Judy Faulkner: From Basement Beginnings… to a Self-made Billionaire

[caption id="attachment_15640" align="alignright" width="300"] CEO and founder of Epic Systems: Judy Faulkner[/caption]

Judy Faulkner is the hands-on programmer who pioneered the concept of patient-centric digital medical records in the US.

Faulkner taught herself the basics of coding in just one week during her undergraduate years — and went on to become a computer science professor. It was during that time, in the mid-1970s, that she had the stroke of inspiration that would lead to the founding of Epic Systems.

Distracted and daydreaming, she was suddenly hit by an idea. “I remember running into the kitchen, grabbing a pad of paper and just writing code, code, code, code,” she said in a New York Times interview.

In a Wisconsin basement in 1979, Faulkner launched Epic Systems with “one-and-a-half employees”. Today, the company resides on a 1,100-acre countryside campus and employs nearly 10,000 people. Epic reported revenues of $2.7bn in 2018, and Forbes estimates Faulkner’s personal wealth to be nearly double that.

Faulkner is a skilled mathematician and an astute entrepreneur. In the ‘70s, healthcare providers were using specialised programmes to track patients’ electronic health records (EHRs). But the systems were hospital- or practice-specific, and vital information was often lost over the course of treatment. Epic Systems, originally called Human Services Computing, was created as an ecosystem of health data that orbits the patient over a lifespan.

The company develops software solutions for hospitals, clinics and speciality practices. Its software suite can help speed-up revenue cycles, with streamlined paperless payment systems and insurance management. With Epic solutions, doctors can use AI-backed insights that enhance decision-making or introduce telehealth advancements for patient care.

The patient is at the heart of everything Epic does, and Faulkner ensures that the engineers grasp the seriousness — and responsibility — of that charge. She dispatches her team on immersion trips to operating rooms (ORs) across the US, where they witness the real-life application and impact of their developments.

“You might faint,” she said (it has happened), “but you watch the OR to see how our can software do better. How do we make it better? How do we get feedback?”

Engineers in this high-stakes field commit to gruelling schedules to ensure every line of code is correct. Epic’s sprawling campus was designed to promote productivity and creativity. Workers have offices conducive to uninterrupted focus, and windows fill the buildings with natural light. The workplace is full of whimsical features, such as an illuminated “intergalactic hallway”, an Indiana Jones-style tunnel, a treehouse with a swing bridge and a Star Wars-themed conference room. Workers can expect an additional perk after five years of service: a one-month sabbatical, with round-trip airfares for two to a destination of their choice, plus per diems for food and accommodation. The offer is extended again after each five-year block of service.

Epic is employee-owned and developer-led. Since its start over 40 years ago, the company has grown without the benefit — or burden — of venture capital or private equity. Faulkner has insisted on developing all Epic software in-house.

“If you are publicly traded, then your legal fiduciary duty is to increase shareholder value,” Faulkner told Healthcare Transformation. “We think our duty is to keep patients healthy, keep healthcare organisations strong, and keep clinicians happy.”
The Epic platform currently holds the EHRs of more than 250m patients. Faulkner is excited about what that huge data repository could mean for the future of evidence-based medicine: “We’re going to be able to make much more informed decisions and have much more insight into the long-term effects of what we do.”

But the company and its CEO have taken flak for the stance taken against recent US legislation aimed at implementing interoperability standards. Critics accuse Faulkner of attacking the federal rule to maintain a monopolistic hold on US healthcare data. She says her motivation is more altruistic.

“Studies have shown that most of the mobile health apps resell or share the data with others, and that’s dangerous,” she warns. “When patient data goes to an app from a health system, family members’ data will go over too. There is no way to get that out.”

Faulkner acknowledges that the legislation contains good elements, but insists that some things — such as the removal of IP protection for screens and algorithms — should be fixed before it is enacted.


Tirelli & Partners: ‘Being Happy is a Priority, and Ethics Can’t Be Limited to a Code of Practice’

Italian real estate firm challenges traditional profit generation — and stands up for wellbeing.

[caption id="attachment_15643" align="aligncenter" width="819"] Tirelli & Partners. Michael E Tirelli, principal, on right[/caption]

Tirelli & Partners is a top luxury real estate firm — and a cutting-edge real estate consultant.

It was established in 1987 as a boutique agency to provide personalised service to sellers, buyers, owners and tenants of luxury properties both in Italy and abroad.

The idea was to provide the sector with the same level of expertise and professionalism that clients receive in other spheres of business.

The company is now a leading brand and stands out for the quality and dedication it brings to its services — residential or commercial.

While still highly active in the luxury residential property market — which includes publishing Italy´s only in-depth analytical report of the sector every six months since 2003 — Tirelli has expanded its operations to include the following services — office, retail, hospitality and logistics:

Transactional consultancy (purchasing, sales, lease-back and rental)

Real estate consultancy (investment analysis, Highest and Best use assessments, feasibility studies)

Technical consultancy (due diligence, project management, contract and closing assistance)

Evaluations and surveys (any asset class, real estate portfolios and real estate credits)

Information and research

The company serves high-net-worth individuals in their investments and divestments, as well as leading national and foreign investors in their decision-making processes.

“We are convinced that the ethics of each professional activity cannot be limited to the code of practice,” says principal Marco E Tirelli, “but must include the professional rapport with the client and the civil society.”

“In each profession, an interpersonal dimension is implied that goes beyond the code of practice. This is what Tirelli strives to achieve through projects that view business in a broader perspective.”

In November 2019, the company converted into a benefit corporation. A month later, Tirelli & Partners became the first real estate company in Italy to obtain the B Corp® certification. (B Corp is a global movement counting more than 3,200 businesses in over 150 industries and 70 countries.)

Instead of solely distributing dividends to shareholders, benefit corporations use their business as a positive force for change in society. These companies look beyond mere profit and redefine their business priorities, choosing to focus on individual social cohesion and the regeneration of natural environments.

“For us, being happy is a priority,” says Marco E Tirelli. “The first line of the charter states it clearly: ‘Our ultimate aim is the pursuit of wellbeing and happiness of all the people who make up Tirelli & Partners, thereby creating a shared economic prosperity’.”

The articles of association include a rule that limits the wage gap between the highest and lowest employees in the company to seven times.

“If we want the world to remain a welcoming place for all, we must ensure that businesses become a positive source of change, redefining the priorities that guide our actions.”

“At first sight, we just look like real estate experts. Actually, our job is to preserve and grow personal relationships. We look beyond profit to have a positive impact on people’s lives.”


Austerity Arrives in the Kingdom

[caption id="attachment_15719" align="alignright" width="300"] Saudi Arabia: Riyadh[/caption]

For the first time in living memory, the Saudi government has embarked on a major austerity drive. In early June, state workers saw their generous cost-of-living allowance abruptly cancelled. Capital expenditure on iconic mega projects has been put on hold as well. In a move illustrative of the sense of urgency felt by Riyadh, the value-added tax rate was tripled to 15 percent. The kingdom introduced VAT just two years ago in a first attempt to address the fiscal deficit that had been on track to reach almost $50 billion (6.5% of GDP) this year – before the Corona pandemic struck.

The recent drop in oil prices has pulled total government revenue down by 22 percent over the first three months of the year, forcing deep cuts in allocations for the Vision 2030 programme. Emergency policy initiatives to fight the spread of the novel coronavirus have also curbed the pace and scale of the economic reforms reforms introduced by Crown Prince Mohammed bin Salman.

According to Finance Minister Mohammed al-Jadaan, the austerity measures are necessary to maintain financial end economic stability over medium to long term and overcome the ‘unprecedented crisis with the least damage possible’. In April, the Saudi Arabia Monetary Authority (SAMA) reported a $24.7 billion drop in its foreign reserve assets – the sharpest decline in over two decades. The kingdom’s central bank tried to limit the damage by shifting $40 billion to the Public Investment Fund (PIF). The one-off transaction enabled the Saudi sovereign wealth fund to snap up shares on the cheap on the world’s major stock exchanges.

SAMA has repeatedly reiterated its commitment to maintaining the Saudi riyal’s peg to the US dollar and has demonstrated the kingdom’s continued financial strength by raising billions in new debt. Based on the domestic money supply, it is estimated that the central bank needs about $300 billion to maintain the currency peg, putting considerable pressure on the kingdom’s $450 billion reserves, mostly held in US Treasury Notes. Al-Jadaan said that he intends to cover the persistent fiscal deficit with a mix of expenditure cutbacks, new borrowing, and dipping into reserves.

Market watchers keep their eyes trained on the size of the $300-billion Public Investment Fund which has been designated as the main conduit for the diversification of the Saudi economy. In the first quarter of the year, the fund acquired $500 million stakes in each of Facebook, Walt Disney, and Marriott International. PIF also invested similarly significant amounts in Cisco Systems, Bank of America, and Citigroup stock. In a sign that they are willing to take on risk, the Saudis bought a $714 million stake in aircraft manufacturer Boeing and a $450 million stake in cruise operator Carnival – two companies hit particularly hard by the corona pandemic.

However, an attempt to acquire UK Premier League club Newcastle United for $365 million has raised considerable objections domestically and is seen as inappropriate given the troubled times. Though supported by most of the club’s fans, the proposed takeover is questioned over a possible conflict of interest. Prince Abdullah bin Mosaad, a prominent member of the royal family, already owns Sheffield United. The Premier League must now decide if Saudi business practices could cause a conflict with its rules on club ownership.

Most of the PIF investments in Q1 2020 were generally well-timed and allowed the fund to maximise its exposure to the recent bull market that saw major indices gaining up to 40 percent in barely 10 weeks. However, the strategy may yet backfire as markets slowly come to grip with the full extent of the pandemic and optimism is replaced by realism.

The Saudi sovereign wealth fund has been an exception in the region. Other public investment funds are mostly sitting tight with a wait-and-see attitude. Much bolder than most, the PIF is seen taking a considered gamble on the kingdom’s pool of capital which is becoming increasingly finite as the world moves away from hydrocarbons. The recent oil spat with Russia over production volumes has added considerably to the financial woes facing Al-Jadaan, depressing oil revenues by well over $24 billion so far this year. To balance the budget, Saudi Arabia needs oil prices to hover around the $70 a barrel mark, a level that seems unattainable for the foreseeable future.

With a relatively young and restless population, recently exposed to the slightly more liberal rule of Crown Prince Bin Salman, the budgetary restraints introduced in the wake of the pandemic may upset an already precarious societal, if not political, balance. The prince’s ambitious and far-reaching reform programme has whetted the appetites of the young and will prove hard to undo. Suddenly, the kingdom’s future looks much less promising than it did just a few short month ago. “I think Vision 2030 is essentially finished,” says Michael Stephens of the London-based Royal United Services Institute for Defence and Security Studies: “Saudi Arabia is facing the hardest time it has ever been through and certainly the most difficult period of Mohammed bin Salman’s tenure.”

The government is aware that the austerity measures unveiled in May, will mostly be felt by those least able to afford them. However, Al-Jadaan emphasised that the government faces a set of difficult choices and can longer postpone changes to the welfare state. This may undermine the social/political covenant that has allowed the kingdom’s rulers to maintain their position largely unopposed in return for lavish benefits bestowed on the population.

The austerity measures have by no means completely disassembled the famed Saudi welfare state. Its largess is still unequalled. At the outbreak of the corona pandemic, the government paid for the repatriation of its subjects and quarantined returnees at luxury hotels with all expenses paid for. It also covered 60 percent of the paycheques of private sector workers, suspended layoffs, offered interest-free loans to households, and slashed utility bills.

Gulf analyst Karen Young of the American Enterprise Institute wonders if the Saudi government has perhaps failed to adjust its operating philosophy – and expenditure – to the leaner times ahead: “At current spending levels, the kingdom will run out of money in three to five years.” Young says that the day of reckoning may be pushed back a few years by aggressive public borrowing. With a current debt-to-GDP ratio of barely 30 percent, there is some room for growth before a hard limit is reached. Meanwhile, the government hopes to foment a new form of ‘fiscal nationalism’, that has Saudis pay – albeit modestly – for the privilege of being part of a generous nation.

A cautious optimism is, however, not misplaced. Middle East sovereign wealth funds boast an estimated $2 trillion in assets – funds essentially put aside up for a rainy day. As it starts pouring, these pools of cash may be deployed to boost economic diversification, offer solace to populations, and experiment with novel business models. The International Monetary Fund (IMF) forecasts Saudi Arabia’s GDP to contract by a relatively modest 6 or 7 percent this year. Other Gulf Cooperation Council (GCC) member states will also see their economies shrink considerably but may expect a strong rebound in 2021. Moreover, most regional banks are well capitalised although reluctant to pass on the emergency support funds released by central banks.

Ultimately, the corona pandemic is likely to accelerate transformations already put in place long before the viral outbreak occurred. The era of limitless spending may have come to an early close, that does not imply that the money has run out. In his statements, Al-Jadaan emphasises that most austerity measures are temporary in nature and will likely be reversed as soon as the pandemic has abated, and oil prices return to their previous level. Business as usual may have been disrupted by the pandemic, new opportunities will arise before long. In short, few regions are actually better poised to seize the post-corona moment then the financial powerhouses and innovators of the Middle East.


Europe: Fig Leaves to Save Spain and Italy

Looking to score without breaking a sweat, European politicians of almost every ideological persuasion often turn on ‘Brussels’, assigning blame to the union for every conceivable domestic ill and castigating it for their own failings. Unable to put up a meaningful defence to the barrage of accusations and criticism, the EU plods on doggedly, convinced that a Europe of individual – and bickering – nation states stands no chance in a world steered by superpowers.

Doomsayers never tire of predicting the EU’s imminent demise and the ‘colonisation’ of the old continent by China or the United States, both of whom could do without a third wheel. After their first dissonant response to the Corona Pandemic, the 27 remaining member states of the union seem to have belatedly agreed to coordinate their efforts in avoiding a second coming of the virus, rebuilding the economy, and staving off outside bargain hunters.

The EU is, of course, famous for finding compromise solutions at the eleventh hour and kicking the proverbial can down the road in case differences cannot be bridged. In June, the European Commission rediscovered its sense of purpose and unveiled the outlines of an ambitious and costly plan to repair the economic and financial damage caused by extended lockdowns. The initiative is, though necessary, potentially divisive as was shown in May when the so-called Frugal Four, led by Dutch Finance Minister Wopke Hoekstra, staged a revolt of sorts by refusing to consider any form of debt and/or risk pooling. Mr Hoekstra did so rather bluntly, offending southern member states such as Italy, Spain, and Portugal and, in the process, laying bare an unstable fault line.

In the end, German Chancellor Angela Merkel had to intervene in an equally forceful manner. Much to the Frugal Four’s surprise, she came down on the side of the southern have-nots. After Mrs Merkel had properly admonished Dutch Prime Minister Mark Rutte, who was told to stop throwing a ‘childish tantrum’, the chancellor clearly indicated that her country would support the issuance of shared debt by the European Commission, backed by future member state remittances. Mrs Merkel reiterated that Germany will not lack solidarity with Italy, Spain, and other countries whose economies have been derailed by the pandemic.

The repositioning of Germany, previously vehemently opposed to any form of debt and risk sharing, is nothing short of revolutionary in nature. It was, however, inevitable and, as such, expected. Until recently a discrete backer of both the Frugal Four (Austria, Denmark, Sweden, and The Netherlands) and the Hanseatic League 2.0 – another informal grouping of fiscally prudent countries – the German government has repowered the Berlin-Paris axis in the conviction that nothing good will result from an experiment in European brinkmanship.

Perhaps fooled by the country’s rather stern attitude to debt displayed during the Greek banking crisis of 2015, and its almost obsessive dedication to fiscal rectitude, the ‘frugals’ may have overlooked the single-most important consideration of German foreign policy: the constitutionally mandated commitment to further European unity. Berlin considers anything or anyone threatening the integration of Europe as inimical to its interests. This also helps explain why the British were unable to enlist German support during their exit negotiations with the union. The countless appeals made by London all went unanswered with Mrs Merkel repeatedly showing a slight annoyance at the UK’s inability to understand her, diplomatically awkward, position.

Apart from foreign policy considerations, Germany is better aware than most, that its export-oriented economic model needs healthy markets to prosper. In short, not even Germany can afford to let the economies of Spain and Italy founder. The troubles experienced by Greece five years ago are mere pinpricks compared to the potentially devasting consequences – financial, economic, and political – of large Mediterranean markets crushed under the weight of debt and/or austerity.

The European Union has been designed in such a way that, once joined, no member state can leave the collective embrace without inflicting severe damage on its economy and society. By condemning former enemies France and Germany to each other (and to mutual dependency), war was made impossible. Although most Europeans now think of war as an outlandish affliction to which they are immune, the absence of armed conflict is still a relative novelty on a continent scarred by centuries of strife.

Voting for Brexit, the British may have considered the European Union merely as a common market with a few added, and undesirable, embellishments, most continental nations know better and realise its importance, although often remain reluctant to admit their dependence on a project that ultimately seeks to supplant the sovereign nation state.

That nation state was briefly revived after the scope of the pandemic became clear and panic set in. Each EU member state invoked its own sovereign prerogatives in the face of the threat to public health and formulated a bespoke response without consulting or informing Brussels. In fact, the European Commission, the executive branch of the union, was ignored by most, if not all, member states as borders closed and states dipped into their reserves to offer direct support to businesses – both big no-no’s expressly forbidden under European treaties.

It took the European Commission the better part of two months to reassert its authority and convince member states of the need for a coordinated response to the emergency. Paradoxically, the Corona Pandemic may yet strengthen European cooperation and integration. Albeit under a different name, eurobonds will at long last see the light of day which will allow the union to deploy its considerable fiscal heft for the first time by leveraging future income from member states’ remittances to raise additional cash on global capital markets.

The commission also exploring the idea to introduce a limited number of direct EU taxes. In this vein, the French government has suggested a tax on big tech firms whilst others propose additional levies on polluters to help green the continent whilst adding a revenue stream to assist weaker member states.

The plight of Spain and Italy, and the prospect of yet another decade lost to a recession, has been central to Brussels and Berlin. However, the Frugal Four may yet have some life left. Eastern Europe, home to recalcitrant member states such as Hungary and Poland, is not altogether happy that relatively prosperous Mediterranean countries command all attention. The Visegrád Group, which also includes the Czech Republic and Slovakia, has been observed drawing closer to the Frugal Four and their hangers-on (Finland, Slovenia, and the three Baltic republics) to form a mighty bloc of smaller nations that together have to voting power to stop the Berlin-Paris axis from steamrolling the opposition.

Aware of the brewing unrest, German and French diplomats are increasingly concerned over the growing rift that pits the EU’s constituent parts against each other and may either cause lasting damage or result in an ineffectual policy that leaves two of the union largest economies mired in recession.

Arguably, inter-EU diplomacy has never been more complex and challenging than at present. The departure of the UK has emboldened the Dutch to assume the mantle of contrarian troublemaker in Europe. The Netherlands is now the fifth-largest economy of the bloc and The Hague no longer feels the need to follow Germany blindly – most certainly not after that country ditched its commitment to prudent financial management. Listening in The Hague, it would appear that the Germans have gone off the deep end. The disillusionment is palpable, as is the resolve not to follow their example. However, diplomacy is not usually counted as a Dutch strength and The Hague will find it difficult, if not impossible, to keep its fellow ‘frugals’ in line once Germany and France start applying the pressure.

The good news is, of course, that the monetary firepower displayed by the European Central Bank will soon get company from large-scale fiscal interventions to prop up the sagging and broken economies of Spain, Italy, and other struggling member states. Give a little, take a little is how the European Union works. That and an abundant supply of fig leaves for those unable to quite get their way.


Japan Opens the Money Spigot

[caption id="attachment_15738" align="alignright" width="300"] Japan: Tokyo[/caption]

Once upon a time, Japan was said to pose a menace to the economic hegemony of the industrialised countries of the West.

Current US criticism of Chinese trade practices and currency manipulation echo the acerbic disputes between Washington and Tokyo of the 1980s and 1990s. At the time, Japan’s outsized current account surplus caused much indignation in the US and Europe.

The overseas expansion of the country’s large corporations, backed by the productivity of their workers and a domestic market all but closed to foreign competition, raised serious concerns and ultimately led to negotiations that forced Japan into a series of concessions which in due time reestablished a trade equilibrium. However, thanks to its purchases of overseas assets, the country managed to sustain a consistent and robust surplus on its current account, resulting in a net international investment position (NIIP) of an estimated $2.8 trillion – by far the largest in the world.

Japan’s remarkable NIIP helps explain why its large public debt, bordering 230 percent of GDP, is not considered problematic. The corona pandemic has prompted the Bank of Japan to significantly expand the monetary stimulus measures already in place whilst the government unveiled fiscal support initiatives worth in excess of $1 trillion. The total of the economic support packages announced now amounts to a staggering $2.2 trillion – some 40 percent of GDP.

This has given a new impulse, and dimension, to ‘Abenomics’, the three-pronged economic policy introduced by Prime Minister Shinzo Abe in 2013 to jolt the country out of economic lethargy – and the liquidity trap. The third vector, structural reform, has been suspended for the duration.

Though it managed to contain the viral outbreak without imposing a general lockdown, the Japanese economy, the third largest in the world, has taken a severe hit with GDP expected to shrink by up to 22 percent in the second quarter for an overall decline of 5 percent for 2020 as forecast by the International Monetary Fund (IMF).

Japan faces a unique set of challenges with an economy that has been in suspended animation for the better part of two decades. Just as the curse of stagflation seemed to have been lifted, the pandemic struck with devastating consequences for the country’s exports. However, domestic business activity has now almost fully returned to pre-corona levels with Google’s Covid-19 Community Mobility Report showing the movement of people in big cities at around 80 percent of levels registered in January and February. Already in the second half of May, consumer spending increased sharply as the state of emergency was lifted in 35 of the country’s 47 prefectures. Both department stores and izakaya, pubs visited after-hours by office workers, registered strong demand.

Government accounts are another story altogether after Prime Minister Abe had two extra budgets approved to deal with the pandemic. This derailed the stated goal of turning the fiscal deficit into a surplus by 2025. Finance Minister Taro Aso called his country’s fiscal situation ‘extremely severe’ but insisted that the original timeline to end deficit spending remains in place. However, officials at the ministry said that a primary fiscal surplus in five years’ time is ‘realistically speaking’ unattainable.

Market watchers fear that the huge extra outlays will still not be enough to prevent a return of deflation, possibly prompting the Bank of Japan to add yet more to its monetary stimuli. Analysts expect core consumer prices, which exclude volatile fresh food but include energy, to fall by 0.5 percent during the current fiscal year ending in March 2021. For the following year, a modest 0.3 percent rise is being forecast.

In a sense, Japan struggles with an economic situation and outlook not entirely dissimilar from the one faced by Europe. There too, years of quantitative easing have failed to spur inflation to any noticeable degree. The spectre of deflation lurks in the shadows even as central bank money spigots flood economies with trillions to stimulate demand. Both the Bank of Japan and the European Central Bank (ECB) have been unable to reach their 2 percent inflation target and are unlikely to succeed any time soon. By now the Bank of Japan’s balance sheet has ballooned to $6.2 trillion. The ECB’s consolidated balance sheet stands at about $5.2 trillion).

Economist expect the Japanese economy to rebound during the second semester but not nearly enough to make up for lost ground. The case of Japan, soon to be emulated in Europe, seems to prove the central tenet of Modern Monetary Theory (MMT) which holds that deficits and money supply do not really matter as long as an economy has not deployed all available labour and material resources. Inflation will only appear after organic growth has exhausted supplies when further expansion would cause excess demand, leading to rising prices or, conversely, a reduction of buying power.

MMT economists argue that with little to no inflation, central banks in most major countries should not hesitate to inject fresh cash into sluggish economies. In fact, long before Milton Friedman unleashed his monetary theories, and his ‘Chicago Boy’ disciples, most central banks were charged not with limiting inflation, but with ensuring near-full employment.

MMT challenges conventional beliefs about the way states interact with their legal tender. Most of those beliefs stem from the gold standard era – now long gone. MMT economists point out that under today’s fiat currency system used by almost all sovereign countries, a government can essentially issue as much money as it needs because, as the sole issuer of currency, the state cannot go broke. In the MMT textbook, public debt merely represents money injected into the economy and not yet taxed out of it.

MMT advocates consider Japan a pioneer – and shining example. The country’s central bank has not stopped jacking up the narrow money supply for close to twenty years. It has done so to keep unemployment levels down and ensure demand stability. MMT proponents do not plead for spending for spending’s sake but for mechanisms that guarantee jobs and income. Thus, modern monetary theory seeks to fight economic downturns with job creation.

Of course, in the real world, issuers of fiat currency enjoy monetary freedom only to the extent that they possess actual and meaningful seigniorage, the ability to tax within their domain. This explains why countries such as Zimbabwe or Venezuela are unable to print money without almost immediately sparking inflation, leading quickly to hyperinflation or a complete loss of confidence in currency as a means of exchange (and not as sometimes thought, a very high rate of inflation).

With untold trillions in overseas assets and a healthy current account surplus, Japan has all the fundamentals in place to leave the pandemic behind and plod along merrily, albeit largely unremarkably. Stagflation is likely to continue to be a defining characteristic of the country´s economy as it may well become a fixture in Europe. In the years before the corona pandemic, growth throughout the European Union had been just about as anaemic as in Japan. Though corona changed everything, it remains highly unlikely that these mature economies will rebound with a vengeance. They will come back, alright, but will do so slowly and carefully.


South Africa and the Struggle for Reform

[caption id="attachment_15736" align="alignright" width="300"] South Africa: Cape Town[/caption]

Widely considered a bellwether for emerging market sentiment, South Africa’s rand has been on a dizzying rollercoaster ride, seesawing on currency markets as traders try to match fact with perception and decipher the country’s true predicament. On 11 June, the rand suffered its biggest single-day decline (-3.8%) in four years. The next day, the currency clawed back as markets realised that the South African Reserve Bank was having no trouble raising cash at knock-down interest rates. At the start of the corona pandemic, the currency lost 9 percent in value against the US dollar, only to stage a 13-percent rally in the weeks that followed.

The cost of credit default swaps, essentially an insurance premium to cover debt default risk, retreated to its pre-corona low after registering a spike in early April following Moody’s downgrade of the country’s sovereign credit rating. Though no longer investment-grade, South African bonds remain a favourite amongst both local and overseas investors. It is as if the descend into junk territory never happened. In fact, the country is currently paying less to borrow than at any time in the five years preceding the downgrade.

In Paris, Société Générale strategist Jason Daw is not at all worried about South Africa’s increasingly perilous fiscal position and expects a fairly strong post-pandemic recovery to sustain the rand. Daw even recommends investors an ‘overweight’ position in rand-denominated instruments. The weekly debt auctions of the National Treasury continue to attract considerable interest with fresh bond issues oversubscribed by an average of 40 percent. Yields have moved lower as the pace of inflation slowed due to low oil prices and repressed demand.

Globally, the economic consequences of the pandemic have not yet improved the yield of financial instruments, forcing investors to keep looking for returns in relatively low-risk emerging markets. The impression is that Moody’s and the two other major rating agencies may have jumped the gun on South Africa.

In its latest analysis, published early June, the Organisation for Economic Cooperation and Development (OECD) noted that South Africa may benefit more than initially expected from the fiscal and monetary stimulus initiatives of Europe and the United States. A quick recovery in China is also likely to sustain demand for South Africa’s commodities. The OECD report concludes that the country should not experience too many difficulties in sourcing the funds needed to support households during the lockdown period and businesses in hard-hit sectors such as tourism. The organisation recommends South Africa engage with multilateral lenders and implement the broad economic reforms already considered before the viral outbreak.

Slowly emerging from an exceptionally strict lockdown, South Africa faces a 5.5 percent contraction of its GDP. The OECD expects activity to pick up significantly next year but warns that continued shortfalls in the supply of electric power may dampen growth whilst a bloated bureaucracy and complex tax legislation discourage investment. The organisation calls on the South African government to improve the business climate and put the state finances on a more sustainable footing by streamlining its own apparatus and shedding loss-making state-owned enterprises. The World Bank is a bit more pessimistic in its outlook and forecasts South Africa’s GDP to shrink by 7.1 percent this year – this would constitute the largest decline in economic activity in over a century. Most predictions exclude the possibility of a second wave of corona infections. Should one occur, all bets are off and the precipice beckons.

Even with the current outbreak, this year’s fiscal deficit is expected to reach 14.4 percent of GDP whilst public debt will likely balloon to 81 percent of the domestic product. Any attempt to consolidate state expenditure depends to a large degree on the successful renegotiation of the generous 2018 public sector wage agreement. So far, this has proved elusive. Finance Minister Tito Mboweni has failed to convince trade unions of the need to amend the agreement which includes significant annual increases. Mboweni now needs to shave R160 billion ($9.4bn) off the public sector wage bill over the next three years. However, the country’s largest unions argue that the 2018 deal is binding and have taken their case to the Labour Court for arbitration.

Professor Phillipe Burger, vice-chancellor for Poverty, Inequality, and Economic Development at Cape Town’s University of the Free State, suggests that South Africa must improve its sovereign credit rating as a matter of the utmost urgency if the country is to attract the investment volumes needed to shape its future. In his policy paper Future South Africa Vision, Burger argues that society needs to reimagine what the country can look like in 15 to 20 years: “We must look beyond present-day problems and work towards a high-growth, green, urban, and investment-driven tomorrow. To do that, the country needs to properly address its current issues and ditch the junk-status mindset that many have fallen into.”

Burger is worried that the downward shift in investments registered over the past years will prevent the nation from tapping its potential for growth. “To grow the economy effectively, government must provide room for the private sector to invest in high growth industries and reduce the red tape and policy uncertainty. Government and private sector must together identify and address the stumbling blocks. In exchange, the private sector must commit to their investment targets for economic growth and job creation.”

The professor posits that before the corona outbreak, South Africa’s malaise was mainly caused by a lack in consumer and business confidence: “This ‘junk status vision’ originates from our dilapidated infrastructure and insolvent state-owned enterprises. What we need most is a sense of optimism and confidence in our collective ability to build a better country.” Economic growth has been difficult to sustain over the past five years. South Africa’s GDP has barely moved political infighting prevented a national accord on a reform package.

Pushed close to the edge by the pandemic, South Africa has appealed to the International Monetary Fund (IMF) for support – a first in the country’s history. The National Treasury has also applied for emergency financing at the Chinese-led New Development Bank, the World Bank, and the African Development Bank.

The Ramaphosa Administration has asked the IMF for $4.2 billion in emergency support. According to Lumkile Mondi, a lecturer in Economics at the Johannesburg Witwatersrand University, the move was prompted by more than just financial considerations: “The ruling African National Congress has always held that going cap in hand to the IMF was out of the question since it is seen to undermine the country’s sovereignty. In the years following the end of apartheid, it was decided to put the house in order without prodding from the IMF or other multilaterals. That article of faith has now been ditched.” President Cyril Ramaphosa hopes that the appeal to the IMF may shock the ANC in action.

Inheriting an economy broken by international sanctions, the ANC initially moved quickly and effectively to put South Africa on a sustainable footing. In 2007, the country recorded its first post-apartheid budget surplus. At the time, public debt represented just 26 percent of GDP. However, the call of riches proved too luring to ignore and over the following decade the performance of South Africa’s fiscal accounts deteriorated steadily whilst the state wage bill increased by at least 40 percent in real terms.

Though the administration of Ramaphosa advocates forcefully for structural adjustments to the economy, and a return to the prosperous times of before, it has not been able to get congress on board. After 26 years in power, the ANC has become a political arena with periodic fights between disparate factions vying for a turn at the depleted trough. As a result, little gets done in the way of governing.

However, the financial damage wrought by the corona pandemic is expected to spark congress into action as its lethargic approach to crucial policy issues can no longer be sustained without risking a complete meltdown. The National Treasury expects a $17 billion drop in tax revenue as a direct result of the lockdown.

Moreover, Ramaphosa has indicated that the crisis currently unfolding is too serious to waste. As current head of the 53-member African Union, he said that the pandemic must strengthen the collective resolve to ‘forge a new economy in a new reality’.

That message resounds throughout the continent. In Nigeria, the government managed to leverage the pandemic to scrap costly fuel subsidies, arguing that it needs the $2 billion spent annually on providing cheap fuel for fighting covid-19. Nigeria has also pushed through long-awaited changes to its exchange rate mechanism and implemented policies to wean the country off its dependency on oil exports.

Taking an early and proactive approach to the pandemic, Nigeria secured a $3.4 billion IMF credit facility and tapped into other sources of relatively cheap credit. This boosted investor confidence even as oil prices plummeted. The yield on the benchmark 2047 dollar-denominated bonds dropped from 13.2 percent in March to 9.1 percent two months later.

Though Nigeria’s underlying fundamentals remain weak, the country has managed to outperform other Sub-Saharan emerging markets during the first and crucial phase of the pandemic, leading analysts to believe that its economy can escape relatively unscathed and bounce back quickly. Nigeria is also helped by the modest size of its public debt which now stands at 34.8 percent of GDP.

Investor confidence has been bolstered by the IMF’s stamp of approval, the elimination of fuel subsidies, and the unification of the niara exchange rate. South Africa is paying attention and hopes to emulate the example set by the continent’s biggest economy.


UNCDF and Convergence: Getting the Right Blend in Game-Changing Finance

In December of 2015, the global news website, Quartz, published a piece entitled “Both Venture Capitalists and Banks are Betting on Blockchain.”

In the five or so years since this piece was posted, the debate over blockchain persists — whether it is hope or hype, future or fraud, promising and scalable or inefficient and forgettable. What has driven this intense debate is the contention that blockchain is more than merely an innovative technology — that it represents a game-changer in how we transfer data, conduct transactions or share information.

Perhaps the closest analogy in the development finance space involves blended finance, which Convergence defines as “the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development”.

While the discussion surrounding blended finance is not as heated as the debate over blockchain, the subject has similarly taken over much of the conversation space in the area of development finance. And like blockchain, what drives the blended finance conversation is the contention that it represents a game-changer. In this case, a game changer in its potential to catalyse private capital towards investments that would otherwise be overlooked — namely investments in developing countries generally and least developed countries (LDCs) in particular — delivering on return-on-investment and the development impact that defines the Sustainable Development Goals (SDGs) agenda.

On the basis of existing results, however, the sceptics of blended finance have more to hang their hat on than the believers when looking at its ability to drive finance to the places hardest to reach.

UNCDF and Convergence collaborated on a report in 2019, Blended Finance in the Least Developed Countries 2019, which detailed the state of blended finance in the context of LDC transactions. Just six percent of the total private capital mobilised globally by official development finance over the 2012-2017 period benefited LDCs, according to OECD data. (This is not necessarily “underweighting” relative to the size of their economies, though it is small relative to the amount of official development assistance, or ODA, received by LDCs.)

In the report The State of Blended Finance 2019, published by Convergence, the percentage of transactions in low-income countries that were blended finance in nature fell significantly; from 43 percent for the 2010-2012 period to 26 percent for the 2016-2018 period. This reality exists within a context where ODA is at best stagnant, and at worst avoiding the areas where it is most needed.

The OECD reported last year that ODA dropped by almost three percent in 2018, with a declining share going to the neediest countries. Overall, the investment needs for LDCs to achieve the SDGs is three times the existing level of total capital investment into LDCs, according to the UN Conference on Trade and Development (UNCTAD).

But none of this means that it is time to place blended finance in the category of “hype” and look for other solutions. One of the most important things to remember is that blended finance, particularly in the development context, is still in its early days. Until the Addis Ababa Action Agenda — the international conference held in 2015 that laid out the foundation for SDG financing — there were practically no communities of practice or profound contemplation on the subject of blended finance and sustainable development. Now that we have had five years to consider blended finance’s role in sustainable development, there are a few new strategies that both donors and investors can consider when pursuing blended finance solutions to deliver sustainable development to the areas that need it most.

Taking a Portfolio Approach

Theoretically, blended finance is an attractive proposition. Concessional capital from a government or philanthropic organisation can absorb the early losses tied to risky investments. This makes the risk-adjusted return on the riskier investments more palatable to investors with large amounts of capital — including institutional investors and pension funds. And while these sources of capital investment should be targeted for development-oriented investments, it does not mean that blended finance is always the best solution.

One reason is the size of the transactions in developing countries and LDCs. In many instances, it is simply not big enough for traditional investors, meaning that executing an investment would simply not make business sense relative to the costs. Separately, these groups of investors often lack the boots on the ground in, or deep knowledge of, developing and LDC markets. So even if the cost of the transactions were not prohibitive, the perceived risk of the investment — just as often as the actual risk — can still prevent the unlocking of commercial capital.

This does not mean that blended finance can never be used for investments in developing and least developed countries; and of course, we should do all we can to help investors separate the perceived risks of investing in these markets from actual risk. There is also scope for financial engineering to deliver scale and reduced risk, for example by blending within large investment funds whose money goes down either directly into small transactions or into smaller, lower cost, and more nimble local funds.

But donors need to accept that blended finance is not always going to be the best solution to finance a given transaction in these geographies. And in a context where ODA is an ever finite, if not shrinking, resource, donors would be better served if they adopted a portfolio approach towards blended finance transactions.

Such an approach calls on donors to assess their development projects in the context of the portfolio as a whole, not as a set of disconnected, individual investments. More to the point, it means lining up projects and strategically deploying ODA in a holistic fashion. A portfolio approach involves concentrating your ODA on the riskiest investments and preserving your blended finance deals for those projects that are a bit more palatable.

Despite the downward trend of ODA, the fact that it can be deployed as purely concessional capital gives it an essential and irreplaceable purpose. Deploying more ODA towards a very risky investment, versus less ODA in the hope of unlocking private capital, can be the best way to use those precious funds.

In essence, this is a Ricardian argument on comparative advantage. When parties trade in goods or services on the basis of what each party is able to produce most effectively, the resulting efficiency produces an all-in economic gain. Donors should probably not be trying to induce private sector investment in the most extreme of situations where they, and only they, have the type of capital that can enter these situations.

Communities of Practice

The concept of blended finance is not new. Investment transactions of this nature have been around for at least 50 years, even if we did not call it blended finance. But today, while it is increasingly becoming a tool of development finance, communities of practice only recently emerged surrounding it. The easiest proof is the fact that there are still varying definitions of what blended finance is.

At a practical level, this means that the field has not yet truly leveraged those actors with specific capabilities in blended finance to ensure that they apply their skills and capital in a tailored, impactful way.

Fortunately, more and more official donors are looking to blended finance to drive impact. As sub-sets of donors emerge with specific interests within blended finance, they need to be able to easily identify blended finance structures and transactions that fit with their specific comparative advantages — whether on the basis of instrument used; geographic area or region; an investment sector, or a development theme, such as scale, LDCs, or gender.

Institutions such as the Swedish International Development Co-operation Agency, Sida, have an edge in the issuance of guarantees in complex, structured transactions such as the IFC Managed Co-Lending Portfolio Programme. Others have strong institutional connections to the host governments where they work. The Millennium Challenge Corporation, for instance, operates through compacts with host governments that allow it to push for investment environment changes that facilitate the major infrastructure projects it supports. Leveraging comparative advantage in this space will go a long way towards ensuring that the right blended finance transactions are being executed, in the right places, in the right ways.

Do Not Overlook Local Capital

International capital markets would seem to offer some solutions for those in the development finance space seeking to mobilize additional money into the SDGs. The trillions it would take to close the annual SDG financing gap for developing countries is still a fraction of the global financial assets that are traded daily. But this capital is also very difficult to access for riskier investments in developing countries and LDCs. Institutional capital of this nature is looking for scale, predictable returns, replicable vehicles, and oft-invested markets.

This does not mean ignoring such markets, but it does mean not overlooking local capital markets. Many developing countries and LDCs simply do not have developed local capital markets. But where there are local capital actors, they may very well represent the appropriate sources of capital for a blended finance transaction. These sources of capital are often investing in safer bets, notably government bonds. So, a blended finance transaction with its first-loss cushion involving a local project can be quite suitable for a local bank to invest in. In addition, local capital can be deployed without incurring any foreign exchange risk.
One particular kind of investment where this can be impactful involves SMEs, specifically in LDCs. For SMEs in these markets to scale, their capital needs are typically between $50,000 and $1m. Of course, it doesn’t make sense to blend $50,000 at a time, which is why many blended finance structures designed to invest in SMEs typically blend different forms of capital in an intermediate vessel first (a financing facility or fund), which then makes smaller investments into SMEs.

A good example is Aceli Africa, a financing facility designed to improve local lending to agricultural SMEs in Africa. Once operational, it intends to do this by offering financial institutions cash incentive payments to defray the high operating costs, and a risk-sharing mechanism to reduce lenders’ exposure.

Reverse Engineer

Between the SDGs becoming mainstream and the increasing awareness of the impact investment market — the Global Impact Investors Network estimates the size of the market at just over $500bn — the desire for investment tools and products that provide return on investment and SDG impact is growing.

But to better entice the private sector, it’s critical for donors who are engaged in blended finance to adapt their products to the needs of the private sector. They need to look first at the type of investor they need to energise, understand the constraints on that investor type, and then mould, or reverse engineer, their own offering to those commercial requirements. Donors mostly have a fixed set of products and it falls to the private sector investor to figure out how and whether to use them.

UNCDF has been involved in two blended finance vehicles designed to invest in SDG-oriented projects in developing and least developed countries. One vehicle — the BUILD Fund — focuses on capitalising early stage companies and SMEs in LDCs. A separate vehicle — the International Municipal Investment Fund (IMIF), managed by the infrastructure investment and global asset manager, Meridiam; and created by UNCDF, United Cities and Local Governments and the Global Fund for Cities Development — is a bespoke fund. It is designed to focus exclusively on supporting cities and local governments; notably municipalities in developing countries, including the least-developed countries.

Both funds rely on first loss tranches to catalyse commercial capital into the mezzanine and senior tranches, which will be protected from early losses.

Blended finance is, by no means, a panacea to achieve the SDGs. But there is no path to sustainable development reaching the places with the greatest development needs without private capital, which will not be accessible unless an array of game changing tools is deployed.
Blended finance can be one of those game-changing tools, but only if it is utilised in a game-changing fashion. With 10 years to go until the 2030 deadline of the SDGs, there is little time to waste.

About the Authors

[caption id="attachment_15742" align="aligncenter" width="300"] Author: Joan Larrea[/caption]

Joan Larrea is CEO of Convergence Blended Finance, the global network for blended finance. It generates blended finance data, intelligence, and deal flow to increase private sector investment in developing countries.

[caption id="attachment_15743" align="aligncenter" width="300"] Author: Laura Sennett[/caption]

Laura Sennett is policy specialist with the United Nations Capital Development Fund, which makes public and private finance work for the poor in the 47 least developed countries.

About UNCDF

UNCDF offers “last mile” finance models that unlock public and private resources, especially at the domestic level, to reduce poverty and support local economic development. UNCDF pursues innovative financing solutions through: (1) financial inclusion, which expands the opportunities for individuals, households, and small and medium-sized enterprises to participate in the local economy, while also providing differentiated products for women and men so they can climb out of poverty and manage their financial lives; (2) local development finance, which shows how fiscal decentralization, innovative municipal finance, and structured project finance can drive public and private funding that underpins local economic expansion, women’s economic empowerment, climate adaptation, and sustainable development; and (3) a least developed countries investment platform that deploys a tailored set of financial instruments to a growing pipeline of impactful projects in the “missing middle.’’

About Convergence

Convergence is the global network for blended finance. We generate blended finance data, intelligence, and deal flow to increase private sector investment in developing countries, and accelerate advances in the field through our Design Funding Program to achieve development at scale. Convergence’s global membership includes over 200 public, private, and philanthropic investors as well as sponsors of transactions and funds. To learn more, visit www.convergence.finance.


Heidelberg University (CSI) on Financial Innovation: Unleashing Full Potential of Impact Investing

[caption id="attachment_15746" align="alignright" width="300"] Heidelberg University, Germany: Facade of the main building[/caption]

Many relevant fields and geographic areas are blank spots on the impact investing landscape, because they appear too risky or offer too low returns. If impact investing is to contribute to the SDGS, this needs to change. Financial innovation could be a way to work towards this goal. What we need are financial instruments that give social ventures more time than commercial ventures to mature, keep them on track and enable a long-term perspective through private and public interaction. We also need to find ways of combining investments to level out risk or return across fields or geographic regions.

Impact investing is meant to address the world’s most pressing problems.

In theory, this can work, when financial investors put social impact first and are willing to compromise on market returns. In line with this, there has been a gradual increase in the discourse that investments should be made for impact, and not only with impact.

The European Venture Philanthropy Association (EVPA) is spearheading this philosophy, but reality shows it is easier said than done.

Recent research has shown that impact investments for sustainable development are least placed in areas where they are most needed. A study of the Overseas Development Institute (ODI) shows that blended finance is least active in countries with low (or no) credit ratings.

An investigation by the OECD has shown that the amount of private finance tends to be lower in regions marked by social fragility and security issues. But if such countries and regions remain blank spots on the impact investing landscape, the market’s transformative potential in view of the Sustainable Development Goals (SDGs) is seriously hampered.

Similar, if less dramatic, observations can be made of social investments in industrialised countries. Social impact bonds — whose “bond” designation has been criticised, since they are actually private-public funding and service partnerships — often focus on areas where potential state savings are biggest, or where outcome achievement is easily monitored.

This is the case for work-integration enterprises or resocialisation programmes for prisoners. The Peterborough Prison social impact bond in the UK, for example, has become known as a world first. Areas with lower (indirect) financial returns and higher risk, such as interventions on homelessness or drug addiction, appear less attractive.

Equity investments, in a less-than-transparent market, often focus on social tech ventures, such as digital health platforms, or sustainable consumer goods, such as edible straws. These may become financially self-sufficient efficient in a reasonable timeframe. Ventures that will take a long time to succeed on the market — or will always be based on a hybrid income model consisting of earned income, subsidies and donations — are often ignored.

These could be innovative neighbourhood-support or shared economy models, or interventions that prop-up cultural exchange and address extremism. Given the challenges of individual isolation and newly resurgent cultural conflicts, most would agree that effective action in these areas is needed.

Both observations taken together show that there is a de facto exclusion of a large range of fields and geographical areas for impact investing. If we care about making impact investing a tool for moving towards the SDGs, this should concern us.

The question is, how can impact investing unleash its full potential?

One answer is: by promoting financial innovation. We need structured, mezzanine finance products, which enable the involvement of private and public investors, introduce a long-term perspective, and contribute to risk-sharing.

At the level of individual deals, if investors want to give investments a chance that are high-risk, low-return, but of high societal importance, two options in particular should be considered.

The first is to employ mezzanine instruments that combine a loan, equity and/or bond logic. Ventures would initially receive a loan at a below market return of x percent. Only after break-even would this be topped-up by an equity component for the investor, or by a fixed-income component of y percent to be delivered by the investee.

The achievement of predefined social impact key performance indicators (KPIs) by the venture would be rewarded by no additional financial return expectations. Missing them, for example due to “mission-drift, would be “punished” by an additional return expectation of z percent.

Such an instrument protects the start-up phase of a venture and keeps it on track for its social mission, while satisfying social and financial return expectations. The Financing Agency for Social Entrepreneurship (FASE) reports that their use is becoming more common.

Secondly, investors could seek strategic partnerships with foundations or governments. Foundations, based on their prosocial mission and high endowment, might be willing to offer first-loss guarantees, giving the ventures more time to sustain themselves and buffer investor risks.

Governments might, in the medium- to long-term, enable financial sufficiency for a non-market venture through introducing a service into public contracting on regulated quasi-markets for social services.
For specific fields, industries, or geographic areas, structured financial products could help achieve viable risk-return profiles. Investments could be combined across regions, where more stable ones provide a counterbalance to those that are less stable, levelling out the overall risk. They could also be placed within a region but across fields, so that for example market rate return investments in booming areas, such as green tech, would help fund empowerment.

The structured investments mentioned here could be designed like Asset Backed Securities (ABS), which got notoriously prominent because of their role in the past financial crisis. However, instead of being driven by high-return expectations — via the restructuring of low-risk products into high-risk derivatives — they level-out risk (or return) to a moderate degree. A positive side-effect could be the potential aggregation of many smaller scale investments to make them attractive for institutional investors, such as Germany’s Ananda Ventures, which typically aims for deals above €500k.

These are only a few options, but I believe they could be crucial for getting impact investing into areas where it is most needed. Investors, market-shapers and intermediaries should consider them, and if they already employ them, share their experiences.

Next to the structural barriers discussed here, our lack of knowledge about players and deals in impact investing is the second-biggest challenge in the path towards the SDGs. i

About the Author

[caption id="attachment_15747" align="aligncenter" width="277"] Author: Gorgi Krlev[/caption]

Gorgi Krlev holds a PhD from Oxford University (Kellogg College). He is a postdoctoral researcher at the Centre for Social Investment (CSI) at the University of Heidelberg. His research focuses on social finance, impact, entrepreneurship and innovation. The book, Social Innovation — Comparative Perspectives, won the Best Book 2019 Award of the Public and Non-profit Division of the Academy of Management (AOM). He can be found on Twitter @gorgikrlev.

About CSI

The Centre for Social Investment is a research centre at the Max-Weber-Institute for Sociology in the Faculty of Economics and Social Sciences of Heidelberg University. It is an interdisciplinary centre for research, education and training.


Saying No to China

What had originally been announced as a series of conferences followed by a high profile summit in Leipzig to seal and celebrate a landmark investment agreement between the European Union and China, was downgraded to an online chat between EU Commission president Ursula von der Leyen and President Xi Jinping. The pandemic intervened, as did Hong Kong and a series of other irritants that prompted Brussels to re-evaluate its relations with Beijing.

During the video conference taking place today, obligatory diplomatic niceties will be exchanged: both parties are expected to express an interest in ironing out minor differences and work towards closer cooperation. That said, business is to be concluded without so much as a fig leaf for appearances’ sake. The European Union is not about to be caught out on a limb offering or denying the Chinese trade and investment deals without knowing who, if anyone, is in charge in Washington.

It took seven years of negotiations to conclude that there is no chance of the highly anticipated investment agreement being reached anytime soon. The biggest stumbling block has been China’s reluctance, or downright unwillingness, to restructure the state-owned segment of its economy. Time and again, Chinese negotiators promised their EU counterparts reforms to be enacted at some point in the future without, however, offering a firm timeline or any other specifics.

This foot dragging alone would have been enough to dissuade the EU from investing too much effort in cementing an investment deal. The suggestion to allow a select number of larger EU corporations privileged access to the Chinese domestic market was brushed aside as impractical, unfair, and insufficient. “Such marginal concessions add no real value and have convinced Brussel that no investment deal is to be preferred over a bad one,” says Andrew Small, China expert at the European Council on Foreign Relations thinktank.

And then the corona pandemic happened. Diplomats in Brussels have been astounded at Beijing’s willingness to wield its raw geopolitical power during the emergency to muzzle civic freedom in Hong Kong and impose the controversial new security law it redacted on the former British colony. The EU has also noted how China used the pandemic to almost cynically improve the country’s international standing by extracting maximum propagandistic value from the supply of mostly faulty and subpar medical goods to member states struggling to contain the viral outbreak. The suppression of op-ed articles written by EU leaders and officials in Chinese media has also been noted.

The pandemic has accelerated a shift in EU foreign policy away from mere trade considerations and towards a more comprehensive approach that also includes human rights and, crucially, geopolitical concerns. Thus, Brussels prepares to flex its own muscles and shape a less altruistic foreign policy that affirms, and exploits, its power. The notion that, given time and encouragement, China might come to resemble a true market economy and inch towards a democracy, has been formally ditched. For the EU, China will henceforward be judged on its merits and no longer on wishful thinking. It is why President Jinping will have to make-do with a video conference carefully choreographed to prevent him from claiming any sort of victory or breakthrough.

The EU’s first sustained foray into global geopolitics seeks to fill the space - if only momentarily - left by the United States. Brussels must consider the possibility, horrifying to many, that President Donald Trump may yet secure a second term in office, forcing the EU to replace the US on the world stage as the keeper of liberal democratic values.

The present diplomatic balance is markedly different from the one following the 2009 banking crisis when the EU also feared that China would use the downturn to strengthen its presence. Though Chinese companies and investors did snap up a port in Greece, a few public utilities in Portugal, and some real estate elsewhere, it was not felt that the country had abused its power or tried to undermine the EU’s own standing. Beijing coordinated nearly all its moves with Brussels and showed a deference that was much appreciated at the time and bought the country a considerable degree of goodwill.

President Jinping follows a markedly more aggressive policy and barely tries to disguise his government’s determination not to waste the current crisis - and the power vacuum left by the US after that country entrusted its foreign and trade policy to ideologues, rogues, and amateurs. The EU seems no longer willing to turn a blind eye whilst China expands its influence by showering smaller Eastern European member states with investments under the Belt and Road Initiative (BRI). The Commission in Brussel was barely able to mask its shock and surprise when Italy formally joined that initiative last year.

China’s expertise in forging bilateral deals with weaker member states angling for its money, patiently chipping away at Brussels’ own influence, has backfired: belatedly, the Commission has come to realise the danger of indulging Beijing and treating China as an up and coming global power looking to occupy its rightful place on the world stage. That naiveté is now passé and the kid gloves have come off.

Earlier this month, EU High Representative for Foreign Affairs and Security Josep Borell called on member states to display a ‘collective discipline’ when dealing with China. The European Commission and a number of individual member states such as Germany, Denmark, and The Netherlands have already enacted measures to protect their businesses against hostile or uninvited takeovers by Chinese companies acting as a front for state-owned enterprises. The Commission is finalising a set of three complementary measures to protect European intellectual property and business interests.

The new legislation currently under consideration is primarily meant to give member states an option to turn away China by invoking EU rules, saving them the embarrassment of offending Beijing outright. ‘Go talk to Brussels’ is the new way of saying no to China.


Taking Underground Approach to Carbon Neutral Heating for Homes

[caption id="attachment_15783" align="alignright" width="300"] Kathy Hannun[/caption]

Limitless carbon-neutral energy is right under our feet, says Kathy Hannun, the co-founder and president of geothermal giant Dandelion Energy.

While geothermal usually means magma-driven energy projects, Dandelion focuses on the Earth-powered heating and cooling of homes. Dandelion residential geothermal systems allow heat exchange by circulating a water solution through a closed-loop deep underground, where the temperature remains a steady 13 degrees Celsius. A fan system enables homeowners to regulate the temperature by pushing or pulling that heat.

Dandelion has a two-fold mission: to help homeowners slash energy costs, and to reduce carbon emissions. The company chose New York as its base and is eager to aid the state in its climate action commitments. In the north-east of the US, winters can be brutal and natural gas hard to find; burning fuel oil is a necessary evil for many residents. The heating and cooling of homes accounts for 25 percent of New York’s carbon emissions, but Hannun’s solution is a more cost-effective and carbon-conscious alternative.

Hannun was working as a product manager and Rapid Evaluator at Google’s Alphabet’s X lab when she started exploring the technology behind geothermal energy. She developed the idea with a colleague, James Quazi, and the two launched Dandelion as a spinout company in 2017 — Hannun as CEO, and Quazi as CTO.

“We saw an opportunity to do something — to innovate in a way that is beneficial for homeowners who are spending a tremendous amount on heating and cooling, as well as for the environment,” Hannun told Fast Company, which named her one of its 100 Most Creative People of 2018.

Dandelion’s geothermal systems release a fifth of the carbon emissions produced by fossil fuel-based systems, and can reduce energy bills by 50 percent, a win-win for people and the planet. Geothermal energy is safer than fossil-fuel systems, requires little maintenance, and makes little noise.

The technology for geothermal energy has been around for decades, but installation costs and complexity have made it a luxury product for a niche market. Before Dandelion, residential geothermal systems would cost about $50,000 — and those who could were happy to pay it. Hannun, a civil engineering and computer science graduate, was determined to bring geothermal to the masses, and she has done just that.

Dandelion has revolutionised the market with a geothermal installation offer for around $20,000. To put that price in perspective, a central air conditioner and gas furnace with all the ductwork costs anywhere from $6,500 to $12,500. The Dandelion system can be purchased with cash or via financing.

Hannun credits the solar industry for paving the way. “Because of solar, we have consumer loan products that allow you to finance products for your home over 20 years with zero money down,” she says. “So, for homeowners who choose to purchase geothermal with a loan, they come out cash-flow positive. That sort of loan product didn’t exist before solar, so we couldn’t have offered it and overcome that cost barrier for consumers.”

Apart from warming-up investors and moving legislation, the solar industry has attracted — and trained — some top tech talent. Hannun isn’t above poaching a worthy candidate for the team. Dandelion’s head of operations, Danny Rubin, previously managed the workforce, permitting and logistics of solar operations in the north-east.

“We’re so lucky that we can just take somebody that grew up with the solar industry and then apply them to this problem,” Hannun said.

Hannun counts herself lucky to have found favour with investors as well, and recently announced the close of a Series A-1 funding round that pushed total investments up to $35m. In the press release, she referred to 2019 as a “breakthrough year for Dandelion and residential geothermal”, during which the company tripled its workforce and customer base.

“Humankind’s dependence on fossil fuels is leading us in the direction of global instability and environmental ruin,” Hannun told Forbes. “If we can work to make our energy sources clean and renewable, we will be in a much better position to succeed as a species. From my perspective, this is the defining problem of our generation.”


Grupo T-Solar - The Generation Game: In 2020, That Means CSR, Environment, Efficiency and Opportunities for All Employees

Grupo T-Solar – a leading independent renewable power producer and asset manager – generated more than 595 gigawatt-hours (GWh) of clean electricity in 2019.

[caption id="attachment_15792" align="aligncenter" width="566"] Archidona PV plant[/caption]

The company has an enviable record in the development and operation of renewable power plants – 53 of them – with almost 400 megawatts (MW) of installed capacity in Spain, Italy, Peru, Japan, USA and India.

Grupo T-Solar focuses on the European market, with 92 percent of its assets in Spain and Italy. Including recent divestments in Japan and US, the company manages more than €1.9bn in renewable assets.

T-Solar is a vertically integrated platform with extensive, long-standing, in-house expertise across the value chain: development, financing, construction management, project management, and operations of solar (PV and CSP) powerplants.

An experienced and well-qualified management team controls the development, financing, management and operation of energy assets.

A cohesive 35-strong T-Solar team – engineers, business administrators, lawyers and financial experts – has been working together for 13 years to achieve these results.

Grupo T-Solar has broad experience in setting-up new business and developing new markets and projects, with recognised achievements in all the key areas of renewable business.

It has a strong international profile with experience in markets including Spain, Italy, the US, India, Japan, Peru, Puerto Rico and South Africa. Deep technical knowledge of renewables – in particular solar technology – has focused on project development and the optimisation of operational and financing structures.

Grupo T-Solar Asset Portfolio

Since 2008, Grupo T-Solar has positioned itself as an independent renewable energy leader with a develop-to-own strategy. The objective is to maximise value from its existing portfolio and develop a pipeline of utility-scale projects – while retaining operational and financial discipline.

“We want to consolidate and strengthen our presence in the renewable energy markets through the investment in high-quality projects increasing our current installed capacity,” says CEO Marta Martínez.

[caption id="attachment_15793" align="aligncenter" width="986"] Spain: Arnedo PV Power Plant[/caption]

Group with a Mission

Grupo T-Solar concentrates its efforts and business activity on solar energy, one of the most important, affordable and clean energy sources on the planet. It achieves this through continuous investment effort and collaboration with reliable partners. It remains committed to the development of a sustainable business in accordance with the highest ethical, moral and legal standards.

The vertically integrated platform offers extensive in-house expertise across the value chain. A disciplined approach to the acquisition of portfolios under operation, and the development of new projects, has led to attractive returns. “We focus on optimising operational and financing structures that deliver consistent dividend,” says Martínez. “To achieve those objectives, we leverage our relationship with Tier 1 suppliers and financing institutions.”

[caption id="attachment_15794" align="aligncenter" width="849"] Italy: Constantino Paradiso PV plant[/caption]

Energy Management Centre

Grupo T-Solar has developed an energy management centre (EMC) to conduct remote monitoring and operation of its power plants. The EMC is the core technical asset of the organisation, providing real- time 24/7 monitoring and remote control of powerplants worldwide from a centralised location.

It is equipped with the latest computing technology and a reliable telecommunications infrastructure to keep track of each plant’s performance. Additionally, the EMC is accredited by the grid operator in Spain (Red Eléctrica de España) to provide control-centre services The continuous follow-up and improvement of the powerplants’ performance keeps energy production at the optimal level and, at the same time, guarantees the return of the investment in the long term.

The improvement of plant availability through the early detection of failures assures the highest energy production levels.

Analysis of historical data optimises current performance and influences the design of new projects. There is also real-time, around-the-clock security surveillance through cameras and intrusion-detection mechanisms.

Grupo T-Solar’s CSR efforts are concentrated in a fight against climate change, and form a core part of the group’s corporate strategy. It has implemented an audited Environmental Management System and has programmes focused on reforestation, biodiversity and habitat protection.

Energy efficiency, sustainable resource planning and material optimisation initiatives are standard features of the organisation.

Grupo T-Solar is committed to local communities, and has implemented social initiatives and annual activities. The Social Support Fund in Peru, created in 2011, improves education in the area of the direct influence of the Majes and Repartición solar plants.

Grupo T-Solar also supports initiatives to provide access to drinking water, business training projects for young students, and academic research and training projects. It sponsors events to promote human rights with various NGOs, awareness of climate change, and – in 2020 – works with PICE Network for Energy Consumers to avoid energy poverty in Spain.

Committed to Employees

Grupo T-Solar promotes personal development plans, gender equality, and social volunteering action among its employees. The main initiatives for employees are the equality and conciliation initiative (efr), the talent development programme, coaching and team-building activities, and the group’s Health & Wellbeing programme.

United Nations Global Compact Initiative

The company is a signatory to the UN Global Compact Initiative, committed to promoting and implementing universally accepted principles in the areas of human rights, labour, environment and anti-corruption. It publishes and presents a Sustainability Report containing the progress of the implemented programmes and measures.

Meet the T-Solar Team

[caption id="attachment_15789" align="aligncenter" width="188"] CEO: Marta Martínez[/caption]

Marta Martínez is the CEO of T-Solar. She is an entrepreneur: co-founder of the telecommunications company Comunitel in 1998 (currently part of Vodafone) and of T-Solar in 2007. She started her career at PwC and held various management positions in the financial area of the automotive group Peugeot-Citroën.

Martínez specialises in developing and financing projects, and in M&A transactions. She became T-Solar’s chief executive in 2011 and was responsible for the firm’s internalisation process, currently present in six countries.

Marta Martínez is certified by the Spanish Board Directors Association (IC-A) in Good Corporate Governance.

“As an experienced manager and entrepreneur,” she says, “my goal is to detect business opportunities, create optimal conditions for their development, mitigating the risks and leading the teams to engage and deliver.

“To achieve the best results, we need the full involvement of the team. Creating an inspiring environment is the mission of every manager. This participative leadership is my contribution to the project, and it’s aligned with my way of being and thinking.”

Martínez is skilled in financing, M&A, processes definition and implementation, strategy, leadership and corporate governance. “I consider myself a lifelong learner, constantly embracing changes,” she says.

[caption id="attachment_15788" align="aligncenter" width="196"] M&A & Business Development Director: Enrique Barbudo[/caption]

Enrique Barbudo is the M&A and business development director of Grupo T-Solar Global. He started his career in the telecommunication division of Siemens in Germany, and during his 15-year tenure he held technical, sales and business development positions. He also worked for Cisco Systems. Barbudo was a co-founder of T-Solar in 2007, responsible for business strategy implementation and the company’s international expansion leading project development until commercial operation date.

[caption id="attachment_15791" align="aligncenter" width="193"] O&M Director: Jose Benito García[/caption]

Jose Benito García is the O&M director at T-Solar. He started his career at Union Fenosa group in the field of the operation and management of powerplants. He later joined GdF Suez group (now Engie), responsible for co-generation plants. He joined T-Solar in 2008 and created the O&M department. He manages the operation of PV and CSP plants in Spain, Italy, Peru, the US, India and Japan. He has participated in the development and construction of renewable energy projects. He has in-depth knowledge of the legislative, technical, financial, contractual and administrative requirements and experience in the negotiation of large EPC and O&M contracts, as well as PPA agreements.

[caption id="attachment_15790" align="aligncenter" width="195"] CFO: Manuel Fernández[/caption]

Manuel Fernández has been CFO of Grupo T-Solar since August 2017, in charge of the group’s overall financial management, embracing market related functions (trading, investments, structured finance and investor relations) as well as administration and control (accounting, planning and reporting, controlling, tax, and risk management). Fernández has a diverse 25-year professional background in capital-intensive sectors: chemicals (Dow Chemical Company), renewable energy (Torresol Energy and Sunedison), Infrastructures (Red Eléctrica). He has worked in Western Europe, the US, Latin America and the Middle East. Fernández is at ease in corporations from multinationals to start-ups.

He is an expert in negotiation and execution of complex financial operations, a a member of the group’s Management Committee and a director in multiple affiliated companies. His role frequently exposes him to the highest level of decision-making bodies in the T-Solar Group of Companies (board of directors, general shareholders’ meetings, and audit and investment committees.

[caption id="attachment_15787" align="aligncenter" width="191"] Legal Director: Elena Herrero-Visairas[/caption]

Elena Herrero-Visairas is the legal director of T-Solar. She is responsible for corporate management, legal and compliance advice and is the group secretary.

She has more than 20 years’ experience in domestic and international law. Before joining T-Solar in 2007, she worked for international law firms, starting her career at MFB in London, then moving to Stephenson Harwood and DLA Piper in Madrid, where she worked in the transport and energy sectors.

Elena Herrero-Visairas set up the T-Solar legal department in 2007, providing legal support for the business development strategy. She has expertise in corporate management, financing and M&A of energy projects. She designed and implemented the company’s compliance programme.


Pandemic Gives Boost to Illicit Trade

[caption id="attachment_15852" align="alignright" width="414"]https://cfi.co/organisations/un/ WISeKey CEO: Carlos Creus Moreira[/caption]

A corrosive agent in many guises that threatens public health, depresses growth, undermines good governance, and degrades the environment, illicit trade permeates global society and stunts development. It now represents an estimated 3.3 percent of the world economy. Though that may seem a modest share, illicit trade is still growing, challenging governments, private businesses, and consumers alike whilst deploying new technologies to circumvent regulation and exploit opportunities.

During the first of a webinar series on illicit trade organised by Geneva-based WISeKey, a leading cybersecurity company, in conjunction with the Zermatt Summit Foundation and the OISTE Foundation, speakers from both multilateral entities and multinational corporations explored the ways in which illicit trade affects the implementation of the sustainable development goals (SDGs) as defined by the United Nations in 2015. They also discussed the use of new technology to combat illicit trade.

Teresa Moreira, head of Competition and Consumer Policies at UNCTAD, confirmed that illicit trade directly threatens a number of SDGs and calls for a multi-stakeholder approach such as public-private partnerships (PPPs). Last year, UNCTAD launched an illicit trade forum in an attempt to promote solutions across different vectors: “Annually, about $2.3 trillion is drained from the global economy. This endangers not just public health but also hurts the environment and results in job losses due to unfair competition.”

The current corona pandemic has refocussed attention on non-regulated forms of commerce as rogue entrepreneurs were quick to meet a surge in demand for personal protective equipment and other medical supplies with fake or subpar goods. Jeffrey Hardy of the Transnational Alliance to Combat Illicit Trade pointed out that a lack of public awareness is hampering efforts to fight this form of organised crime: “A lot needs to change and it remains an uphill battle. Illegal operators have seized the moment as authorities were distracted by the pandemic and consumers turned to online shopping during lockdowns, becoming easy targets. Branch protection efforts were reduced with criminals enjoying a holiday of sorts. Also, shrunken incomes have driven consumers towards cheaper counterfeit products.”

Juhani Grossmann of the Basel Institute of Governance noted that during the pandemic, mafias have moved to replaced the state in places where governments were unable to provide adequate assistance: “Trust in government is steadily decreasing. Illicit trade adds to the momentum as it can only thrive through corruption.” A specialist in the illegal widlife trade, Mr Grossmann expects illicit cross-border trade to flood markets once the pandemic has receded and restrictions are lifted: “Increased levels of poverty will cause more people to turn to poaching for a supplementary income. That is already happening with stockpiles of illegal wildlife products accumulating and waiting to find a way to the end consumer.”

Bruno Massier, president of the World Trade Point Federation, is particularly worried about that ‘last mile’ where the illicit trade meets the consumer: “The shopping experience no longer includes a trip to a nearby store, but has moved online. Illegal goods now reach the buyer by mainstream commerce platforms. Though giant retailers such as Amazon and Alibaba make every effort to ensure the legitimacy of the trade conducted on their websites, it is not enough to effectively stem the flow of illicit goods. In order to do that, stakehodlers need to cooperate and coordinate their policies.” Mr Massier proposes, amongst others, to vastly improve digital identification and validation protocols and processes akin to those introduced in the financial sector after 9/11 terror attack: “We propose to add e-commerce to the list of transactions that require a solid digital id validation procedure.”

Philip Morris International (PMI) has already deployed the power of big data and digital ledgers to track and trace every single pack of cigarettes the company sells in a growing number of European jurisdictions. Alvise Giustiniani, PMI vice-president in charge of illicit trade prevention, explains that the recently introduced system leaves indelible ‘fingerprints’ that allow the company to track its product from the moment it is manufactured to the moment it is bought by the end consumer. “It is still a cat and mouse game, but our approach allows us to help catch criminals and creates transparency. The underlying philosophy is that, contrary to a person, a machine cannot be corrupted.”

During Thursday’s webinar, Christopher Wasserman of the Zermatt Foundation sounded a contrarian note by suggesting that illicit trade is merely a consequence of malfunctioning economies: “I tend to focus on ways to perfect legitimate trade. Technology has a big role to play but must serve a specific purpose. After the financial crisis of 2009, we started to think of new ways to organise the economy, placing people at the centre. Fintech and the financial sector must serve the broader economy which in turn must contribute to the common good that ultimately benefits each individual.”

Host and WISeKey CEO Carlos Creus Moreira noted that there is a great and urgent need to form partnerships to effectively fight illicit trade. Mr Moreira is particularly encouraged by the possibilities emerging as the Fourth Industrial Revolution gathers steam. All participants agreed on the need to forge public-private partnerships to push back against organised crime and illicit trade.

WISeKey develops technology that serves people and puts the human dimension centrestage, building a future that celebrates and empowers ‘human grandeur’. The company helps design and build the smart infrastructure that promotes equal high-quality access to technology whilst ensuring privacy and security.