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Some Emiratis glad Dubai’s ambitious plans dented

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Dubai nationals were alarmed by the fallout from the emirate’s debt standstill, but many hope the crisis may stem the torrent of foreigners into the conservative Gulf Arab city, where locals are outnumbered ten to one.

The freewheeling emirate, one of seven that form the United Arab Emirates, sent jitters through global markets last week when it announced that one of its flagship developers had asked for a six-month repayment freeze on some debt.
The global financial crisis over the last year has tarnished Dubai’s growth model – neo-liberal, East Asian-inspired and tightly managed from the top by ruler Sheikh Mohammed.

Construction work has slowed. Dubai’s debt pile is now estimated by Moody’s ratings agency at $100bn.

Most Emiratis say they are proud of the UAE’s global name, gained largely through Dubai’s glamorous projects such as man-made islands in the shape of palm trees and architectural gems such as the sail-shaped Burj al-Arab hotel.

But as foreigners flocked in, Emiratis were reduced to barely a tenth of Dubai’s 1.7 million population and their share of UAE’s 4.2 million total population is not much greater.

Radio talk shows and internet debate have portrayed the issue as a crisis in the past year.

“I don’t have anything to lose in this financial crisis,” said Ebtisam al-Kitbi, a politics professor at the UAE University in al-Ain. “As an activist and academic, I view it as an advantage for us as Emiratis.”

“There was only the sound of real estate here, and if you criticised anything, they said ‘you are against development’,” Kitbi said, adding that major trading families had their own commercial interest in what was termed the “Dubai model”.

Dubai was the UAE and Gulf Arab pioneer in allowing foreigners to own property in certain areas, encouraging wealthy Arabs, Asians and Westerners to buy into the dream.

The rulers and certain merchant families have been the biggest local beneficiaries of the affluence. Most Emiratis work in the government sector and some live modestly.

While foreigners cluster in the cities and luxury skyscrapers, Emiratis tend to live separately in their own communities, jealously guarding their traditions.

“Emiratis are relieved a bit due to the international financial crisis, but it is nowhere close to where people would like to see the country heading,” said UAE blogger Ahmed Mansoor. “I believe the UAE has reached the point of no return when it comes to demographic imbalance.”

Defiant tone
The tone was defiant during UAE national day celebrations this week, where miniature models of iconic Dubai buildings and Sheikh Mohammed’s book “My Vision” – lauding a “make the desert bloom” miracle – have been paraded through the streets.

On a TV talent show, the audience gave a special cheer when the name of the man behind Dubai’s “miracle” was mentioned.

The Dubai ruler, also UAE vice president and defence minister, came out fighting on Tuesday, saying the global reaction to the debt crisis had shown “a lack of understanding”.

Dissent has been muffled in a society encouraged by official media to go along with the runaway development brought about by their rulers’ policies. The UAE has a federal advisory body, but less than one percent of Emiratis are eligible to vote.

Media activity criticising rulers or harming the economy faces heavy fines in a draft media law waiting approval.
Emirati political scientist Abdul-Khaleq Abdullah, who signed a rare petition against the draft law this year, said the authorities were now keen to assuage local concerns.

“On a fundamental level, there is a realisation that this country has managed to cater to expat needs too far and they paid little attention to local, national concerns,” he said.

“They don’t want to get locals too angry. The state is one step ahead of a demand from locals.”

Foreigners are being encouraged to dress modestly, some were arrested for eating in public during the Muslim fasting month of Ramadan, and two Britons were tried last year for engaging in sexual activity out of wedlock and in public.
The foreigner majority is even cited in UAE domestic discussion as a reason for avoiding democracy, since that could encourage long-term residents to demand a say in governance.

“It’s safer to have 90 percent of the population as foreigners, as long as locals can have some kind of elite status,” said British historian Christopher Davidson, adding that Dubai paid only lip service to controlling expat inflow.

A tale of two American economies

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But official measures of GDP may grossly overstate growth in the economy as they don’t capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. Third quarter GDP – properly corrected for these factors – may have been two percent rather than 3.5 percent.

The story of the US is, indeed, one of two economies.  There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.

Consider the following facts. While America’s official unemployment rate is already 10.2 percent, the figure jumps to a whopping 17.5 percent when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the last three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest that those losses were above two million.

Moreover, the total effect on labor income – the product of jobs times hours worked times average hourly wages – has been more severe than that implied by the job losses alone, because many firms are cutting their workers’ hours, placing them on furlough, or lowering their wages as a way to share the pain.

Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever, and recent studies suggest that a quarter of US jobs can be fully outsourced over time to other countries. Thus, a growing proportion of the workforce – often below the radar screen of official statistics – is losing hope of finding gainful employment, while the unemployment rate (especially for poor, unskilled workers) will remain high for a much longer period of time than in previous recessions.

Consider also the credit markets. Prime borrowers with good credit scores and investment-grade firms are not experiencing a credit crunch at this point, as the former have access to mortgages and consumer credit while the latter have access to bond and equity markets.

But non-prime borrowers – about one-third of US households – do not have much access to mortgages and credit cards. They live from paycheck to paycheck – often a shrinking paycheck, owing to the decline in hourly wages and hours worked. And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms. Larger firms – even those with large debt problems – can refinance their excessive liabilities in court or out of court; but an unprecedented number of small businesses are going bankrupt. The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans, and other forms of consumer credit.

Consider also what is happening to private consumption and retail sales. Recent monthly figures suggest a pick-up in retail sales. But, because the official statistics capture mostly sales by larger retailers and exclude the fall in sales by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is.
And, while higher-income and wealthier households have a buffer of savings to smooth consumption and avoid having to increase savings, most lower-income households must save more, as banks and other lenders cut back on home-equity loans and lower limits on credit cards. As a result, the household savings rate has risen from zero to four percent of disposable income. But it must rise further, to eight percent, in order to reduce the high leverage of household sector.

To be sure, the US government is increasing its budget deficits to put a floor under demand. But most state and local governments that have experienced a collapse in tax revenues must sharply retrench spending by firing policemen, teachers, and firefighters while also cutting welfare benefits and social services for the poor. Many state and local governments in poorer regions of the country are at risk of bankruptcy unless the federal government undertakes a massive bailout of their finances.

Moreover, income and wealth inequality is rising again: poorer households are at greater risk of unemployment, falling wages, or reductions in hours worked, all leading to lower labour income, whereas on Wall Street outrageous bonuses have returned with a vengeance. With the stock market rising while home prices are still falling, the wealthy are becoming richer, while the middle class and the poor – whose main wealth is a home rather than equities – are becoming poorer and being saddled with an unsustainable debt burden.

So, while the US may technically be close to the end of a severe recession, most of America is facing a near-depression. Little wonder, then, that few Americans believe that what walks like a duck and quacks like a duck is actually the phoenix of recovery.

Nouriel Roubini is Professor of Economics at the Stern School of Business at New York University and Chairman of Roubini Global Economics (www.roubini.com).

© Project Syndicate 1995–2009

Escaping the fossil fuel trap

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Worst of all, they carry large and unsustainable costs in terms of carbon emissions. Indeed, their contribution to rising levels of CO2 in the atmosphere is beginning to overshadow the other problems.

But use of fossil fuels, and hence higher CO2 emissions, seems to go hand in hand with growth. This is the central problem confronting the world as it seeks to forge a framework to combat climate change. Compared to the advanced countries, the developing world now has both low per capita incomes and low per capita levels of carbon emissions. Imposing severe restrictions on the growth of their emissions growth would impede their GDP growth and severely curtail their ability to climb out of poverty.

The developing world also has a serious fairness objection to paying for climate-change mitigation. The advanced countries are collectively responsible for much of the current stock of carbon in the atmosphere, as well as for a significant (though declining) share of the world’s annual emissions. As a consequence, the developing world’s representatives argue, the advanced countries should take responsibility for the problem.

But a simple shift of responsibility to the advanced countries by exempting developing countries from the mitigation process will not work. To be successful, a strategy of fighting climate change must be not only fair, but also effective.

If developing countries are allowed to grow, and there is no corresponding mitigation of the growth in their carbon emissions, average per capita CO2 emissions around the world will nearly double in the next 50 years, to roughly four times the safe level, regardless of what advanced countries do.

Advanced countries by themselves simply cannot ensure that safe global CO2  levels are reached. Just waiting for the high-growth developing countries to catch up with the advanced countries is even less of a solution.

So the world’s major challenge is to devise a strategy that encourages growth in the developing world, but on a path that approaches safe global carbon-emission levels by mid-century.

The way to achieve this is to decouple the question of who pays for most efforts to mitigate climate change from the question of where, geographically, these efforts take place. In other words, if the advanced countries absorb mitigation costs in the short run, while mitigation efforts lower emissions growth in developing countries, the conflict between developing countries’ growth and success in limiting global emissions may be reconciled – or at least substantially reduced.

These considerations suggest that no emission-reduction targets should be imposed on developing countries until they approach per capita GDP levels comparable to those in advanced countries. While such targets should be self-imposed by advanced countries, they should be allowed to fulfill their obligations, at least in part, by paying to reduce emissions in developing countries (where such efforts may yield greater benefits).

A crucial corollary of this strategy is large-scale technology transfer to developing countries, allowing them both to grow and to curtail their emissions. The closer these countries get to being included in the system of restrictions, the greater incentive they will have to make their own additional investments to mitigate their emissions.

The world has already accepted the basic principle that the rich should bear more of the cost of mitigating climate change. The Kyoto Protocol established a set of “common but differentiated responsibilities” that imply asymmetric roles for advanced and developing countries, with the obligations of developing countries evolving as they grow.

The ingredients for such a grand bargain are fairly clear. The advanced countries will be asked to reduce their CO2 emissions at a substantial rate, while emissions in developing countries can rise to allow for rapid, catch-up economic growth. The goal is not to prevent developing countries’ growth-related emissions, but to slow their rise and eventually reverse them as these countries become richer.

The best way to implement this strategy is to use a “carbon credit trading system” in the advanced countries, with each advanced country receiving a certain amount of carbon credits to determine its permissible emission levels. If a country exceeds its level of emissions, it must buy additional credits from other countries that achieve emissions lower than their permitted levels. But an advanced country could also undertake mitigation efforts in the developing world and thus earn additional credits equal to the full value of its mitigation efforts (thus allowing more emissions at home).

Such a system would trigger entrepreneurial searches for low-cost mitigation opportunities in developing countries, because rich countries would want to pay less by lowering emissions abroad. As a result, mitigation would become more efficient, and the same expenditures by advanced countries would produce higher global emission reductions.

As for developing countries, while they would not have explicit credits or targets until they graduate to advanced-country status, they would know that at some point (say, when their carbon emissions reach the average level of advanced countries) they would be included in the global system of restrictions. This would provide them with an incentive even before that point to make decisions concerning energy pricing and efficiency that would reduce the growth of their emissions without impeding economic growth, and thus extend the period during which their emission levels remain unrestricted.

Conflict between advanced and developing countries over responsibility for mitigating carbon emissions should not be allowed to undermine prospects for a global agreement. A fair solution is as complex as the challenge of climate change itself, but it is certainly possible.

Michael Spence is the 2001 Nobel Laureate in Economics, and Professor Emeritus, Stanford University. He chairs the Commission on Growth and Development.

© Project Syndicate 1995–2009

Uganda poised to become top-50 oil producer

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A deal last week has brought Uganda a step closer to becoming a significant oil producer, offering billions of dollars of fresh investment to develop newly discovered oilfields.

Italian energy giant Eni said on Monday it had agreed to buy a stake in two large oil exploration blocks in Uganda for up to $1.5bn.

For a decade, exploration in the land-locked former British colony has been carried out by a handful of independent oil companies who have drilled a series of successful wells but who lack the large amounts of capital or expertise on their own to bring the local oil industry to its full potential.

The entry of Eni, an integrated oil company with enough cash to build pipelines, terminals and refining capacity, heralds an escalation of development, which analysts say is likely to make Uganda one of the top-50 oil producers by 2015.

“Eni has done its homework on Uganda and is very keen,” said Thomas Pearmain, African energy analyst at IHS Global Insight.

“To develop these resources is going to require multiple billions of dollars in investments, and Eni would not want access to Uganda’s oil if the prospects were not good.”

“Scratching the surface”
Oil was first discovered in the region in the 1920s in the Albertine Graben – the northern most part of the East Africa Rift system – and the first well was sunk in 1938. But World War Two and political instability in Uganda between 1940 and the 1980s meant there was limited exploration.

The search for hydrocarbons began in earnest in the 1990s after a return to political and economic stability following President Yoweri Museveni’s ascent to power.

Uganda now has nine exploration blocks from its northern border with Sudan through Lake Albert on the western border with the Democratic Republic of Congo and south to Lake George.

Exploratory wells have had remarkable success finding oil, especially around Lake Albert, where British independent explorer Tullow Oil has been drilling.

Tullow Vice President for Africa business Tim O’Hanlon says the company’s blocks in the country have the potential for reserves of over two billion barrels of oil and some analysts believe this could be a conservative estimate.

“They have just been scratching the surface so far,” said Pearmain. “Results have been very successful. All but one of 25 wells has found oil or gas — an amazing strike rate. And there is a lot of acreage that has not yet been touched.”
Only about a third of Uganda’s licensed oil exploration areas have yet been explored and geologists see huge potential.

“Apart from the reserves discovered already, there is talk that Uganda is sitting on about another six billion barrels, on top of the two billion barrels already confirmed,” said one fund manager who invests in energy projects in Uganda.

“Conservative”
“Some of the investment community believes Uganda has the potential for much more substantial reserves than have already been discovered. The oil companies are being very conservative,” said the fund manager, who declined to be identified.

Uganda has already attracted around $500m in exploration investment but it will take billions more to bring on the oilfields already identified.

Eni, which is buying a 50 percent interest in blocks 1 and 3A around Lake Albert from explorer Heritage Oil, is expected to build a pipeline eastwards from the lake, possibly to the Kenyan port of Mombasa, the nearest harbour 1,300 km (813 miles) away and a potential export centre for Ugandan oil.

The costs will be high. The pipeline will need to be heated as the oil is waxy and the Ugandan government also wants a refinery to be built to feed growing local consumption that is now supplied by imports from Kenya.

Tullow is building specially designed and engineered rigs to drill in Lake Albert, also an enormously costly exercise.
But the investment should pay dividends. Analysts see Uganda producing 100,000-150,000 barrels per day (bpd) by 2015, putting it on a par with some other African producers such as Chad.

Tom Cargill, Africa programme coordinator at London think tank Chatham House, says the cost of building infrastructure is likely to limit returns for Eni and the other oil companies in the country but sees good long to medium-term returns.

“It will squeeze margins but if you are a large enough operation it will still be an attractive proposition,” he said.
“Uganda is a reasonable mid-level prospect and I’ve not seen anything that suggests we are being misled on the resources there. If the financing and the correct deal can be put in place, the prospects are positive.”

Honduras coup tensions take toll on economy

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Business was bad in Honduras even
before the president was ousted in a June coup, unleashing months of political
turmoil that have deepened the impoverished country’s economic woes.


Honduras was already suffering from the recession in the US, its top
trade partner, due to slack demand for its key clothing exports and a plunge in
the amount of cash being sent home by relatives.


And while Central American neighbours show
signs of recovery from the global slowdown, Honduras’s economy is shrinking at
an annual rate of more than 3 percent as nervous tourists shun the country and
shoppers tighten their purse strings.


“Sales have fallen something rotten
since the coup,” said fruit seller Ana Julia Varela, 45, at the capital’s
Jacaleapa market. “I’ve been in this market for 30 years and it’s never
been like this. We just want peace so our sales pick up.”

A de facto government is running the coffee
and textile producing nation as campaigning for a disputed presidential vote
gathers pace, and a US-led deal to end the five-month political crisis is in
tatters.


FDI plunged 42 percent in the first half of
the year to $251.7m and economic analysts say it will likely fall further as
investors freeze plans due to the lingering uncertainty.


“The situation in Honduras is hampering its ability to move
forward,” said Jose Antonio Cordero, an economist at the Washington-based
Centre for Economic and Policy Research who has written a recent report on Honduras.


“If there hadn’t been this political
instability, the government might have been able to apply corrective measures
such as a more evident and decisive fiscal stimulus package,” he added.

 

Travel
warning

Tourists are staying away, particularly US visitors put
off by a state department travel warning that urges “extreme
caution.”


“There’s no denying it’s affected us,
mainly because of the drop in American visitors,” said Sandra Guerra of
the Copan
tourism chamber. “In July we had a tremendous decline of 70 percent (but)
now things are starting to pick up a bit.”

In an effort to boost flagging sales,
managers at one of Tegucigalpa‘s
biggest shopping malls have put up the Christmas decorations early and stores
are cutting prices.


Trade with neighbouring countries is also
suffering as their governments refuse to recognise the de facto government,
complicating customs procedures for agricultural goods, although coffee exports
have not been disrupted by the crisis.


Main coffee areas were not the scene of
roadblock protests meaning beans have been able to arrive at port as usual.

“Tourism and intra-regional trade have
been worse affected because by not recognizing the government of (de facto
leader Roberto) Micheletti, we can’t resolve any problems,” said Juan
Daniel Aleman, secretary general of the El Salvador-based Central American
Integration System, or SICA.


Meanwhile, health and welfare programmes
are suffering due to a freeze on aid by the EU and lending by international
development banks in protest at the toppling of President Manuel Zelaya.


Critics of Zelaya, who irked the country’s
business elite by hiking the minimum wage and forming close ties with Venezuela‘s
socialist president, Hugo Chavez, blame his economic policies for scaring off
investors.


Zelaya is urging his supporters to boycott
any election, but at the Jacaleapa market, stall-holders hope the poll will get
the country back to normal and encourage customers to loosen their purse
strings.


“Things are awful, really awful,”
said Maria Teresa Molina, who sells painted wooden toys and flowers. “I
imagine it’ll calm down after the elections. Let’s hope it all goes smoothly
because everyone wants that with all their heart.”

US coal industry stakes survival on carbon capture

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A looming government clampdown on CO2 emissions is about to confront an already embattled US coal power industry with two stark options: capture carbon or die.

Legislation from Congress or tough new regulatory demands could make it costly to spew greenhouse gases, posing a serious threat to the nation’s coal-fired power plants.

With coal the single biggest source of carbon emissions, industry backers are pinning their hopes on technology to trap and store these emissions blamed for heating up the planet.

Carbon capture technology is far from a done deal, however. Unproven on a commercial scale, the process is extremely expensive and there are a multitude of safety concerns.

“Right now we have politicians making promises about the technology of carbon capture and sequestration (CCS) that scientists don’t know that they can meet,” said Graham Thomson, author of a peer-reviewed study for the University of Toronto.

The stakes in this technology are also high for American consumers, who rely on abundant domestic coal for around half of the country’s electricity generation.

On the global stage, leaders from around the world will meet next month in Copenhagen to try to agree on binding international targets for reducing greenhouse gas emissions.

With coal the source of 40 percent of global carbon emissions, talks on funding for carbon capture will also likely be a key part of these negotiations.

For American Electric Power Chief Executive Mike Morris, there is no question that this technology is necessary and feasible.

In his office atop AEP’s headquarters in Columbus, Ohio, Morris told reporters: “This country and countries of the world are going to have an approach to cap carbon.”

The US House of Representatives narrowly passed climate legislation this year that would limit US greenhouse gas emissions by requiring major polluters to get permits for the carbon they release into the atmosphere.
Although most permits would be free at first, eventually companies would have to pay for or reduce their emissions, which could possibly put major emitters out of business.

In the Senate, key lawmakers are working to craft a similar law that would garner enough support for passage.

If no bill emerges from Congress, the Environmental Protection Agency has taken steps to regulate emissions under the Clean Air Act.

First of its kind
One of the country’s largest electricity generators, AEP is spending money to match the rhetoric. Partnering with the French engineering company Alstom, AEP is pioneering a project that will trap coal emissions and inject the carbon underground at its Mountaineer power plant in West Virginia.

The $73m test project, which began fully operating in October, is billed as the first in the world that brings all the components of trapping, transporting and storing carbon together at an existing coal plant.

The company hopes it will lead to the first US commercial-scale CCS project, at a cost of about $670m.
Located amid rolling hills along the Ohio River, AEP’s existing plant is a 1,300-megawatt behemoth consuming 12,000 tonnes of coal daily at full capacity.

Using technology developed by Alstom, the demonstration project at Mountaineer captures some of the carbon dioxide produced by the plant and transfers it through pipelines to two sites where it is pumped underground.

Not a free move
“The issue of global warming control is a technology challenge and this project and others like it will demonstrate there is a technological answer,” Morris said. “But … we all need to realise it isn’t a free move.”

The cost of carbon capture will be high. Early in November the International Energy Agency said the world will need to spend $56bn by 2020 to build 100 such projects, with an additional $646 bn needed from 2021-30.

A report released by the Global CCS Institute in Australia earlier this year said technology development is caught in a classic “Catch-22” situation.

“The only way costs can decrease is by installing a large number of CCS projects worldwide,” it said.
Governments may have to foot the bill for many of the upfront costs. AEP has applied to have the US government cover about half the cost of its commercial-scale project.

The technology uses up to 30 percent of a plant’s power, meaning it uses more coal and makes less electricity for sale.
Even with advances in technology, consumers will still face some of the costs, said Franklin Orr, director of the Precourt Institute for Energy at California’s Stanford University.

“We’re going to have to charge ourselves enough for the electricity to pay those costs,” he said.

Safety concerns
Although hailed by US Energy Secretary Steven Chu as an essential technology, some critics question whether it will be possible to safely trap and store carbon for decades on the scale necessary to address global warming.

To make a serious dent in carbon emissions, billions of tons of CO2 will have to be injected underground.

There are also concerns about leaks from the storage areas. Carbon dioxide in high concentrations can cause asphyxiation but such accidents are considered unlikely. And there are also worries that drinking water sources could be contaminated.

“We’re putting a lot of our eggs in one basket, when in fact it may not work at a commercial scale,” Thomson said.
Other experts say these concerns can be addressed by ensuring that companies only inject carbon underground in areas that are geologically suited to hold and absorb the gas.

“I’m convinced that can be done safely,” Orr said. He noted that industries routinely handle much more dangerous compounds such as methane gas.

While there are many doubters, the march toward deployment of carbon capture technology continues. Governments around the world continue to offer incentives, and funding to trap carbon may be part of international climate change negotiations.

“CCS is the only climate change solution we have for the existing fleet of coal-powered power plants,” said Sarah Forbes of the World Resources Institute.

Instant warm-up: InstaForex Award

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As a result of the upsurge in interest there are more and more companies interested in Forex, all the more under the conditions of the world financial crisis, as many other financial market segments at best stand as “air bags” and at worst, as high risk ventures. New players in the Forex market are not able to demonstrate dynamics of development due to the strength and power of experienced participants. Despite the evident attractiveness of the market for new players, ranking within the market remains a rather stable construction. Forex is still divided into three main groups: experienced players, who have been trading at the market for more than 10 years, “middle-weight” players appeared in the years of a relaxed competitive environment, and beginners with less than two years experience. However, there are trends dropped from the general outline in each settled order of items. The brightest representative of them is an international online broker – InstaForex. The company stormed into Forex market two years ago, and soon obtained the right to be called one of the world’s leading Forex brokers.

As many other newbies who enter the market, InstaForex set itself up as versatile broker providing a full range of trading instruments. Obviously, it is necessary to enter current Forex markets head-on and not with the minimum range of options, as the competitive landscape in this segment is close to its peak, if not already reached.
However, in contrast to the majority of newbies who announce a full range of trading instruments, InstaForex has been offering the full set of services which were highly evaluated by the clients since the first days of trading. All these show thorough and fundamental preparation of InstaForex for market taming.

Since the early days, InstaForex has offered clients a wide range of trading instruments and nowadays their clients use 107 currency instruments, 34 CFD on American shares and gold. At the same time the company does not limit the deposit amount. A client may deposit just $1. Traders may choose the leverage ratio from 1:1 to 1:500, two accounts types: with spread and without, instant deals’ execution, instant account replenishment and charging six percent annual interest rate on uncommitted funds. However, not only trading conditions which ease has already been evaluated by more than 100,000 traders all over the world, but also a number of other important factors predetermined the success rate of the InstaForex brand. InstaForex conducts competent and strategically regulated marketing policy within the framework of which the InstaForex brand becomes not only more familiar and attractive but also represents the symbol of success and professionalism at market. The matter is not just in the successful company’s name and logotype for the niche of the online brokers. The winning stake on the key word “instant” and symbol of human and technology symbiosis cannot be denied. Success of InstaForex lies in the additional options and services which are efficiently connected with the basic trading conditions.

Trading conditions
First of all, the system of welcome bonuses is worth mentioning. Having replenished the trading account with $100 and up to $50,000 a trader may apply for a bonus of between $30 $5,000. However, welcome bonus is an effective marketing instrument but it cannot make trade-smart client join InstaForex. For the experienced trader, who has changed several brokers, special conditions and guarantees provided by the company seem to be more important. In the aforementioned aspects the company is in the first flight and in accordance with some positions is a pioneer. Among special offers for traders the following instruments should be mentioned: VIP-accounts with spread from one pip, swap free accounts, system of equal swaps for Buy and Sell deals. Funds withdrawal directly to the visa card and segregated accounts guaranteeing 100 percent safeguard of assets are really unique company’s services which do not have analogues among the other online exchange brokers.

One of the company’s mottos is “InstaForex – the world where challenge gives a move (push) to development”. This motto is used in the programme of InstaForex campaigns and contest promotions, and fully reflects its meaning. It is difficult to find another broker which gives so much attention to the marketing events. Currently InstaForex holds two campaigns and two regular contests; every participant can win up to $3,000 and a new Hummer H3. The total annual prize fund is more than $250,000. Each competitor advances his/her trading level with the help of the contests and as a result increases the quality and efficiency of his/her trading, that again proves the truth behind the motto “InstaForex is the world where challenge gives a move to development”.

Not the least important component of a Forex broker’s success is its ability to create the net of partners and representative offices in different parts of the world and arrange efficient work of all its units. InstaForex deals successfully with this task, having reached great results which even old brokers would dream of. At the moment average net income of InstaForex partner is more than $3,000 every month. The number of InstaForex Introducing Brokers exceeds 140 in 20 countries of the world. Back on the partnership programme InstaForex offers six different types of partnership: beginning with Introducing Broker and investment partnership types and ending with the certified educational project or web-representative partnership type. Stated differently, each person interested in the partnership with InstaForex will find the form of cooperation which is convenient for him or her. Within the framework of the partnership programmes there are favourite terms concerning partner’s award and provided materials (website, promoting production, educational and guide materials, certificates, diplomas etc). Besides primary activity – online trading services – InstaForex successfully develops other lines of activities. Thus, for instance, InstaForex manages educational online projects like InstaFXeducation.com, a summary review of information about Forex and trading techniques; mql4.instaforex.com, devoted to EAs; and InstaMediaGroup, an advertising agency.

To sum up, it is safe to say that InstaForex bursts into the world brokers’ elite that is proved by bare facts: best trading conditions, more than 100,000 clients, over 140 Introducing Brokers in 20 countries. InstaForex is an example of the company which managed to become one of the market leaders for two years owing to the competent strategy and efficient promoting policy. The time of recognition has come for InstaForex. Nowadays, InstaForex is acknowledged as a top brand in Asia according to World Finance.

Maintenance from within

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In the wake of the financial crisis, the UK FSA reviewed bank liquidity policies. Its proposals are not final but it is apparent that banks will have to operate under a more stringent liquidity risk management regime. Although comprehensive, the FSA review does not address the issue of internal bank funds pricing. Fund transfer pricing is a key issue.

Liquidity and risk management
Recent FSA proposals on the future of bank regulation emphasised inter alia a more controlled approach to bank liquidity risk management. Features of the new regime include:
– increased self-sufficiency in funding;
– a more diversified funding base;
– longer average tenor of liabilities,
– a “liquidity buffer” of high quality government securities.

These recommendations should be welcomed, and should be seen as part of a wholesale shift in the basic banking model, which hitherto had relied excessively on short-term and wholesale, undiversified funding. However, the FSA proposals do not address another critical issue in banking operations: how funds are managed internally. In truth, how banks structure their internal fund pricing can influence significantly the activities of individual business lines.

Therefore, it is important that a bank’s internal funding framework is placed under scrutiny, with guidelines enforced by the regulator where deemed necessary.

We define liquidity risk as being unable to (i) raise funds to meet payment obligations as they fall due and (ii) fund an increase in assets. Funding risk is the risk of being unable to borrow funds in the market. The FSA-prescribed mechanism to mitigate liquidity and funding risk is notable for its focus on the type, tenor, source and availability of funding, exercised in different market conditions.This emphasis on liquidity is correct, and an example of a return to the roots of banking. While capital ratios are a necessary part of bank risk management, they are not sufficient.

Northern Rock and Bradford & Bingley were more a failure of liquidity management than capital erosion. It is not surprising that there is now a strong focus on the extraneous considerations to funding. However the use of that funding, including the price at which cash is internally lent or transferred to business lines, has not been closely scrutinised. This needs to be addressed by regulators as it is a driver of bank business models, which were shown to be flawed and based on inaccurate assumptions during 2007 and 2008.

Internal framework
While the FSA does touch on bank internal liquidity pricing, the coverage is peripheral. This is unfortunate, because it is a key element behind the model. Essentially, the price at which an individual bank business line raises funding from its Treasury desk is a major parameter in decision making, driving sales, asset allocation, and product pricing. It is also a key hurdle rate behind the product approval process and in individual line performance measurement. Just as capital allocation decisions affecting front office business units need to account for the cost of that capital, so funding decisions exercised by corporate treasurers carry significant implications for sales and trading teams at the trade level.

The price at which cash is internally transferred within a bank should reflect the true economic cost of that cash (at each maturity band), and its impact on overall bank liquidity. This would ensure that each business aligns the commercial propensity to maximise profit with the correct maturity profile of associated funding. From a liquidity point of view, any mismatch between the asset tenor and funding tenor, after taking into account the “repo-ability” of each asset class in question, should be highlighted and acted upon as a matter of priority, with the objective to reduce recourse to short term, passive funding as much as possible. It is equally important that the internal funding framework is transparent to all trading groups. A measure of discipline in decision-making is enforced via the imposition of minimum return-on-capital (ROC) targets. Independent of the internal cost of funds, a business line would ordinarily seek to ensure that any transaction it entered into achieved its targeted ROC. However, relying solely on this measure is not always sufficient discipline. For this to work, each business line should be set ROC levels that are commensurate with its (risk-adjusted) risk-reward profile. However, banks do not always set different target ROCs for each business line, which means that the required discipline breaks down. Second, a uniform cost of funds, even allowing for different ROCs, will mean that the different liquidity stresses created by different types of asset are not addressed adequately at the aggregate funding level. Consider the following asset types:
– a 3-month interbank loan;
– a 3-year floating rate corporate loan, fixing quarterly;
– a 3-year floating-rate corporate loan, fixing weekly;
– a 3-year fixed-rate loan;
– a 10-year floating-rate corporate loan fixing monthly;
– a 15-year floating-rate project finance loan fixing quarterly.

We have selected these asset types deliberately, to demonstrate the different liquidity pressures that each places on the Treasury funding desk (listed in increasing amount of funding rollover risk). Even allowing for different credit risk exposures and capital risk weights, the impact on the liability funding desk is different for each asset. We see then the importance of applying a structurally sound transfer pricing policy, dependent on the type of business line being funded.

Cost of funds
As a key driver of the economic decision-making process, the cost at which funds are lent from central Treasury to the bank’s businesses needs to be set at a rate that reflects the true liquidity risk position of each business line. If it is unrealistic, there is a risk that transactions are entered into that produce an unrealistic profit. This profit will reflect the artificial funding gain, rather than the true economic value-added of the business.

There is evidence of the damage that can be caused by low transfer pricing. Adrian Blundell-Wignall and Paul Atkinson in a 2007 report for the OECD discuss the losses at UBS AG in its structured credit business, which originated and invested in collateralised debt obligations (CDO). Quoting a UBS shareholder report,
“…internal bid prices were always higher than the relevant London inter-bank bid rate (LIBID) and internal offer prices were always lower than relevant London inter-bank offered rate (LIBOR).”

UBS structured credit business was able to fund itself at prices better than in the market (which is implicitly inter-bank risk), despite the fact that it was investing in assets of considerably lower liquidity than inter-bank risk. There was no adjustment for tenor mismatch, to better align term funding to liquidity. A more realistic funding model was viewed as a “constraint on the growth strategy”.

This lack of funding discipline undoubtedly played an important role in decision making, because it allowed the desk to report inflated profits based on low funding costs. As a stand-alone business, a CDO investor would not expect to raise funds at sub-Libor, but rather at significantly over Libor. By receiving this artificial low pricing, the desk could report super profits and very high return-on-capital, which encouraged more and more risky investment decisions.

Another example involved banks that entered into the “fund derivatives” business. This was lending to investors in hedge funds via a leveraged structured product. These instruments were illiquid, with maturities of two years or longer. Once dealt, they could not be unwound, thus creating significant liquidity stress for the lender.

However, banks funded these business lines from central Treasury at Libor-flat, rolling short term. The liquidity problems that resulted became apparent during the 2007-2008 financial crisis, when interbank liquidity dried up.

Many banks operate on a similar model, with a fixed internal funding rate of Libor plus (say) 15 bps for all business lines, and for any tenor. But such an approach does not take into account the differing risk-reward and liquidity profiles of the businesses.

The corporate lending desk will create different liquidity risk exposures for the bank compared to the CDO desk or the project finance desk. For the most efficient capital allocation, banks should adjust the basic internal transfer price for the resulting liquidity risk exposure of the business. Otherwise they run the risk of excessive risk taking heavily influenced by an artificial funding gain.

Conclusions
It is important that the regulatory authorities review the internal funding structure in place at the banks they supervise. An artificially low funding rate can create as much potentially un-manageable risk exposure as an risk-seeking loan origination culture. A regulatory requirement to impose a realistic internal funding arrangement will mitigate this risk.

We recommend the following approach:
– a spread over the internal transfer price, based on the median credit risk of the individual business line. This would be analogous to the way the Sharpe ratio is used to adjust returns based on relative volatility. It would also allow for the different risk-reward profiles of different asset classes;
– a fixed add-on spread over Libor for term loans or assets over a certain maturity, say two years, where the coupon re-fix is frequent (such as weekly or monthly), to compensate for the liquidity mismatch. The spread would be on a sliding scale for longer term assets.

Internal funding discipline is as pertinent to bank risk management as capital buffers and effective liquidity management discipline.

As banks adjust to the new liquidity requirements soon to be imposed by the FSA, it is worth them looking beyond the literal scope of the new supervisory fiat to consider the internal determinants of an efficient, cost effective funding regime. In this way they can move towards the heart of this proposition, which is to embed true funding cost into business-line decision-making.

Dr Moorad Choudhry is Head of Treasury at Europe Arab Bank, and author of Bank Asset and Liability Management (John Wiley & Sons)

Enriching lives

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ICICI Bank has relentlessly pursued customer focused strategies, innovative mechanisms and market penetration approaches to reach its current position. Today it has a global presence and a rich customer base spanning 19 countries including India, through its combination of banking subsidiaries, branches and representative offices.

The international banking group has been one of the strategic arms of ICICI Bank. The subgroup NRI (Non-resident Indian) services has been an engine of growth for this segment, thanks to the strong business model it has adopted.

Today, ICICI Bank NRI Services has established a strong franchise among NRIs by offering a comprehensive product suite, technology enabled access, a wide distribution network in India and alliances with local banks in several overseas markets. In 2008, the Asian Banker association accorded recognition to this subgroup for “business modeling and revenue distribution”.

The genesis
ICICI Bank NRI Services was formally launched in 2001 to provide a one-stop service point to address the home-linked financial needs of the NRI population. At a bank level, the establishment of the NRI Services group was a key step in adding international revenue streams and diversifying risks across geographies. The NRI product suite quickly evolved to include a variety of products, addressing the entire gamut of financial needs of this overseas community.

Business model
ICICI Bank, in its remittance and NRI product suites, has built a very comprehensive service architecture around the various segments of the migrant population that is unrivaled in Asia. What differentiates ICICI Bank from the rest is the NRI lifecycle approach that clearly segments the NRI cycle and aligns specific products and services to it. ICICI Bank has a full-fledged customer relationship management programme that makes use of a rich database for targeted marketing and effective segmentation to deliver superior products and services that contributes to a strong bottom line performance for the Bank. The NRI service team ensures regular contact and communication with the NRI both in  the country of residence as well as every time they visit India.

Remittances is a regular need across the lifecycle of an NRI Customer. In FY 08, India was the largest remittance receiving country in the world, with total inward remittances pegged at over $46bn, which is a clear indication of the market potential of this need. To address this, a dedicated team constantly explores the optimum products and services enabling the customer to remit money in the fastest and most convenient manner possible.

Today, ICICI bank, in addition to providing the innovative online remittance product – Money2india, has launched innovative products like Instant Branch Transfers which enable the NRIs to transfer money to beneficiaries having accounts with ICICI Bank on a real time basis and the “Easy Receive” account which was developed for the convenience of the beneficiary in India. ICICI Bank remittance offerings simplify the end to end procedure of a remittance, whereby an NRI can initiate, track and confirm the completion of remittance to the beneficiary.

ICICI Bank offers a product suite, which is, one of the most comprehensive in the marketplace, and is designed to cater to its target segments at all stages of the lifecycle. Along with basic NRI product offerings in the form of NRE/ NRO Savings and Term deposits, the bank also offers segmental offerings, as a result of extensive research undertaken to determine the exact banking needs of a customer.

ICICI Bank is the first Indian bank to offer the twin account facility under the Global Indian Account umbrella, which consists of an NRE savings account and a current account in the country of the customer. Access to the account by way of debit card, internet banking password, cheque books and operating instructions are given to the customer over the counter in India before he goes overseas. Further, instance remittance facility is offered between the current account in the overseas country and the Easy Receive account to conveniently transfer money to India. This facility is now available for US and UK customers, and will soon be launched in Canada. The global Indian account offers seamless banking for the NRI and takes away the worry of opening a bank account in a new country.

NRI Edge, launched last year is a premium product proposition through which various benefits are offered to NRIs. These include platinum debit card, priority servicing, travel and medical insurance as a bundled value offering.

Customer relationship
ICICI Bank is one of the few Indian banks to offer round the clock dedicated customer service for the NRI segment through toll free numbers in major geographies, which helps resolve customer queries and provides assistance at every stage. ICICI Bank also has a superior Internet platform, which caters to commonly used customer transactions within the comfort of their homes. The Click2Call initiative is the first of its kind in the industry, wherein the customer only has to click a link and provide his details and the customer representative gets in touch with him within 30 minutes.

ICICI Bank endeavours to engage actively with its customers and provide complete financial solutions, according to their needs. The e-Relationship Manager (eRM) initiative has been launched by the bank, envisioned as the single point of contact for the customer’s banking needs. This facility is offered to select customers only as of now. The eRM not only provides information about products and assists the customer with all his banking needs, but also performs goodwill gestures like wishing the customer on special occasions. The bank has created a special relationship base through this proposition.

It has been observed that the NRI customer seeks information on taxation and in particular, his Indian investments, which he may not have easy access to from his country. Keeping this need of the customer in mind, the team has launched a unique initiative known as Webinars (web-seminars) on a periodic basis, wherein industry experts are invited to disseminate information. Through webinars, the customer can listen to the expert and obtain his queries on a real time basis from his home. For customers in India, live seminars are conducted during high NRI footfall seasons, which vary across the country. These initiatives give the bank an opportunity to engage with the customer in person, thus fostering a long lasting relationship.

Investment and insurance products
For financially savvy investors, ICICI Bank provides the 3-in-1 trading account (demat, trading and bank accounts coupled into one account) through ICICIDirect.com, which allows an NRI to invest in equity, futures and options, IPOs and other financial products on a real time basis. This offers the customer an efficient and hassle free trading platform.

The NRI seeks gains through trading, but also needs alternate long term and high return investment options through the property market in India. For these customers, ICICI Bank offers a wide variety of Mortgages and Property Search products to find, fund and insure their homes in India.

The bank also offers to some eligible customers the Life Insurance and General Insurance products to provide safety and security of the NRI’s family and assets in India. This includes investment and savings plans, retirement plans and child plans, as well as home and health insurances for his and his dependents in India to avoid any financial contingencies.

Conclusions
The NRI Services arm of ICICI Bank has made significant strides ever since its launch in 2001. The success has been achieved by understanding customer needs and then leveraging its competencies in terms of its product suite, reach, alternate channels, customer engagement and technology platforms. This provides a very enriching customer experience across all stages of his/her relationship with the bank.

The NRI business is deepening its customer interface and product suite to play a larger and proactive role in the full realisation of India’s potential. It has helped the bank to diversify its earnings across businesses and geographies, taking India to Indians. The focus going ahead will be to strengthen the presence in existing overseas locations, maintain high and prompt levels of service and use customer friendly communications channels to have top-of-mind recall amongst the entire NRI community for any of their financial services requirement.

New horizon for oil and gas

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Innovation is vital for the future of the energy industry, something which oil and gas services and solutions company Al-Rushaid recognises. The firm works with international partners to adapt new solutions and technology and transfer them to the Saudi Arabian market. Drive across many oil and gas fields of Arabia and you’ll see a distinctive bright orange plume whooshing into the sky from a specially designed vertical pipe. Unfortunately, these plumes often leave smoke trails that can be seen for miles around.  Oil and gas flares, as these flames are known, are a common aspect of production to release a build up of pressure in the plant.

Yet despite their prevalence, the flares really represent wasted resources and environmental damage. Increasingly, oil and gas production facilities are looking at ways of capturing this excess gas or dealing with it in a more environmentally-friendly manner.

A newly-developed “smokeless flare” is one solution to the problem. The technology enables excess gas to be released but reduces the waste and environmental impact of traditional methods.  The technology was initially developed by an engineer from Saudi Aramco, and then licensed to US-based Zeeco, who in-turn partnered with the multi-faceted oil and gas conglomerate Al-Rushaid to bring the technology to the Saudi market and around the globe. Under the joint venture, Al-Rushaid has established a production facility in Saudi Arabia to produce the technology and ship the product to markets around the world.

The arrangement is typical for Al-Rushaid in many ways. For a start, it is constantly searching for new technologies to improve oil and gas extraction, refining, and energy management.  It is also characteristic of the company’s structure; Al-Rushaid has more than 30 different joint venture and wholly owned subsidiaries.

Innovation and diversity
Al-Rushaid’s focus on innovation and development of new technologies neatly complements the company’s continual growth and diversification. The company began life in 1978 when Sheik Abdullah al-Rushaid, formerly an employee at Saudi Aramco, started his own business. From the beginning, many arms of the company were joint ventures with partners from around the globe.

Today the company partners with dozens of international companies and institutions to bring specialised products and services to Saudi Arabia. Often Al-Rushaid will supply the plant facilities and assist its international partner with access to capital,  local and global manpower resources, and the Saudi Arabian and Gulf States marketplace of business.

“Because of our long-sustained relationships with the Saudi government and Saudi Aramco, we have access to market which many other companies outside of the region would not have,” explains Abdullah Al-Rushaid.

“The flipside is that many of these companies have interesting technology that can be deployed to this geographic region.   Our company’s key value proposition is to transfer and deploy technology in energy and information technology industries to the Saudi Arabian and Middle East region,” says President and Vice Chairman Rasheed Al- Rushaid.

This arrangement means that Al-Rushaid maintains an integral place at the forefront of new technological developments. It continues to explore new areas of development, new technology and new partnership possibilities.

Again, this is characteristic of the company, which has barely sat still since its earliest days.  After an initial 10 years focusing primarily on the oil and gas industry, Al-Rushaid began to branch out into related areas. Today the group has a diverse set of related enterprises including Arabian Rockbits & Drilling Tools, Al-Rushaid Trading Company, Ensco Arabia, Global Al-Rushaid, Cameron Al-Rushaid, NATCO Al-Rushaid, Weatherford Saudi Arabia, Flowserve Al-Rushaid, Al-Rushaid Construction, Cleveland Bridge Group,  Dresser Al-Rushaid Valve & Instrument, Whessoe Oil and Gas, Al-Rushaid Petroleum Centre, and others.

Energy production remains Al-Rushaid’s core business, however, and it continues to form new partnerships and explore other areas of technology transfer. And while Al-Rushaid is primarily focused on energy from oil and gas today,  the whole domain of renewable energy and efficient energy management is also part of the vision of the company, says Rasheed Al-Rushaid.

Saudi Arabia, has some of the largest reserves of hydrocarbon energy in the world and there’s a much greater consciousness here about conserving energy, conserving natural resources, more than there is anywhere else in the world, says Rasheed Al-Rushaid, President of Al- Rushaid.

“Even the resources which would appear to be in abundant supply, we treat them as a treasured resource. So we are putting a lot of investment into maximising utilisation and conservation of those resources.”

Al Rushaid’s partnership with Zeeco is a good illustration of this culture. Demand for this product is strong and will continue to increase in the Gulf States region and around the globe.

Another important new link-up for Al-Rushaid in this area is its partnership with the newly-opened King Abdullah University of Science and Technology (KAUST) to explore areas for future research and development. KAUST is a research university which is emerging as a leader for technological innovation and will be an incubator of new commercial applications and business relevant to our company, Rasheed Al-Rushaid says.

“We are collaborating with them to help identify areas to go into, to use some of the facilities of KAUST which will be used as technology labs to spin-off new joint ventures, and so on.”

Al-Rushaid is also a founding member of a technology transfer partnership with the university that will examine ways of commercialising academic research that comes out of the institution.

Growing industry
The oil and gas industry is picking up again after the last 12 months,  Abdullah Al-Rushaid believes, although he notes that overall Saudi Arabia and  Middle East was much less affected by the downturn than the rest of the world.

Today the price is still not close to previous years’ highs (July 2008)  of around $125 a barrel. But, it has now increased  to a level where oil and gas companies could feasibly fund new exploration and this can be seen happening throughout the region.

“If the price continues to hover in the 70s and 80s  and continues its climb,  I think you’ll see hydrocarbon exploration and production gradually increase again during 2010 and beyond,” says Chairman Adbullah Al-Rushaid. “With products like Zeeco and others, we are continuing to come up with innovative products and solutions which I wouldn’t say are entirely recession-proof, but at least we have a balanced portfolio of subsidiaries and joint ventures now which mitigate risk.

Al-Rushaid is now looking to the future and planning for its next thirty years, and beyond. The company’s evolution will continue, with some highly positive changes set to be introduced,” says  Rasheed Al-Rushaid.

“We are recognising the importance of being a global player in the market place for our unique portfolio of energy industry related solutions and services for now and into the future.”

For further information tel: +3893 3333; www.al-rushaid.com

One to watch

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In every economic downturn there are inevitably winners and losers. Espírito Santo Investment, winner of the 2009 World Finance Award for best investment bank in Portugal, is one of today’s winners. “How many banks remained liquid and continued lending throughout this latest global economic crisis?” asks Executive Vice-Chairman Rafael Valverde. “How many institutions, following the collapse of Lehman Brothers and the international liquidity crisis, would have gone ahead with plans to open a branch of their investment bank in New York City?”

Although the Portuguese banking system is subject to the same liquidity constraints as everyone else, it was largely untouched by the major shocks that caused many banks around the world to collapse or significantly rewrite their balance sheets. “Portugal is a net importer of capital,” explains Paulo Martins, head of Corporate Finance. “As such, our banks really did not have the incentive to take on some of the toxic assets that caused problems for other banking communities. As a result, we maintained a solid balance sheet and have kept on lending to our customers throughout the crisis.”

And there are deals to be done. While other banking communities have seen a decline of 50 to 60 percent in the available deal flow, Espírito Santo in Portugal has experienced only a 30 percent decline. Paulo Martins attributes this in part to the relative isolation of the slow-growing Portuguese economy, which was immune to much of the financial crises that hit international markets. Now that the dust is settling in markets like neighbouring Spain, the devaluation of assets in those countries is tempting Portuguese investors to pick up some bargains. “I would think we will have a period of around two years when Portuguese companies can get involved in opportunities outside our country that prior to the collapse they couldn’t afford,” he comments.

Many of these deals come to Espírito Santo, which has built competitive advantages in its domestic market by developing a distribution footprint that is very similar to the presence that major Portuguese clients have internationally. “The Portuguese market is too small for the large international investment banks to sustain a presence, so there was a clear opportunity for a local bank to build an international platform that would support Portuguese business activities,” says Paulo Martins. Working with local clients, Espírito Santo now has a larger presence in Spain and Brazil than any other Portuguese investment bank, and is building its platform in Poland, Angola, the UK and New York as its clients look to become more involved in these geographic areas. 

Espírito Santo has also built a solid position in capital markets within its domestic arena, and is extending it throughout its growing international distribution platform.  The bank has participated in all the major privatisations in Portugal and led most of the recent IPOs and takeovers in that country. It has also led most of the Eurobonds issued by Portuguese companies. “Our strong position in the local market means that we know better than the big international banks what is going on inside these companies,” comments Luís Luna Vaz, head of Capital Markets.

“With this competitive advantage we are able to support our clients as they expand internationally. We have also built strong research teams in the Iberian and Brazilian markets, and are using our strength in this area to increase our penetration rate into the developing markets.” 

Project finance
“When the world economic crisis hit, the infrastructure markets survived reasonably well,” comments Nigel Purse, the bank’s head of Project Finance. “People still need to travel on roads, drink clean water, have electricity to power their homes and access to hospitals when they are ill. So investment in these infrastructure projects has continued, particularly as many governments respond to recessionary pressures by undertaking public work projects as a way of stimulating their economies.”

Inevitably, by the beginning of 2009 the value and volume of project activity slowed significantly, but for the Espírito Santo Project Finance team there have been some interesting opportunities. “As a result of the world banking crisis, there are now fewer banks in the infrastructure finance market space and liquidity is at a premium,” Purse points out. “Those banks that have built up a proven expertise and maintained their liquidity are finding themselves at the receiving end of a lot of phone calls.”

As a result, the team has a pipeline of well over 100 transactions, the strongest pipeline it has ever had in its target areas of transport, power and energy, and general infrastructure. Unlike the capital market and corporate finance activities of the bank, the project finance team is not constrained by geography, with a current asset book of project finance loans in 18 different countries, and advisory activities in several more. 

Surprisingly, given the size of the projects and the long term investment requirements, infrastructure finance can be a highly faddish area of activity which requires a nimble approach.  “Over the last three or four years we have developed a considerable reputation in renewable energy financing because there has been a lot of technological development coming out of Portugal and Spain in that area,” says Purse. “But now we’re starting to see a lot more projects coming up in conventional power, such as developing natural resource facilities in the Gulf and gas storage capabilities in the energy importing states of Europe.”

Strength through experience
The recent crisis in the global banking community has not only thrown up interesting opportunities for those institutions that maintained a healthy balance sheets, it has also made clients place a significant premium on trust, reliability and deliverability. In Portugal, Espírito Santo’s focus on building strong client relationships through being focused, flexible and reliable has put it in a strong position. “If we think we cannot do something, we openly say so,” says Executive Vice-Chairman, Rafael Valverde. “That gives our clients trust, which is a key part of the relationship that enables us to grow with them in their international activities.”

With access to the majority of the major corporate finance and capital market transactions in Portugal comes the opportunity to work alongside the top international banks. “This gives us solid experience and great credentials to market in the international arena,” notes Paulo Martins. “It gives us the ability to go to any international corporate and present good ideas and experience as part of a group of banks that can deliver success.”

Ironically, it is the economic experience of its home country that may throw up some of the bank’s most exciting growth opportunities in the future. “Portugal and Spain had a pretty unique experience when they joined the EU in 1986,” explains Rafael Valverde.  “Our development was not comparable with the larger economies like France and Germany, so we had the challenge of managing five percent growth per year for nearly a decade. This experience can be of value to businesses operating in or moving into the new EU countries in eastern Europe, and both our clients and the bank itself see this as a major growth area.”

For further information tel: + 351 21 319 69 16; email: psantos@besinv.pt;
www.esinvestment.com

Angolan enterprise goes global

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BAI is actively engaged in providing an attentive service to individual customers and offering innovating solutions to support SMEs, while sustaining an undeniable position among corporate organisations and public institutions.

A team of dedicated and expert professionals ensures the bank’s presence both in national and international markets.
BAI has led the efforts to introduce world class practices to the Angolan market mainly through initiatives to improve the efficiency and effectiveness of internal processes, the modernisation of IT infrastructure and risk management; thus, improving its responsiveness to client demands and the solidity of its balance sheet.

Since the end of 2007, BAI has been implementing a project whose main aims include the improvement of the quality of its services through the reengineering of business processes and the modernisation of IT systems not only in its operation in Angola, but also in its international subsidiaries. The adoption of new IT systems, which is well under way, includes the replacement of the core banking system, the introduction of an ERP solution and the implementation of control systems.

Moreover, BAI created new organisational units in order to better manage its risks. For instance, in 2008 BAI created the first Information Technology Security Department in the Angolan banking system in order to monitor and protect all the information systems in place in the bank.

Finally, BAI has implemented a set of internal rules in order to prevent money laundering and terrorist financing. This move by the bank came ahead of any laws passed by the government or central bank regarding these issues.

With 66 branches in Angola, BAI is also present in Portugal, through BAI Europa, in Cabo Verde, through BAI Cabo Verde, S. Tomé e Príncipe and Brazil through partnerships that ensure BAI businesses.

Important operations
Over the last eighteen months BAI has either participated or committed to participate in the financing of major public and private initiatives in the most varied sectors of the economy. The major transactions and deals BAI engaged in are:
– In February 2008 BAI got involved in the financing of a logistics programme to support food distribution in Angola. The bank provided $400m to finance the programme.
– In July 2008, the bank led a syndicate to finance the operations of the largest private oil company in Angola in the amount of $92m participating in it with $60m.
– In August 2008, BAI financed the purchase of buses for public transportation in the amount of $375m.
– BAI was mandated to arrange a $168m syndicated facility for the implementation of a sugar, alcohol and energy mill. In September 2008 the facility was available and BAI participated with $57m.
– In 2009, the bank signed a contract with the government to finance the production and distribution of 40 million school books. The credit facility amounts to $150m. One of the main purposes of the initiative is to revitalise the printing industry in Angola and contribute to reduce the imports of school books.

Internationalisation
Despite the fact that it is still quite young, BAI has always acted in a proactive way, and today – besides being the largest Angolan bank in term of assets – it is also the most internationalised Angolan bank, being present in three continents: Africa (Cape Verde and São Tomé and Principe) Europe (Portugal) and South America (Brazil). Some of these are highly competitive and regulated markets in which BAI has achieved some success. An example of BAI’s international operations success is the increase of BAI Europa share capital, during 2008/2009, by €22.5m to finance its rapid growth, in a period of world financial and economic crisis.  

Corporate social responsibility
BAI’s management understands that the banks’ success depends on the commitment it has with the community in order to contribute to its development. With regards to CSR, BAI has chosen to provide financial services to the poorest and support and promote mainly cultural and sports initiatives. For instance, in 2008, BAI increased its capital in NovoBanco by $5m. NovoBanco is a small microfinance bank where BAI holds a majority stake of 85.7 percent in partnership with Chevron Sustainable Development (14.3 percent). BAI’s investments in NovoBanco follows a CSR rationale, since it aims at providing banking services to the poorest sections of the Angolan population, allowing BAI to share its profits with the community. Moreover, in the last 18 months BAI donated $1.7m mainly to support and promote cultural and sports activities. The activities included, for instance, BAI’s resumption of its BAI Arte brand, a platform to share with the community the works of the most established Angolan artists through exhibitions. BAI’s involvement and support of sports activities have secured it a deal with the Angolan Basketball Federation to name the national basketball championship as BAI CUP for the next three sports seasons.

In 2008 BAI added another country to its opereations with the opening of BAI Cape Verde, a bank where it holds a 71 percent stake. BAI is also present in Portugal with BAI Europa (99.99 percent stake), Brazil with BPN Brasil (20 percent stake) and São Tomé and Príncipe with BISTP ( 25 percent stake).

The 48 percent increase in the number of clients is partially explained by the 47 percent increase in the number of branches. Accounting for the enlargement of BAI’s client base was also the introduction of a very attractive savings solution in local currency, “Rendimento a Campeão”, a 90 days Certificate of Deposit in local currency yielding 10 percent p.a. In 2009, BAI followed on its tradition to innovate offering the best terms in the Angolan market for a 90 days Certificate of Deposit in local currency with the introduction of a product yielding 15 percent p.a. and with a prize (an apartment) at stake.

BAI kept furthering market penetration, by increasing the number of ATM’s and Points of Sale (POS’s) which grew 77 percent and 178 percent respectively. The bank’s sales force managed to persuade an increasing number of businesses on the advantages of its POS’ solution terms. Though the commissions charged per transaction are similar for all banks, BAI, as opposed to its competitors, does not charge a maintenance fee for POSs.

The number of debit cards in circulation grew from 74.979 in 2007 to 133.830 in 2008 as the bank strived to provide a card to each of its clients.

Peace of mind

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When Blom Bank was awarded CPI Financial’s gong for the Best Bank in the Middle East earlier this year, the accolade was more significant than it might otherwise have been – it capped a real breakthrough. Not only was this the first time that a Lebanese bank had won the award, and one received after a tough year of global economic turmoil at that, it was also followed by a slew of others: Banker Middle East gave Blom Bank Best Mutual Fund in the Middle East award for this year, as well as that for Best Investment Advisory Service in the Middle East.

Indeed, the awards have come thick and fast, suggesting just how improved standards are paving the way for the Middle East’s successful institutions to play an increasingly important role in the global economy: World Finance, Global Finance and Emea Finance all gave Blom Bank their equivalents of a Best Bank in the Lebanon award, with Global Finance also recognising it for the best trade finance and best foreign exchange operations in the country. So much for room in the trophy cabinet – but Blom Bank also backed it with hard and fast figures: for the first half of this year it recorded the highest profits in Lebanon, up 5.8 percent on the same period last year, to $138.3m – a bravura performance for an organisation with assets also up 8.51 percent for those six months to $19.42bn and with total deposits up 10.47 percent to $16.69bn.

Small wonder then that Blom Bank is now widely recognised as the leading Lebanese Bank, with arguably the strongest household name recognition for a bank in the country and certainly with the greatest reach of any competitor organisation beyond it. As well as domestic subsidiaries including Blominvest, a private investment bank, and Arope, an insurance business, with 56 branches in Lebanon alone – with three more opening over 2009 – Blom Bank now has presence in some 11 other countries too, an on-going expansion programme that began in the mid-1970s. As well as a strong regional reach – it has operations in Syria, Jordan, UAE , Qatar and Egypt, where this year has seen considerable expansion, and where annual profits shot up an impressive 73.4 percent. Blom also has a private banking operation in Saudi Arabia, and banking businesses in Cyprus, Romania, Switzerland, France and UK.

A cultural success
Nor is its spread merely geographic. It is also cultural: a further subsidiary of Blom Bank – and a growing market internationally – is its Islamic bank, called Blom Development Bank, which was launched to the public in the spring of 2007 and carries out all of its banking operations in line with both Sharia law and within the regulations of the Lebanese Central Bank. It offers a deposit service and Islamic financing services taking into account the religious dilemma posed by the fact that Islamic law does not permit the making of money from money – including that made from interest – with wealth generated only through legitimate trade and investment in assets. Sensitive to the particular needs of many of its customers, Blom Bank has consequently offered financial services in the form of, for example, ‘Murabaha’ (by which a commodity is sold with the costs and profit known to the seller and buyer alike), ‘Ijara’ (through which a property is bought by the bank and then sold to the customer for the same price under a long-term ‘promise to purchase’ agreement), ‘Wakala’ (a fee paid for expertise), as well as ‘Tawaruk’ and ‘Istisna’a’.

By the end of 2009, Blom Development Bank will open a branch in Tripoli and one planned for Beirut too, with various locations currently under consideration. The three Sharia scholars on Blom Bank’s Islamic subsidiary’s board have been involved in making it especially competitive in this market through the identification of new types of financial arrangements that are compliant with Sharia law, several of which are in the pipeline for launch over the next few years and which should help Blom tap into local financing activities that have so far been the preserve of conventional banks.

Certainly, Blom Bank’s ambitions have been as much those of scope as geography and culture, setting out its mission as being the intention to operate in all banking and related finance fields. The bank has already had considerable success with its aforementioned insurance division – one which now covers car, health, fire and personal accident areas, as well as life insurance. This year saw the opening of three dedicated insurance branches in Lebanon – a timely follow-up to Arope Lebanon gaining three places to fourth in the total Lebanese Insurance Market Ranking last year – as well as one in Syria, and two insurance companies in Egypt, in relation to life and property insurance markets. Growth has also been seen in the bank’s savings products linked to life insurance, such as its retirement plan denominated in US dollars, and those geared towards covering the cost of children’s education.

As well as the insurance market, Blom Bank is also building its presence in commercial, corporate, retail, private and investment banking sectors. Private banking (through Blom Bank’s Blominvest arm and Blom Bank operations based in Geneva) has been especially successful, with investments and asset management sectors benefiting particularly from Blom Bank’s expertise in Lebanese investment instruments and brokering on the Beirut Stock Exchange (BSI), but also the work of its research department. This produces market-leading daily reports on the Lebanese economy, conducts equity research into Lebanese and regional companies and publishes the respected BLOM Stock Index, Lebanon’s first financial market index, covering all stocks quoted on the BSI. Blom Bank also produces its Blom MENA Banking Index, which tracks the performance of all of the listed banks across 11 Arab countries of the Gulf Co-operation Council, Middle East and North Africa.

Long and short term foresight
The creation of mixed-asset funds – such as the BLOM Cedars Balanced Fund and the Blom Petra Balanced Fund, both launched last year to target the Levant region – is an example of the kind of advances over recent years that might be said to have more than justified that slew of awards. Blom Bank has sought to establish an inclusive customer-friendly approach providing products for all: for those with smaller amounts they wish to use more profitably, Blom has also created a variety of mutual fund investment products; perhaps one of its most stand-out successes has been Tayseer, an investment product that has been reintroduced more than five times, and which on each occasion has provided good returns on everything from currencies to Eurobonds, gold to oil.

Blom Bank’s commercial banking activities are a further case in point of its desire to manage its clients’ money profitably but safely. If in past times it, along with other regional banks, has been considered as rather conservative in its lending policies (shaped also, of course, by central bank regulations), the current economic climate is now seeing these re-framed as ones of foresight rather than fearfulness. Nor has it especially suffered slower profit growth attributed by Lebanese banks to the lower interest rates applied to their high foreign currency liquidity: deposits at Lebanese banks grew by $8bn over the first half of this year, with expectations that Lebanese living abroad would make less income and transfer less money being over-turned and money continuing to flow.

Tight terms and required collateral have remained the bedrock of Blom Bank’s lending policy – with consideration given to the Lebanese Central Bank’s urging of Lebanese banks to lend more in Lebanese pounds instead of dollars to reflect a shift in bank deposits from foreign currencies to the local currency. Compared with its peers, Blom Bank’s profitability ratios are strong, something attributed to the greater cost efficiencies that have done so much to build its reputation – net interest income accounts for close to three quarters of the bank’s operating revenues and is mostly generated from holding inter-bank deposits and government securities (this, as with many Lebanese banks, being considered an excessive exposure to sovereigns).

But, crucially, this is not to say that Blom Bank – established in 1951, one of Lebanon’s oldest banks and still its largest lender by profit – has lacked imagination: its board would be the first to recognise that a conservative attitude alone may allow for growth but at a painfully slow rate. This year, for example, has seen Blom Bank look more to financing the likes of real estate developer Landmark’s benchmark residential and tourism project in Beirut’s Central District Area. Blom’s involvement in such deals – this one to the tune of $130m – is expected to be especially welcome due to its consistently high profile in the domestic market. Blom Bank is also active in sponsoring events which promote the image of Lebanon on the International scene such as Blom Beirut Marathon. In preparation for the opening, earlier this year the bank signed a deal which will see it remain the key sponsor until 2011.

Indeed, while Blom has adopted a policy of expansion that has taken as far west as Paris and London, its chief commitment might rightly be said to be local at heart: its regional expansion has been of especial benefit to the growing number of Lebanese and Arab expatriates throughout the Middle East.

Clearly the bank can make a strong claim to market leadership in Lebanon, with recent years seeing a number of innovations in other countries too, many of which have been quickly imitated by the competition. Blom was, for example, the first bank in Jordan to drop the requirement for a guarantor for car loans. In Egypt it was the first to introduce an international MasterCard co-branded with the local network 1-2-3 which, cleverly, works as a local card in Egypt and an international card abroad. And in Syria it was one of the first four private banks granted a licence.
Retail banking has also been a key area of development for the bank over recent years. Much like other banks, Blom Bank has pursued an inclusive policy aiming to develop products for all needs and incomes: its range of payment cards, for example, operates under both Visa and, as had been noted, MasterCard brands but includes options from Classic through to Black Platinum, as well as a similar spread of corporate cards – among many firsts, Blom Bank, in fact, launched the Middle East’s first Visa Platinum Corporate card, as well as its first Visa Platinum Business card. Ahead of many companies in the banking sector, it also offers prepaid cards and those dedicated for internet banking, and has got together with cellphone network provider Alfa to create another first for the Middle East, a co-branded credit card programme that gives its members free talk time under certain Alfa deals.

Certainly Blom Bank has been quick to not only identify specific customer groups and provide them with dedicated products – its recently-launched Watan card, for example, was created just for use by members of the Lebanese army and security forces – but to give an unusual degree of customer personalisation too: Blom Bank’s ‘personalise your card’ system allows cardholders to order their card, on-line or through branches, with their choice of image selected from Blom’s picture library. This again, was a first in the banking world across the Middle East.

A similar thinking lies behind its Golden Points Loyalty programme, which, with every $100 of purchases allows cardholder to win from a range of gifts, among them top-flight hotel stays, electronic goods, airline tickets as well as gifts from certain establishments accepting the cards. Certain cards also offer an innovative cash back programme that allows cardholders to redeem a percentage of their purchases, from three percent up to an impressive 25 percent. With the same kind of personalisation in mind, Blom Bank also offers a variety of specialist accounts, including traditional savings accounts, as well as those devised to help with the mundane – the settlement of utilities bills, for example – as well as the more magical – such as preparing for a wedding.

Technology applied by Blom is helping consumers and retailers alike throughout Lebanon too. For consumers, Blom Bank’s branches throughout the country each have an ATM, with five branches of a new format offering faster teller service having been opened over the last year. And for retailers, Blom’s Point of Sale machines now accept all forms of payment card, as well as the latest generation of chip cards, which have been introduced over recent years to minimise the risk of fraud. With this being a key priority throughout the retail banking sector, Blom Bank has also established a 24hr call centre to deal with any service issues as well as a network of dedicated account managers to handle particular POS problems. A similar service is also offered to customers, together with internet and telephone banking. Telephone banking of another order is in operation here too: customers can also receive SMS alerts whenever the balance of their account changes.

Technology is just the most obvious way in which Blom Bank is looking forward. The bank’s primary strategic objective remains to maintain its leading position in Lebanon, chiefly through the organic growth with which it has been characterised for the last half century, as well as maintaining its efforts to preserve its outperforming level of cost efficiency and consolidating its one-stop-shop, universal bank profile. The bank’s motto – ‘Peace of Mind’, which was driven home in yet another innovation, last year’s advertising campaign, the first of its kind on Lebanese national TV – is proving to be as much a promise as a marketing tag-line.

For further information email: blom@blom.com.lb;
www.blom.com.lb

Clamping down on directors

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Given the difficulties that prosecuting authorities have with regards to trying to stamp out anti-competitive practices and cartel activity, it is perhaps unsurprising that the UK’s consumer watchdog wants to equip its armoury with something more threatening than punitive fines and even jail times. The Office of Fair Trading (OFT) has announced that it is considering widening its use of competition disqualification orders (CDOs) against company directors in an effort to crack down more effectively on anti-competitive practices.

Currently, company directors are only likely to face disqualification for breach of competition law if they are found to have personal responsibility for their companies’ contravention of the competition rules. However, the OFT wants to change this approach – and it does not require any change in existing law to do so. The court’s powers already exist under the amended Company Directors Disqualification Act 1986 but they have simply not been used before. Lawyers say that such a move will stop directors from “turning a blind eye” to anti-competitive practices.

CDOs were introduced by the Enterprise Act 2002 to promote compliance with antitrust law by providing sanctions for the individuals responsible. On the application of the OFT or a sector regulator the court can disqualify a company director for up to 15 years if the company has breached competition law (through price fixing or cartel offences, for example) and the court considers the director unfit to be involved in the management of a company as a result.

But the OFT thinks that this approach has not worked and on the back of research which it commissioned in 2007, it believes that sanctions should also be taken against directors where they “ought to have known of” or “should have taken steps to prevent” a breach of antitrust law, even if they were not personally involved in the breach. The OFT is also considering – in exceptional circumstances – using disqualification orders where no breach of competition law has been proven or where no financial penalty has been imposed.

Added to that, the OFT wants to extend its discretion to apply for disqualification orders to cases where a company has benefited from the lower levels of its leniency regime, typically “type c” leniency where the applicant is not the first to bring the cartel to the attention of the OFT but which later co-operates with the investigation. This has been used to controversial effect in cases such as the £121.5m fine against British Airways in August 2007 after the airline admitted collusion in fixing the prices of fuel surcharges, while giving a “no-action letter” – essentially a pardon in exchange for information to encourage companies to inform on fellow operators – to Virgin Atlantic, which had colluded in the price-fixing arrangement on six occasions before blowing the whistle.

More OFTen than not
Presently, the OFT will not apply for the disqualification of a current director of a company which has benefited from any form of leniency. This is because it wants to encourage companies to come forward with information in exchange for leniency for their role in the unfair practice. As the OFT still wants to encourage the early offering of information on cartels, it has said that it would not seek disqualification orders against first whistle-blowers or in other cases where a company has qualified for the highest levels of leniency.

Launching the consultation in August, Ali Nikpay, the OFT’s senior director of policy, said: “We know that the prospect of being disqualified as a director is one of the most powerful deterrents to anti-competitive behaviour. Our proposals aim to increase the incentives on company directors to take responsibility for competition law compliance and tackle behaviour that harms competition.”

Lawyers believe that the OFT’s proposals are a strong inducement to make compliance a major boardroom issue. “These proposals are significant in that they increase the dangers for individuals in being involved in cartels, which the OFT hopes will feed through to corporate behaviour,” says Liz Fowler, competitions lawyer at City law firm CMS Cameron McKenna. “While there may be room for argument on the facts in individual cases about whether a director ‘ought to have known’, the OFT’s proposals will in any case up the ante in what is already a very stressful time for company directors. The proposals re-emphasise the need to know what is going on at all levels of your organisation and to make competition law compliance a company priority.”

Ros Kellaway, partner and head of competition at law firm Eversheds, says that “the OFT seems to have moved from zero to 100 mph on this subject”. “The OFT has never used its powers of director disqualification under the old guidelines but its lack of experience hasn’t stopped it from producing a very aggressive new set of proposals which make it far more likely that disqualification will become a real possibility.”

Lawyers agree that the OFT wants to have a greater range of threats than just levying fines. “The OFT has noticed that fines don’t seem to act as a deterrent,” says Stephen Hornsby, specialist competition lawyer at solicitors Davenport Lyons. “Some industries are characterised by recidivism and it is innocent shareholders who pay the fine,” he adds. “In addition, in some cases, the workforce may be affected. It is natural, therefore, to focus on other means of securing compliance and in this context widening the circumstances in which directors can be disqualified is understandable.”

Nicole Kar, competition partner at Linklaters, says that the proposals are significant in that they indicate a much tougher stance toward directors of companies involved in cartel conduct. She warns that “the consultation period should be viewed by directors as a notice period within which to have their companies’ compliance and early detection systems put in order as increased enforcement activity against directors of companies breaching competition law seems an inevitability of the OFT’s current proposals.”

In the hot seat
The ramifications of the proposals for companies are likely to be twofold, says Kar. Firstly, companies should expect greater challenge from directors about their compliance efforts and may find that directors require as a matter of policy that they are provided with audit reports and receive early warning of competition law concerns. “The proposals will prompt directors to make inquiries of the companies they are involved with in terms of their compliance programmes, training and early detection systems, such as whistleblower hotlines, and spot audits,” she says. Typical hot-spot areas that will need increased director scrutiny include the sales and marketing divisions which tend to be at higher risk of cartel conduct than other divisions with little or no interaction with competitors or customers, such as finance and IT, she says.

Secondly, says Kar, companies should expect that the divide between corporate and individual interests will widen further as a result of the measures, which form the most recent part of a package of proposals adopted by the OFT to strengthen the deterrence effect of competition law. Another significant measure from the corporate perspective in this vein are amendments to the OFT’s leniency policy which prevent a corporate from securing immunity where a director or employee was the first to blow the whistle on a cartel.

Kar also believes that seniority of directors is also likely to be a factor in terms of how culpable they may be regarded if a prosecution should take place. In December 2007 the OFT charged three businessmen with dishonestly participating in a cartel to allocate markets and customers, restrict supplies, fix prices and rig bids for the supply of marine hoses and ancillary equipment in the UK over a four-year period. However, the County Court judge was significantly influenced in his sentencing of one of the Dunlop executives by the fact that he was managing director. The judge stated that “even though you may not have been as deeply involved as [the other Dunlop defendant] in the everyday workings of the cartel, I have no doubt that your responsibility in the dishonest management of your company was greater than his”. 

Yet despite the potential benefits of “beefing up” the OFT’s ability to threaten directors into compliance, the regulator’s proposals are not without significant problems. Crucially, there is no concrete guidance provided to directors of the circumstances in which the OFT would seek a director disqualification order in cases where the OFT believes a director “ought” to have known of cartel conduct but had no actual knowledge. Cartel conduct is by its nature covert and the individuals involved (often rogue employees) may go to great lengths to conceal it.  As a result, directors will be judged – with the benefit of hindsight – about whether facts were such that they should have known that the company was involved in a cartel with its competitors.

 This issue is exacerbated by lack of precedent. Despite its apparent current tougher enforcement stance, the OFT has not, in practice, sought an order for a director’s disqualification for breach of competition law since the Act was amended to provide for a competition disqualification order in 2003. As a result, says Kar, there is no precedent to inform a director of the appropriate standard of due process which he or she is meant to attain, and that, she says, is “very unsatisfactory in circumstances where a director’s employment and career prospects may be seriously jeopardised”.   

 Lawyers also point out that the OFT’s proposals may “cloud” the way that a director reacts when faced with the prospect of an OFT investigation. As directors can now be made personally liable for anti-competitive practices taking place in their organisations – with or without their knowledge or consent – they may act in their own interests to seek leniency for themselves, rather than act in the best interests of the company. For example, as Kar points out, a corporate decision to seek leniency is often a difficult one, involving fine judgments as to the sufficiency of the evidence available (and whether further investigation is required before any approach to a regulator should be made) and the financial and reputational impacts on the corporate both of the conduct discovered and of a leniency application. If the OFT gets its way, however, “a director is obliged to act in the best interests of his or her company but will now have significant considerations of personal liability to factor into any ‘corporate’ decision to seek leniency,” she warns. 

While lawyers are agreed that tougher enforcement against anti-competitive practices may be welcome, they can also see the potential pitfalls. Some are worried that the proposals could cause more harm than good. As Kellaway at Eversheds points out: “The new guidelines are said to reflect the need to deter individuals and not just to punish shareholders through fines, but this seems to ignore the fact that depriving a company of its experienced directors will unquestionably punish shareholders – in the case of smaller companies possibly even more than any fine. The new approach will also fall exceptionally harshly on smaller businesses where directors are inevitably more hands on. And yet those businesses often have less access to advice in an area of law which is specialised and complex.”

How directors and companies can protect themselves
Directors and companies can best protect themselves by taking measures to prevent and detect competition law breaches. The former could include instituting a competition compliance programme and training “higher risk” divisions of the company, such as sales, purchasing and marketing teams. Companies will also need to seriously consider employing a compliance officer or setting up a compliance hotline (with, for example, external lawyers) to answer practical questions about the permissibility of conduct, as well as requiring employees to sign annual competition compliance certifications, seek consent before attending trade association meetings (a fertile source of anti-trust breaches) and to file reports on meetings with competitors. Other measures aimed at detecting competition law breaches could include establishing a whistleblower hotline, as well as conducting spot competition audits of “higher risk” divisions or individuals.

The global scene
The UK is not the only country to consider revising its regulations on anti-competitive practices. A number of jurisdictions have recently introduced or are in the process of considering the introduction of director disqualification in relation to competition law breaches, or more specifically, cartel conduct. 
For example, provisions permitting director disqualification were introduced in Sweden’s new Competition Act which came into force on 1 November 2008, and in 2007 amendments to Russia’s Code on Administrative Violations were made. Similar provisions already exist in Australia under the country’s Trade Practices Act. 

Director disqualification is being considered in relation to proposed competition legislation in Hong Kong, and a number of jurisdictions including the US, Canada, and  South Africa, provide for director disqualification under company law as a result of an individual being sentenced to imprisonment. According to Robert Heym, partner in the Munich office of Reed Smith, in Germany “a director can be recalled at any time from his position by the shareholders or a supervisory board of a stock corporation if the corporate body is of the opinion that a director has violated the law and caused a material damage for the company.”

However, some countries have had their efforts to introduce more stringent rules against directors rebuffed. In Hungary, for example, provisions intended to provide for two year occupational bans of executives working for enterprises found to have been involved in cartels were declared unconstitutional. This was because their proposed
implementation did not provide sufficient protections for the individuals’ rights of defence. 

The G20’s missing trillion dollars

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It was the announcement that saved April’s G20 summit in London. The world’s richest nations would provide a trillion dollars to save the globe. More specifically, the trillion would go to the emerging markets hard-hit by the global slump. Even better, this enormous sum would be provided in the form of loans and credits without the usual strings attached.

The amount was unprecedented. Never before had so massive a sum been promised to the most vulnerable victims of the crisis and the self-congratulation was entirely justified. “Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale,” said the G20 statement. The money would be stumped up by individual nations roughly according to the size of their respective economies, and paid through existing international financial institutions. At the head of this relief column would be the IMF.

It was, added the statement without a shred of exaggeration, “the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times.” Although the G20 didn’t make the comparison, the promised capital sum is analogous to the US-inspired Marshall Plan that put Europe and Britain back on its feet after the second world war.

There were no dissenters to the statement, not officially anyway. A G20 country doesn’t break ranks without good reason. However it’s believed that the heads of state of some nations were lukewarm, particularly the savings-rich Asian ones, and the most lukewarm was probably China for three good reasons.

The first is that China did not turn up in London to help save the world; it came to promote its current idée fixe, the progressive abandonment of the greenback as the world’s reserve currency in favour of an alternative like the Single Drawing Rights that already fulfil the role of a proxy for the dollar in certain kinds of sovereign transactions. China’s motivation is largely because it holds somewhere north of a trillion dollars of their own in T-bills and other proxies for the greenback. Not unreasonably, they are worried that America’s problems may devalue this gigantic storehouse.
As premier Wen Jiabao remarked around that time, “we have lent a huge amount of money to the United States” and, “to be honest, I am a little worried”.

The second is that the Chinese government and Zhou Xiaochuan, governor of the People’s Bank of China, do not see why they should have to tidy up after the US. As they’ve put on record, both are dismayed by American excesses in the last few years, notably president Bush’s obliteration of the surpluses accumulated so conscientiously – and at some political cost – by predecessor Bill Clinton as well as by the capacity of US citizens to live beyond their means. In a recent speech Dr Zhou went out of his way to criticise America for its “lax lending standards”, “excessive leverage”, and “frivolous development of derivative products”.  In central banker-speak, this is tough talking, especially in reference to the parent of the reserve currency.

And the third is that China is engaged in its own massive internal stimulus. Although its economy has suffered little more than a flesh wound from the crisis, the government of premier Wen Jiabao has pledged an injection of capital second only to that of the US, in part to keep the Asia-Pacific pot boiling. All the signs coming from Beijing suggest this should be good enough.

A billion reasons to forget
Meantime where’s this globe-saving trillion? Well, so far it hasn’t happened. Half a year after it was promised, the G20’s gift to the world is just a trickle. All we have is a vague promise from the G20’s finance ministers at their September summit that it is “close to completing the delivery of $850bn of additional resources agreed in April.” There’s no deadline, not even an indicative one. The rest of the September statement amounted to a reiteration of the April announcement: “In the period ahead we need to focus on providing resources to low income countries to support structural reforms and infrastructure development etc, etc.”

As it happens, it’s the multilateral development banks (the MDBs) such as the European Bank for Reconstruction and Development that have led the charge so far. Boosted by $60bn from the World Bank and the promise of more to come, they will lend over $110bn this year plus a further $200bn between now and 2011. More importantly, the funds are being dispensed almost on a daily basis.

They’ve done so by applying urgency to the crisis. The big five – International Bank for Reconstruction and Development, EBRD, African Development Bank, Asia Development Bank and Inter-American Development Bank – have substantially leveraged their capital to provide deeper funds to oil the economies of their respective regions. Loan conditions have been softened and performance criteria re-tuned for the emergency. Among a welter of exciting new measures, the MDBs are drawing private capital out of their regional economies by providing guarantees, bond insurance, bridging finance and other inducements to add to the general pool of liquidity.

These banks aren’t a big part of the trillion-dollar solution but they are, as a spokesman told World Finance, “part of the G20 focus”. In short, the provision of urgent liquidity.

Figures to fit the bill
The money is certainly needed. When the global leaders gathered in London, the crisis was enveloping their nations. As IMF managing director Dominique Strauss-Kahn observed at the time, there were fears of a “more severe contraction in global economic activity and even greater and more prolonged financial strains than currently envisaged.” In short, a cataclysm was on the cards.

Entire nations were being starved of credit, unemployment was spiralling, banks were being furiously re-capitalised, markets were in free-fall, giant manufacturing companies such as GM and Chrysler were being rescued. International investors had lined their pockets with fish hooks with unfortunate consequences. Cross-border investment was plummeting, especially to emerging markets, and capital markets in even the big, advanced economies had slowed right down.

The size of the decline – rather, collapse – across half of the world was shocking. According to IMF figures, net private capital inflows into emerging markets were down to $122bn in 2008, pretty much a fifth of what they were in 2007. Bank lending to those nations had gone into reverse. It was painfully obvious that theories about de-coupling – namely, that developing economies would not be affected too badly or even at all by the problems of the western world – were hopelessly optimistic.

Take just Africa. Right now, it’s suffering from falls in practically everything that matters – in global demand for its products, in remittances, in capital flows and, increasingly, in donor aid. “It was said a year ago that African countries were not so linked to the financial system in the West that the effect of the crisis would not be so important,” summarises Dominique Strauss-Kahn, managing director of the IMF. “This was wrong. With some delay, they are now being hit by the crisis.”

As US Treasury Secretary Tim Geithner said shortly afterwards, the world was going through the sharpest decline since the end of the Second World War. “Today’s crisis is unlike any we have experienced for seven decades,” he added for good measure. “The balance-of-payments crises of the 1950s and 1960s, the oil crisis of the 1970s, the debt crisis of the 1980s, or the Asian financial crisis of the 1990s all pale by comparison.”

While all that is true, this is not an Asian financial crisis, as Dr Zhou and premier Wen have doubtless made clear behind closed doors. It’s a made-in-USA crisis, as indeed secretary Geithner has largely acknowledged, and yet the largely blameless, high-saving Asian nations have been drawn into it despite the fact that many millions of their citizens live in material conditions no better than those of the emerging markets deemed to be in need of rescue.
The reasons for Asian reluctance to rush into the trillion-dollar project are clear enough. Take just China, rapidly emerging as the region’s leader in place of Japan. In the latest top 1000 banks compiled by The Banker, China’s banks occupy the first three places measured by pre-tax profits as well as most of the top 25 places. Combined, the pre-tax profits of China’s banks come to $84.5bn. That’s $68bn more than second-ranked Japan, with USA and Britain nowhere.

Asian sovereign wealth funds tell a similar story. The ones established by the hard-saving as distinct from hard-spending nations are predictably in Asia.

The backbone of these bank profits and the liquidity of sovereign wealth funds is based on the peoples’ savings, poor as many of them are. And as Dr Zhou reminds us in so many words, it’s the saving nations that have virtue on their side. Chinese public debt per capita currently stands at a mere $649.52. And in the US? It’s $21,863.70 and rising rapidly. Within two years, per capita US debt will hit $32,307.

So we’ve got a gravitational shift taking place in banking and investment as well as in ship-building, car-manufacturing, electronic goods and whiteware among others. Like China, these nations are determined to preserve their financial sector’s essential integrity. Also like China, the wealthiest nations hold large deposits of American public debt and they are lined up behind Dr Zhou’s campaign.

Fearful of a deteriorating greenback, Asia’s leading central banker wants a “super-sovereign currency” that basically sidelines the dollar, very much like Keynes’ still-born bancor, and removes all the settlement uncertainty associated with a tarnished greenback. This is high-level geopolitics and the stakes are high.
In short, China will look after its own backyard, thank you.

However it’s not China that’s holding up the assembly of the trillion dollars. If a week is a long time in politics, six months is an eternity for developing nations sinking deeper into recession by the day. The IMF, which is front man for the world-saving trillion dollars, has not explained the delay in raising the money and distributing it, but reports suggest that the sticking-point lies in smaller European nations seeking concessions for stumping up their share of the kitty.

According to Andrew Tweedie, director of the IMF’s finance department, the fund-raising deals are going steadily, but appear to be well short of the assumptions made in April. Agreements are in place with Japan ($100bn), Canada ($10bn) and Norway ($4.5bn). EU member countries have committed some $100bn, but we’re nowhere near the promised amount. Although the G20 statement did not include any caveats about the availability of the full trillion-dollar stimulus, some countries have since told the IMF that they will only give “favourable consideration” to increasing their contributions while others have said they will only consider it, favourably or otherwise.
At this stage, the ambition of wrapping up the balance before the new year looks decidedly optimistic.

Elsewhere, things appear to be moving slowly. The important concessional loans to the poorest nations are still in the planning stage. And only about $50bn of a new wave of flexible loans are available now, roughly a tenth of the envisaged total pool. The $6bn contribution from IMF gold sales announced in April are far from being signed off and, anyway, a successful sale of the gold depends on the state of the market.

To the impartial observer, it very much looks as though the G20’s trillion-dollar statement caught the IMF by surprise.

As outlined last April, the deal is meant to go like this. As the main culprit for the crisis, the issuer of the reserve currency and the biggest economy, the US throws a quarter of the trillion dollars – $250bn – into the pot. The IMF raises “immediately” a further $250bn from a group of countries not including America in the form of temporary financing. These are short-term loans, in other words, from a coalition of 26 wealthy countries.

When that money is assembled, it will be deposited in a new mechanism known as a “new arrangement to borrow”, or NAB. Basically what your average commercial bank would call a flexible loan, an NAB is a borrower-friendly system that allows the IMF to extend credit to hard-pressed nations according to need – and their deserts. The nations have to demonstrate responsible economic management. And if the IMF wants to borrow in the market for the above purposes, it will be allowed to do so.

On top of this, there’s $100bn from the MDBs. Their capital comes from member countries but these banks, which are historically very conservatively financed along 50:50 capital and credit lines, usually raise funds through international bond issues on an open market.

Topping up these sums, the IMF distributes a further $250bn of Special Drawing Rights, the international settlement currency. Although only $100bn of this goes to emerging economies and the rest to other nations including the US, calculated according to the size of their contribution to the initial $500bn, the SDRs help the more beleaguered governments pay their foreign exchange bills through the sovereign settlement system. This is the only part of the package that appears to be going swimmingly.

The last £250bn is about trade. A short-term, two-year backstop for the private financing of imports and exports, it is to come from the G20 countries. Their motives are not entirely altruistic; all of them depend to varying degrees on selling and buying to developing economies. 

And, all hands to the pump, the IMF has been told to distribute a further $6bn from the sale of some of its gold reserves. Originally, the proceeds from the yellow metal were intended for the fund’s own income but now they will go to low-income countries in the form of concessional financing.

Working trillions
But where is it all? Nobody’s saying another trillion is easy to find. It is, of course, additional to each countries’ own fiscal stimulus which, the IMF estimates, will by the end of 2010 hit a combined emergency total of $4trn. The US alone is working its way through a mere $800bn.

But the longer the money takes to flow, the more recipient countries must start to wonder whether perhaps the G20 and host prime minister Gordon Brown strong-armed some member nations over a hectic weekend to greenlight the magic figure, and then made the announcement on the fly. That is, before everybody had worked through the difficulties of raising another trillion dollars from hard-pressed finance ministers. Indeed some of these finance ministers have resigned in protest at the way the central banks are working the printing pressed overtime with the inevitable and alarming risks of devaluing entire sovereign currencies in the next few years.

Bureaucracy wins
The responsibility for getting out the trillion lies primarily with the IMF and is clearly a huge burden, almost certainly much bigger than it expected. Even before the April summit, it put its hand up to take the central role in gathering and dispersing the trillion with an adroit exhibition of central bank diplomacy.

Before the crisis, the future of the IMF in its existing form looked black. Bank of England governor Sir Mervyn King and others were agitating for a substantial overhaul of its highly bureaucratic structure.

To many, it seemed the IMF, as the unofficial parent of the multilateral development banks, had mislaid its brief. The MDBs were supposed to use their resources to fight poverty, boost productivity in agriculture, build and nurture the building blocks of economic growth, and channel efforts into creating greener economies. Yet according to frustrated central bankers, the governance structures of some of them, including the IMF, were so complicated and rigid that they simply weren’t doing their job for the developing world. Too many senior staff were selected on political rather than merit-based grounds.

But that was before Dominique Strauss-Kahn got the hot seat at the onset of the crisis, in November 2007, with a clear mandate to reform the institution. The preferred choice of France’s Nicolas Sarkozy who has managed to appoint Frenchmen into two of the most important positions in the crisis (the other is Jacque de Larosiere who heads up the body designing the post-crisis system of regulation across Europe), Strauss-Kahn is a professor of economics turned politician and he knows how to play the game. He served as finance minister in France when he helped guide the launch of the euro, arguably the most successful new currency of modern times. He knew all about the shortcomings of the IMF, having served on the board of governors in his capacity as finance minister. And as an economist, he can talk pretty much across the spectrum. His research fields are broad – the saving behaviour of households, public finance and social policy. Relatively young at 60, he could prove to be the man of the hour, or at least one of them.

It was no surprise therefore that, as the crisis wore on, the IMF became uncharacteristically activist. Painting a black and deteriorating picture of the global economy, IMF staff told a preliminary meeting of G20 deputies that “a decisive breakthrough” was overdue and conventional monetary easing in the form of freer credit and low official interest rates had failed to complete the job.

 “Financial markets remain under heavy strain and systemic institutions are still perceived as fragile,” the IMF paper noted. “More aggressive and concerted policy actions are urgently needed to resolve the crisis and establish a durable turnaround in global activity.” In principle, what was needed was a big-picture, cross-border infusion of liquidity focused on the financial sector.

According to IMF insiders, Strauss-Kahn told staff in so many words to shred their old ways. He demanded what he called “conditionality” in lending programmes. That is, they had to be designed specifically for the problems at hand rather than reflecting the outdated, inflexible, pre-crisis rule book.

Nor has the managing director forgotten his research days when he studied the economics of social policy. Senior staff say he directed them to pay particular attention to social spending so that it reached the poor, elderly and unemployed. “You could say that our new programmes have a degree of social conditionality attached to them,” one reported.

Thus when the G20 announced the trillion-dollar stimulus, with the IMF in the lead role as officially the central institution of the global financial architecture, Strauss-Kahn was delighted, telling reporters that the huge increase in the institution’s resources would boost its firepower around the world.

Most people give the IMF high marks for turning itself around. “A major shift has occurred in IMF policy,” points out Philip Lane, professor of macroeconomics at Trinity College Dublin. In particular, he cites the flexible credit line (FCL) as an example. The FCL means loan money is now automatically available to qualifying member countries. All they need to show is a good track record in economic governance. “As such, the allocation of funds in part will be customer-driven”, said professor Lane in an interview with the Financial Times. 

The rate’s not bad either. The price of drawing down an FCL varies according to size and lending period, but it is unlikely to exceed 2.9 percent in most cases, a rate any business would die for. Unsurprisingly, a queue is forming for these customer-driven loans.

These new facilities symbolise a genuine sea-change in IMF policy. Instead of the recipient country having to tick all the usual boxes every time it requests help, credit is now permanently available provided the country pursues sound economic principles. Heaven forbid, the IMF is getting streamlined.

Without this new facility, some countries would be in more trouble than they are.  Mexico, for instance, has just signed up to a one-year, $47bn flexible credit line. It doesn’t have to repay the money for a reasonable period, somewhere between three and a quarter to five years. Furthermore the loan can be renewed on an unrestricted basis, subject of course to good behaviour, and the money can be used more or less as the government deems most urgent.
In similar ways the IMF is reinventing itself to keep the global economy more liquid. Perhaps most importantly for the long term future, the poorest countries are getting a better deal with shorter-term loans and emergency financing. All this of course reflects the explicit recognition that established trading countries depend on the emerging ones for their mutual benefit, and that the crisis is not of the latter’s making.

So the IMF is back in the game. According to Strauss-Kahn, the trillion-dollar boost is just the start of much better things. “You will see that it’s the beginning of increasing the role of the IMF, not only as a lender of last resort, not only as a forecaster, not only as an advisor in economic policy and its old traditional role, but also in providing liquidity to the world, which is the role finally and in the end, of a financial institution like ours.”

Adds professor Lane: “For the long term, an expanded role for the IMF and the Financial Stability Board in monitoring global financial risk may be helpful in avoiding future crises.”

While all that’s very true, the IMF’s obvious difficulties in cobbling the trillion dollars together clearly suggests that the G20 jumped the gun. It’s proving much harder to raise the amount than prime minister Brown thought, or was prepared to let on. Right now, some of that globe-saving trillion looks to be a way off.