.

“Cyprus would be an attractive location for investors from China, wanting to invest into the European Union. Cyprus certainly, given its geographic location and the efficiency of its tax system can be a point of interest for outbound investors.

“Without doubt we can see Cyprus in the immediate future being used mainly for outbound investments from China and both inbound and outbound for India.

“The importance with China is that we need to make them aware of the benefits of Cyprus and this is the challenge that we are currently facing being a small island. We are hoping through the Deloitte network we can promote Cyprus to potential investors.

“It’s something that I believe there is a lot of scope that’s gradually going to pick up once the Chinese are more confident in the overseas market.”

But will Cyprus maintain its stability throughout these changes and keep its place at the forefront of the foreign investment market?

The simple answer from Pieris Markou, “definitely”.

Risks & rewards

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Until a couple of years ago, companies could have been largely forgiven for thinking that if they were supplying to one of the world’s largest retailers, their money would be safe. But fate has dealt some cruel blows in the latest global financial crisis. In December 2008 the UK’s largest independent entertainment retailer Zavvi was forced to go into administration when it was crippled by the collapse of Woolworths’ Entertainment UK wholesaling division. The wholesaler was Zavvi’s main supplier and its demise left the store unable to take customer orders. The high-profile collapse taught companies two invaluable lessons: firstly, don’t be over-exposed and overly dependent on a single source supplier and secondly, that any company – no matter how big – can go bust and potentially take your organisation with it.

Just a month prior to Zavvi’s collapse, a November survey of 40 chief procurement officers or equivalent executives carried out by management consultancy Accenture found that more than 70 percent were more closely monitoring the financial stability of their suppliers and almost three-quarters were increasing their focus on supplier relationship management. The same survey also found that nearly 20 percent of respondents reported that their suppliers were unable to meet their supply levels or needs and for almost 15 percent, suppliers had been put out of business or forced to merge with other companies. In a more recent survey called “Risks in 21st century supply chains” published by Aon, the insurance broker, 91 percent of respondents reported that their supply chains have inherent risk, up from 78 percent in the 2008 survey.

Even for companies such as Intel, the US semiconductor manufacturer, which outsources only about 10 percent of its production, stepping up the level of scrutiny of its external suppliers is an important strategy. “We’re having to watch our supply line and make sure of their financial health and whether they can stay in business and are financially sound,” said Brian Krzanich, the company’s vice-president and general manager of manufacturing and supply chain.

In October, Royal Philips Electronics, the world’s leading maker of light bulbs and healthcare solutions, announced plans to bring down its operational costs by up to 30 percent over next two years, by reducing the number of IT suppliers from around 800 to 10 and outsourcing more application development and support projects to India. “As part of our One Philips, One IT initiative, we plan to consolidate our data centres (over 400 currently), bring down the number of suppliers and move more work to our centres in India,” said Maarten J de Vries, IT and supply management, member group management committee, Royal Philips Electronics. “We want to leverage our outsourcing partners and Indian operations more than ever before,” he added.

Unilever has also instituted a new supplier management team to accelerate the pace of its tough IT cost reduction programme. The household goods manufacturer, which makes products including Marmite, Dove soap and Domestos bleach, is attempting to cut 40 percent from IT operational expenditure from 2007 to 2011, and it has so far carved GBP 960m from costs.

The company has admitted that it has a “fragmented” approach to technology which is dependent on too many suppliers – a result of a previous aggressive merger and acquisition strategy. Unilever has moved to cut suppliers “dramatically” after at one point using 160 vendors for 1,200 applications. It has cut 20 percent from application costs by moving to “one or two” key related service suppliers, and has cut 30 percent from testing and upgrade costs by moving from 10 suppliers to one in this area.

Marks & Spencer has also taken the decision to cut its supplier numbers. “M&S has been reviewing our supply base across clothing and food, and the approach we have taken has been consistent. This approach has been to consolidate business into fewer suppliers,” M&S executive chairman Sir Stuart Rose wrote to a manufacturer who had implored him to reconsider the termination of their trading relationship.

Sir Stuart has been locked in a battle to revive the fortunes of M&S since he was appointed in 2004 and critics say that the suppliers have taken much of the pain. The first step was to cut their number and to simplify the retailer’s labyrinthine supply chain. The second step was to ask the remaining manufacturers for a “margin contribution” – a business euphemism for lower prices. Named Operation Genesis by Sir Stuart, the industry quickly nicknamed it Operation Genocide. Northern Foods, M&S’s biggest food supplier, closed its factory in Fenland, Lincolnshire, with the loss of more than 700 jobs last year, when it walked away from a deal to supply Italian ready meals. Hain Celestial, a sandwich maker, put the staff of its Luton factory on consultation when it lost a contract this year.

Opportunity costs

Yet, despite the opportunity the present financial crisis has given the world’s largest firms the capability to squeeze their supply chains, the credit crunch has highlighted the precarious nature of some companies’ dependence on specialist and niche parts manufacturers. In Germany, car manufacturer BMW was forced to bail out one of its key suppliers when it filed for insolvency in February. The luxury carmaker was about to introduce its new Z4 convertible and Edscha, a German manufacturer of sun roofs, door hinges and other car parts, was contracted to supplied its roof. A BMW company spokesman said: “We had no choice. To go to another supplier would have taken six months and we don’t have that. We had to help Edscha and try and stabilise it.” Edscha is still trading, but BMW remains so worried about disruption to its supply chain that it has increased the number of staff in its risk monitoring department to look only at components-makers.

The incident has prompted some of Germany’s largest manufacturing firms to revaluate their supply chains, and to leverage their clout to secure their own positions and to gain a competitive advantage by speeding up efforts to cut the number of suppliers they use. Car parts makers Continental and Schaeffler recently agreed on sourcing co-operation that would cut the number of their 5,600 suppliers by half. Siemens, Europe’s largest engineering group, even said it would cease ordering from as many as 74,000 suppliers this year – a fifth of its 370,000 purchasing partners.

“Such programmes have become very popular,” says Martin Raab, head of supply chain management at Capgemini Consulting. “Purchasing often adds up to 60 percent to 80 percent of overall costs. This is something where you can save a lot of money very quickly.” Many car industry executives hope that the crisis will lead to the long sought-for consolidation and reduction of capacity in the fragmented supplier industry. BMW has in recent years reduced the number of suppliers. The premium carmaker has also been talking to arch rival Daimler about co-operation, involving joint purchases. “Consolidation among suppliers will accelerate significantly,” said Herbert Diess, head of purchasing at BMW, earlier this year. “For us, this is the preferred way to make the industry more competitive.”

While organisations may welcome the benefits that reducing the number of suppliers in the long-term, the more immediate dangers of key suppliers going bust, failing to deliver, or choosing to exercise their influence to renegotiate contracts and terms and conditions in their favour are at the forefront of the minds of key decision-makers. Indeed, checking the integrity of the supply chain is a more pressing issue than trying to reduce their number, says Paul Howard, head of insurance and risk management at supermarket chain Sainsbury’s.

Howard says that organisations need to get greater assurance from their suppliers that they are still capable of delivering the requisite goods and services, and that their own supply chain management is robust enough to continue to function if it takes a knock. He says that, as a crucial first step, organisations need to conduct regular due diligence to keep on top of any potential supply chain management issues. “Supply chain management has always been a crucial area to our business and it is always highly placed on our risk agenda,” he says.

Howard says that organisations need to determine who their key suppliers are and work with them to develop and test a contingency plan that will allow them to still supply goods (to your company at least). “We have regular meetings with our key suppliers which can take place on a monthly basis. We conduct these at their premises and we assess their business continuity plans, trading risks, supply chain arrangements and risks, and solvency so that we are satisfied that risks are being managed appropriately,” he says.

Clarity at all costs

Companies should also insist on knowing who their sub-suppliers are, and also consider carrying out site checks at their operations. “The clue to the issue is in the title – ‘supply chain’,” says Howard. “Just looking at the companies that you directly source from would only give a very superficial review of the strength of your supply chain management programme. Organisations need to look deeper and see who their suppliers are sourcing from, and find out whether they are asking the same questions that you are asking of them.”

A mixture of incentives – such as putting some firms on a “preferred supplier” list – and penalties, such as charging suppliers for late or wrong delivery – can also help to ensure that suppliers ship their orders on time, says Nick Wildgoose, global supply chain product manager at insurer Zurich Global Corporate. “Having strict credit terms helps increase a company’s working capital and is also useful in flagging up late or overdue payments, which can be a significant warning sign about a company’s financial health. Having preferential terms for key suppliers also helps these companies go the extra mile for your business and could help your organisation stay afloat,” he adds.

Peter McHugh, partner in the commercial team at law firm Pinsent Masons, says that organisations need to ensure that management have established business continuity plans, and that the resilience of these plans are regularly tested to look for weak spots, such as where they may be reliant on single-source suppliers, or geographic areas that may be sourcing a disproportionate amount of goods. “You need to look hard at the arrangements that you have in place and ask whether they are still appropriate and if the level of risk associated with them is still low. What may have been a suitable, low-risk arrangement last year may not look so attractive now and so arrangements may need to be revised quickly,” he says.

But as well as preserving one’s own organisation from supply chain failure, some experts believe that organisations can also help keep their suppliers out of danger, and without the need to take over their business, as happened in the case of BMW and Edscha. Mark Perera, chief executive of the Procurement Intelligence Unit, a UK-based think-tank, says that the relatively new concept of supply chain finance could offer much needed support. Leading companies such as Sainsbury’s, Volvo, Syngenta, Nike and Royal KPN all use supply chain finance as a way of keeping their suppliers in credit.

The theory behind it is relatively simple: say, for example, that a baker supplies a supermarket with 1,000 loaves of bread every day at a total cost of GBP 5,000 per week. Ordinarily, the baker would then invoice the supermarket and wait 30 days for the invoice to be settled, depending on what credit terms had actually been agreed.
However, due to the credit crunch, the baker needs the invoice to be settled earlier so that it can continue its operations, yet the bank is reluctant to lend enough funds at a fair rate based on the baker’s risk and credit profile. However, using supply chain finance, the baker could receive an early payment by using the supermarket’s credit facility with its own bank. “It’s an easier solution than bailing the supplier out and will help guarantee the flow of goods,” says Perera.

Insuring the positive

Yet despite the options listed above, the most obvious tool for mitigating business risk is an insurance policy. However, the very type of policy that organisations want to buy to prevent insolvency – credit insurance – is in short supply, and credit insurers are much less willing to underwrite policies while the possibility of credit default is still high in some industry sectors.

Andrea Cropley, partner in the corporate group at law firm Nabarro, says that “there is a real paranoia about companies being refused credit insurance or an inability to get the appropriate limits, particularly in the retail and manufacturing sectors. As a result, companies need to be a lot more aware of the risks that could be present within their supply and distribution chains.”

Cropley adds that even in circumstances where companies are able to renew their credit insurance policies, they need to ensure that the same policy terms (at the very least) are being retained. “Insurers are less likely to be as generous in their terms as was the case a few years ago, so companies need to check that they are getting the appropriate level of cover that will protect them. In particular, she says, in-house legal teams need to check the details of their credit insurance policies. They must ensure that they have ‘retention of title’ clauses so that their organisations can at least reclaim their stock if a company they supply to goes bust.”

Clare Francis, associate at law firm Pinsent Masons, agrees that retention of title clauses are becoming much more important, but for credit insurers as well as policy-holders. She says: “It is becoming increasingly common for credit insurance policies to make it a condition that a retention of title clause is fully incorporated into their sales contracts. If you do not have such a clause effectively incorporated into your contracts with your customers then there is a risk that you are not complying with the insurance policy conditions and the policy could therefore be invalid.”

Francis says that some credit insurance policies specifically request an “all monies” retention of title clause which enables a claim so long as goods can be identified, even if specific goods cannot be matched to specific invoices. As a result, the precise wording of the clause can be critical. In addition, she says, it is important that the clause is effectively incorporated. This can be particularly critical if the organisation is trading on standard terms and conditions of business. Francis says: “If your terms only appear on post-contractual documents, such as invoices, then the term may not be incorporated which would put you in breach of your credit insurance terms. Worse still, if the customer has provided their terms then you could be found to be trading on their terms which will almost certainly not include any retention of title provisions.”

Experts fear that although numerous surveys find that companies feel that their supply chain’s risk profile may have increased, little of any practical purpose is actually being carried out. Wildgoose believes that “supply chain management is still being ignored by a lot of companies as a potential high risk area, even though the possible damage to the company caused by any disruption in the supply chain can be massive.”

“Organisations are more dependent on suppliers providing goods and services now than they ever have been before,” says Wildgoose. “The growth of outsourcing as a way to reduce costs and the global nature of it, such as having telephone operators in India and so on, can mean that major business operations are being carried out in far flung locations, thousands of miles away from the organisation’s actual market, which means that they can be difficult to audit regularly.”

“As a result, if anything goes wrong with the supply chain, it can be more difficult and expensive to fix,” he says.

Towards a milder tax climate

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Meteorologists see global warming as a threat. Tax practitioners in Germany see it as beneficial, certainly in the light of its effects on the tax climate. Traditionally, Germany has been ranked as a country with high direct, but relatively low indirect, taxation. That changed, however, in 2008 with a cut in the corporation tax rate from 25 percent to 15 percent following a VAT hike from 16 percent to 19 percent a year earlier. These and the other accompanying changes were part of the then government’s policy of reducing direct taxes as far as necessary to be seen to be taking international pressure from, in particular, financial investors and major MNCs seriously, whilst remaining true to its overriding aim of achieving budget equilibrium in 2011. The extra VAT revenue was absorbed into the state budget easily enough; the corporation tax drop called for compensation from within the overall sphere of business taxation.

Businesses in Germany are faced with two taxes on profits – corporation (or income) tax and trade tax. The corporation tax rate change was accompanied by a change in the method of calculating the trade tax due which meant – seen nominally – an overall reduction of the total burden from some 38-41 percent to a theoretical, but highly publicised, finance ministry claim of “below 30 percent”. However, this claim depended on a business location in an outlying country district where local trade tax rates tend to be lower; a more reasonable estimate for a location near a business centre with easily accessible communications by road, rail and air would lie in the range of 32-33 percent.

When pointing to these rates other compensatory changes to the system have to be taken into account. Partly, these relate to simple disallowance of expenditure and partly they serve to increase the trade tax base over that for corporation tax. It is becoming increasingly unrealistic to talk of a composite burden from two taxes with differing bases of assessment, especially when both bases are moving ever farther from accounting income. A measure of the problem can be gleaned from a simple statistic: the corporation tax rate cut of 10 percentage points was to cost – net of compensating items – no more than EUR 5bn within a total federal budget of EUR 280bn. It will be appreciated that few of the compensating items were immaterial to those affected. It is, though, true that the burden was not evenly spread. SMEs in local ownership were spared most of the ill effects of the limitation on the deduction of related-party interest to 30 percent of EBITDA with a generous threshold of EUR 1m interest cost below which the limitation does not apply. Provisions in the Income Tax Act largely offset the trade tax of small businesses with a combination of a credit for the amount paid and a reduced top rate for trading income. The loss forfeiture provisions on change of shareholder do not affect unincorporated entities. International businesses feel the pinch, though, especially as they are also the butt of a toughened foreign tax credit policy aimed at curbing “white” income (income taxable in neither country by reasons of differing legal definition) and treaty-shopping (shifting income by source and location to maximise treaty benefits).

In point of fact, not all of the compensating items are apparent from the legislation. There is a growing tendency for tax auditors to take a hard line in the interests of cash collection. Often this takes the form of an over-emphasis on formality, enabling the tax auditors to move income and expenditure within the audit period (typically five years at one stint) or to disallow tax groups. The resulting recalculation of the tax base can lead to significant shifts in the payment pattern (such as from the accumulation of expense in a loss period) giving the tax authorities, at the least, the opportunity to levy large interest charges and to bring tax payments forward.

Less significant from the point of view of the revenue raised than tougher tax audits, though of far greater publicity value, has been the campaign against the misuse of tax havens. The finance ministry has taken an aggressive stance on “uncooperative tax havens” and has succeeded in negotiating information exchange agreements with most European financial centres with low-tax regimes. The ministry has sternly announced that it intends to keep a watchful eye on its treaty partners and to take a firm line with any failure to honour commitments. There is a distinct contrast in tone here with the idiom of the OECD which proudly reported at the end of September that all major financial centres had now committed to observe OECD standards of transparency and information exchange and that only a few countries had failed to meet their long term commitments. On the other hand, the official German list of uncooperative havens – a register of countries, transactions with which come in for special scrutiny – remains blank.    
The economic crisis hit Germany, though not in all sectors of the economy, in early 2008. Initially, the hope was to fend off the worst with massive cash support for the banking system and from then on to muddle through until the crisis solved itself. The aim of a balanced budget in 2011 was dropped, but otherwise there was little apparent change in policy. Certainly, tax audits have not become any more lenient and there have only been one or two minor concessions in tax law to help companies in trouble to overcome their problems. It is now clear to all that something more is needed.

The general election held on September 27, 2009 yielded a clear parliamentary majority for a conservative/liberal coalition government between the CDU/CSU and the FDP. The combination is the wish of both sides and talks on the coalition agreement setting policy for the next four years went smoothly. All three parties involved have committed themselves in their election campaigns to reduce taxes, and all three are now realising that there is no scope for doing so before economic recovery is on a solid footing. On the other hand, something must be done, if the new government is not to be the first in the history of the Federal Republic to take office without changing the tax acts.

The new cabinet adopted a “Growth Acceleration Bill” on November 9, 2009 with the aim of enacting tax improvements by the end of the year. They would then take effect for 2010. The measures include: indefinite extensions of the previous government’s EUR 3m interest limitation threshold, and of its suspension of the loss of carry-forward curtailment provisions on change of shareholders within the context of a rescue operation. The bill suggests complete exemption for group reorganisations from the loss curtailment provisions and hidden reserve protection of a loss-carry-forward despite shareholder changes. Also included on the bill is: relaxation of the interest limitation, exemption of property ownership changes on merger or spin-off from real estate transfer tax, reduction of the trade tax add-back for property rentals and, for the tourist trade, a reduced VAT rate for hotel accommodation.

More innovatively, and of greater long term benefit, a tax credit for R&D expenditure is under consideration. This would be in addition to the standard deduction for the expense as incurred and would therefore be in the nature of a subsidy. Clearance from the European Commission would be necessary. The idea was launched in the academic world, but has now been taken up by the new government. Discussions with potential beneficiaries and other interested parties have not yet started and legislation is certainly a long way off. However, there is a strong body of support for an idea, which seems essential to maintain Germany’s position among the world’s technology leaders.

The initiative now lies with the new government. Expectations are that it will seek to generate a business-friendly climate, not least by making minor corrections to some of the wilder measures of its predecessor. At the moment, there is no money for major initiatives, but this is accepted by all key players. This will change when the crisis is over, but until then progress in the tax field is likely to be gradual, rather than spectacular. An easing up on tax audit intensity with a return to a more amenable but justified approach would seem a reasonable hope. A similar let up on foreign tax policy may also be in the offing.

The new government finds German tax at a cross-roads. The reforms are in place, but their impact has been dampened with restrictive conditions and compensatory measures. If these are eased, Germany will no longer be perceived as a country with an unfavourable tax climate. Of course, a country of the size and structure of Germany will never compete with low tax countries, though it may attract investors by offering a sophisticated, welcoming environment. All signs are positive.       

Prof Dr Dieter Endres is the Senior Tax Partner of PricewaterhouseCoopers, Germany

Springing to life

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The Greek legal market is a mirror of the Greek economy. Parts of it, such as shipping, are truly global.  That’s why one finds international law firms specialising in shipping in the port of Piraeus and the capital, Athens. Those international firms have already claimed most of the big consulting and litigation jobs gradually edging the traditional Greek firms to the margins of the legal market.

Other parts of the Greek economy are truly inward looking, confined to local demand and unable to compete globally or even regionally.  Those are reflected in the vast number of small legal outfits, mostly family based and controlled, commanding very low fees but also unable to offer attractive positions to the growing numbers of law school graduates entering the market. Career growth is primarily a function of family affiliation and in nearly all cases the firm is passed down to the next generation. Associates see little long term benefit from staying with the firm and, for the most part, they aspire not to firm membership but to setting up their own small operation. Firms are usually identified with a small number of individuals who are owners in the full sense of the word. The firm has little – if any – substance apart from its owners. These law offices represent that large majority of Greek practices and control professional organisations such as the various Greek Bar Associations (membership in one of them is a prerequisite for providing law services in the respective city or area).

A new model needed

Then there are very few firms that are trying to break the traditional Greek mold and introduce a different model for practicing law: they bid for the jobs that require greater sophistication, specialised knowledge, better organisation and infrastructure and a critical mass of lawyers to be able to address volume and time requirements. They compete for the big state sponsored jobs (infrastructure projects privatisations, IPOs and rights offerings, big litigations and arbitrations). They interface and occasionally face competition from major foreign law forms, usually London based and not otherwise set up in Greece, that combine knowledge of the Greek market through Greek recruits at their foreign locations and the level of sophistication and quality that is their hallmark. The few intrepid Greek firms also face competition from smaller more opportunistic outfits often run by politically well-connected practitioners (capitalising, at least temporarily, on their personal acquaintances) or university professors who leverage their academic position to secure lucrative appointments as litigation or arbitration counsel or to be engaged to produce legal opinions.

What is now the norm in most of the European Union, the provision of business law advice by increasingly large law partnerships, is still the exception in Greece and the struggle to reshape that market still has a long way to go. 

The recent crisis has underlined how peripheral Greece truly is in the European and global context. It took a while for the impact to be felt, exactly because Greece is loosely connected with the global economy; it will take longer to recover because it depends heavily on borrowings and specific sectors such as tourism, that have a longer term sensitivity to the recent downturn. This means that the top crust for which the larger local practices compete is getting smaller. And yet, the crisis may also have a silver lining: flight to more qualitative legal services.

A corporate ethos

PotamitisVekris was set up in 1996 as part of the strategic effort of one of the big accountancy firms to develop legal services as part of their international service offering. It started as a small team of four lawyers and has grown today to over 30. It boasts six partners well-recognised for their expertise in their respective service areas and skilled associates. Its outlook is international and most if not all of its lawyers have received legal training abroad, a number of them also having been admitted in foreign jurisdictions such as New York, England, Wales and Paris. While small by US and UK standards it is one of the larger Greek firms. It is also now a fully independent law firm having recently separated from its accountancy partner and set out on its own ambitious course.

Having grown within a multinational organisation it has absorbed a corporate ethos that sets it apart from its local competitors. Its partners are a group of completely unrelated individuals, tied by bonds of professional respect and affection and not family relations. In fact says Xenophon Paparrigopoulos, an EU and competition law specialist, “we have agreed never to bring into the firm any relatives in any professional capacity (except as trainees), and have also pledged to leave the firm when time comes against the return of capital actually contributed and no expectation of goodwill or other preferential treatment over those who join as members at a later date.  All associates are entitled to be considered for partnership if they stay with the firm long enough.  Many do. Most of the senior associates have been with the firm since the 1990s.”

Rewarding team work

PotamitisVekris believes that the best professional results are achieved by consistent team work and have structured their compensation and incentives with that in mind. In the Greek legal market, it is common for partners to draw their income from their own clients. This means that clients are first and foremost tied to a partner and only secondarily to the firm.  This is a corollary of the primacy of individuals to the firm. In PotamitisVekris’ view, both lawyers’ and clients’ interests are better served if the firm takes precedence and clients enjoy the benefits of the whole legal team, depending on their needs and the respective skills, experience and specialisation of the lawyers.  Stathis Potamitis, the firm’s Managing Partner, explains: “We have decided to tie partner earnings principally to the performance of the firm as a whole and only secondarily to the contribution of each of us to the top line. Similarly, the common practice in Greece is for associates to receive the larger part of their compensation as a function of the billable hours they book or the revenues they actually generate. We consider that this is not only unfair to our more junior colleagues but, also, destructive of the alignment of interests which is required for a well functioning team of professionals. Our associates receive a fixed salary regardless of the time billed or revenues actually generated. They also receive bonuses but those are not more that one third of the overall annual compensation and are awarded against a combination of individual performance assessment and performance of the firm overall”.

Recognition and trust

PotamitisVekris have seen their reputation rankings improve year after year as the depth and breadth of their expertise becomes better known to its clients and the market in general. Says partner George Bersis, a capital markets expert: “We continuously and consistently improve our standing both in areas where we have been recognised in previous years (capital markets, M&A, energy) but also in new areas, such as IP and competition. We invest very substantially in knowledge tools and continuing education for all our lawyers.  We also invest substantially in infrastructure. We have received ISO certification while we have also just completed the implementation of a new cutting edge MIS system and Document Management System.  We are on our way to a law office with less paper and continue exploring ways to use the available technology to bring us closer to each other and to our clients. To that end we are working on an intranet site that will be accessible by our professionals and selected clients.”

Niche in Southeast Europe

PotamitisVekris tries to stay on top of its clients’ legal needs and to respond to their expectations. The last decade has been marked by the outward expansion of Greek businesses in some sectors (particularly banking) to other Southeast Europe countries. The firm has developed a significant cross border M&A capability and has represented a number of its anchor clients, such as Alpha Bank, Piraeus Bank, Hellenic Petroleum, Sarantis & Fourlis Group, in acquisition moves in Albania, Montenegro, Serbia, Bulgaria, Romania, Ukraine, Poland and Turkey.  Says partner Johnny Vekris, a corporate and real estate expert who has led the firm’s activities in various neighbouring countries: “In the course of our work we developed strong ties with local law firms in each of those jurisdictions, have developed our own familiarity with some of those markets, and to date maintain a very close association with Dinova & Rusev in Sofia. We are one of the very few Greek firms that endeavoured to advise on significant M&A transactions outside Greece as international counsel and have been well received by our clients”. 

Growing the economy

PotamitisVekris have played a significant role in the growth of the Greek capital markets, having taken a lead role in the switch to book entry form of listed securities and the formation and regulation of the Athens derivatives exchange. They also contributed to improving the regulation of financial services firms and the introduction of innovative exchange products.  More recently they have claimed a significant participation in the new infrastructure projects and the growth of PPP in Greece.  Partner Euripides Ioannou has been instrumental in the development of the project finance capabilities of the firm and is now shepherding its expansion into similar areas of practice such as energy. As he explains: “We made a serious commitment early on to address the legal needs of investing in all aspects of energy law – from renewable energy sources to carbon emissions and electricity trading – and we secured recognition as one of the few firms that can claim real legal expertise in that field.”

Professional initiatives

Last but certainly not least PotamitisVekris lawyers declare themselves proud to practice law and are keen to provide assistance not only to paying clients but also to other deserving causes.  The firm has taken special pains to ensure that its lawyers have the opportunity and means to do pro bono work.  Says litigation expert Konstantinos Papadiamantis: “We have pledged to dedicate not less than five percent of our time to pro bono matters and the promotion of worthy causes.  We take on a number of individual cases relating to immigration and political asylum.

We also provide free legal coverage to various not for profit organisations, such as the Elliniki Etairia, an association dedicated to the environment and cultural heritage, the KM Protypi Geitonia (Model Neighbourhood), a new initiative for the revitalisation of Athens, and Libraries for Children and Young Adults, a public private initiative that brings books to underprivileged children around Greece, while we also have acted in the establishment of the Centre for Democracy and Reconciliation in Southeast Europe, an organisation committed to investigating specific ways of enhancing and encouraging social dialogue and building social cohesion in our region. We are also founding members of Resolve, a professional initiative for the promotion of mediation and SDRs, and a new Financial Law Association, recently established in Athens”.

Passion for a better world

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While the rest of the world is still quaking with the after effects of a financial crisis, Central America has silently begun its mission to change.

Often associated with poverty and political upheaval, Central America has commenced plans to merge key services across the five countries, including ambitious plans to continue with Central American integration and to, ultimately, create a single government and currency for the region, as a stepping-stone to modernise and create an improved way of life.

At the forefront of this social and cultural change is Arias & Muñoz, the law firm who cover all areas of practice law throughout Central America.

The firm, which was established in the very heart of Central America almost seventy years ago, has been proactive in its approach to helping the cause, with a dedication to improve situations for those who are in need while also providing excellent service for all of their clients.

Incorporating El Salvador in 1942, the firm has steadily expanded over the last three decades. Founder, Dr. Francisco Armando Arias, who at 95 years old still works in their main offices in El Salvador, was joined in the 1980s by Costa Rican attorneys Josè Antonio Muñoz and Pedro M. Muñoz, and now has seven offices in five countries.

The desire to work to the best of their ability for their clients is an admirable quality with a corporate mission to provide the passion and drive needed to achieve and exceed client needs.

Pro Bono operations

By opening offices and developing a client base in Guatemala, Honduras, Nicaragua and Costa Rica, Arias & Muñoz have been able to cater to the needs of their clients and aid in the reconstruction of some areas of society that are most at need.

Dr. F. Armando Arias, current partner of Arias & Muñoz and son of its founder, spoke to World Finance about the importance of this pro bono work to the company as they strive to help those who are in need.

“We feel like we have a responsibility within the different societies which we are doing business and we feel the pro bono work is a way to reciprocate all the good things we have received from society,” Dr. Arias said.

The pro bono work carried out by Arias & Muñoz has indeed been very successful, with a résumé that reads similar to that of a charity organisation, achieving many triumphs in their quest to protect the interests of the needy.

“I recall that a few years ago I was talking with the priest of a parish of Tacuba, a small town here in El Salvador,” Dr Arias said, “he told me that there was a lot of couples in this town that need to perform marriage in accordance with the civil law system that we have. There has to be a civil law in place before anyone can go to church to perform a religious marriage. He told me that there were many couples that, because of lack of facilities and lack of funds, were not able to get married.”

Arias & Muñoz decided that they wanted to help the people of this small town in El Salvador and thus formed a strong team to draw up the required documents so that marriages could take place.

“There were 40 people from our law firm that were involved in getting all the documents and put all the procedures in place to arrange the marriages and to perform the services. Since then, that was about five years ago, on a yearly basis, we go to the town and we offer to perform the marriages and get all the documents and requirements free of charge for these people.”

This is not the only generous act that Arias & Muñoz have performed for the town, having also started a small clinic and hired a team of practitioners and nurses to give free consultations and medicine for Tacuba’s low income residents. 

The pro bono work undertaken by Arias & Muñoz is just part of their extensive list of services and operations. These services include advice on corporate banking, tax, property and irrigation, with the firm having advised some of the largest Central American and international companies whilst also retaining a dedication to work with small businesses and communities.

Most recently, Arias & Muñoz have struck several lucrative deals, which indicate their substantial influence and status among the world’s major organisations.

“One recent development is the participation of Arias & Munoz in a joint venture between Avianca, the leading Colombian airline and Grupo TACA, the leading airline in Central America and Peru, by which they joined operations through the contribution of their shares to a newly formed holding company”, explains Dr Arias. “The newly formed group represents a consolidation of top airline operations in Latin America which offer world class products, having important hubs in the region: San Salvador, San José, Bogotá and Lima. Estimated revenues of the joint venture are in excess of USD 3bn per annum. Arias & Muñoz work has involved assisting these companies on regulatory issues related to antitrust law in all Central American countries. The US law firm Greenberg Traurig acted as the leading firm for TACA under the coordination of Kenneth C. Hoffman, partner of the firm”.

The deal will see a combination of the two airlines achieving 130 aircraft operating in North, Central and South America, including Boeings and Airbuses.

Another highly successful transaction for the company was Arias & Muñoz’ legal advice to Monsanto, an agricultural specialist in America, whilst buying one of the largest corn producers in Central America. Their professional advice and approach has paid dividends, with Monsanto choosing to keep the firm as one of their legal advisors for future transactions.

Arias & Muñoz’ focus on the environment has also been substantial, with the creation of a specific practice for the concentration of matters in this area. Fantastic results have already been achieved in the two years of operation with the firm continuing to encourage environmental development and protection.

Award-winning

Winning several awards this year for their work, including Central America Law Firm of the Year 2009 and El Salvador Law Firm of the Year 2009 by Chambers & Partners; Best Central America M&A Lawyer 2009 for Dr. F. Armando Arias and Best Corporate and Commercial law firm 2009 both by World Finance, perhaps suggests that Arias & Munoz are more than just a word of mouth success story, as Dr Arias may have us believe. It is Arias & Muñoz’ treatment of their clients, which has earned them much admiration as they strive to be the best and take time in discovering the needs of their clients to provide a professional service.

With the firm achieving substantial success it is likely that further expansion and development may follow.
Dr Arias said: “We are always looking for new opportunities. Panama is one of the opportunities that we are assessing, as well as the Dominican Republic and why not maybe South America with a joint venture with one of our colleagues there.”

The strengthening of core services remains the firm’s main priority with a pledge to improve the knowledge-base of their current employees.

He added: “We are trying to set up a programme by which all our lawyers have masters degrees in specific areas of practice and I think that’s part of our projects in the near future. This is a formation of the professional growth at the firm and I think that is very important for us.”

It is the desire to succeed in each aspect of their work and to go that extra bit further which has made Arias & Muñoz so successful in Central America. They are indeed a “bench mark law firm”, who, as Dr Arias admits, “presume to be an elite in the legal field in Central America and the sense of belonging between our clients and between our lawyers and the firm and the dedication our lawyers feel in whatever they do, I think the clients really appreciate that because they feel that we really belong and can really be part of their business and their company.”

Despite the financial downturn, Arias & Muñoz themselves have not been affected due to their thorough knowledge, cleverly constructed deals and most of all the trust their clients have for them.

“We are great believers that we need to exceed the needs of our clients and are totally and absolutely dedicated in figuring out and meeting the needs of our clients,” Dr Arias said.

Arias & Muñoz stand as a role model for the region, with a commendable focus and tenacity to succeed.

Back to basics

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Europe Arab Bank recently hosted its second Financial Forum at the London Stock Exchange, entitled ‘Managing the Crisis: the response of the MENA regulators’. Moderated by the journalist and broadcaster John Humphrys, the forum featured guest speakers HE Dr. Umayya Salah Toukan, the Governor of the Central Bank of Jordan, and HE Mr. Farhat Omar Bengdara, the Governor of the Central Bank of Libya. Libya and Jordan’s governors gave their thoughts on the impact of the downturn, including their approaches to managing the crisis and views on prevention in the future. The debate on global financial reform has induced widespread interest in the re-regulation of global financial markets and the future of the banking industry as a whole, according to EAB.

EAB is a wholly-owned subsidiary of Arab Bank plc. The Group has a global network of over 500 branches and subsidiaries, in 30 countries across five continents. The Bank provides a ‘Bridge to MENA’, linking Europe with the Middle East and North Africa by combining local knowledge, support and banking facilities with international experience, industry knowledge and product expertise. The market is rapidly expanding, as Europe succumbs to a temporary operation-impeding, one-size-fits-all solution, while MENA looks forward at how to prevent and control risk starting from a date in the past. This is where the difference lies.

A view from Jordan

Jordan is a jurisdiction where ‘events and ideas are still evolving’ (according to Toukan himself), a stellar example of conservative banking. HE Dr. Umayya Salah Toukan, the Governor of the Central Bank laid out the four major issues faced by Jordan:

1 Fragile and unsustainable recovery
The signs of sterilisation and recovery gave rise to concerns that recent indicators may have resulted from unprecedented fiscal measures, according to Toukan. Exit strategies need to be put in motion while striking the balance between, on the one hand, not exiting too early and repeating the mistakes of the Great Depression, and on the other, ensuring that private sector demand is robust enough to meet public sector stimulus. Running alongside these issues is the concern that if inflation accelerates, interest rates will have to rise in an untimely manner.

We were reminded that the declining dollar may be a factor in protectionist measures, and Toukan re-iterated just how crucial it was to avoid a 1930s-style disaster. Speaking with great expertise and prudence, Toukan revealed that one of the conclusions from the IMF meeting in Istanbul was that a co-ordinated future of global action was needed to address macro-economic challenges and existing internal and external imbalances, and the responsibility for this ought to be placed on the US, Europe and China.

2 Going back to basics
Serious damage has been done, Toukan admitted, and the speculative frenzy by global banks has been a main factor in the free-fall. HSBC chairman Stephen Green’s famous ‘the industry collectively owes the real world an apology’ quote, couldn’t have been more timely, and the Jordanian governor accepted it with nigh-on aplomb. The order of the day must be ‘back to basics’ rather than disguising the problems with a ‘business as usual’ shroud.

3 The regulatory regime
Regulators opted to deregulate and rely on self-regulation, and IMF surveillance failed. In contrast, the design of the new regime gives a larger mandate to certain banks while leverage ceilings, capital adequacy requirements and compensation schemes don’t reward excessive risk-taking and central banks will have to be micro and macro-regulators. The two related risks of the new regime entail taking in the larger mandate itself and that of over-regulation and its impact. He described the more substantive role of the new regime as anchoring not only inflation, but also confidence. The problem lies far deeper than in the figures according to Toukan, and it’s essential that faith is restored for credit to flow and for the economy to function.

4 The future of international institutions
The G20 has acknowledged the growing impact of developing countries such as India, Brazil and Saudi Arabia, according to Toukan and as a result, the design of the new order will take longer. The post-WWII order was designed in some two weeks, and it is essential that MENA has a role in the new evolving order. Increasingly conservative policies of banks leaves countries better placed than when this crisis kicked off, and but there are still serious economic challenges  to be dealt with, namely fiscal discipline, macro-economic reform, and harmonisation between countries.

Policy framework needs to be taken more seriously, according to Jordan’s governor. Political and social reform should be pursued with an open mind, and the rule of law and freedom of expression are essential to the investment climate. Policy framework in Jordan has touched on this over the past ten years, with pre-emptive steps to maintain confidence and restore a healthy banking system.

Libya’s recovery
HE Mr Farhat Omar Bengdara outlined the positives of Libya’s recovery, recalling that in spite of early comparisons with the 1930s, the crisis seemed to be unwinding faster than anyone expected. Stability and recovery are underway, and the processes in place seem to be strong. The banks reacted swiftly, protectionist measures did not spread and policy-makers became more aggressive; measures were used to instill public confidence, sure, but it wasn’t all optimistic.

Can central banks sustain the current monetary policy of low interest rates, injection-assisted liquidity and inflationary pressure? Could government and the central banks continue to support the banking sector and continue making bailout plans? Will consumer confidence be restored? Expected growth has not been as strong as at the end of previous recessions, and unemployment is expected to remain high for some time in Libya. The recovery is unlikely to be uniformly V or W-shaped, as the form of recovery depends on how and when countries exit the policies implemented. Modestly, Bengdara explored Libya’s positive position in terms of growth and depth of crisis, talking down their ample liquidity and early shifting to government bonds and long-term maturities.

The crisis reaffirmed the belief that we need a well-sequenced approach with broad-ranging programmes in place to modernise the central banking systems. This includes an upgrade of monetary policy framework, structure and supervision. The governor reminded us how one country’s problems have a knock-on effect on others, and emphasised the importance of an international address of shortcomings to identify holes in regulatory framework. Libya’s plans to build a solid and efficient banking system are in good stead, with the country currently in a far more comfortable position than many; Bengdara remained understated about Libya’s surplus, dignified even.

The road ahead
Conservative banking is the way forward. Cash ought to be kept for local needs, while maintaining a small ratio of strategic investment with some banks but a lower-risk strategy. Collective punishment should be avoided where possible, as punishing banks not at fault fails to redress the balance.

Liquidity and leverage ratios make it difficult for banks to be profitable, but the regulators have to – according to both Bengdara and Toukan – be careful not to kill financial innovation. Pessimism and uncertainty are far more than a public façade for the problems faced, but the rest of the world can take much from Libya and Jordan’s approaches.

Caleb cleans up in Zambia

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The head of the Bank of Zambia is a religious man. And he needs to be in a country that was until a few years ago infamous for corruption, the weakness of its central bank, the woeful inadequacies of its banking system, and generally low international regard for the national currency, the kwacha.

On this occasion however, Fundanga wasn’t referring to his nation’s Augean stables but to a Bank of Zambia-backed initiative to keep the streets of Lusaka neat and tidy. The initiative could be taken as a metaphor for Fundanga’s campaign to tidy up the banking system as well as to reform public finances. He’s had the job for seven years, an unusually long period in a nation where central bankers routinely fall foul of the government. It was Fundanga’s good fortune to start his run under the late Levy Mwanawasa, the anti-corruption president who died in 2008. Had he tried to implement reforms under Mwanawasa’s predecessor, the long-serving, big-spending Frederick Chiluba, the governor would probably have gone a long time ago.

Chiluba has been cleared in a six-year trial of charges of stealing USD 500,000 in Treasury bills while his wife was given three and a half years hard labour on other charges. A 2004 civil ruling brought by Zambia’s attorney-general, London’s High Court has ordered the ex-president to return USD 24m in looted funds.

The job of Zambia’s chief central banker is rather different from that of, say, the governor of the Old Lady of Threadneedle Street. The governor has a wide range of responsibilities that in other countries are parcelled out among different offices. For instance, not only does Fundanga’s BoZ have to worry about the entire financial sector from banks to building societies, insurers to microfinance, it has responsibility for the integrity of the kwacha, the implementation of a real-time payment system across the financial sector including the Lusaka Stock Exchange and, it seems, the state of national finances. In many ways the governor is the conscience of the entire financial system.

Among other reforms the BoZ is in the middle of a full-scale campaign to push banking services into the bush, mainly through telephone banking. Most of the Zambian population are “unbanked”, and “financial inclusion” is Fundanga’s goal. As many nations reel from the shockwaves of the global crisis, Fundanga is widely seen as a beacon of hope.
Foreign investors have just written off USD 11bn in the Congo while Nigeria’s central bank had to find USD 4bn to bail out nine of the country’s 24 banks for a series of disastrous loans to local businesses. You can be sure Fundanga has been on the phone to his Nigerian counterpart, the newly-appointed Lamido Sanusi.

It’s been a busy seven years for Fundanga. Back in 2002, just after Chiluba lost power, the IMF delivered a damning report on just about every aspect of Zambia’s banking system. It was particularly horrified by the way Chiluba’s government gave pay rises to the “defence forces” out of empty coffers during the elections. However its latest report gives good marks. A more stable interbank market for funds is under development. The currency was floated, and there are plans to seek a sovereign credit rating.

Further reforms are necessary. The IMF criticised the failure of ministries to stick to budgets. This is par for the course in Zambia, despite the governor’s efforts. The latest presidential elections that brought Rupiah Banda to power blew out the public finances once again.

Along the way the governor has received plenty of flak from his opponents for adopting western-style systems. One politician described him as “a blind follower of neoliberal dogma of the imperialists and neocolonialists”. That’s also par for the course for reforming central bankers in sub-Saharan Africa.

Obama sees climate deal as summit deadline nears

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US President Barack Obama has expressed confidence a climate deal can be clinched as dozens of world leaders gather on Wednesday to try to break a deadlock at UN climate talks.

“The president believes that we can get an operational agreement that makes sense in Copenhagen,” White House spokesman Robert Gibbs told a briefing in Washington on Tuesday, three days before a deadline on a new UN deal to combat climate change.

Leaders including Venezuelan President Hugo Chavez, Zimbabwe’s President Robert Mugabe and British Prime Minister Gordon Brown were set to give speeches at the December 7-18 climate meeting, until now dominated by environment ministers.

The world leaders have until a main summit on Friday to agree a deal under a deadline set at a meeting in Bali, Indonesia, in 2007. Negotiations since Bali have been marred by mistrust between rich and poor nations.

US Secretary of State Hillary Clinton wrote in an International Herald Tribune opinion piece on Tuesday that success in Copenhagen demanded that all major economies take decisive action and agree to a system that is transparent and trusted.

“The president believes that to get an agreement that is truly operational, that we have to have that – that transparency.  That’s one of the things that he’ll work on as we go forward,” Gibbs said.

As the deadline approaches for a pact that would favour a shift to low-carbon businesses, some politicians are warning of the risks of failure in the 193-nation negotiations, even as they urge compromises to allow a breakthrough.

“It’s possible that we will not reach agreement and it’s also true that there are many issues to be sorted out,” Brown said in Copenhagen on Tuesday night.

“In these very hours we are balancing between success and failure,” said Danish President of the two-week meeting, Connie Hedegaard, at the opening of a high-level phase of the talks on Tuesday night.

A formal summit of more than 120 world leaders on Thursday and Friday is due to agree a global deal to slow rising temperatures set to cause heat waves, floods, desertification and rising ocean levels.

Environment ministers have been meeting since the weekend, trying to ease splits between rich and poor nations about sharing out the burden of curbs in emissions of greenhouse gases and raising billions of dollars in new funds to help the poor.

Deeper cuts in greenhouse gases

“The absolute core benchmark for success is for the first time in history to have an agreement between rich and poor countries on this common challenge,” Australian Prime Minister Kevin Rudd said in Copenhagen.

The United Nations wants developed nations to cut their greenhouse gas emissions more deeply than planned by 2020, wants developing countries to do more to slow their rising emissions and wants billions of dollars in aid to help the poor.

China, the United States, Russia and India are the top emitters and have all set goals for curbing emissions in recent months. But rich and poor nations are demanding more than the other side is willing to give.

A major hurdle is that the United States has not yet passed legislation capping its emissions – unlike all its main industrial allies.

Friends of the Earth said that South African Nobel Peace Prize winner Archbishop Desmond Tutu wrote to all African leaders urging them to insist on a deal to limit global warming to a temperature rise of 1.5 Celsius over pre-industrial times.

Many nations favour an easier 2.0 Celsius limit.

“A global goal of about 2 Celsius is to condemn Africa to incineration and no modern development,” according to a copy of the letter. Tutu said that it would be better “to have no deal than to have a bad deal”.

But Brown said the costs of failure to rein in greenhouse gases, mainly from burning fossil fuels, could be huge.

Inaction would cause “a reduction in our national income of up to 20 percent, an economic catastrophe equivalent in this century to the impact of two world wars and the Great Depression in the last,” he said in a statement on arrival in Copenhagen.

Major US businesses including Duke Energy, Microsoft and Dow Chemical called for tough US emissions cuts which would mobilise a shift to a greener economy.

US’ Geithner: TARP to earn healthy profit for US

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Plans from Wells Fargo & Co and Citigroup to repay taxpayer funds will put the US government on track to reduce its bailout investments in banks by more than 75 percent, while earning a healthy profit for the US, Treasury Secretary Timothy Geithner said on Monday.

“With the recent announcements on repayments, we are now on track to reduce TARP bank investments by more than 75 percent, while earning a healthy profit on that commitment,” Geithner said in a statement after Wells Fargo announced it will repay the $25bn it received from the government under the Troubled Asset Relief Program after it sells $10.4bn of common shares.

A Treasury spokesman said separately that the Treasury was “pleased that Wells Fargo was moving ahead with plans to repay taxpayers back,” adding that the department has repeatedly stated that it never intended to be a long-term shareholder in private companies. He added that replacement of taxpayer funds with private capital increases confidence in the financial system.

“Today’s announcements mean that more than $185bn of the $245 that TARP invested in banks is now slated to be returned to taxpayers – with $90bn scheduled to come back just in this month alone,” the spokesman said in a statement. “While much work lies ahead to improve lending and spur job creation, the news from Wells Fargo moves us closer to winding down the government’s unprecedented involvement in the banks.”

Malaysia PM to offer CO2 reductions in Copenhagen

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Malaysia’s government will offer “credible” cuts in its emissions of carbon dioxide at the Copenhagen climate change summit in a bid to halt global warming, Prime Minister Najib Razak told Reuters on Sunday.

Najib will be among more than 110 world leaders who will meet in Copenhagen next week to attend a summit to try to clinch a deal on deeper emissions cuts by rich nations, steps by developing nations to cut their carbon pollution and finance to help the poor adapt to climate change.

“We are willing to offer our commitment, I am not just going to call on the developed world I am going to commit Malaysia and I am going to commit Malaysia to very credible cuts which means we have to spend, which we will do,” Najib said in the interview.

Najib said the cuts were still being worked on.

The UN has said a full, legal treaty to expand or replace the existing Kyoto Protocol is out of reach at the talks, after two years of troubled negotiations, and is likely to be agreed some time in 2010.

UN data shows Malaysia’s carbon emissions in 2006 stood at 187 million tones or 7.2 tonnes from each Malaysian.

Although that figure is far less than neighbouring Indonesia, which is the world’s third largest emitter with 2.3 billion tonnes or 10 tonnes per capita, according to Indonesian government data, Najib said all nations must contribute.

“It has to be predicated on the fundamental principles of the Kyoto protocol and the UN Framework on Climate Convention,” he said.

“Amongst which the most important being the common but differentiated responsibilities that the developed world must deliver against larger cuts in terms of carbon emissions and that the developing world should be assisted particularly in terms of finanancial assistance, capacity buiding and technology.”

Tight budgets must accomodate climate change

Najib said that despite the current economic turmoil, which has seen the US and Europe plunge into huge budget deficits, the fight against climate change had to take priority.

The UN wants to raise $10bn a year from 2010-12 in quick-start funds to help the poor cope with global warming and move away from fossil fuels. But few nations have offered quick-start cash.

In the longer term, the United Nations estimates the fight against global warming is likely to cost $300bn a year from 2020, largely to help developing nations adapt to impacts such as droughts, floods and heatwaves.

“If we really talking about it we must walk the talk (on funding). Otherwise we are just going to face a very uncertain future and the effects will be quite catastrophic,” Najib said.

Bolivia’s Morales needs cash, know-how for bold plans

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Bolivia’s President Evo Morales wants to launch state-run paper and cement ventures and develop lithium, petrochemical and iron projects in his second term but a lack of foreign investment and know-how could hamper his ambitious plans.

Leftist Morales won 63 percent of the vote in an election on Sunday to run the energy-rich but economically poor Andean nation for a second term, according to quick count tabulations. Official results were due later on Monday.

In his first term, Morales nationalized the natural gas industry, the country’s top export earner, forcing foreign firms such as Spain’s Repsol and Brazil’s Petrobras to hand a larger share of revenues to the Bolivian state.

He also took over mining and telecommunication companies and launched a government-run airline and a daily newspaper.

The government has said it now controls 28 percent of the economy, up from about eight percent before Morales took office, and is eyeing a 40 percent role in the near future.

Morales is negotiating the acquisition of a majority stake in three power generation companies, two of which are controlled by Britain’s Rurelec PLC and France’s GDF Suez.

He has vowed to use his five-year second term to build large hydroelectric dams; launch cement, paper, dairy, sugar and drug companies; and develop petrochemical, iron and lithium industries to allow Bolivia to export value-added products.

Although the landlocked country has the second-largest deposits of natural gas in South America after Venezuela and massive reserves of lithium and iron, it has failed to develop a strong economy from its natural wealth and most consumer goods are imported.

Bringing know-how
Finance Minister Luis Alberto Arce acknowledges the government cannot develop large-scale projects without outside help.

“Foreign investors have two advantages, they could bring the know-how and the cash … (they would be welcomed) to invest in strategic sectors if they have an expertise that we don’t have,” he told reporters in an interview on Friday.

“We’d like to do it on our own, but we can’t,” he said.

Morales, an Aymara Indian who herded llamas as a boy, has said large-scale projects would allow him to boost social welfare programs. Cash handouts to encourage school attendance, to the elderly and to young mothers have reached 2.5 million Bolivians, about a quarter of the population, this year.

“Thanks to the nationalisations … we can pay stipends and subsidies,” Morales said in a campaign meeting in the northern Pando region last week.

Although critics have accused Morales of buying voter support with subsidies, Arce insisted they are spurring economic growth.

Analysts say Morales’ moves to give the state a bigger role in the economy have deterred foreign investors, preventing Bolivia from honoring pledges to increase natural gas output.

“They told us that the natural gas sector was going to fuel revenue growth, but instead we are losing markets … It remains to be seen whether there will be resources to finance these huge projects,” said analyst Gonzalo Chavez.

Between 2006 and 2008, foreign companies invested an average of $383m a year in Bolivia, less than half what they invested between 1998 and 2000. Arce said sales of natural gas to Brazil, which buys the bulk of Bolivia’s energy production, fell this year by 22 percent to 24 million cubic meters a day.

However, Bolivia hopes to boost natural gas exports to Argentina, thanks in part a consortium led by oil major Repsol, which has pledged to invest $1.5bn in Bolivia.

Morales last week lamented that the lack of foreign investment prevented Bolivia from developing an industry to refine natural gas into other by-products and acknowledged that he needs to lure investors to the landlocked country.

“How to guarantee these projects, how to guarantee investments, that’s the responsibility of the state. That’s another challenge,” he said.

Morales is a fierce critic of capitalism and blames foreign companies for ransacking Bolivia’s natural resources, but some analysts say he will likely to be less radical in his second term.

“The government … now wants to attract more investments to develop (the hydrocarbons and mining sectors). As a result, it will probably be careful not to adopt excessively aggressive measures that could lead to the departure of foreign investors,” said the New York-based Eurasia Group.

OPEC set for no change, oil price holds the key

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OPEC is expected to hold output steady when it meets in Luanda at the end of this month, rounding off a year of stable production policy and of robust oil prices.

Oil inventories are brimming and any recovery in demand is expected to be slow, but international benchmark U.S. crude futures have more than doubled from just above $32 a barrel last December to above $76 now – roughly the level OPEC has said is high enough for producers and not too high for the still delicate world economy.

“The oil price has not been the cause of surprise for us for some time, so there is really no need for OPEC to surprise the oil market,” one OPEC delegate told Reuters.

More comments were expected this weekend at a meeting of the Organisation of Arab Petroleum Exporting
Countries in Cairo on Saturday, but no formal decision on output policy is expected until the 12 members of OPEC meet on December 22 in Luanda.

When the Organisation of the Petroleum Exporting Countries last met in September, Saudi Oil Minister Ali al-Naimi told reporters the market was supported by expectations of economic growth and able to ignore excess supply.

That meant the group could keep output policy officially unchanged, as it has done ever since last December’s announcement of a record cut of 4.2 million barrels per day.

In an interview shortly after the September meeting, Naimi went so far as to predict there would be no need to change output targets for all of 2010 on the basis of supply and demand forecasts then available.

“I think they are comfortable with where prices are now. I don’t think anybody is suggesting this is justification for a rise in supply. Equally, they’re not too worried right now about fundamentals,” said David Kirsch, director of market intelligence at PFC Energy in Washington.

Unofficially moving targets
The only change this year has been decreasing compliance with OPEC’s output targets.

As prices have recovered from the December 2008 fall to the lowest in nearly five years, OPEC’s discipline has gradually slipped from historic highs of around 80 percent in April and May to only around 60 percent of agreed curbs now.

Provided the group does not spring any surprises in Luanda, at a meeting hosted by the current OPEC president Angola, this would be the longest period of steady output policy since 2005-6.

Then oil prices had faltered to around $60 a barrel, but a long-term bull-run, begun around 2002 was still essentially intact.

The rally ended with last year’s record price spike to nearly $150 a barrel in July, followed by the economic crisis.

Fundamentals versus speculation
Now, some analysts argue, OPEC could face further price falls if it does nothing in view of inventory levels well above historic averages and the prospect of a seasonal fall in demand in the second quarter of next year.

Another view is that prices have been remarkably resistant given historically high levels of inventory. The implication is there is speculation in the market and OPEC should raise output levels if it wants to cap price gains that could destroy demand in a still difficult economic context.

Already leading exporter Saudi Arabia increased its supplies to some regular customers in December, industry sources said, although Kirsch estimated the increase was probably only around 150,000 bpd.

“Given that Saudi Arabia has already started to leak a bit more crude oil and has sent repetitive comments that it would not allow the market to run away higher, we will not exclude the scenario of an increase in the official quota at the next meeting,” said Olivier Jakob of Petromatrix.

The backdrop of Copenhagen climate change talks December 7-18 has highlighted the risk to OPEC of a global drift away from fossil fuels and the Dubai debt crisis, right at the heart of the core oil-producing region, has served as a reminder of the continuing weakness of the global economy.

In an interview with reporters, OPEC Secretary General Abdullah al-Badri said OPEC would have to tread carefully at the December meeting.

“OPEC’s policy decisions throughout 2009 have clearly demonstrated our commitment to the global economy and assisting in its recovery,” Badri said.

He also noted the high levels of inventory. In addition to brimming stocks on land, he estimated a massive 165 million barrels of crude oil and refined products were floating in vessels at sea.

“They (OPEC members) don’t feel that fundamentals are driving it up, so if they put more oil in the market now what good would that do?” said Kirsch of PFC Energy.

Lamborghini braces for tough 2010, China revs up

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Lamborghini expects to post a roughly 35 percent slide in 2009 sales as the global economic downturn slams the brakes on spending from even the super-rich, with growth likely to pick up again only in 2011.

Next year will remain challenging for the maker of supercars graced by a charging bull logo, a unit of top European car-maker Volkswagen, though bright spots such as China may help salve the pain.

Chief Executive Stephan Winkelmann said on Wednesday Lamborghini was on track to end 2009 with about 80 cars sold in China – a sliver of the company’s annual 2,000-odd production but a market that should rank among its biggest in coming years.

Lamborghini sold 70 cars in China in 2008.

“It was tough, it’s still tough,” Winkelmann told reporters in an interview in Los Angeles before opening the company’s first fashion and accessories boutique outside China.

“2011 will be a recovery, but we first have to see, if the year 2010 will be another very tough year for the industry.”

Known for low, sleek designs and eye-watering top speeds, Lamborghini and rival Ferrari, owned by Italy’s Fiat, have remained resilient through past downturns. But the severity of the current recession has walloped their business.

Lamborghini posted a 37 percent drop in sales in 2009’s first 10 months, Winkelmann told Reuters. Executives nonetheless expect to achieve a full-year pre-tax profit.

It sold 2,430 cars in 2008 with prices ranging from €170,000 to €360,000 ($256,000-$542,200). In the first half, it managed a €5.4m profit on revenue of €223.7m – a drop of more than 43 percent.

Winkelmann would not forecast 2010 sales.

But “everything you see has been much worse than forecast,” he warned, referring to the industry and economic data.

Divine sound
All that gloom was set aside briefly on Wednesday. In a nod to the city’s reputation as a luxury motorists’ haven, about a score of brightly hued Lamborghinis powered their raucous way from Santa Monica through winding canyon roads to the suburb of Topanga, drawing envious stares.

Winkelmann and a number of executives from Lamborghini’s Sant’Agata Bolognese headquarters then presided over the low-key launch of a fashion boutique outside of Los Angeles, near the upscale beachfront community of Malibu, selling branded products from jackets and trousers to bags.

The boutique bore more than a passing resemblance to outlets bearing Ferrari’s prancing stallion logo, but executives downplayed comparisons.

“You buy into a brand, you increase image and awareness,” Winkelmann said. More are planned in future, but “in this tough economic situation we don’t want to push too much.”

Founded in 1963 by Ferruccio Lamborghini and now a unit of Volkswagen’s luxury Audi brand, Lamborghini will remain focused on investing in technology and matching production with waning demand, Winkelmann stressed.

It has hemorrhaged customers in real estate and investment banking industries pummeled by financial market turmoil and the credit crunch. But many are simply postponing purchases as the decision to buy a Lamborghini was both emotional and financial, executives argued.

In response, the company has scaled back production, sent workers home temporarily and negotiated deals with suppliers to tide it through the difficult environment.

Lamborghini boosted pre-tax profit by 27 percent in 2008 to €60m ($84.66m) on revenue growth of 2.5 percent to €479m.

Longer term, the company is making inroads into promising markets beyond its traditional strongholds of Europe and the United States, including Latin America, to continue to try and expand its fan base.

Winkelmann has said he expects China to overtake Italy as its second-biggest market in the next three to five years, up from ninth-biggest last year.

“If it’s going to go on like this, it’s going to happen sooner than expected,” Winkelmann said. But “I don’t want to be too optimistic.”

Hopes low on near-term China approval for Hummer deal

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Hopes China’s Tengzhong will complete the deal to buy General Motor’s Hummer brand as early as this week appear unlikely to be fulfilled, with the regulator tasked with assessing the deal yet to receive a formal application, according to a regulatory source.

Nearly two months have passed since GM signed a deal to sell its iconic but tarnished Hummer brand to Sichuan Tengzhong Heavy Industrial Machinery, an obscure Chinese machinery maker.

Hummer’s CEO Jim Taylor told Automotive News last month he hoped a deal would be closed by December 1 but the deal needs approval from China’s Ministry of Commerce, which is still awaiting documents from Tengzhong.

“We have not received formal application materials from Tengzhong,” said an offical at MofCom, who asked not to be identified due to the sensitivity of the matter.

“The Tengzhong-Hummer issue is not on our agenda yet,” the official told reporters.

However, Tengzhong said it had been in touch with the Chinese government since before closing the landmark Hummer deal with the Detroit automaker in early October.

“We have been cooperating with the government all along and have submitted whatever materials needed for the approval,” said a Tengzhong representative.

“There is little we can do at this stage. We can only wait.”

A MofCom spokesman declined to comment.

Rocky road
Chinese manufacturers are venturing on to the global stage with bids for Western brands to take advantage of a steep industry downturn, but there remain doubts on whether they can handle such deals given their lack of expertise and limited international exposure.

For Tengzhong, the challenge is even greater, as on top of turning around GM’s struggling gas guzzler, it needs to clear regulatory hurdles for a deal which runs counter to China’s energy efficiency drive.

Taylor, the GM executive who has helped steer the sale and will remain as the new company’s chief executive, was told that approval would take four to six weeks after closing the deal, according to Automotive News.

Analysts say the apparent foot-dragging by the commerce ministry suggests there are opposing voices in the Chinese government against the Hummer deal even though it is premature to ring the death knell now.

“Obviously regulators in Beijing can’t see eye to eye on the Hummer buy as it’s a brand going down hill globally,” said Boni Sa, an analyst with international industry consultancy CSM Worldwide.

The lack of details disclosed in the sales agreement, including the financial terms, also raised question marks.
 
“All we know is that Tengzhong owns the Hummer brand and the right to use the technologies. And that by itself does not sound like a good deal,” John Zeng, an analyst with consulting firm IHT Global Insights.

Hummer has its origins in a multipurpose vehicle known as the Humvee that was used by the US military. GM bought the brand in 1999 and its sales peaked in 2006, but they have been hit hard since then by a slumping US economy and higher gas prices.

Through September, its US sales were down 64 percent this year.

Spain’s jobless claims rise again in November

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Spain’s registered jobless rose for the fourth consecutive month in November official data showed on Wednesday, and was seen edging higher as the recession weighs and a multi-billion euro stimulus package loses steam.

The Spanish economy is not expected to emerge from recession until next year as it reels from the collapse of a decade-long construction-led boom and plummeting consumer spending.

Seasonally unadjusted data showed Spanish jobless claims rose by 60,593 in November from October to almost 3.9 million people, almost a million more than a year ago, the Labour Ministry said.

The rise was less fierce than the almost 100,000 layoffs in October and around 170,000 leap in November 2008, the government noted, but should not be taken as a sign the economy will begin to create jobs any time soon, economists said.

“The November numbers were slightly better than expected. However, in general, unemployment in Spain is likely to increase further, but maybe at a slower pace,” said Giada Giani at Citigroup.

The Spanish government pumped €8bn into the economy this year to create more than 400,000 mostly low-skilled jobs in an attempt to patch the hole left by the paralysed housing sector.

The around 30,000 infrastructure contracts created by the plan will be completed by the end of the year, and with little sign of a general return to growth, Spain’s labourers are once again expected to rejoin dole queues.

“We don’t see the government suddenly withdrawing stimulus measures to help workers. But in 2010 we continue to see unemployment increasing with minimal growth expected,” said Silvio Peruzzo at RBS.

The government has announced plans to launch a new €5bn stimulus plan for 2010, but it will be aimed at sustainable long-term growth sectors like renewable energy, environmental tourism and new technologies.

Reform talks
While economists have called for wide-sweeping reforms to the labour market, the government has been cautious to make any major proposals which have not been decided through consensus with the workers’ unions and business representatives.

Spanish Prime Minister Jose Luis Rodriguez Zapatero outlined several areas in which the labour market could be streamlined on Wednesday and said tripartite talks on the measures will begin in the first quarter of next year.
But analysts worry that the number of jobless would continue to increase in the absence of urgent reforms and as the recession drags on.

Eurozone-wide unemployment remained stable at an 11-year high in October at 9.8 percent, official data showed on Tuesday, while Spain stood at 19.3 percent in same month, the worst in the 16-member region.

Last year’s sudden collapse of the construction sector has quickly spread across the whole economy and all main economic areas registered losses in November, the government said.

Data showed the jobless rate in the service industry rose 1.7 percent month-on-month and by 1.3 percent in construction. Joblessness also increased by 0.6 percent in the industrial sector and by 2.6 percent in agriculture.