IABA: E-Sustainability - Law and Technology Working for the Environment

By Leonardo A. F. Palhares and Caio Iadocico de Faria Lima

The times we live in have been shaped by evolution and technology in a very interesting way.

In June 2012, the United Nations Conference on Sustainable Development, also known as Rio+20, gathered 188 Heads of States and delegations in Brazil to discuss the progression of global environmental protection and, above all, the future prospects for the environment and its relationship with society. Apart from the criticism over the results obtained in the meeting, two points stand out, and they deserve special attention in this article: (i) the impressive number of Heads of States and delegations who attended the meeting in Rio de Janeiro to discuss environmental preservation in the midst of global economic crisis and (ii) the fact that, for the first time, the discussion broached, with the due attention, the relationship between environmental protection and the use of technology in our "Information Society." [1]

Focusing on this second matter, the Inter-American Bar Association, through its Committee on Telecommunications Law, Science and Technology, was invited by the UN, along with the Brazilian Chamber of Electronic Commerce (www.camara-e.net ), to organize an "On-Site Event" that dealt with the subject of e-sustainability and how the State, Business and Civil Society in general could contribute to environmental conservation in light of the use of everyday technology that now is present in our "online" life in the Information Society. And so it was done. The seminar on "e-Sustainability: Law and Technology in the Service of Environmental Protection" was an exciting success. With the participation of national and international associations, representatives of Brazilian government and multinational companies, the discussions regarding the subject have shown how important the role of the digital world in preserving the environment actually is. Issues of how to organize the next steps towards an online presence in this new Sustainable Information Society were also raised.

"... the discussions ... have shown how important the role of the digital world in preserving the environment actually is."

This article aims to simply and briefly, bring up these major steps free of technical language. We will define the roles of the most important players that are involved in this issue (Item 1) and will also talk about the creation of metrics that would help in the calculation of the benefits achieved and that can also be an incentive to the adoption of measures and creation of public and private policies (Item 2).

I - Who does what? The role of the individual in the new Sustainable Information Society

The participation of Heads of States in Rio+20 and all the repercussion that the subject of environmental protection has generated in the recent years show how outdated the concept of environmental degradation by Brazilian Professor Eduardo Viola [2] as being a "disease of the rich" really is. The concept of sustainable development, despite the triviality of its use, is already known or at least understood by most people.

However, it is always necessary to define each one’s roles and what can and should be done to put the debate into action and, also, the share of responsibility for using natural resources each one of us is responsible for. The definition of roles, in this regard, seems to be fundamental for the adoption of practices of effective policies for environmental protection, including the virtual environment.

1.1 - The Role of State in the Development of e-Government

The definition of simple, effective and efficient public policies, focused on the sustainable development should, as a starting point for any analysis, relate to the controls and incentives that should be transferred to society, with regard to defining the principles of its own activity in management of public affairs.

In this sense, it is essential that the effective search for sustainability in the Information Society goes through the assumption, by the States, of a model of governance that takes advantage of the available technological resources. The reduction in paper production, with the adoption of electronic and online models for the rendering of services to citizens should be a prerogative of every State, in the adoption of what we call e-Government.

[caption id="attachment_1947" align="alignright" width="228"] Brazil's President Dilma Rousseff at Rio + 20[/caption]

In this sense, as the headquarters of Rio+20 and also the headquarters of the e-Sustainability Seminar, Brazil has been fulfilling its role in the struggle for dematerialization of its administrative and bureaucratic processes. Assuming an ambitious model of e-governance, Brazil has adopted in recent years, a structured planning for the adoption of digital tools and also on-line structuring of its functions and services, placing them at the disposal of all citizens, in virtual environments, avoiding, with this policy, unnecessary travels, overloading of the public transportation system, expenses with such materials and generation of waste, in a way to prevent the emission of carbon into the atmosphere.

Income tax declarations are annually sent to the Brazilian Internal Revenue Service via internet, consultations in public systems, registries, court proceedings and even the public consultation of bills can be freely accessed online by any Brazilian citizen. From the creation of a certification system based on digital identities, more than 5 billion electronic invoices were issued in Brazil in 2011. Also following the National Broadband Plan, Brazil already has more than 70 million people connected to the internet and with access to all e-Citizen services offered by the State. Similar numbers and examples are increasing in the Brazilian government, generating general economy of procedures, materials, and most importantly, natural resources.

But none of these advances would be possible if there wasn’t a conjunction of the following four factors, which are essential commitments for the creation of any structure of e-Government: political commitment to  transformation of the State and the breaking of bureaucratic resistance paradigms; (ii) adoption of well-structured planning based on effective policies to the adoption of digital tools of government; (iii) strengthening of the role of state institutions focused on technology and the creation of a connected society; and, especially (iv) the creation of regulatory frameworks allowing the practice all points listed above.

1.2 - The Role of Corporations and Voluntary Commitments

When the UN launched the Global Compact (http://www.unglobalcompact.org), a free initiative designed for the adoption of corporate social responsibility practices, some leaders of major corporations in the world declared that after centuries of responsibilities assigned to the States, it was time to let the leadership of the relevant issues of our global society to corporations.

Apart from the matters that may arise from the possible interpretations of this positioning, the importance of the role of corporations when it comes to environmental protection is undeniable, especially if considered the model for economic growth currently adopted. The corporations are responsible for a huge part of the use of natural resources and activities that are or might be potentially harmful to the environment are originated in their production channels.

The most important question is how to transform the corporations from antagonists of environmental protection to partners in the friendly environmental protection.

The answer may lie in volunteerism or in the concept of “faire ensemble”, fairly used by French jurists. Current experiments on environment preservation policies show how obsolete public policies based on command and control [3] are enforced (if at all) at a minimum and, instead, how the environmental protection instruments can be reinstated (through green taxation or green markets for carbon credits, for example). The central idea supported here is that the participation of corporations could achieve higher levels and with more commitment if the direct benefits of adopting environmentally sustainable practices could be felt.

The role of corporations, before the prism of volunteerism, could be expanded beyond obligations related to the pure, hard core of their activities and their impacts on the environment to encompass other peripheral fields of its operations that could also represent environmental gains, such as consumer awareness office supplies, paper, energy, computers, travel of executives, etc [4]. It is precisely in this point that technology can help the Information Society to do their part and help in the environmental protection.

But how to engage the companies throughout the world without the threat of a strong State sword over their heads? The answer may lie below.

II - Generation of Metrics and Environmental Marketing for the Measurement of Environmental Benefit

The growing ecological awareness of citizens nowadays is the greatest ally that sustainable development has in the world. It is expected that the environment is protected and initiatives for this purpose are recognized, validated and preferred by the market in general. Hundreds of studies and analysis point the fact that consumers tend to prefer companies that have their brands and philosophies aimed at environmental responsibility.

Regarding the adoption of everyday technologies for the protection of environmental resources, the problem is the lack of simple and objective metrics that can serve as a reference for states or corporations. The lack of such metrics makes it impossible for states and corporations to understand the results that small actions could have, both from the standpoint of costs and impacts on the environment and, on the other hand, and even more important, prevent the market and consumers in general to understand and value the importance of such actions.

Due to the inexistence of any recognized standard to demonstrate how the environment is benefited by company policies and initiatives that could be easily applied, such as digital execution of agreements or using video conference resources more often (instead of a proper meeting, for example, to which it would be necessary to print papers, move people, generate pollution, maybe overload public and private transportation, etc.), simple and meaningful actions are not being taken. Likewise, the lack of such metrics, innovative public policies also cease the creation of the environmental preservation cycle to e-Sustainability or the Sustainability of Information Society ceases its growth.

Such studies along with the creation of metrics that allow simple calculation of the positive impacts of the adoption of online services to replace traditional media services performed via "physical" could allow the adoption of several behavioral actions by individuals and corporations or even encouraged by coherent and cohesive public policies.

This is not rocket science, just commitment, study and calculation.

Inspired by the winds blown in Rio+20 and based on cooperation agreements that were signed in the course of e-Sustainability Seminar: Technology and Law in the Service of Environmental Protection, two significant actions are being taken by the associations that organized the event.

On one hand, the Inter-American Bar Association started acting   on the assembly of a Digital Rights Inter-American Observatory, with the purpose to create a reseau of lawyers for all the Americas that could contribute to the development of standards and rules that can encourage and enable the adoption of sustainability practices for the Information Society.

Secondly, in cooperation with ITI - National Institute of Information Technology (www.iti.gov.br), the Brazilian Chamber of Electronic Commerce started works and studies for the preparation of the first national model for e-metrics sustainability, which, when duly published, will allow with precision, the quantification of the environmental benefit of all technological measures for the preservation of environmental resources and environmental protection in Brazil. This innovative initiative will, once finalized, be an example for all Latin American countries from the Digital Rights Inter-American Observatory.

These are really interesting times to be lived and even more interesting when we have the opportunity to contribute to the development of our society through actions that really count.

Each one of us can contribute to our ability.

About the Authors

Leonardo A. F. Palhares

Brazilian Lawyer, partner at corporate law firm Almeida Advogados, President of the Committee XVI: Telecommunications, Science And Technology Law of the Inter-American Bar Association and Vice President of Strategy at the Brazilian Chamber of Electronic Commerce.

Caio Iadocico de Faria Lima

Brazilian Lawyer, associate at corporate law firm Almeida Advogados, member of the Inter-American Bar Association and Joint Coordinator of the Legal Committee of the Brazilian Chamber of Electronic Commerce.

About Inter-American Bar Association (IABA)

Founded on May 16, l940 by a group of distinguished lawyers and jurists representing forty-four professional organizations and seventeen nations of the western hemisphere, the Inter-American Bar Association ("IABA") represents a permanent forum for the exchange of professional views and information for lawyers to promote the Rule of Law and protect the democratic institutions in the Americas. Approximately every 12 months, the IABA holds an international conference in one of the countries of the Americas during which time special seminars on legal topics are presented and IABA Committees and Sections meet. The IABA also offers regional seminars, has an active Young Lawyers Section, and participates in international conferences and meetings sponsored by other international and national legal organizations.

[1] As defined by Fritz Machlup: "Information Society is a term - also called Knowledge Society or New Economy - that emerged at the end of the twentieth century, originated in the term globalization. This kind of society is in process of formation and expansion. This new model of social organization is based on a mode of social and economic development where information plays a key role in the production of wealth and contributing to the welfare and quality of citizens’ life. For the advancement of this society is necessary for the possibility for everyone to access the Information and communication, that are present in our daily life and that provide essential tools for personal communications, work and leisure."

[2] E. VIOLA, A evolução das políticas ambientais no Brasil (1971-1991), Dilemas Socioambientais e Desenvolvimento Sustentável. Campinas: Unicamp, 1992.

[3] Command and Control is the way we usually identify public policies that assign the role to the state to create standards to be followed (command) and commit to oversee their proper discharge (control), assigning punishments to those who do not obey.

[4] Microsoft recently published an article in Brazil (http://www.camara-e.net/2012/04/18/verdes-sim-com-muito-orgulho/) on their efforts to minimize by 30% the environmental impacts of their office activities in the environment, getting the tools from power management of your servers in a reduction of consumption of over 22 million kWhs of electricity.


NEPAD: Boosting Africa’s Most Valuable Renewable Natural Assets – Fish

Sierra Leone’s fisheries sector, valued at 735 million US dollars, has received a boost from the Partnership for African Fisheries Programme (PAF), through 1,4 million US dollars disbursed by its West Africa Pilot Project (WAPP).  This intervention will provide direct and indirect employment for over one hundred people, hoping to strengthen the livelihood of about five hundred people in Sierra Leone.

The Partnership for Africa’s Fisheries (PAF), managed by the New Partnership for Africa’s Development, NEPAD Agency, has been working to empower the fisheries sector by facilitating access to financial institutions, particularly to those most vulnerable to fishing such as small-scale and grassroots fishers. It also promotes responsible fisheries management, sustainability in Africa's fisheries and supports reforms in governance and trade.

The fisheries sector of Africa has the potential to contribute about six percent of the continents annual economic growth; however, it has not enough resources to deal with this challenge because of over exploitation, illegal fishing, inadequate management, lack of economic constraints and the threat of climate change, according to recent estimates.

"... illegal fishing in Sub-Saharan waters is costing about 1 billion US dollars every year."

Experts warn that Africa may be losing the potential to harvest between 2 to 5 billion US Dollars of economic returns every year due to mismanagement. Also, illegal fishing in Sub-Saharan waters is costing about 1 billion US dollars every year.

In order to deal with these challenges, PAF established and oversees continental working groups in key policy areas such as Good Governance; Illegal, Unreported and Unregulated Fishing; Fisheries Investment; Fisheries Trade and Access to markets; and Aquaculture. The working groups are composed of African and non-African experts in fisheries and aquaculture. They draw on experience in fishing communities, industry, government and educational institution.

PAF was established in 2009 as a collaboration between the NEPAD Agency and the UK’s Department for the Environment, Food and Rural Affairs (DEFRA) and builds on earlier fisheries reforms in Africa such as the Abuja Declaration on Sustainable Fisheries and Aquaculture in Africa.

It hosted the 2010 hosted first Conference of African Ministers of Fisheries and Aquaculture (CAMFA) in Banjul, The Gambia. This African Union-led conference was the first of its kind and facilitated information sharing and promoted dialogue on the role and importance of the fisheries sector. CAMFA was established as a policy organ of the African Union (AU) to provide high-level guidance for continent-wide reforms. In January 2011, the 16th Summit of the AU endorsed the establishment of CAMFA. Through CAMFA all AU member states have committed to develop and implement a Comprehensive African Fisheries Reform Strategy by 2013.

This was a milestone for the fisheries sector since fish is one of the leading export commodities for Africa, with an annual export value of nearly 4.8 billion and 614 million US dollars for intra-African trade. It also makes a valuable contribution to food and nutrition security on the continent feeding 200 million Africans yearly. In many parts of Africa, fish is considered as the only protein food and represents the sole source of essential elements and fats to many vulnerable rural African consumers, especially women and children.

However, Africa is still unable to meet its own fish consumption needs due to inadequate infrastructure, lack of financial resources, technologies and mismanagement and therefore has to import fish products.

Hence, fisheries is also integral part of the agenda of NEPAD’s Comprehensive Africa Agriculture Development Programme (CAADP) aimed at increasing food supply and reducing hunger through national budgetary allocation.  So far, 30 African countries have signed the CAADP Compact to commit at least 10 per cent of their national budgets to agriculture. PAF supports these efforts and is being incorporated into their national CAADP food security investment plans, one of the key drivers to raise agricultural productivity on the continent to at least 6 percent annually.

In essence, PAF is about increasing, sustaining and protecting Africa’s most valuable renewable natural assets – fish - and to stimulate growth across the continent. This means strengthening Africa’s capacity to consider, determine and implement responsive reforms in fisheries governance and trade.

About NEPAD

The New Partnership for Africa’s Development (NEPAD) is a flagship socio-economic programme of the African Union (AU). NEPAD’s four primary objectives are to eradicate poverty, promote sustainable growth and development, integrate Africa in the world economy and accelerate the empowerment of women.

The NEPAD Agency is a technical body of the AU that advocates for NEPAD, facilitates and coordinates development of NEPAD continent-wide programmes and projects, mobilises resources and engages the global community, regional economic communities and member states in the implementation of these programmes and projects. The NEPAD Agency replaced the NEPAD Secretariat which had coordinated the implementation of NEPAD programmes and projects since 2001.

The strategic direction of the NEPAD Agency is premised on six themes: Agriculture and Food Security, Climate Change and Natural Resource Management, Regional Integration and Infrastructure, Human Development, Economic and Corporate Governance as well as Cross-Cutting Issues including Gender, ICT and Capacity Development.


Brazilian Investor Relations Institute (IBRI): Access to International Capital Markets

[caption id="attachment_1973" align="alignright" width="240"] 14th National Meeting of IR and Capital Markets held on July 2-3, 2012.[/caption]

Connecting Brazilian Investor Relations (IR) professionals with global capital markets is a key objective for IBRI (Brazilian Investor Relations Institute).

With this objective in mind, every two years, IBRI hosts Brazil Day, an international forum in which the country’s leading publicly listed companies present themselves in New York as investment opportunities for American investors.

In pursuit of the same objective, IBRI organizes Tarde de Brasil en Latibex (an Afternoon of Brazil on Latibex) jointly with the Madrid Stock Exchange in line with the principles of institute’s mission statement: stimulating and promoting exchange between Brazilian IR and capital markets’ professionals and the overseas markets. (Note: Latibex is a stock market for Latin American stocks; based in Madrid since 1999).

Capital markets in the Middle East and Asia are increasingly of interest to Brazilian companies.

The Brazilian IR profession has successfully penetrated new markets in addition to those that are already part of a permanent agenda such as the United States and Europe. Capital markets such as those in the Middle East and Asia are beginning to emerge on the list of countries of interest to Brazilian companies.

Improving and cultivating the relationship with analysts and investors internationally requires knowledge of specific of foreign culture and thus IR professionals with these skill sets are increasingly in demand.

The IR profession in Brazil is increasing their profile in society. An example hereof is the recent appointment an IR professional, Leonardo Pereira, to assume the Presidency of the Brazilian Securities and Exchange Commission (CVM).

IBRI has been fostering discussions and inviting professionals of the highest caliber such as Jeffrey Morgan, President of NIRI (National Investor Relations Institute), and Duncan Niederauer, Chairman of NYSE Euronext, as a means of bringing Brazilian IR professionals closer to the new trends in international Investor Relations.

IBRI intends to continue its important work of elevating the professional standards for the IR profession and of supporting the promotion of Brazilian companies overseas.

About IBRI (Brazilian Investor Relations Institute)

IBRI was founded on June 5, 1997 to enhance the role of Investor Relations professionals in the Brazilian capital markets and contribute to strengthening and improve the IR community.

IBRI’s philosophy of work includes raising the profile of partnerships with entities in the domestic and international markets which have common objectives in the IR area. In this context, IBRI believes that the partnerships which have been established have generated value for the members as well as contributed to enriching the technical discussions with official bodies – with which IBRI has signed agreements – such as the CVM (Brazilian Securities and Exchange Commission).

On July 2 and 3, 2012, the 14th National Investor and Capital Markets Relations Meeting was held. This annual event is the largest of its kind in Latin America with an audience of more than 700 professionals. The 15th National Investor Relations Meeting is scheduled to take place on July 3 and 4, 2013 in São Paulo, Brazil. www.ibri.com.br


Fruitful Relationships: Clearing and Settlement in Brazil

By Flavio Peppe

As Brazil’s economy has grown so has its financial markets. The volume of equities traded on the main market, BM&F BOVESPA, has increased five-fold over the past five years, and the exchange’s derivatives platform was the world’s sixth-largest in terms of contracts traded in 2010. In these circumstances, it is no surprise that traditional and alternative investment managers based in the US, Europe and Asia are joining the tide of banks, trading firms and infrastructure providers flocking to the Brazilian markets.

Nonetheless, potential new entrants to the Brazilian financial markets should be aware that some of its unique features. The country is renowned for its range of regulatory and legal requirements, although some of these protectionist features have helped to insulate Brazil from the worst effects of the global financial crisis. As a result, foreign firms often choose to form partner ships with established local players as the best way to achieve compliance and have a presence in this emerging market.

This is the second paper in our series to focus on the particular opportunities and challenges that face global asset managers entering the Brazilian market. Where the first paper examined the overall investment climate, this paper sets out the key features and structures of Brazil’s unique clearing and settlement framework. It also identifies some other key considerations that foreign investors need to be aware of before investing or setting up operations in the world’s seventh-largest economy.

The rapid growth of Brazil’s economy and financial markets are attracting a wave of foreign entrants

Foreigners visiting Brazil sometimes acquire a taste for soft drinks made from guarana beans, a natural stimulant, which are hugely popular. In the same way, international investors looking to spice up their returns are developing an increasing appetite for exposure to Brazil’s rapidly growing economy. National output expanded by 6.9% in 2010, and the Brazilian Government predicts annual growth to continue at an average rate of 4.9% between 2011 and 2015. Brazil has an expanding middle class, growing consumer demand, booming commodity exports and a vast program of public and private sector investment.

As Brazil’s economy has grown so has its financial markets. The volume of equities traded on the main market, BM&F BOVESPA, has increased five-fold over the past five years, and the exchange’s derivatives platform was the world’s sixth-largest in terms of contracts traded in 2010. [1] In these circumstances, it is no surprise that traditional and alternative investment managers based in the US, Europe and Asia are joining the tide of banks, trading firms and infrastructure providers flocking to the Brazilian markets.

"The volume of equities traded on the main market [...] has increased five-fold over the past five years..."

Nonetheless, potential new entrants to the Brazilian financial markets should be aware that some of its features are as unique as those of the famous guarana bean. The country is renowned for its range of regulatory and legal requirements, although some of these protectionist features have helped to insulate Brazil from the worst effects of the global financial crisis. As a result, foreign firms often choose to form partnerships with established local players as the best way to achieve compliance and have a presence in this emerging market.

Foreign investors should be aware of Brazil’s unique national payments structure, developed in response to specific historical factors

In this paper we place particular emphasis on an area that foreign entrants to Brazil’s financial markets are unlikely to be familiar with – the country’s unique clearing and settlement arrangements. Fund transfers, payment mechanisms and post-trade clearing and settlement are not typically a primary consideration when entering a new market. They are often described as “financial plumbing,” but in the words of one former US banking regulator, “they are more like the central nervous system.” [2] The global financial volatility of recent years has only increased awareness of how essential it is for different elements of the financial system to work together; this is an area that firms looking to operate in Brazil cannot afford to ignore.

Many of the unique features of Brazil’s current financial architecture have their origin in the 1990s, when Brazil was going through a period of very high inflation. As a result, regulatory attention was focused on reducing the length of settlement cycles. During the following decade, attention shifted toward reducing settlement risk and potential contagion arising from institutional failure. Settlement risk or “Herstatt risk” – named for a German bank that failed in 1974 – is the risk that a financial institution may fail to complete both legs of a transaction, leaving its counterparty exposed to a sudden loss.

[caption id="attachment_2033" align="alignright" width="162"] Main seat of Central Bank of Brazil[/caption]

A number of legal and structural reforms were made in response to these concerns, including the Brazilian Central Bank (Banco Central do Brasil or BCB) being given the power to nominate certain clearing and settlement systems as systemically important. Systemically important platforms are required to settle transactions in central bank funds, on a delivery versus payment (DVP) basis. In practice, bond, equity, foreign exchange and derivatives platforms – including the majority of over-the-counter (OTC) trading systems – are all designated as being systemically important.

Structurally, the BCB established a realtime gross settlement system, known as the Reserves Transfer System (Sistema de Transferência de Reservas or STR), to settle transactions using accounts held at the central bank itself. Payment messages are sent to STR via the National Financial System Network (Rede do Sistema Financeiro Nacional or RSFN). In addition, the BCB advised the National Congress on The Payment Systems Law of 2001, which took several further steps to reduce settlement risk. These steps included permitting multilateral netting by clearing houses and safeguarding assets posted as collateral from judicial seizure and the reach of bankruptcy law.

The Brazilian Central Bank sits at the center of a complex but highly efficient network of clearing and settlement systems

As a result of these reforms, Brazil’s national payment system today is characterized by the extensive use of straight-through processing. All large value and other systemically important fund transfers are settled in same-day funds, and typically do so within a few minutes of being initiated. Interbank fund transfers are settled irrevocably on a real-time basis. The architecture utilized to make this to happen is centered on STR. This forms the hub of Brazil’s payment systems and functions in conjunction with a variety of other clearing and settlement platforms, connected via the RSFN.

[caption id="attachment_2046" align="alignleft" width="225"] São Paulo Stock Exchange Building[/caption]

All systemically important interbank transfers are settled directly through STR. Some other settlements take place via SITRAF [3] – a privately operated fund transfer system that effectively shares a platform with STR. Two other clearinghouses also provide interbank clearing and netting: SILOC, [4] for deferred transfers, and COMPE [5] for checks. In both cases, settlement is made through STR. The efficiency of this structure means that transfers between Brazilian retail and commercial bank accounts are now among the fastest in the world. Most retail banking payments are settled on the same day they are initiated, and electronic transfers from checking accounts are typically completed in less than one minute.

In the financial markets, most transactions settle either on the day a trade is made, or one day later (T+1). Federal government bond transactions are cleared and settled through two systems. The most important is SELIC, [6] which handles OTC transactions on a real-time gross settlement basis and is operated by the BCB itself. Deals transacted on the stock exchange (BM&F BOVESPA) are cleared and netted off by its own Debt Securities Clearinghouse and settled jointly with the STR.

The Debt Securities Clearinghouse is one of four multilateral netting systems owned and operated by BM&F BOVESPA. The others are the FX Clearinghouse, for transactions involving the US dollar and Brazilian real; the Derivatives Clearinghouse, for swaps and futures; and the Equity and Corporate Bond Clearinghouse (former CBLC), which mainly handles equities. Each uses the RSFN to arrange settlement in conjunction with STR. Corporate bonds and derivatives traded off the main exchange are cleared and settled through CETIP, a publicly owned organization focused on OTC activity.

Foreign entrants to Brazil’s financial markets are subject to some specific tax and regulatory requirements

As well as the unique features of Brazil’s clearing and settlement systems, foreign individuals and companies entering Brazilian financial markets should be aware of several other factors that apply only to overseas players. Resolution 2,689 of the National Monetary Council requires all foreign investors to nominate both a legal and a fiscal representative within Brazil. A legal representative is required to respond to any civil claim that may arise against the foreign investor, and a fiscal representative to liaise with the Brazilian Internal Revenue Service. In practice, a single financial institution can often act as a foreign investor’s legal and fiscal representative, and take responsibility for the investor’s regulatory reporting to the BCB or the Brazilian Securities & Exchange Commission (Comissão de Valores Mobiliários or CVM).

Foreign investors are also required to hire a local custodian, and firms wishing to trade on an exchange need to establish a local office or enter into partnership with a local institution. Any organization establishing a mutual fund in Brazil should also be aware of the requirement for daily net asset value reporting to the CVM, for disclosure on their website.

"The real has gained significantly against the US dollar over the past two years..."

Lastly, and most importantly, foreign currency investments in Brazil are liable to a financial transactions tax (Imposto sobre Operações Financeiras or IOF). Unlike a withholding tax applied to outflows, the IOF is levied on capital inflows to the Brazilian financial markets. Apart from revenue generation, the main aim of the IOF is to limit the effect of short-term capital flows on the value of the Brazilian real. The real has gained significantly against the US dollar over the past two years, reflecting a hawkish interest rate policy and the effect of growing commodity prices.

In October 2010, the IOF levy on foreign currency conversions for investment in bonds, derivatives and many other financial instruments was raised to 6%, with a lower rate of 2% applied to equities. This has not prevented international investors from allocating funds to Brazilian assets, but it has certainly encouraged them to look more carefully at their Brazilian strategies and operating structures. It also illustrated how important it is for foreign entrants to plan an optimal route through the complexities of Brazil’s laws, taxes and regulations.

We expect foreign players to play an increasing role in the evolution of Brazil’s financial markets

We have summarized some of the most important features of the Brazilian payments system that foreign investors should be aware of, along with some other key regulatory and tax-related requirements. As already mentioned, these complexities – and their associated costs – are often seen as having partially insulated Brazil’s financial markets from global trends. This has helped to limit the impact of the global financial crisis on the Brazilian economy, but it has also tended to hold back the pace of market development.

Nonetheless, Brazilian financial markets are evolving. Asset classes such as real estate funds, private equity funds, alternative investments and ETFs are gaining increasing traction, even if they are at an earlier stage of development than in many other emerging markets. Similarly, the vertical integration that is still a notable feature of Brazil’s financial markets is the subject of growing discussion. At a time when regulators in the US, Europe and elsewhere are looking to break up vertical silos, BM&F BOVESPA is rare in providing the trading platform, posttrade processing, clearinghouse and depositary services for a large proportion of national securities transactions.

In response, Brazilian asset manager Claritas has recently signed an agreement with BATS Global Markets, an alternative trading venue, to explore the creation of a new Brazilian trading platform with its own clearing and depositary services. At the same time, BM&F BOVESPA, unusually for a leading national stock exchange, is taking steps to attract more high frequency traders – a group widely seen as crucial to the success of alternative trading platforms. It is currently developing a new multi-asset platform in conjunction with the CME of the US. [7] In a separate development, US futures exchange ICE has acquired a 12% stake in CETIP. [8]

It therefore seems certain that the structure and features of the Brazilian investment market will continue to evolve, albeit under the watchful eye of the BCB, CVM and the National Monetary Council. Like the guarana tree, which protects its caffeine-packed fruit with bitter leaves, foreign investors may find some features of Brazil’s settlement systems a challenge. However, in our view this is likely to be outweighed by their appreciation of the resulting benefits. Over time, foreign entrants also have the potential to play a growing role in the evolution of Brazil’s financial markets.

About the Author

Flavio Peppe
Partner, Brazil
Ernst & Young Terco
Auditores Independente S.S.
Tel: +55 11 2573 3290
Email: flavio.s.peppe@br.ey.com

Ernst & Young is a global leader in audit, tax, transactions and advisory with 152,000 employees worldwide.

Glossary

BCB — Banco Central do Brasil (Brazilian Central Bank)
CETIP — Central de Custódia e de Liquidação Financeira de Títulos (Organized OTC Market for Securities and Derivatives)
COMPE — Centralizadora da Comensação de Cheques e Outros Papéis (Central clearinghouse for checks)
CVM — Comissão de Valores Mobiliários (Brazilian Securities & Exchange Commission)
DVP — Delivery versus payment
IOF — Imposto sobre Operações Financeiras (Financial transactions tax)
OTC — Over the counter
STR — Sistema de Transferência de Reservas (Reserves Transfer System)
RSFN — Rede do Sistema Financeiro Nacional (National Financial System Network)
SELIC — Sistema Especial de Liquidação e de Custódia (Special System for Settlement and Custody)
SILOC — Sistema de Liquidação Diferida das Transferências Interbancárias de Ordens de Crédito (Deferred Settlement System for Interbank Credit Orders)
SITRAF — Sistema de Transferência de Fundos

[1] ”Trading firms flock to Brazil,” Financial News, 28 March 2011.
[2] ”Issues Related to Central Counterparty Clearing,” Speaking at the European Central Bank (ECB) and the Federal Reserve Bank of Chicago (FRBC) conference 04 April 2006.
[3] Sistema de Transferência de Fundos (Funds Transfer System).
[4] Sistema de Liquidação Diferida das Transferências Interbancárias de Ordens de Crédito (Deferred Settlement System for Interbank Credit Orders).
[5] Centralizadora da Compensação de Cheques e Outros Papéis (Central clearinghouse for checks).
[6] Sistema Especial de Liquidação e de Custódia (Special System for Settlement and Custody).
[7] ”BATS and Claritas consider Brazilian Exchange,” Financial Times, 12 February 2011.
[8] “ICE buys into Brazilian clearing firm,” Financial Times, 15 July 2011.


Samba Tech: One of the Hottest Startups in the World

By Pedro Filizzola

[caption id="attachment_2060" align="alignright" width="186"] Gustavo Caetano, CEO of Samba Tech[/caption]

Samba Tech’s story begins back in 2004 when our CEO and then marketing student, Gustavo Caetano, was an intern at a big health insurance provider in Brazil, but wasn’t enjoying the experience. He didn’t like the internal bureaucratic process and how slow things moved. He’s dream was always to create a company where he could make something innovative and at the same time have fun.

Eight years ago, Gustavo bought a top-of-the-line mobile phone, which at the time had an 18-colour-screen – and, whilst waiting for a delayed flight, he had tried to download a game and... he couldn’t. His marketing studies had taught him that when you want something that doesn’t exist it`s because there is market demand. He came back home and made a research and found that there was an opportunity in Europe. He built a final-year college-business-model, travelled to London, where he had a meeting with a game production company. They loved what they heard and Gustavo returned to Brazil with a deal in hand.

He arrived in the land of football and carnival full of excitement but quickly faced a harsh reality: he needed money to open his company. Gustavo called his father and cheekily asked him if he could introduce him to somebody rich and believe it or not, Samba Tech started exactly like this! Through a $ 100.000,00 investment, courtesy of his father’s contact, Gustavo founded the company as  a mobile game reseller. Given it was a new market, there wasn’t any competition and the startup quickly began selling games in over 40 channels, sealed deals with the largest brands in the gaming market and opened offices in Argentina and Chile.

But following a successful year, Samba Tech figured it out that the mobile devices could be one more device to receive content. At that time, digital communication was on an increasing trend and Samba Tech decided to switch its focus to this sector and as a result, the company shut down the mobile operation. At the end of 2007 Samba Tech developed an Online Video Platform, which focused on professional video management, distribution, and monetization.

In other words we have developed a digital logistic concept, whose function is similar to that of the traditional logistics sector. For example, a wine producer needs to deliver a shipment, therefore it contracts a logistics company to take care of the whole process from collecting the wine to its delivery at the final destination. Samba Tech does the same, but with its customers’ videos, ensuring it reaches the end user.

After consolidating its position and acquiring some important clients, Samba Tech received investment from FIR Capital, a local brand of DFJ, which invested $ 3 million in 2009. In the same year, Gustavo, whilst waiting for another plane, was talking to the man next to him and  mentioned what Samba Tech had developed and  the business he had built in just a few years. The man happened to be  a director from MIT (Massachusetts Institute of Technology) and  introduced him to the “Sloan” G-Lab program. Samba Tech applied and was one of the 40 start-ups selected. Since then MBA students from the Institute have been helping the company to improve its operation and strategy.

Also 2009 saw Gustavo named CEO of the year by Editora Abril and Visa which marked the beginning of a new era at Samba Tech, that grew by over 200% that year and became the routine rate for the next few years.

Following 2009, Samba Tech won 3 more important awards: Red Herring North America 2010, CHINICT RisingStar 2011, and AlwaysOn 250 Top Private Companies 2012. It currently has a market share of over 80%, has expanded into Latin America and was chosen as one of the “10 hottest startups in Brazil” by Forbes and Business Insider. Currently, Samba Tech has embarked on a joint venture with the Australian company Adstream in the distribution of digital advertising content from agencies to TV Networks and the online video advertising division - Samba Ads – has been established as a separate subsidiary of the group. Furthermore, the company is moving to become the largest B2B Internet Group in Latin America.

History was being written by an under 30-year-old entrepreneur who had previously failed twice before reaching success. Because of his innovative and daring style Samba Tech today supports the distribution of around 1 billion content per year, reaching 1 out of 10 unique video users in Brazil. The company is one of the best positioned startups in the market and beloved by its stakeholders. How has this been achieved? Flexibility, focus, and growth.

Flexibility: Companies need to adapt to the uncertainties that appear along the way. Uncertainty lies in the definition of a startup. Adapting to markets and trends is essential. The  Rework, a book published by 37signals, and a New York Times best seller, says that "planning is guessing" – a plan is an attempt to predict the future. Spending  too much time wondering what to do and not accepting the initial business plan as gospel, can be the difference between thriving in the market and being swallowed up by it.

Focus: When you are young, focusing on a large market or a promising niche and specializing in something that nobody is doing, and preferably in which a big player isn’t currently interested, presents an enormous opportunity. The company can easily establish itself as a leader and reap the maximum benefits, however, it is important to draw a line in the sand and recognize the limits: whoever does everything does nothing. In a highly consolidated market, focus is even more important. By understanding your company’s strengths and focusing on them, one can ensure the necessary competitive advantages to overcome the war.

Growth: It’s important that companies continuously find ways to ensure that their business grows. This differentiates a company from a poor story to a worldwide successful one. This is not necessarily tied to the scale of its operations in different countries and markets, but the demand for the products / solutions it produces. If more and more people use your company on a daily basis, the greater the chance you have of succeeding.

Brazilian Startups Association

Based on the success of Samba Tech and his entrepreneurial flair, Gustavo was named the president of the Brazilian Startups Association. His job is to evangelize and spread the spirit of entrepreneurship and startups. ABStartups fosters digital entrepreneurship by assisting in the establishment of startups and offering a reference database for startups and investors. Its main role is to provide the opportunity for startups to exchange experiences, as well as to teach and learn methodologies and best practices.

Brazil is Hot

Why form such an association in Brazil? Because Brazil is the next world hotspot. Currently it is the 6th biggest economy, has the 5th largest Internet market and is 4th in number of startups. The government will invest 40 billion reais in tech startups, 70 billion in broadband and it is expected to attract 30 billion for the World Cup. The timing couldn’t be better and emerging markets are the current big thing.

The internet has broken down barriers and we’re now seeing the birth and growth of global companies in Brazil. This is the reason why VC firms are opening offices in the country.

The Brazilian market is shaping up to be an exciting place with great potential. Many new businesses emerge each year and much of this is due to a change in the mentality of the Brazilian population, since they are happier to take risks and endeavor rather than just “getting a job”. There are many good reasons for starting a new company in the current climate for example: the increasing access to broadband, credit for SMEs and available information, as well consulting programs and accelerated growth.

Samba Tech’s success story proves that it is possible to build something big even outside of the U.S., so why not take a chance?


Panama - A Tax Friendly Environment for Foreign Investors

By Luis E. Ocando Bustamante, International Tax Partner of Ernst & Young, Panama, Central America, and Dominican Republic.

[caption id="attachment_2094" align="alignright" width="300"] Panama City Skyline[/caption]

The economic boom of Panama [1] has been accompanied by changes in its tax system, making Panama more attractive for foreign investors, especially for multinational companies that focus on regional or global context.

Over the last years, Panama has introduced changes in its domestic taxes as well as in the international taxation field. These changes have been allowed Panama to consolidate its position as a main financial and international services center in the region.

The economy of the country is based mainly on the services sector. Panama has become a centre for international services not only for its geographical position but also for economic characteristics, like the use of the US dollar as its currency, and certain tax benefits.

In order to incentive the use of the country as platform of services by multinational corporations, the legislation count with special regimes. For instance, the Law 41 of 2007 created a special regime for the establishment of multinational companies that operate in Panama providing those services included in the Law 41 [2] to its head office or related companies. The regime also applies for a head office of a multinational company.  Benefits include exemptions on corporate tax income, VAT, special rules for labor, custom and migratory matters, among others.

"Panamanian law include tax incentives for a wide range of activities, such as tourism, call center, free trade zone, telecommunication, and agriculture."

The Law N°41 of 2004 is another attractive regime which provides tax benefits for companies operating in “Panama Pacific Special Economic Area” (former Howard Air Base). The regime applies as long as the companies are dedicated to specific services activities, such as maritime services, offshore services, call centers, information technologies, among others mentioned in the Law. The benefits include exemptions for income tax, dividend tax, import duties, VAT, capital gain tax, among others.

The special regimes mentioned above are only examples of the number of laws that provide incentives in the country. Panamanian law include tax incentives for a wide range of activities, such as tourism, call center, free trade zone (known as Colon zone), telecommunication, and agriculture.

As for the general income tax regime, after a 2010 tax reform, changes introduced in the domestic legislation made the country more competitive, reducing the corporate income tax rate from 30% to 25%, which is below the regional average rate. As many countries in the region, Panama does not count with integration rules applicable for dividends, however as a general rule, dividend are subject to a withholding reduced rate of 10%, which may be reduced up to 0% under some tax treaties. The territorial system, that has characterized Panama since its first form of income tax, has not been subject of severe modifications. Therefore, Panama continues to be one of the few countries in the world where taxes are imposed only on income generated within the country.

On the other hand, Panama has been moved toward the international taxation landscape, introducing new concepts and increasing its tax treaty network.

At the moment, seven double tax treaties are already in effect. Those are treaties with Mexico, Spain, Barbados, the Netherlands, Luxembourg, Singapore, and Qatar. Tax Treaties with France, South Korea and Portugal will be in effect on January 1st, 2013. Furthermore, Panama has signed tax treaties with Italy and Ireland which are not yet in force. Negotiations have been finished with Belgium, Czech Republic, Bahrain, Israel, Belgium, and United Arab Emirates, but the treaties have not yet been signed.

In this context, Panama is the only country in Latin American with the most extensive treaty network, compared with other economies of the same size. Companies may take advantage of it to avoid double taxation or obtain reduced treaty rates.

After a process led by the Government, in July of 2011 Panama was removed from the “grey list” of the OECD. The decision to begin a process for the exclusion of Panama from this list was part of a national strategy to promote Panama´s international services. Currently, Panama is working for maintaining this new status through the signing of more tax treaties and the amendment of its domestic law.

In summary, perspective for investment is more than hopeful. According to the Government, the growth prospects are reinforced by a comprehensive five-year plan that focuses logistic, tourism, agriculture, and financial services as the key sectors. Besides, off-shoring services, maritime services, private health services and Regional Headquarter of Multinational are considered sectors with a future potential.

About the Author

[caption id="attachment_2083" align="alignleft" width="160"] Luis Ocando[/caption]

Luis Eduardo Ocando is the Tax Leader in the Panama Office and International Tax Partner for Central America and Dominican Republic (EYCA). Transfer Pricing Leader for EYCA.

Luis is a lawyer and has 26 years of experience in the Tax System in Venezuela and over 13 years of experience in international taxation. Luis has been recognized by the International Tax Review as one of the most renowned tax advisors of Venezuela for 7 consecutive years (from 2002 to 2008). In 2011, EY Panama has been recognized by International Tax Review as leader in the market (2011 Americas Tax Awards).

Before joining Ernst & Young Central America (joined on January 2007), Luis was Partner Director of International Tax Services for Ernst & Young Venezuela (from 2002 to 2006). Luis was Tax Partner for PwC from 1996 to 2002.

Member of the Panamanian Negotiation team appointed by the Government of Panama (in September 2009) to negotiate Income Tax Treaties between Panama and OECD Countries.

Ernst & Young is a global leader in audit, tax, transactions and advisory with 152,000 employees worldwide.

[1] According to International Monetary Fund estimations, Panama had 7.505% growth in 2010, 7.404% in 2011, with a projection of 7.238% growth for 2012, 6.563% for 2013, 5.832% for 2014, and 5.3764% for 2015.

[2] For example, direction or operations management; logistics and/or storage of components; technical assistance to its business group; financial Management and treasury services; accounting of business group; consulting, marketing and advertising, among others.


European Environment Agency: Greening Our Economy

By Professor Jacqueline McGlade

[caption id="attachment_2133" align="alignright" width="169"] Photo by Gülçin Karadeniz[/caption]

At first sight, the fate of threatened species might seem a world apart from the economy. Upon closer examination, however, we start to understand the connections between the two. The ‘good health’ of natural systems is a precondition for the ‘good health’ of our social and economic systems. Can one say that a society is thriving when it is exposed to air and water pollution and endures related health problems? Equally, can a society ‘function’ if a large proportion is unemployed or cannot make ends meet?

Despite gaps and uncertainties in our understanding, we can see that our world is changing. After 10,000 years of relative stability, the average global temperature is increasing. Although the European Union’s greenhouse gas emissions are declining, fossil fuels continue to release more greenhouse gases into the atmosphere than our land and oceans can absorb. Some regions are more vulnerable to the potential impacts of climate change - and these are often the countries least prepared to adapt to new climatic conditions.

With more than seven billion of us living on the planet, humans clearly have a role in steering and accelerating this change. In fact, our current consumption and production levels may be damaging the environment to the point that we risk making our home uninhabitable to many species - including ourselves. Many people in developing countries aspire to have lifestyles similar to those in developed countries, which could put additional pressure on our natural systems.

These rapid global changes mean that we are losing global biodiversity at a rate never before seen in history. Extinction rates may be up to 1,000 times higher than the historical background rate. The destruction of habitats is one of the main reasons.

Although the total forest area has been increasing in Europe in recent decades, globally it is a different story. The United Nations Food and Agriculture Organization estimates that every year about 13 million hectares of the world’s forests (roughly equivalent to the size of Greece) are cut down and converted to other land uses, such as cattle grazing, mining, farming or urban development. Forests are not the only ecosystems under threat. Many other natural habitats are at risk because of human activities.

The Way Forward: Inclusive Green Economy

When the primary day to day concern of billions is putting food on the table and sending their children to school in the hope of a better future, it may be almost impossible for many to avoid grasping short term solutions. This means people need better opportunities.

[caption id="attachment_2135" align="alignleft" width="228"] Photo by Pawel Kazmierczyk[/caption]

It is clear that our economic activities require natural resources. But what might be perceived as a dilemma — a choice between preserving the environment and developing the economy - is actually misleading. In the long term, economic and social development necessitates sustainable management of natural resources.

At the end of 2011, one in ten people was unemployed in the European Union. This figure was more than one out of five for young people. Unemployment puts severe strains on individuals, families and the society as a whole. Nearly one quarter of the EU population was at risk of poverty or social exclusion in 2010. The global poverty rates are even higher.

Our current economic models fail to account for many of the benefits a healthy environment provides us. Gross domestic product (GDP) - the economic indicator most commonly used to convey a country’s level of development, standard of living and status relative to other countries - is based on the value of economic output. It does not include the social and human price we pay for the side effects of economic activity, such as air pollution. On the contrary, the health services provided to those suffering from respiratory diseases is included as a positive contribution to GDP.

The challenge is to find out how we can redesign our economic models so that we can generate growth and improve the quality of life across the world without damaging the environment, while also protecting the interests of future generations. The solution has been termed ‘the green economy’.

Although it seems a simple concept, translating the idea into reality is much more complicated. Clearly, it will require technological innovation. But it requires lots of other changes, too - to the way we organise businesses; the way that we design cities; the way we move people and goods around; the way we live, essentially.

If we were to put it in business terms, we need to ensure long term sustainability in all our domains of wealth creation: natural capital, human capital, social capital and manufactured capital, as well as financial capital. The concept of green economy could also be explained through these distinct but interlinked capitals.

In evaluating the costs and benefits of our decisions, we need to look at the impacts on all capital stocks. Investments in roads and factories may increase our manufactured capital but they can actually undermine our overall wealth if they imply destroying our forests (part of our natural capital) or damaging public health (part of human capital).

Opportunities Ahead

Changing the way we live, produce and consume actually opens a new world of opportunities. We recently published Signals 2012 which gives an overview of where we stand today, exactly 20 years after the 1992 Earth Summit in Rio de Janeiro, Brazil. It looks into how the economy and the environment are linked and why we need to ‘green’ our economy. It also gives a glimpse of the large variety of opportunities available.

There is no single solution that will help us make a quick transition or one that fits all. For example, while there may be common overall goals to manage waste effectively, Greenland’s waste management might need to address a completely different reality on the ground than Luxembourg’s.

Timing plays a crucial role. Today, we need solutions that address the environmental problems at hand with today’s technology, bearing in mind that our policies and business decisions will have to be continuously improved and adapted to keep up with our growing understanding of the environment and technological developments. But there are many solutions already out there. And many more are on the way.

A Question of Choices

Ultimately, it will be a question of choices - policy choices, business choices and consumer choices. But how do we choose the best option?

Do we have the information and the tools we need to develop appropriate policies? Are we addressing the issue at the ‘right’ level? Do we have the ‘right’ incentives or market signals to invest in renewable energies? Do we have the ‘right’ information or labels on the goods we are buying so we can opt for the greener alternative?

What we know and when we acquire this knowledge will be instrumental in helping different communities to make their ‘right’ choices. Ultimately, knowledge will empower us to come up with our solutions and create new opportunities by sharing them with others.

About the Author

Professor Jacqueline McGlade became Executive Director in June 2003 and is currently on leave from her post as Professor in Environmental Informatics in the Department of Mathematics at University College London.

Prior to this, she was Director of the Centre for Coastal and Marine Sciences of the UK Natural Environment Research Council, Professor of Biological Sciences at the University of Warwick, Director of Theoretical Ecology at the Forschungszentrum Jülich and Senior Scientist at the Bedford Institute of Oceanography in the Federal Government of Canada.

Her research is focused on the governance of resources and environmental informatics with particular reference to ecosystems, marine resources and climate change. She has over 200 peer-reviewed papers, articles, books and legal submissions and has produced and presented a number of TV and radio series and programmes plus three feature films. She has been awarded international prizes and honours from Czech Republic, Germany, Italy, Monaco, Romania, Sweden, UK and the USA.

Professor McGlade has held a number of key advisory roles and chairs at national level, including Trustee of the Natural History Museum and Board Member of the Environment Agency, at European level, including the European Bank for Reconstruction and Development, and at international levels including for the United Nations and the Consultative Group on International Agriculture Research.

About European Environment Agency (EEA)

The European Environment Agency is an agency of the European Union. EEA’s task is to provide sound, independent information on the environment. It is a major information source for those involved in developing, adopting, implementing and evaluating environmental policy, and also the general public. Currently, the EEA has 32 member countries.


IFC: Banking On Women – Changing the Face of the Global Economy

Women entrepreneurs are changing the face of the global economy, helping to sustain job creation and economic growth. While investors are increasingly looking to the BRICs and beyond for growth opportunities, the fact is that women represent the largest emerging market. It is estimated that women-owned entities represent over 30 percent of registered businesses worldwide.

According to the Harvard Business Review, women control about $20 trillion in global consumer spending and it is projected to reach $28 trillion by 2014.

However, all too often women, including women entrepreneurs who already face societal and cultural barriers also find it more difficult than men to gain access to finance. The International Finance Corporation (IFC), part of the World Bank group focused on private sector development as a means of lifting people out of poverty,  is seeking to increase access to finance for women entrepreneurs. We do this by leveraging our extensive global network of more than 850 financial intermediaries and by working with corporations that share our objective to strengthen and broaden outreach to women.

IFC has set itself ambitious targets and in FY 13 IFC has committed to support projects that will provide access to financial services to $22.74 million micro or individual  clients, at least 50% being women, and to 750,000 small and medium sized businesses (SMEs), at least 25% being women-owned.

Financial inclusion and access to finance for women including women micro entrepreneurs has positive impact.  Last year, IFC was able to extend about $33 million microloans around the world through its client network. The challenge is to increase access to finance for women entrepreneurs who operate entities that are larger than micro enterprises. For example Millar Landy Quiroga, a woman entrepreneur who runs a micro business in the Colombian Capital Bogota, who is a client of BancaMia, is grateful for the micro loans she received to improve business at her family run lumber yard. As she says “Thank God we have done so well, that’s what the loans have helped us with” and she has plans for the future, “I would like to create more jobs, hire people, [and] make it a bigger company.”

While Microfinance has an important role to play, it is only one part of the solution. The challenge is how to improve access to larger formal sources of credit for women.  However, there are many barriers.

Unfavorable business and regulatory environments are among the barriers that impede women entrepreneurs from accessing finance. The fact that many emerging markets financial institutions do not tailor financial products and services to women entrepreneurs represents a missed opportunity and constrains private sector development.

IFC’s Banking on Women program is working towards realizing the objective of increasing access to finance for women entrepreneurs. It is playing a catalyzing role to help partners and financial institutions worldwide to profitably and sustainably serve businesses owned and run by women, focusing on regions and countries that have strong enabling ecosystems for SMEs as well as large numbers of women entrepreneurs.

IFC is targeting global, regional and local financial institutions with an SME lending track record as partners, as well as the value chains of local, regional and global corporations that share the objective to strengthen and broaden outreach to women entrepreneurs.

IFC uses its investment capital to help financial institutions profitably expand their portfolios and to help women entrepreneurs access finance and strengthen their businesses. We are also exploring non-traditional models for increasing reach to women entrepreneurs through community banks, cooperatives, chambers of commerce and business associations.

During the fiscal year that ended June 30 2012, IFC invested in six projects around the world. Three investments in Eastern Europe for a total of $50 million for lending to Women-Owned SMEs, in Garanti Romania, Abank in Turkey, and Fibabank in Turkey. The program has also made two investments in Asia, with $75 million to BII Indonesia, 30 percent of which is for Women-Owned SMEs and a further $25 million in loans to OCB, Vietnam, with a 30 percent carve out to Women-Owned SMEs.

The program is already started to show signs of success where it was launched in Eastern Europe. In Turkey, many women own or run smaller businesses, but only 15 percent of women have access to formal finance. IFC and its clients are trying to change that. In FY12, IFC partnered with FMO, the development bank of the Netherlands, to provide a $40 million loan to ABank to increase finance to small and medium enterprises owned by women entrepreneurs. More than half of the loan has been on-lent to women entrepreneurs so far.

[caption id="attachment_2145" align="aligncenter" width="548"] IFC's Value Proposition[/caption]

 In the Bayram Pasa district of Istanbul, Dilek Seyitoglu oversees the operations of Star Plastic, a small but successful manufacturer employing 25 people and exporting its plastic products to over 10 countries.

“We had been working with Abank for two years,” said Seyitoglu. “Then our bank suggested this financing for women entrepreneurs and we successfully applied for it. Thanks to the Abank loan we bought our facility and, thanks to this, we can look at the future with confidence.”

Seyitoglu believes such loans will play an important role in supporting women, including women entrepreneurs. “Men are dominant and active in business life in Turkey, so supporting women with these women entrepreneurship loans from Abank and IFC is very important in helping women become more present.”

Then in July 2012, IFC provided long term client Bank of Georgia with a $25 million loan to support the Bank in reaching out to female entrepreneurs, who face more challenges accessing credit than their male counterparts. Through the bank’s network of 164 branches, the program is expected to help SMEs both inside and outside of the capital Tbilisi.

Bank of Georgia’s interest in the program was piqued after they worked with IFC on a women-owned SME survey, which found that such businesses comprised noticeable proportion of the Bank’s SME lending. However, focus on providing access to finance to women by the Georgian finance sector still represents a largely untapped market opportunity.  With the Bank of Georgia already a dominant player in the SME space, it has now rolled out innovative products targeting the underserved but high potential women entrepreneur market.

Additionally, Banking on Women, is not just about social and economic development, it makes good business sense. Take the example of the Australian market leader Westpac, who believe the ‘female economy’ is worth investing in.

Westpac has found that focusing on the women segment has been a powerful tool for strengthening their balance sheet. Westpac's value proposition for the women segment combines strategy focused on marketing, branding, financial education, and face-to-face and social medium networking as well as volume targets supported by continuous research.

Westpac has also found that whilst women clients are more risk-adverse and need more information to make decisions, they are better depositors. They remain loyal to institutions that treat them respectfully and are strong brand advocates.

The benefits of increasing reach to women clients can be measured by revenue increase and balance sheet growth for banks, and improved incomes for women and their families, and increased economic development and growth for countries. Gender equality is smart economics, as more women participate in the workforce, the more a country’s per capita income increases.

IFC also offers advisory services to financial institutions to deepen their ability to reach women-owned businesses through: strategic planning, market positioning/segmentation, product repositioning and staff training.

The management and business skills of women entrepreneurs need strengthening.  IFC is working with women entrepreneurs providing customized training in business planning and management, financial literacy etc. IFC also facilitates networking and mentoring sessions for market expansion and business growth. We have even launched a Banking on Women LinkedIn group to help connect women entrepreneurs and client banks.

With our network of clients around the world IFC has the platform and expertise to effect positive change for access to financial services for millions of women in emerging markets and it is a development imperative we can deliver on.  A robust pipeline of new investments is under development and IFC is working on establishing new partnerships around the world with financial institutions, corporations, chambers of commerce and business associations to achieve ambitious goals of increasing access to finance for women including women entrepreneurs.


M&A in Emerging Countries – Tax Risks and Opportunities

The Importance of Taxes in M&A Processes

[caption id="attachment_2157" align="alignright" width="300"] Puerto Madero, Buenos Aires[/caption]

Companies are focusing more and more on the tax aspects of M&A. This focus is partly because tax authorities are scrutinizing transactions more closely than ever before. But this increase concentration is also due to the drive toensurethat deals deliver the value they promise, as company boards examine transactions in more detail.

This is particularly important in emerging markets, where even companies with years of experience doing deals in these regions of the world face unfamiliar legal and regulatory challenges, of which, tax is one of the biggest.  Uncertainty is one of the main characteristics of emerging countries, and it should be managed by familiarizing with the local environment, not just the local tax law, practice and procedure but also the reasoning behind it.

A global M&A tax survey report recently prepared by Ernst & Young shows that companies continue to seek value from transactions in a wider range of tax areas than ever before. Accordingly, mentioned survey also concludes that more than half of the tax directors questioned said that when planning a transaction, they reviewed the tax effectiveness not just of matters requiring immediate attention to get the deal done, but also of other aspects of their company´s operations that could be affected by the transaction – areas such as tax-effective supply chain planning, intangible assets, indirect taxes,

Also, the M&A tax survey report shows that fifty-seven percent (57%) of tax directors surveyed said that their companies place more importance on tax issues as part of the deal processes compared to three (3) years ago.  Half of these said their companies placed significantly more importance on tax – a figure that has nearly doubled since 2010. There has also been a material increase in the percentage of tax directors who say that tax is a primary component of transaction value for their companies.

Some of the causes that increased the importance of the tax analysis in M&A processes are the following:

Increasing focus on tax efficiency to reduce the cost of deals or improve the return from deals;

Increasing complexity of tax legislation affecting deals;

Increasing scrutiny of deals by the board of directors;

Increasing scrutiny of deals by tax authorities;

Increasing scrutiny of deals by shareholders

Dealing With Taxes in Emerging Countries

More and more capital is flowing into emerging markets through M&A. Such investments offer companies opportunities to expand into new markets and to make their supply chains more efficient. Yet risks remain, particularly around tax.

Many multinational companies had done a deal in at least one of the BRIC countries (Brazil, Russia, India and China) during the past three years. Outside the BRIC countries, the M&A survey report, identified evolving M&A interest in a number of other emerging countries or regions, including Indonesia and Southeast Asia, South Africa, Nigeria, Argentina, Chile, Colombia and Peru.

Emerging markets may be a focus of corporate M&A, but even companies with years of experience doing deals in these regions of the world face unfamiliar conditions, particularly legal and regulatory ones. Unsurprisingly, a main challenge is tax. Principal challenges when entering a transaction in emerging countries are the following:

Uncertainty of how tax legislation and practice will be applied to the particular transaction steps;

Risks that the tax system or tax incentives will change, affecting projected tax costs;

Currency and tax issues in relation to repatriating income flows;

Risk of inheriting pre-transaction tax liabilities;

Retrospective changes to tax legislation or its interpretation;

Limited case law and the unpredictability and duration of the litigation process.

Consequently, an awareness of the potential tax risks in emerging markets is essential. But investors also need a thorough understanding of the tax environment in the particular market where they are investing. There is no substitute for localexpertisein navigating the tax uncertainties that can erode the value of a deal.

The Importance of Adopting Proper Tax Planning – The Tax Impact of Acquisitions and Investors “Exit Strategy”

Apart from the tax risks related to a potential investment in emerging markets, the investor and specially investor’s tax advisors should assess all aspects to draw up a proper tax planning related to the structure to be adopted when acquiring an investment or exiting it.

Aspects like the decision to carry out the acquisition through a share deal or an asset deal shall influence not only the clauses to be negotiated so as to limit successor´s responsibilities of the tax contingencies that the buyer might eventually bear but also the tax costs of the acquisition, the tax impact in the future distribution of dividends, the generation of intangible assets which may not be deducted due to legal restrictions, and the matters associated with the foreign exchange market and foreign trade for the incoming and outgoing foreign currency, among others.

The exit strategy is a also fundamental aspect to evaluate right from the very moment of planning the structure of the acquisition. Thus, the investor should weigh whether by adopting a structure of purchase that implies, for example, a tax saving in the purchase or a limitation on the tax contingencies that the buyer will bear, the tax impact derived from the sale will eventually be significantly larger than the advantages or benefits obtained when purchased.

In conclusion, the matters mentioned above disclose the recent growing importance of tax matters as an essential risk factor to consider by the investor planning to acquire businesses in emerging markets. Besides, tax issues become relevant as part of the strategic planning tools that the investor should take into account when acquiring, running or eventually exiting a business.

About the Author

Sergio Caveggia is a Tax Partner currently in charge of the Transaction Tax Area in Argentina. He joined the tax division of Ernst & Young in 1994, and has over 18 years experience in dealing with tax-related matters.
He has served numerous clients in a variety of industries. He has developed strong expertise in international taxation and mergers and acquisitions matters, structures for inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax area. Moreover, he has been involved in practically all Buy-side and Sell-Side due diligence analysis in our firm in the last 10 years.
He is a Certified Public Accountant, graduated from University of Belgrano in Argentina, he also obtained his Tax Specialist’s Degree at the University of Belgrano. He is also a member of the Professional Council of Economic Sciences of Buenos Aires and the Argentine Fiscal Association.


NEPAD: Improving Frontline Healthcare in Africa

Hundreds of millions of women and children have no access to potentially life-saving care with often fatal results. 358,000 women died due to complications in pregnancy and childbirth in the year 2008, with 99 percent of the deaths occurring in sub-Saharan Africa and Asia, according to recent estimates by the World Health Organization (WHO).

There are many more examples of mortality and morbidity that can be prevented with improved quality of nursing and midwifery care. Such care can best be initiated, maintained and improved by training nurses and equipping them with advanced knowledge and skills, says the New Partnership for Africa’s Development, NEPAD Agency.

The NEPAD Agency has been at the forefront in mobilising funds from bilateral partners to support the training of nurses and midwives across the continent and enhance African-led health care research. So far, five million dollars have been earmarked for the Economic Community of West African States (ECOWAS) and the Economic Community of Central African States (ECCAS) for training programmes in community health nursing, maternal and child health, mental health nursing, critical care and trauma nursing.

The NEPAD Agency believes that nurses and midwives are in the frontline of health services in Africa. Training these health workers has a real impact on the ground. Ensuring that they are provided with the necessary competencies to work and function properly is key in reducing alarmingly high maternal and mortality rates in Africa.

The continent currently has an estimated shortage of one million health workers; other estimates find the shortage to be even greater. While the numbers and types of health workers vary by country, statistical snapshots leave no doubt of the scope of the health worker crisis in Africa.

Delivery of quality health care in the majority of developing countries is also hampered by a lack of or limited health care workforce, weak infrastructure and unsustainable health care financing mechanisms. This deficit hinders many African countries from achieving the health-related Millennium Development Goals such as universal access to HIV and AIDS treatment, child health, maternal health and other health goals. Nor can malaria be combated without effective healthcare services and systems.

As a response to these challenges, the NEPAD Agency has been training nurses and midwives in East and Southern Africa. They have completed master’s degrees and acquired work experience that enable them to improve how they serve their communities.  Around 100 nurses and midwives from East and Central Africa will have graduated with master’s degrees by 2013.

As part of the programme, a consortium of Southern African universities is assisting five countries to establish advanced training programmes in community health nursing, maternal and child health, mental health nursing and critical care and trauma nursing. The NEPAD Agency is collaborating with these institutions to set-up centres of excellence for participating countries to build health curriculums, research capacities and health-care training.

Kenya, Tanzania, Rwanda, Mozambique and most recently the Democratic Republic of Congo now have at least one such specialist health programme. In Kenya specialists in community health nursing, maternal and child nursing graduated whilst students in Tanzania specialised in psychiatric nursing, critical care and trauma. In the Democratic Republic of Congo the specialist training is focused on maternal and child nursing and in Rwanda on critical care and trauma. This training provides not only specialist practitioners, but also researchers in these fields and people who can train others.

Plans are advanced to extend the project to countries of the Economic Community of Central African States (ECCAS), namely Chad, Gabon and the Republic of Congo. The three-year master’s programme will commence in these countries in early 2013 and will provide 75 students the opportunity to study to post-graduate level a health-care course.

Most of these trained nurses will go back to their communities, mostly rural and remote areas, trying to meet the health-care needs in these neglected parts of the countries. Others will pursue doctor’s degrees as offered in the recently started Gabonese health specialist programme.

The project is hoped to run over a period of ten years and will seek to mobilise ten million dollars from bilateral partners so as to contribute towards achieving the health-related Millennium Development Goals.

About NEPAD

The New Partnership for Africa’s Development (NEPAD) is a flagship socio-economic programme of the African Union (AU). NEPAD’s four primary objectives are to eradicate poverty, promote sustainable growth and development, integrate Africa in the world economy and accelerate the empowerment of women.

The NEPAD Agency is a technical body of the AU that advocates for NEPAD, facilitates and coordinates development of NEPAD continent-wide programmes and projects, mobilises resources and engages the global community, regional economic communities and member states in the implementation of these programmes and projects. The NEPAD Agency replaced the NEPAD Secretariat which had coordinated the implementation of NEPAD programmes and projects since 2001.

The strategic direction of the NEPAD Agency is premised on six themes: Agriculture and Food Security, Climate Change and Natural Resource Management, Regional Integration and Infrastructure, Human Development, Economic and Corporate Governance as well as Cross-Cutting Issues including Gender, ICT and Capacity Development.


Grant Thornton - China: M&A Due Diligence Pitfalls

By Barry Tong, Partner, Advisory, Grant Thornton Hong Kong Limited

To acquire a business is a journey and in the words of Lao Tzu, "…a journey of a thousand miles begins with a single step.” One of the first steps that increases the chance of a successful merger or acquisition is thorough financial and tax due diligence. Investment decisions, mergers, acquisitions and joint ventures, if successful can propel a business to new heights, but if unsuccessful, can lead to ruin. When purchasing a business the greatest danger may lie below the surface. Due diligence gives you an understanding of the business and identifies the issues you need to know to make an informed decision and to get the valuation right.

At times we are asked, “Why is due diligence necessary?” Buyers may believe that as they have the seller’s audited financial statements, met with the seller’s management, who have confirmed their investment thesis and also visited the seller’s facilities and seen their equipment, that formal due diligence is unnecessary.

But an audit is not enough. Audits typically have a greater focus on the balance sheet than the income statement; they do not address the quality of earnings, business issues and trends, market share, customer or supplier concentrations, management, systems, or infrastructure. The standards can be quite different for due diligence as well. If the buyer is paying a multiple of earnings, adjustments to earnings and normalised revenue and expense items can have a material impact on purchase price.

Effective due diligence assesses the seller’s quality of earnings and determines the relative contribution of the various value drivers. It can corroborate the buyer’s investment thesis or provide the data required to support an adjustment to the valuation. Beyond this, due diligence assesses the seller’s personnel and systems, identifies issues to be addressed in the purchase agreement and gives the buyer a head-start on post-acquisition integration issues.

During due diligence various adjustments are made to earnings and adjusted earnings are often used as a proxy for cash flow. Cash flow, in turn, is often used to substantiate the valuation. Although the primary objective of due diligence is not valuation, due diligence establishes normalised earnings which is the “raw material” of valuations.

Given the importance of adjusted earnings, it merits looking at some of the most common adjustments to earnings.

Management proposed adjustments – If management’s proposed adjustments are not well documented or do not make sense, the buyer has no obligation to accept all or any portion of them. A ‘bridge’” can illustrate the magnitude and direction of the key factors that cause a change between two periods. These graphic pictures can be worth more than a thousand words in your understanding of what caused the difference in earnings or cash flow.

Management‘s accounting judgments – Management’s judgments impact earning. The judgments made about the adequacy of the bad debt reserve, warranties, inventory reserves, accruals, or allocations of expenses in carve-out situations can all have a significant impact on earnings and hence your conclusions about cash flow.

Accounting policies, procedures and practices – Revenue recognition, cutoffs, non-recurring items, one-time expenses (layoffs and discontinued operations), cash verses accrual accounting methods can, intentionally or unintentionally, mislead a buyer’s conclusions regarding operating cash flow. Any changes in accounting policies, procedures or practices during the periods being analysed can distort your conclusions, e.g. extending the useful life of depreciable assets between year one and two can improve earnings without any underlying economic impact.

Forecasts and run rates – Discontinuities between historical results and forecast assumptions that are unsupported or a recent significant change in run rate or the run rate assumptions require special attention and possibly due diligence adjustments. We find it useful to focus on backlog as a key short-term predictor of future revenues. The importance of backlog increases if run rates are being proposed as the basis of forecasts.

Let’s turn our attention to some specific risks that we commonly see in our due diligence work in China and some approaches for mitigating these risks.

Minority-interest and joint venture investments - Acquiring a minority interest in a business or entering into a joint venture are common ways to invest. In these cases, the scope of your due diligence should include background checks on the owners and managers. Spend time to get to know your partners over several meeting, both business and personal. The relationship with and trust in your business partner is vital to the success of your investment.

Multiple sets of books – It is common for Chinese private companies to have multiple sets of books and it is essential to understand why there are multiple sets and the differences between them. Frequently the “tax books” will understand income in order to reduce the tax liability, which may result in a potentially large contingent liability for a buyer.

Revenue recognition and cash reconciliations – We recommend reconciling cash deposits (from bank statements) to revenue. Although not perfect, it is an approach to corroborate revenue and develop and understanding of how and when key customers pay.

Owners’ compensation and personal expenses – These are probably the most common due diligence adjustment to earnings for smaller private companies. The owner’s post-close compensation arrangement must be understood and documented.

Related-party transactions – Are family members employees of the business? Do family members control businesses that are key customers or suppliers to the seller?  Relatives of the owners or managers may be on the company’s payroll, customers may include related or affiliated companies, and key suppliers may be related or affiliated by common ownership. The due diligence process needs to identify these relationships and determine if there is contractual employment, sales, or purchase agreements that will survive closing.

Transfer pricing – The seller may have sales or purchases that do not appear to be economically justified, but may be because related or affiliated companies are involved. Sometimes affiliated companies are used to move money into other jurisdictions. The ownership of Chinese companies is not always transparent and may be quite complex. Transfer pricing policies need to be understood and documented so they can be supported from a tax standpoint.

Contingencies – Adjustments here often arise from off-balance sheet obligations and can be significant surprise to a buyer. Contingencies can refer to a number of different off-balance sheet liabilities, such as leases, litigation, or third-party guarantees. Thorough due diligence is required to identify and quantify these risks. How the transaction is structured is also critical to who owns these liabilities post-close.

Management - Due diligence unveils the capabilities of the existing management team and what needs to be done if this needs to be upgraded. Is the business essentially honest? Is its administration competent? Are any problems with the financial information fixable? Will the buyer be able to engineer a higher standard of financial reporting in the target company? Management is always a key fixture in Chinese company and attention to detail needs to be placed upon it. Analysing the contents of the financial due diligence also gives the buyer an opportunity to examine cultural compatibility, as well as the level of competence that the buyer has to work with.

Professional advice - These are just some of many financial due diligence issues that need to be addressed - they may vary depending upon each specific case. A good professional adviser will be able to discuss all issues with you, assess what needs to be checked through, and allocate dedicated on the ground staff to look into and report back. Advisers who subcontract such work are not ideal, as they may not be able to manage the process directly, owing to a chance of an increased margin of error. Proven track record and sufficient resources in China should be taken into consideration.

Clearly, the process of acquiring a business is a journey with many risks, but in the words of another philosopher, “…any journey well begun is half finished.”

Grant Thornton Hong Kong Limited is a member firm of Grant Thornton International in Hong Kong. We are an integrated part of Grant Thornton China, offering a full range of assurance, tax and advisory services to privately held businesses and listed companies of all sizes.