Christopher Colford: Speed Bumps Along the Road to Competitiveness

Egypt’s Self-Inflicted Limits on Economic Efficiency.

It’s an axiom of economic policy: The future belongs to the efficient. In a relentlessly competitive global marketplace, those who manage to get just one step ahead of their rivals are destined to gain outsized rewards. Competitiveness requires policymakers to adopt efficiency-focused “rules of the road” that remove obstacles, accelerate innovation, mobilize capital, liberate ideas and speed goods to market.

That’s a universally accepted principle, right? I certainly thought so – until I hopped into a car in Egypt and began traveling the country’s highways.

Granted, we’re not talking about a rational environment here: This is more akin to a near-anarchy of motorised chaos. Egypt’s every-man-for-himself roadways are notorious for their mayhem. Traffic accidents, vehicle repairs and highway deaths reportedly reduce the country’s GDP by about 3% annually – an enormous drag on the competitiveness of a struggling economy that can ill afford any additional woes.

[caption id="attachment_7577" align="aligncenter" width="607"] The old party headquarters (left) of ousted autocrat Hosni Mubarak, along the Nile River near Tahrir Square in Cairo. The buildings were looted and burned in January 2011 during the early stages of Egypt’s revolution.[/caption]

So perhaps I should have been prepared for the highway bedlam that I experienced during my travels in Cairo and Giza last winter and during my explorations this spring around a broad swath of the Nile Delta region. You haven’t fully experienced traffic-jam frustration until you’ve endured the anarchy of Egypt’s roadways, where every vehicle known to humanity – from the humble donkey-cart to the most stylish limousine, from the most aggressive “tuk tuk” taxi to the most overladen multi-unit freighter – contends ruthlessly for every last centimetre of scarce road space.

Bumps in the Road

Yet the mind boggles at one of Egypt’s self-inflicted impediments to mobility and efficiency: the ubiquitous use, on roadways large and small, of the speed bump – smack-dab in the middle of major highways, forcing free-flowing traffic to come to a screeching halt.

Focusing on strengthening urban productivity – analysing economies through the lens of the “competitive cities” approach, which weighs the many factors that contribute to metropolitan-level dynamism – I’ve come to see Egypt’s use of the speed bump, even on what should be top-speed superhighways, as a metaphor for the country’s deeply troubled competitive position.

“Mercilessly effective in forcing traffic to slow down, unmarked speed bumps are built into Egypt’s highways at unpredictable intervals.”

Initially, I hesitated to write about the speed-bump factor – dreading that, as just an occasional visitor to Egypt, I might be overgeneralising, based on travels mostly on the Cairo region’s traffic-choked roads. But amid my most recent travels in additional regions, I continuously observed the same speed-bump phenomenon – around the Nile Delta city of Mansoura and then up toward Damietta, and around smaller towns like Talkha, Markaz Sherbin and Bilqas. The speed bump is clearly a widely used Egyptian traffic-management tool, inspiring wonderment and begging for further analysis.

Mercilessly effective in forcing traffic to slow down, unmarked speed bumps are built into Egypt’s highways at unpredictable intervals. They require drivers to be ever-vigilant, for fear of bottoming-out their cars and ruining their transmissions. Just to clarify: Egypt’s speed bumps are not like the modest, inches-high humps that decorously restrain drivers in suburban European or North American cul-de-sacs: We’re talking about major-league obstructions in the roadway.

On otherwise modern superhighways around places like Sheikh Zayed City and 6 October City in the Giza governorate – where urban planners are creating modern cities in the once-empty desert, hoping to relieve some of the pressure on overcrowded Cairo – traffic must come from mile-a-minute cruising speed to a near-standstill when drivers spot each tall, unpainted speed bump. On the narrower north-south highway paralleling the Nile River, where passenger cars must already contend with heavy trucks trundling to and from Mediterranean ports, drivers’ wariness of stealthy speed bumps is an added factor slowing traffic to an exasperating crawl.

The Pharaoh Within

[caption id="attachment_7580" align="alignleft" width="198"] In a dusty desert town in Egypt, I happened to run across a local example of the practical impact of international assistance to developing countries. A prominent plaque on the courtyard wall of the Al-Saida Preparatory School in the town of Markaz Sherbin declares, “This school has been established in co-operation with [the] World Bank.”[/caption]

Why the speed bumps – along major traffic arteries, no less? As Egyptian friends explained to me, most Egyptian drivers routinely ignore any posted speed limit – and, it seems, just about every other attempt at traffic regulation. “When we climb behind the wheel,” I was told, “we discover that there’s a little bit of a Pharaoh within all of us.”

In a desperate effort to reduce accidents and highway fatalities, the system of unpredictable, unmarked speed bumps can achieve what even a battalion of traffic cops could never accomplish: enforce slower speeds.

Insidious by day and invisible at night, the speed bumps are a potentially ingenious traffic-control tool – yet their side effects can inflict a jolting impact even on cars with skilful drivers. Woe to any car (like mine) that fails to anticipate a looming speed bump, even at moderate speed: The impact on a car’s suspension and transmission – and its passengers’ spines – can be shattering.

We accidentally took the full-on impact of a speed bump near the town of Mit Ghamr – wrenching our car’s front brakes out of alignment for the remainder of the week, and forcing us to wonder whether, in case of an emergency, the scraping-and-grinding brakes might fail.

Self-imposed speed bumps along the arteries of commerce, it strikes me, are a useful metaphor for what ails so many economies. Societies sometimes resort to deliberate and self-limiting policy interventions to bring some rationality to human behaviour in various civic pursuits – not just in regulating something as straightforward as traffic, but in restraining the most complex areas of the pell-mell modern economy. Since individuals cannot always be trusted to obey the agreed-upon social contract, societies often resort to imposing quasi-irrational speed bumps on behaviour – restraints that can, cumulatively, become a debilitating drain on efficiency.

Sub-optimal Restraints

We tolerate convoluted tax policies to try to socially redistribute some wealth, aiming to compensate for the tendency toward ever-greater inequality that – as Prof. Thomas Piketty of the Paris School of Economics has conclusively proven – is an inherent problem within modern-day capitalism. We condone a patchwork of narrowly targeted investment incentives, aiming for idealistic outcomes, yet often merely reward rent-seeking oligopolies and political cronies. We sometimes enforce hair-splitting antitrust standards to limit the threat of monopolistic abuses, yet we allow corporate incumbents to dominate vast and economically strategic industries. We enact full-disclosure regulations and anti-insider-trading safeguards to prevent dishonest dealing in securities markets, yet we wink at split-second trading platforms that give decisive advantages to hair-trigger traders armed with privileged data. We impose tariffs and quotas to protect uncompetitive local industries from more efficient international rivals, yet posturing free-market fundamentalists claim (especially in the United States) that we’d never even think of adopting any sort of strategic “industrial policy.”

Safeguards are vital, to be sure – but at what cost to efficiency and productivity? Such metaphorical speed bumps often succeed in slowing economic traffic, but they can also skew incentives, provoke resentful non-compliance and disrupt the “just-in-time” delivery of goods to market. Moreover, excessive restraints – especially those that reinforce the privileged status of entrenched incumbents – can interfere with the mobilisation of capital for far-sighted investment, impede the liberation of ideas for innovation, and undermine confidence in markets’ fairness.

In the relentless global economy – which champions efficient competitors and condemns low-productivity pursuits to oblivion – society’s speed bumps must be continually reconsidered and recalibrated. As nations’ competitiveness evolves, policymakers must continually re-think whether yesterday’s improvisations can effectively deliver tomorrow’s solutions. Familiar social-welfare mechanisms can sometimes become outdated; longstanding tariff barriers can outlive their usefulness; anachronistic provisions in the tax code can become counterproductive; chronic dependence on subsidies can distort markets more than promote inclusion.

Crying Out for Reform

For policymakers, some of the social speed bumps that we have imposed on our economic landscape cry out for reform; others may remain tolerable, despite the economic toll they inflict. That’s where public-spirited politics and good governance enter the picture.

The challenge is to get the balance right in today’s hyper-speed global marketplace that is ever-eager to exalt successful competitors and expunge economic laggards. Continuously adjusting those wise restraints that enhance social fairness, and recalibrating those tolerable trade-offs that promote shared prosperity, is a perpetual test of “the art of the possible.”

Coming back to the context of Egypt and its speed bumps, both literal and metaphorical: My hunch is that, just as Cairo’s motorists will have to continue to negotiate highway speed bumps long into the future, Egypt’s would-be job-creators and innovators will have to continue to confront their society’s built-in barriers – fiscal, regulatory, political, social and behavioural – that collectively impede the country’s economic performance.

Building city-focused competitiveness seems to be the most promising place to seek workable solutions to grand-scale economic challenges. For policymakers in Egypt, and in every country, strengthening competitiveness at the urban level may be the surest way to help make national economies more vibrant and productive.

The world’s emerging megacities are destined to be the engines of the global economy. Concentrating on building competitive cities offers insights that can help policymakers analyse policies that optimise productivity. The focus on urban competitiveness can also offer us new perspectives on the socioeconomic speed bumps that are bound to pop up, rationally or irrationally, along the road toward the destination that we’re all seeking: a world where we have, at last, eliminated extreme poverty and built shared prosperity.

About the Author

Christopher Colford is a speechwriter and editor at the World Bank in Washington, D.C. He was previously a consultant at Hill & Knowlton Public Affairs Worldwide and a senior editor at McKinsey & Company.


CFI.co Meets the CEO of Travant Capital Partners: Sanyade Okoli

Sanyade Okoli returned to Africa in 2006 following nearly two decades of living in the United Kingdom. She was driven by a strong passion to play her role in the development of Africa and was highly optimistic about the “emerging Africa” story at the time.

Mrs Okoli joined a team of highly experienced finance professionals to establish Travant Capital Partners in 2007 after initially working with Ocean and Oil Holdings, a leading principal investments company based in Nigeria.

A key strategic objective of the Travant founding team was to revolutionise the growing Nigerian investment landscape based on skills and experience acquired over decades of working in some of the world’s leading investment banking, professional services, and multi-national firms.

The team was determined to harness opportunities within the nascent private equity market in Nigeria at the time, which had hitherto been dominated by a few players, and established the Travant Private Equity Fund I (TPEFI), which successfully raised over $100 million in capital commitments by its first close in 2008.

Mrs Okoli’s doggedness, management skills, and determination to achieve results proved critical in navigating the company through difficult times following the contagion effects of the global financial crisis and the exit of several key members of the Travant management team. These were in addition to several other challenges faced by the business as a result of systemic issues faced by the Nigerian financial services industry in 2009 and a general economic downturn.

These challenges necessitated a shift in the company’s previous strategy and business model which resulted in the emergence of Travant’s financial advisory practice as the firm secured mandates from some of the biggest players in the Nigerian financial services industry during the period. Mrs Okoli notes that “in order for Travant to survive the downturn, we had to embrace innovation and display tenacity. Where others folded ignominiously, Travant Capital managed not merely to survive, but to prosper.”

Mrs Okoli openly expresses her passion and optimism about private sector development on the continent and believes creating innovative home-grown solutions is critical to unlocking Africa’s growth potential. She is determined to demonstrate tangible success stories to further emphasise the possibilities that exist across the continent and observes that “only a few overseas investors understand it takes both local knowledge of existing business culture as well as expertise to invest successfully in Africa.”

Despite a well-balanced understanding of the significant challenges experienced by entrepreneurs and investors doing business in the local environment, Mrs Okoli remains optimistic about creating truly sustainable businesses that are able to compete on a global scale and continues to stress that there are several business sectors that offer excellent growth prospects.

As part of ongoing efforts to help bring about this change, Mrs Okoli has overseen Travant’s transition into a full-scale financial, business, and investment advisory practice and is also passionate about assisting in the growth of Africa’s small and medium scale enterprises (SMEs).

Travant recently established an SME development practice along with its other service offerings which is targeted at businesses with strong growth potential. Mrs Okoli provides strategic oversight of Travant Capital’s financial and business advisory practice. She executes mandates for both private and public sector clients covering mergers and acquisitions, capital raising, debt restructuring & sustainability, business transformation, and public private partnership advisory, etc.

Under her leadership, Travant also actively explores investment opportunities in Nigeria and other countries in West Africa as part of its strategy to become a reference point for entrepreneurial investments within the West African sub-region.

Mrs Okoli has held management positions in both the United Kingdom and Nigeria including a senior finance role at British Telecom. She has been on the board of Dorman Long Engineering, a portfolio company of TPEFI since 2010 and is currently part of the governance team overseeing the corporate transformation of the organisation.
A native of Sierra-Leone, Mrs Okoli holds a Master’s degree from Cambridge University and qualified as a Chartered Accountant with Arthur Andersen, UK.


From Somalia to the United States - Ayaan Hirsi Ali

The Big Questions of Our Time

Barely twenty years ago, Ayaan Hirsi Ali aged 23 at the time, arrived in The Netherlands to apply for political asylum and eager to make her mark on a society she considered both “surprisingly compassionate and efficient.” Coming from war-torn Somalia, the events leading up to her arrival in The Netherlands remain murky. Ms Hirsi Ali spent some time in the refugee camps on the Somali-Kenyan border tracing lost family members before arriving in Germany and crossing over into The Netherlands.

She was granted asylum in a remarkably short time. After holding down a few odd jobs while getting to grips with the Dutch language and attending evening classes, she enrolled in Leiden University political science. She obtained her master’s degree in 2000. While at university, Ms Hirsi Ali got involved with politics, becoming first a fellow at the Wiardi Beckman Foundation – the think tank of the centre-left Labour Party – and later joining the centre-right People’s Party for Freedom and Democracy (VVD). In 2003, Ms Hirsi Ali was awarded a prominent place on the VVD electoral roll and promptly landed in parliament where she went on to gain notoriety as a fierce opponent of religious bigotry.

During her studies, Ms Hirsi Ali had renounced Islam to become an atheist. She primarily objected to the perceived inequality of the sexes in Islam. However, her high profile and status as the darling of both the right and the left also brought renewed interest in her past. Holes started to appear in her life’s story as told to Dutch immigration officials. She had provided them with false information on her real name, her age and her travels before arrival in The Netherlands.

The ensuing controversy ended with a full-blown parliamentary debate. Considering her extraordinary contributions to public debate, all major political parties supported a motion asking Minister for Integration Rita Verdonk to consider the “special circumstances” in Ms Hirsi Ali’s case and waive any sanctions. The minister reluctantly granted the request.

Ms Hirsi Ali’s brief but impressive political career in The Netherlands was destroyed by the affair. In 2006 she moved to the United States and a position at the American Enterprise Institute for Public Policy Research in Washington DC. She has authored four books on her own life and journey, and on gender issues. She is the founder of the AHA Foundation, an American non-profit organisation dedicated to the defence of women’s rights.


George Ryan: A Flawed Man Taking on a Flawed System

 George Ryan is a hero tainted by scandal. As governor of Illinois, Mr Ryan followed in the wake of two of his three predecessors and was convicted, in 2006, to over six years in prison for taking bribes. He was released last year and has since retired, in shame, from public view.

Though Mr Ryan’s misbehaviour as a public official and his betrayal of the public trust placed in him remains inexcusable, he is also responsible for saving almost two hundred lives. While in office, Governor Ryan singlehandedly put a stop to all executions. Two days before leaving office, he commuted the sentences of 167 inmates on death row to life terms arguing that the death penalty could not be administered fairly. Under his governorship, thirteen people sentenced to die had their convictions overturned after Governor Ryan allowed new evidence to be presented to the courts. All were released.

Mr Ryan’s firm stance against the death penalty, a rarity in the United States even at the best of times, saw him nominated for the Nobel Peace Prize in 2005. His moratorium on the carrying out of the death penalty in Illinois also encouraged a national debate on the issue. This debate, often akin to a dialogue between the hard of hearing, is raging to this day.

The death penalty is on the books in 32 of the 50 US States. Both the federal and military legal systems carry provisions for capital punishment. In 2013, the country saw 39 people executed. The total number of felons put to death since 1977, when capital punishment was reinstated after a five year reprieve, amounts to 1,379.

“Mr Ryan’s firm stance against the death penalty, a rarity in the United States even at the best of times, saw him nominated for the Nobel Peace Prize in 2005.”

A significant number of innocent people have been executed as well. As a human endeavour, justice is subject to fallibility. The fatal consequences of inevitable miscarriages of justice are what motivated the then-Illinois governor to put a stop to the executions. A famous case was that of Anthony Porter, a Chicago gang member convicted for first-degree murder, who spent fifteen years on death row and came to within 50 hours of being executed.

Just two days before Mr Porter’s execution his lawyers obtained a stay on the grounds that their client may have been mentally retarded. This argument kicked-in the Eight Amendment which, among other things, prohibits the execution of the mentally disabled. Anthony Porter was repeatedly tested and was found to have an IQ score of 51. He was unable to grasp the severity of his crime and the motivation of his punishment.

Alone among the western industrialised nations in carrying out the death penalty, the United States finds itself in the company of China, Iran and other less democratically inclined nations when it comes to the number of executions and incarceration rates.

Governor George Ryan, though very much a failure as an administrator and quite unfit for public office, must nonetheless be credited with gathering the courage to not just question a seriously flawed justice system, but to stop it from putting possibly innocent people to death. Then as now, questioning the death penalty in the United States is no mean undertaking since most Americans do not take kindly to politicians who dare question cherished, but outdated, notions of frontier justice.


Connie Hedegaard, EU Commissioner for Climate Action: Breaking Europe’s Imported Fossil Fuels Addiction

Europe is by far the largest importer of fossil fuel in the world. Recent developments in Ukraine, Syria and Iraq highlight once again how vulnerable our economy is to price spikes, external energy shocks and other regimes’ wishes.

Like a patient hoping to get better, the drip-feed of imported fossil fuels is keeping the European economy alive, but isn’t providing the remedy to spur new growth.
Just take our energy bill as an example. For years, imports of fossil fuels have weighed-in negatively on the European balance of trade. Today, Europe imports more than two thirds of all the gas and almost all the oil it consumes. And it pays more than EUR1 billion per day for its imported fossil fuels, which represent more than a fifth of total EU imports.

Energy dependency costs, that much is clear: But how about the political costs? Just an example: Six EU countries depend on Russia as the single external supplier for their entire gas imports and three of them use natural gas for more than a quarter of their total energy needs.

Wouldn’t it be wise to break this dependency by saving and producing energy here in Europe? The foreign providers may freeze oil and gas supplies, but they can’t freeze our sun or our wind. They can’t charge us for the energy we don’t consume.

“Like a patient hoping to get better, the drip-feed of imported fossil fuels is keeping the European economy alive, but isn’t providing the remedy to spur new growth.”

Our path to real energy security begins at home. We can always dig more coal, some would argue. Would that be the solution? Obviously not: Coal is not only the top contributor to climate change, but it is also the cause of smog, acid rain, and toxic air pollution. It is therefore against our climate policies and targets.

Energy security and climate action go hand in hand. You can’t have one without the other. That’s why renewables and energy efficiency must be the two key ingredients: they’re both good for the climate and our energy independence.

The good news is that Europe is already saving EUR30bn annually by replacing imported fossil fuels with locally produced renewable energy. In other words, we invest the money here in Europe instead of sending it to Putin’s Russia and other fossil fuel providers outside Europe.

By 2050, the EU could halve its imports of oil and gas – representing a saving of 3% of today’s GDP. Much of the required additional investment expenditure can be recovered from what we save on energy costs. Money that now flows abroad can be invested in our domestic manufacturing industries and services instead.

So for Europe, energy security should not only be about the diversification of gas supply away from Russia. We must build an economy that is less dependent on imported energy through increased efficiency and greater reliance on domestically produced clean energy. We must also complete the internal energy market, improve the energy infrastructure and get better at exploiting our own energy resources.

All over the world countries and companies are turning to climate action for their growth strategies. And what countries have committed to internationally is driven to a significant extent by domestic agendas to increase energy security and competitiveness in key growth sectors.

In January, the European Commission outlined its proposals for climate and energy policies up to 2030. These include a binding emissions reduction target of 40% from 1990 levels and an EU-wide binding target of at least 27% of energy coming from renewable sources. And on energy efficiency, doing more is the least we can do, and therefore more energy saving proposals will come next month. EU leaders have pledged to take a decision on the whole package no later than October.

Earlier this month, the US announced draft rules to curb power-plants emissions. This is the strongest action ever taken by the US government to fight climate change and shows that the United States is taking climate change seriously. Also during my recent visit to China, it was clear to me that things are moving in the right direction. China is fast turning climate change into an opportunity for growth and jobs in rapidly innovating economic sectors. We now need to see these domestic actions translated into an ambitious international commitment.

It’s all about priorities. The way to greater energy independence goes through ambitious climate policies. The European Commission paved the way with the 2030 climate and energy package. By taking bold action on climate change, EU leaders will be preserving Europe’s energy security and boosting a sustainable economic recovery. i

About the Author

Connie Hedegaard is the European Commission’s fist Climate Action Commissioner. She started her political career in 1984 as a Member of Parliament in Denmark for the Conservative Peoples Party. Before joining the European Commission, she has been Minister for Environment (2004-2007), Minister for Nordic Cooperation (2005-2007), and Minister for Climate & Energy (2007-2009).

From 1990 to 2004, Ms Hedegaard worked as a journalist for several Danish media. From 1998 to 2004, she anchored the evening news magazine “Deadline”, part of the Danish Broadcasting Cooperation, DR. From 1994-98 she was head of DR’s Radio Newsroom. Ms Hedegaard has been a member and chairman of several Boards and Associations within fields like democratisation, journalism and international affairs. She received her Master’s degree in Literature and History from University of Copenhagen.

About the European Commission

The European Commission is the EU’s executive body and represents the interests of Europe as a whole (as opposed to the interests of individual countries).


From Armenia to France and Back – Francis Kurkdjian

Fragrances from the Past

Though born in France, celebrated perfumer Francis Kurkdjian has remained in close touch with his Armenian roots. On the most recent of his many visits to Yerevan Mr Kurkdjian was received by Minister of Diaspora Affairs Hranush Hakobyan who asked him to lend his fame and support to policy initiatives by the Armenian government aimed at fostering closer ties between the diaspora and the home country.

Currently in the process of bringing part of his business home to the country of his parents, Francis Kurkdjian is also engaged in a project that seeks to introduce young Armenians to the art of perfume making. Details are currently being worked out with Mrs Hakobyan’s ministry. The French / Armenian perfumer also plans to open one or more upmarket shops in booming Yerevan. “The moment is right to expand my business and doing so in Armenia is an obvious choice.”

Francis Kurkdjian is the creator of numerous exclusive perfumes such as Rose Barbare (Guerlian), Silver Shadow (Davidoff), and Le Parfum (Carven). In 2001, Mr Kukrkdjian was awarded the coveted Prix François Coty for his lifetime achievements. In 2009, the French government honoured Francis Kurkdjian with the title Chevalier des Arts et des Lettres for his efforts at reinvigorating the perfume trade through the display of fragrance dispensing art in public squares and other emblematic places.

Mr Kurkdjian did not set out to become a perfumer. In fact, it was his second choice, elevated to the top spot only after failing to gain admittance to the Paris Opera School of Dance in 1983. Mr Kurkdjian went to the ISIPCA perfume school in Versailles instead. He graduated in 1993 and proceeded to obtain a master’s at the Paris Institute of Luxury Marketing.

Now properly set up for success, Mr Kurkdjian promptly created one of the world’s best-selling perfumes for Jean Paul Gaultier, Le Male, in 1995. At the time, he was only 26. He has since created well over forty fragrances for nearly all major fashion designers and purveyors of luxury goods.

Today, the perfumer manages his own Maison Francis Kurkdjian, a bespoke fragrances atelier, that battles against the “dumbing-down” of his trade. Mr Kurkdjian is strongly opposed to the recent trend to “democratise” perfumes by diluting products with inferior ingredients in an attempt to bring down cost and increase market share.

As if to prove this point, the Maison Francis Kurkdjian invested heavily in the re-creation of 17th century fragrances which required academic research to rediscover the sources of the art of perfumery. The first result of this quest is now in: The re-created perfume as used by Marie-Antoinette, the Dauphine of France from 1770 to 1774, Queen from 1774 to 1792, and brought to the guillotine in 1793.


European Policy Centre on Financial Transaction Tax (FTT): Why the EU Needs the FTT but the  FTT Does Not Need the EU

Background

[caption id="attachment_7626" align="alignright" width="206"] Author: Jan David Schneider is Economic Research Assistant at the European Policy Centre (EPC).[/caption]

The nature of the continuing crisis in the euro area has changed several times. With the collapse of Lehman Brothers in September 2008 and the subsequent outbreak of the global financial crisis, Europe’s banking sector was on the verge of collapse. With already excessively high public debt levels accumulated in some parts of the European periphery, the required public support for the struggling financial sector overstrained the public financial capacities in these countries. Consequently, the banking crisis evolved into a sovereign debt crisis which pushed Europe into the worst recession since World War II.

The sluggish economic recovery and the unbalanced austerity policy as a response to the crisis have exacerbated the negative social repercussions for some parts of the eurozone’s population, especially among the young. As a consequence, the crisis has developed into a social crisis that is likely to have a long-lasting effect on the well-being of European citizens and on the general state of the EU and its political stability. With potential long-term effects on Europe’s future human capital, record high youth unemployment rates in the periphery and some core countries are challenging our understanding of generational equity.

Nevertheless, the economic fragmentation and divergence among euro area countries makes structural reform at the Member State level as necessary as ever. The countries most affected by the crisis have started their painful reform process which has already – although with mixed results – born some fruit.

At euro area level, important reform proposals to correct for the eurozone’s missing fiscal union have been proposed and implementation is moving forward in many areas. The introduction of the ’Fiscal Compact’, the ’Six-pack’ and ’Two-pack’ have enhanced debt monitoring and prevention while keeping debt mutualisation to a minimum. Furthermore, these actions are also important steps towards improving the much needed fiscal policy coordination between EU countries and, in an even more stringent way, for the eurozone.

In response to the negative feedback loop between sovereigns and banks, the effort to establish a Banking Union is a historical step forward to prevent the nationalisation of banks’ debts in future crises. Founded on a Single Rulebook, major elements of the final proposal are the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Whereas the SSM covers approximately 6000 banks, only the 128 largest banks will be directly supervised by the ECB. The SRM consists of a Single Resolution Board and a Single Resolution Fund (SRF) that is financed by the banking sector. Although the final shape of the Banking Union constitutes a great effort towards stabilizing the financial sector, the feedback loop between sovereigns and banks could not entirely be broken. As the SRF will only be backed by 55 billion Euros, it remains questionable whether the SRM could handle large banks in distress. The SRF needs more funding in order to efficiently eradicate the possibility of further ‘too-big-to-fail’ situations.

“At this point in time, finding the right balance between austerity and counter-cyclical fiscal policies is the key challenge policy-makers are facing.”

At this point in time, finding the right balance between austerity and counter-cyclical fiscal policies is the key challenge policy-makers are facing. Legitimate calls for more fiscal stimulus and immediate support for growth inducing measures have been expressed by many. However, room for fiscal expansion within national budgets will be narrow in the next few years if not decades. As further debt financing is neither viable nor just towards future generations, it would therefore be very useful to tap new sources of revenue – something that the introduction of an EU-wide Financial Transaction Tax (EU-FTT) could contribute to.

State of Play

The Banking Union proposal is more of a long-term project to future-proof the eurozone for crises to come, but in addition, a timely introduction of the FTT could also benefit the participating countries in the short or medium term by providing them with more space for fiscal manoeuvre. Through an Enhanced Cooperation Procedure (ECP) eleven eurozone countries (ECP-11) – among them the four biggest, Germany, France, Italy and Spain – have aspired to go ahead with the introduction of a harmonisation and extension of their partly already existing but scattered FTT-regimes.

With respect to this, the European Commission had in February 2013 presented an ambitious proposal[1] outlining three main objectives: (i) preventing Single Market fragmentation by harmonising existing legislation; (ii) discouraging financial transactions which are harmful for the efficient functioning of financial markets and the real economy, and (iii) participation of the financial sector in sharing the burden of the crisis by making a contribution to public finances. Apart from the harmonisation aspect, the innovative part of the EU-FTT proposal would be that all transactions of financial instruments made by financial institutions such as banks, insurance companies, funds and asset managers, will be subject to the tax. This will include transactions of securities such as stocks, company bonds, government bonds, most money-market instruments and most importantly all derivatives, both for organised exchanges as well as over the counter. The original proposal was coined to include ’all instruments, all markets, all actors’.[2] It is also noteworthy that shadow banking activities such as securitisation and repurchase agreements (repos) are covered as well. The inclusion of the latter has however, caused some intense discussions and is unlikely to make it into the final directive. In terms of technical practicality, tax collection could be easily achieved through the involvement of existing clearing houses and trading platforms.

“The sluggish economic recovery and the unbalanced austerity policy as a response to the crisis have exacerbated the negative social repercussions for some parts of the eurozone’s population, especially among the young.”

Regarding the revenue potential, the EU Commission calculated the estimated tax receipts from applying the original model to be 30 to 35 billion Euros – an excellent opportunity to create substantial revenues from a sector that, in comparison to others, has been widely undertaxed.[3] These funds would be ideal to, for instance, intensify the fight against high youth unemployment levels. The EU Youth Guarantee scheme introduced in April 2013 will be backed by six billion Euros of EU money for distribution in the next few years. In 2012 the International Labour Organisation has estimated the necessary funding to be in the area of around 21 billion Euros. Would it not make sense to use the FTT as a contribution from those actors that stood at the beginning of the crisis to those bearing the brunt today?

Although retail investors, SMEs and pensioners are explicitly excluded from the transaction tax, the tax will almost certainly be passed on to them, should their transactions involve any financial institutions. Some determined opponents against an FTT have used this fact for horror scenarios on sharp losses of pensioners’ savings and so forth. However, as longer-term oriented buy-hold strategies will naturally require fewer transactions, the tax will be almost unnoticeable for the aforementioned groups since the rates will be set at fairly low levels – 0.1% against the exchanges of shares and bonds and 0.01% for derivative exchanges applied on the notional value of the underlying transaction. Such rates will nevertheless be high enough to create substantial revenues from those engaged in high-frequency trading due to the sheer amount of transactions that are necessary to sustain these types of business models.[4]

Other concerns brought forward against the original EU-FTT proposal can broadly be assigned to three different areas, all of them involving a reduction of financial liquidity: (i) the dichotomy between hedging and speculation, (ii) relocation and tax arbitrage, and (iii) the inclusion of repurchase agreements (repos).

Dichotomy between hedging and speculation

The discussions around the EU-FTT are inevitably linked to an evaluation of the prevailing theories on financial markets. According to the predominant Anglo-Saxon view on financial markets, trading activity, i.e. liquidity, exactly reflects the necessary amount for smoothing asset prices. An FTT would therefore significantly curb short-term transactions and thus reduce financial liquidity leading to higher asset price volatility, which would have direct repercussions on economic growth and competitiveness for the European economy.[5] On the contrary, the Commission’s proposal is expressing a fundamentally different evaluation of financial markets and criticises the perception of ’the more liquidity the better’.4 Due to a preponderance of short-term speculation, there is excess (or virtual) liquidity that is not necessary for the provision of financial services to the real economy. The reduction of short-term speculation would even have positive effects on asset prices and thus the functioning of financial markets despite the existence of lower overall liquidity.

A rationale behind the harmful impact of short-term speculation and positive effects of an FTT on asset prices is exemplified in Schulmeister (2009):5 asset prices are constantly over- and undershooting their equilibrium prices in cyclical swings. Empirical findings suggest that short-term speculation prolongs these swings even further, a contradiction to the Anglo-Saxon view. In turn, this increased volatility for instance, adds to the creation of ‘bubbles’ and causes higher uncertainty, which entails costs to the economy. An FTT could smooth these swings through its dampening effect on short-term trading, in particular on derivatives transactions. Similar to an argument made above, risk hedging related to economic fundamentals requires fewer transactions than speculation and makes it consequently less affected by a low-rate FTT. In fact, the scholar argues that only a small fraction of derivatives trading is part of such hedging activities, the majority can be assigned to short-term speculation. These results are questioned by speculators that need to protect their business models. From a welfare perspective however, these practices are not in the interest of society and are therefore necessary to be corrected for. Financing, insurance and risk transformation, essential to the functioning of the real economy, are much less affected, if at all.

Relocation and tax arbitrage

Regarding the potential relocation of financial liquidity, a poorly designed FTT could cause an outflow of financial liquidity from the ECP-11 area to other financial centres such as London or New York. Due to this liquidity loss, price volatility would rise which would, contrary to the intended stabilising effect, negatively impact asset price stability.

The Commission’s design of the EU-FTT can however prevent such major outflows, as the tax will not be determined by the location of the financial transaction but by the origin of the involved actors as well as the underlying asset (’residence plus issuance’). For example, a German bank that would want to avoid the payment of the tax would need to ignore its entire market operations in the ECP-11 as well as move its headquarters and cease trading all financial products from this area. The likelihood of this happening shows that a critical mass of participation could be established if the proposal was thoroughly implemented in all participating countries. Naturally, not all tax arbitrage possibilities and relocation effects can be prevented, so wider participation would provide even greater benefits to all participating countries.

Inclusion of repurchase agreements (repos)

A large part of the discussion on the loss of liquidity is connected to the debate around the inclusion of repos into the tax base. Although the inclusion was part of the original proposal from February 2013, in mid-2013 the French government, the ECB and representatives of the finance industry expressed their deep concerns over the taxation of repo transactions. Repos are liquidity-enhancing financial instruments with an advantageous risk management framework. The ECB considers repos as an essential part in its strategy to move away from being the largest intermediary of liquidity, a role it took over due to the collapse of inter-bank lending during the crisis.4

However, repos also provide an easy and cheap way to create leverage and hence risk, as basically any asset can be used as collateral and transformed into cash through repos. New repos are repeatedly used with the same collateral to create more and more leverage, a practice that could be reduced through a transaction tax. In times of crisis, when collateral depreciates due to plunging asset prices and increasing ‘haircuts’,[6] the repeated use of the same collateral can take its toll, which may lead to massive defaults of financial institutions. The Lehman Brother collapse can in essence be explained by what Gorton & Metrick (2012) called a ’run on repo’[7]. A final decision on the inclusion of repos into the tax base, has to eventually face the trade-off between long-term financial stability and the loss in liquidity. Whether such a liquidity loss is acceptable or not is directly linked to the position on the excess (virtual) liquidity issue.4

Prospects

Some non-participating EU countries have expressed their concerns that the proposal would have implications for their domestic financial sector. In April 2013 the United Kingdom legally challenged the EU-FTT plans, criticising its potential impact on Britain’s financial sector. The Commission responded that only transactions with a connection to the ECP-11 area would be affected which would be fully in line with international law regarding cross-border taxation. The challenge was eventually dismissed by the European Court of Justice on 30 April 2014.

In addition to the discussions around repos, the willingness to go forward with the finalisation of an ambitious proposal has lost some momentum recently; some of the envisaged compromises may even threaten the viability of the whole project. On 5-6 May 2014, in the last Eurogroup and ECOFIN meetings before the European elections, the ECP-11 block, apart from Slovenia due to its government crisis, expressed to aim for a gradual introduction, i.e. the initial exclusion of certain derivatives.[8] With the prospect of a full coverage only in the distant future, this may defeat the whole rationale of the tax. Including a wide tax base, thereby closing loopholes for speculation, was at the core of the initial proposal and remains crucial to ensure the collection of substantial revenues as well as for stabilising asset prices. It remains unclear when, and whether at all, a full coverage of all derivatives can be achieved in future. Furthermore the ECP-11 now seeks implementation of the directive only by 1 January 2016. Bearing in mind the initial plans for an introduction in 2014, this prevents the tax from being a short-term support to overcome the social impacts of the crisis. In addition, a strong commitment regarding the sensible usage of the tax revenues has yet to be made.

In the next few months it therefore becomes of vital importance to protect the February 2013 proposal from further far-reaching and counterproductive exemptions while negotiating towards a comprehensive inclusion of all derivatives as early as possible, in the way it was intended in the first place. Bearing in mind that several EU countries already have FTTs in place, a harmonising EU-FTT would also be a step forward for strengthening the Single Market.

Cleary, the EU-FTT is more than just a tax. It is a contribution to the much needed modification of the prevailing global Anglo-Saxon financial system, through making careful judgements on social and unsocial trading practices and by correcting for the latter.

This Policy Brief is based on an article[9] written by the author and Fabian Zuleeg, Chief Executive and Chief Economist at the EPC, which was published as an EPC Policy Brief (http://www.epc.eu/pub_details.php?cat_id=3&pub_id=4542) and also in Polish in the magazine ‘Instytut Idei’ on 09 April 2014.

[1] European Commission 2013, ‘Proposal for a Council Directive implementing enhanced cooperation in the area of the financial transaction tax’, COM/(2013) 71 final, 14 February, viewed on 6 June 2014,

http://ec.europa.eu/taxation_customs/resources/documents/taxation/com_2013_71_en.pdf

[2] Apart from all primary market transactions and restructuring operations, most day-to-day financial activities relevant for citizens and businesses such as payment services, mortgage lending, conclusion of insurance contracts or bank loans are excluded from the tax. Whereas spot currency transactions do not fall under the tax, currency derivative contracts do. Refinancing transactions with central banks, ECB, EFSF, ESM and the EU are also exempted from taxation. For a detailed overview of the proposed scope of the tax see the proposal from 14 February 2013.

[3] Financial services are, for instance, excluded from value-added-tax.

[4] See Gabor, D 2013, ‘A step too far? The European financial transactions tax and shadow banking’, UWE Bristol, Working Paper.

[5] See Schulmeister, S 2009, ‘A general financial transaction tax: a short cut of the pros, the cons and a proposal’, Austrian Institute of Economic Research (WIFO), Working Paper, No. 344.

[6] A repo ’haircut’ is the deduction from the market value of an asset that is being used as collateral and reflects the risk of holding that very asset.

[7] Gorton, G & Metrick, A 2012, ’Securitized banking and the run on repo’, Journal of Financial Economics, 104(3), 425-451.

[8] See Council of the European Union 2014, Press Release, 3310th Council meeting, Economic and Financial Affairs, 6 May, Viewed on 6 June 2014.

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/142513.pdf

[9] Schneider, JD & Zuleeg, F 2014, ‘The future of the eurozone’, trans. into Polish by Gmurczyk, J, Instytut Idei, No. 6, April, 76-79, The Civic Institute (Instytut Obywatelski), Warsaw, viewed on 6 June 2014,

http://www.instytutobywatelski.pl/wp-content/uploads/2014/04/instytut-idei-6_WEB.pdf


From Croatia to Chile – The Luksic Family: From the World’s Driest Desert to the Forbes List

In Chile, everyone knows the Luksics and their remarkable story that started with Policarpo Luksic who left his native Croatia as a young man to try his luck in the mineral-rich Atacama Desert in Chile’s far north. Here, in purportedly the world’s driest desert, Policarpo Luksic did reasonably well. He married the granddaughter of a hero from the War of the Pacific (1879-1883) that pitched Chile against Bolivia and resulted in the latter losing its access to the ocean.

It was the next generation that would find the success Policarpo had travelled the world for. In 1952, his son Andrónico Luksic Abaroa (1926-2005) laid the cornerstone of what was to become the family fortune and, indeed, one of the world’s greatest fortunes. That year Andrónico managed to buy a 25% share in a local mining company for next to nothing, selling it two years later to a Japanese conglomerate for a cool $500,000.

The proceeds of the sale were immediately invested in other mining ventures. In the years following, the profits from Andrónico’s deals started to accumulate. As they did, he successfully diversified his investments taking stakes in any kind of business that caught his fancy.

Today, the third Luksic generation, headed by Andrónico Luksic Craig and his brothers Guilermo and Jean-Paul, are in charge of a veritable business empire that generates close to $14 billion in annual revenue. The Luksic’s Quiñenco holding company has interests in rail roads, mining, banking, breweries, shipping, television, energy and telecom. The impression is that the Luksic family has a stake in almost everything that goes on in Chile.

The political turbulence experienced in the early 1970s – a time when private business was not encouraged – caused the Luksic family to look elsewhere for opportunity. They expanded their business interests in Argentina, Colombia, and Brazil where the Luksic’s again acquired stakes in an eclectic range of businesses.

With Croatia becoming the newest member of the European Union and a place safe for business, the Luksic family is at long last returning to its roots. Property is being snatched up left, right, and centre. The family is also supporting an impressive number of initiatives to help with the social development of Croatia: significant contributions are made to improve healthcare, education, and the preservation of national Croat culture. On the business side, $800 million has so far been invested in Croatia. The family sent fourth generation Davor Luksic to manage its affairs in Europe.


From Nigeria to UK – Dr Solomon Fubara: Helping the Diaspora Break into Business

Nigerian-born Dr Solomon Fubara did not quite set out to become a member of the UK diaspora community. In fact, he came to get a university degree in 1983 and had every intention of using his education to get ahead back home. As in many cases, this was not to be. After graduating, Dr Fubara was offered a position in business development and ended up staying. The processes of launching and managing a new business became a life-long fascination. Now, Dr Fubara is the go-to guy for anyone seeking to make a mark in business.

For his work with diaspora entrepreneurs, Dr Fubara was awarded an MBE (Member of British Empire) medal. Specific mention was made of Dr Fubara’s efforts to assist ethnic minority entrepreneurs in navigating the legal maze that surrounds small businesses. Dr Fubara has helped tens of now thriving small business get established in his hometown of Bristol. He has also been active in creating support structures for ethnic minority business owners.

Today, Dr Fubara has taken on a project aimed at encouraging members of the growing Somali diaspora to set up shop and thus grow firm roots in the UK. “Sometimes people pass me on the street and tell me thanks for helping them. That gives me a real sense of satisfaction. I may not always be able to help financially but I think that what BME (Black and Minority Ethnic) businesses need the most is mentorship. A good mentor can make a businesses and a bad one can break it.”

In 2006, Dr Fubara set up the African Caribbean Chamber of Commerce in order to help foster trade links between diaspora communities in the UK and their home countries. “There are still many opportunities to be explored in this area. Long and well established diaspora communities have significant purchasing power and long for products not normally available in the UK. Through our chamber of commerce we try to assist small and medium-sized companies in Africa and the Caribbean to satisfy that demand. In the process we hope to open up markets and contribute our bit to the sustained development of the countries involved.”

Dr Fubara also exports his business knowledge and acumen to Africa where he is involved with a number of business development projects financed by development agencies. He is specialised in strategic policy analysis, business evaluation, and the development of strategies. He holds MBA and PhD degrees and is an active member of numerous professional associations. Over the course of his career, Mr Fubara has worked in private business as well as for UK government agencies.


OECD: Achieving a Resilient Economic Recovery

[caption id="attachment_7648" align="alignright" width="161"] Author: Rintaro Tamaki, Deputy Secretary-General and Acting Chief Economist of the OECD[/caption]

The recovery from the Great Recession has been slow and arduous, and has at times threatened to derail altogether. However, the major advanced economies are finally gaining traction and momentum. Private-sector confidence is rebuilding. After years of weakness, investment and trade volumes have started to rebound. While unemployment remains unacceptably high, the labour market situation is improving in most countries and has stopped deteriorating virtually throughout the advanced economies.

On the other hand, the pace of growth in the major emerging market economies has slowed. Part of this deceleration is benign, reflecting cyclical slowdowns from overheated starting positions - the growth rates now seen in China are undoubtedly more sustainable from both economic and environmental perspectives than the double-digit pace of a few years ago. However, managing the credit slowdown and the risks that built up during the period of easy global monetary conditions could be a major challenge.

The likelihood of some of the most worrisome events that have preoccupied markets and policymakers in recent years coming to pass has diminished. Risks are overall better balanced although still tilted to the downside. Financial tensions in emerging markets are one risk that could blow the global recovery off course and have bigger spill-overs than anticipated. It is not the only one: Falling inflation in the euro area could turn into deflation. Geopolitical risks have also increased since the start of the year.

“The high levels of government debt in all major advanced economies mean that there is little room for fiscal accommodation.”

Policy focus can now switch from avoiding disaster to fostering a stronger and more resilient recovery. The legacy of the crisis still needs to be addressed. The crisis has left scars in the labour market, notably higher unemployment and lower participation of the more vulnerable groups. Growth prospects are weaker than they were in the pre-crisis era. Moreover, one of the key lessons of the crisis is the need to make our economies and societies more resilient – more able to withstand shocks, and more inclusive with the welfare gains from stronger growth better shared across the population. While steps have been taken in both areas, much more needs to be done.

After difficult years of low growth and fiscal stringency, policymakers are facing these challenges with depleted political capital. But they need to seize the opportunity to set global growth on a stronger and more sustainable footing. This key to supporting confidence and has to be backed by macroeconomic and structural policy actions, including the promotion of institutional frameworks that support the implementation of reforms.

[caption id="attachment_7653" align="aligncenter" width="576"] Real GDP Growth (per cent). Source: OECD May 2014 Economic Outlook database.[/caption]

Given persisting downside risks, high unemployment, below-target inflation, and high levels of government debt, monetary policies need to remain accommodative in the main OECD areas. In particular, we call on the European Central Bank (ECB) to take new policy actions to move inflation more decisively towards target and to be ready for additional non-conventional stimulus if inflation were to show no clear sign of returning there.

The high levels of government debt in all major advanced economies mean that there is little room for fiscal accommodation. Nevertheless, following significant progress in stabilising their public finances, most OECD countries can afford the planned slowdown in structural budget improvement. This is not the case in Japan where consolidation needs remain very large. Given its high level of public debt, a credible medium-term fiscal consolidation plan is essential.

In most countries, reducing public debt to more prudent levels and managing future pension and health liabilities will pose a challenge and requires fiscal reforms to ensure the sustainability of public finances without compromising the quality of public services.

It is now time to speed up the pace of structural reforms. Such reforms, while often facing resistance from vested interests, can offer a win-win by raising growth potential and allowing many of the poorest to achieve higher living standards. These policies are critical to the success of Abenomics in Japan, as well as to rebalance of the euro area and foster the convergence to higher incomes by emerging economies.
While impressive reform efforts have been made by crisis-hit countries, there remains substantial scope to boost productivity and create jobs through policies aimed at removing barriers to domestic and international competition in both advanced and emerging economies. This would increase innovation and help get the most out of global value chains, as well as boost investment in the near term and support resilience.

As unemployment starts receding, measures to tackle long-term unemployment, and make sure it does not become entrenched, are a high priority that requires reforms to remove obstacles to more robust job creation and strengthen and redesign active labour market policies.

About the Author

Mr. Rintaro Tamaki was appointed Deputy Secretary-General of the OECD on August 1, 2011. His portfolio includes the strategic direction of OECD policy on Environment, Development, Green Growth, Financial Affairs and Taxes.
Mr. Tamaki is also currently acting Chief Economist and assumes the responsibility as the OECD Representative at the Deputies’ Meetings of the G20.
Prior to joining the OECD Mr. Tamaki, a Japanese national, was Vice-Minister of Finance for International Affairs at the Ministry of Finance, Government of Japan.
During his prominent 35-year career at the Japanese Ministry of Finance, Mr. Tamaki has worked on various budget, taxation, international finance and development issues. He worked as part of the OECD Secretariat from 1978 – 1980 in the Economic Prospects Division and from 1983 – 1986 in the Fiscal Affairs Division of the Directorate for Financial, Fiscal and Enterprise Affairs (DAFFE). In 1994 Mr. Tamaki was posted to the World Bank as Alternate Executive Director for Japan and in 2002 as Finance Minister at the Embassy of Japan in Washington DC. He then became Deputy Director-General (2005), before becoming Director-General (2007) and subsequently Vice-Minister for International Affairs (2009) at the Ministry of Finance.
Mr. Tamaki graduated in 1976, L.L.B. from the University of Tokyo and has held academic positions at the University of Tokyo and Kobe University. He has published books and articles on international institutions, the international monetary system, development, debt and taxation.


World Bank Supports New Innovative Financing to Reach SMEs and Exporters in Turkey

The World Bank’s Board of Directors today approved a US$250 million equivalent loan for the Innovative Access To Finance Project for Turkey whose main development objective is to improve access to longer-term Islamic finance and to factoring for small- and medium-enterprises (SMEs) and export-oriented enterprises (EOEs).*

The project will be implemented by Türkiye Sinai Kalkınma Bankasi (TSKB) as borrower, with a government guarantee. TSKB will intermediate the loan through participation banks and factoring companies targeting SMEs and EOEs. The project has two sub-components:

Sub-component 1 will focus on Islamic finance (estimated at US$160 million), and

Sub-component 2 will focus on factoring (estimated at US$90 million).

“Turkey’s SMEs are the motor of its economy, however, they still face greater constraints in accessing finance than larger companies,” said Martin Raiser, World Bank Country Director for Turkey, on the occasion of the loan approval.  “The World Bank has supported the development of long-term finance in Turkey with over US$4 billion in commitments over the past decade.”

“Turkey’s SMEs are the motor of its economy, however, they still face greater constraints in accessing finance than larger companies.”

- Martin Raiser, World Bank Country Director for Turkey

Raiser added that “As domestic financial markets are becoming more sophisticated, we, ourselves, are switching to innovative financing instruments. Islamic finance is based on the principles of risk-sharing and asset backing, a component of trade, rather than risk-transfer, as seen in conventional banking. Together with factoring, they provide attractive alternatives to traditional bank loans by alleviating constraints for SMEs related to the lack of collateral and credit history.”

The lending instrument for the Innovative Access to Finance Project is an IBRD variable spread loan, with a total maturity of 28 years, including a grace period of 7 years. Repayment will be linked to commitment, with a level repayment pattern.

*For the purpose of this project, SMEs are defined as firms that employ fewer than 250 people and have annual turnover or asset size of less than TL40 million, and EOEs as exporting firms that employ fewer than 1,000 people.


Brian Cox: Science for the Masses

 Amongst the remains of Kolmanskop, an old mining town in the Namib Desert, a scrawny metrosexual soliloquizes about the nature of the universe in a Lancastrian accent. After another minute of establishing shots, the presenter sits down on a dune and builds a sand castle. He then goes on to give an explanation of the second law of thermodynamics and why the wind tends to build dunes rather than castles. Behold a five minute segment of the 2011 BBC series Wonders of the Universe, and its presenter Brian Cox.

Brian Cox, OBE, professor of physics at Manchester University and research fellow at the Royal Society, is the boyish face of science in Britain. Starting in the mid-2000s with a few spots as guest presenter on the popular science programme Horizon, Brian Cox has become the BBC resident physicist, presenting several documentary series and appearing in several talk shows.

His documentary series Wonders of the Solar System (2010), Wonders of the Universe (2011), and Wonders of Life (2013), among others, have an epic cinematic feel to them. The BBC has a tradition of setting aside a generous portion of its resources for such lavishly produced series.

“Sagan had his apple pie, Richard Feyman his elastic band, and Brian Cox a sandcastle.”

Mr Cox’ shows are full of dramatic aerial shots of its protagonist walking about vast and dramatic landscapes, stopping occasionally to stare contemplatively into the distance. A first-time viewer might be forgiven for thinking that the film crew was forced to take such a wide girth just to fit the presenter’s ego on the small screen. That impression would thoroughly miss the point: Professor Cox seems just as much in awe of his surroundings as the viewer and his excitement is quite contagious.

Mr Cox’ explanations of the various subjects brought up are just simple enough to be grasped by most and enigmatic enough to be thoroughly thrilling. No TV show could possibly hope to deliver anything beyond a very basic understanding of scientific theories. However, Mr Cox succeeds wonderfully well in instilling an appreciation of scientific methods and in creating a compulsion to learn more.

His radio show The Infinite Monkey Cage is slightly more brazen in championing of scientific method and disdain for its detractors.

In 2013, on the occasion of the 50th anniversary of the BBC science fiction series Doctor Who – the longest running sci-fi series in the history of television – Professor Cox gave a lecture in The Faraday Theatre of the Royal Institution entitled the Science of Doctor Who. During the event, he gave an explanation of Time Dilation and the nature of black holes to an audience of school children and TV personalities.

The word innovative is often used to descriebe a hero, and rightly so. Heroes are, more often than not, those who tackle major problems and offer innovative approaches to any given problem. There is little innovative about Brian Cox. That is not at all a slight on him rather he’s the poster child for tradition. Not only of the scientific method in general – which arguably constitutes humanities’ greatest tradition – but also that of the science populariser.

The Faraday Theatre in which Brian Cox gave his 2013 lecture was named after Michael Faraday who established the Christmas Day Lecture at the Royal Institution in 1825 – an annual event in which a leading scientist delivers a lecture to an audience of children. The event has been an annual fixture only interrupted briefly by the Second World War. It has been televised since 1966.

The Royal Institution was established in 1799. Its mission is to promote public engagement in the sciences. Brian Cox’ documentaries follow the well-beaten path previously navigated by the likes of David Attenborough’s Life and Carl Sagan’s Cosmos.

Sagan had his apple pie, Richard Feyman his elastic band, and Brian Cox a sandcastle. These men are born storytellers. They are the giants that climb down the ever-growing tower of understanding in order to show the yet uninitiated the heights already attained and the challenges remaining. Brian Cox cites Carl Sagan as one of his major inspirations; just imagine who’ll say the same of Brian Cox.


World Bank Group: “Customer is King” –  Toward More Effective Development?

[caption id="attachment_7689" align="alignright" width="148"] Author: Jeff Thindwa[/caption]

“Customer is King” is an old business saying that accentuates the importance of customers in every business. The private sector generally knows that satisfied customers are cheaper to serve and easier to deal with while unhappy customers will result in reduced sales and profits. They know that success is based on understanding their customers’ needs, adapting to their feed-back and placing them at the heart of service design and delivery. This may seem like a pretty straight-forward market-based approach. However, for customers of public services the situation is often very different with communication largely flowing one-way.

Engaging customers of public services (citizens) to provide feedback on the quality of services is not a new concept in the development community, however, it is far from widespread. Every year enormous amounts of public funds are spent by governments and international organizations on public services in a wide range of sectors (e.g. water, health and education). But, due to weak performance incentives, misallocations, corruption and a lack of citizen pressure, services are often of low quality or fail to reach intended beneficiaries – especially the poor.

Improving Public Services Goes Beyond the Supply Side

Although there are no easy solutions when it comes to improving the service delivery chain, it is clear that efforts must go beyond conventional mechanisms of accountability. Political checks and balances, audit requirements, administrative rules, and the judicial system will only have limited success unless direct attention is also paid to the views and needs of the citizen beneficiaries.

“Experience has demonstrated that citizens can be empowered to hold governments, service providers and international organizations to account.”

Experience has demonstrated that citizens can be empowered to hold governments, service providers and international organizations to account. When citizens engage with public officials in an informed and skilful manner they can provide the demand-side pressure needed for responsive governance, efficient public spending and the stemming of corruption. This can in turn complement and reinforce the conventional mechanisms of accountability. It is therefore important that citizens are aware of their rights and responsibilities and how to exercise them.

Bridging the Accountability Gap

Through our social accountability work around the world we have learnt that it is possible to engage broader segments of civil society and strengthen their voice and capacity. Citizens can be empowered to directly influence policies, which is as important as building the capacity of governments to become more responsive and transparent. In fact, these two capacities reinforce each other and enhance development outcomes.

To help foster citizen-state collaboration and bridge the “accountability gap,” we have developed tools and mechanisms that allow for information exchange, negotiation and trust-building. For example, our Open Budgeting programme helps governments open up budget and expenditure data to users. Some countries have made admirable progress in participatory budgeting, proactively engaging citizens and stakeholders to influence budget priorities and allocations. Another work stream helps partner countries develop Access to Information legislation and train governments and citizens on how to use the information to strengthen public accountability. Our programmes and tools have been applied at local, regional and global levels – below are a few selected examples.

Arming Citizens with Facts through Media

Media can play a critical role when it comes to affecting development outcome (which was also one of the themes for this year’s World Press Freedom Day). Media can provide an accountability check on public spending, expose misdeeds and corruption and create a platform for public debate. In this regard, our Global Media Development programme trains media and civic leaders on how to access, interpret and “demystify” budget and public spending data.

[caption id="attachment_7684" align="aligncenter" width="436"] A Kenyan journalist used budget data to link primary schools’ record low grades, high dropout rates (particularly among girls) and high levels of disease – to a lack of toilets – igniting a chain reaction which led to improved health and education outcomes.
Photo: Arne Hoel/World Bank[/caption]

Kenya

In Kenya a journalist for NTV, Irene Choge, used budget data to link poor primary school performance to a lack of toilets – igniting a chain reaction which led to improved health and education outcomes. After participating in an Open Data Bootcamp, (a crash course in practical techniques to harness open data for storytelling) she used her newly acquired skills to investigate performance data for two primary schools.

She uncovered that the schools’ record low grades and high dropout rates (particularly among pubescent girls) as well as high levels of disease were linked to a lack of sanitation facilities.

In order to raise awareness, Ms. Choge produced several news stories which eventually led the government to act. Resources were re-allocated and an investigation was put in place to explain the budget misallocations.

Civil Society Participation in Budget Process

Our Public Participation in the Budget & Audit programme builds institutional capacity to help civil society organizations (CSOs) analyse budgets, track money flows and compare funds allocated to services delivered. Moreover, the programme is fostering a dynamic collaboration between audit institutions and CSOs aimed at strengthening the audit process and accountability of government.

Kushahawa, Nepal
Several CSOs in Nepal were trained on simplified expenditure tracking as well as budget literacy. As a result, one of the CSOs applied the newly acquired knowledge and tools toward monitoring of social security allowances and discovered that the women of the Kushahawa village were unaware of budget allocations intended for them. The CSO informed the women and helped them claim their entitlements. Moreover, mechanisms were put in place for continued future monitoring.

[caption id="attachment_7687" align="aligncenter" width="662"] A Nepalese community-based organization discovered (through expenditure tracking) that village women were unaware of their social security entitlements. The CSO informed the women and helped them claim the funds. Photo: World Bank.[/caption]

Parliaments Safeguarding Citizens’ Interests

Ideally, parliaments provide the main forum for articulating public concern, influencing policy and overseeing governance processes, such as the formulation and oversight of the national budget. An effective parliament is vital in ensuring that resource allocations are in the citizens’ best interest, and that services are effectively delivered. The Parliamentary Strengthening Programme seeks to enhance the capacity of parliaments to effectively perform their functions by strengthening different institutions and stakeholders within parliament, such as budget/oversight committees, secretariats and budget offices through support to regional and global learning networks.

In Tanzania participation in regional parliamentary learning networks contributed to a closer collaboration between the Public Accounts Committee and the National Audit Office; particularly pertaining to information sharing on the misuse of public funds. These exchanges led members of the Committee to take action and present corruption allegations in the National Assembly – which in turn resulted in the President dismissing the ministers of Finance, Energy, Tourism, Trade, Transport, and Health.

A Platform Linking Governments & Citizens

In order to help governments become more transparent by publicly sharing budget data and facilitating citizen access, the BOOST initiative provides user-friendly platforms in forty countries where budget and expenditure data can be easily accessed and monitored. In addition, 12 governments and two states have posted their data on an Open Budgets Portal, which is a one-stop shop for global budget data.

Moldova published its entire expenditure dataset in one public Excel file. This contributed to ministerial analytical work and investigations on linkages between expenditure and performance – which ultimately contributed to the Ministry of Education’s decision to launch a comprehensive school reform programme.

Digital Engagement: Facilitating Citizen Participation & Feedback

Information and Communications Technologies (ICT) are penetrating even the most remote villages across the globe, offering huge potential for changing the dynamics of how citizens engage with governments and service providers. Hand-held devices can empower citizens to make their voices heard and allow governments to create opportunities for participatory decision making, and to solicit, or respond to, citizen feedback.

In the Democratic Republic of Congo, citizens used mobile phones to influence budget priorities. Even though many are unable to access even basic public services in the DRC, close to half the population has access to mobile phones. The ICT4Gov programme used this opportunity to engage citizens in voting on community priorities (for which the local government devotes a percentage of its budget). For the first time, communities such as Ibanda have gone from having no investment budget at all to having 40 percent of their budget devoted to community investments. Similarly, 120,000 citizens used ICTs to vote on health priorities in the Brazilian state of Rio Grande do Sul – which led to new and improved services.

In an effort to improve education services in 125 schools across Malawi, parents and students will soon be able to use mobile phones to report teacher absenteeism. An education sector accountability programme is developing the feedback tools that will be used to monitor and report absenteeism. This will help the government better understand and find solutions to the challenge.

[caption id="attachment_7688" align="aligncenter" width="436"] In the Democratic Republic of Congo, citizens used mobile phones to influence budget priorities. Photo: World Bank.[/caption]

Delivering on the Customer Promise

More effective and sustainable development outcomes require good governance and this is rarely achieved without meaningful citizen engagement.

Our experiences with social accountability and citizen engagement from around the world have highlighted the need to fundamentally redesign governance models in ways that place citizens at the heart of the service delivery chain - as in the private sector. This means that also in public sector service delivery the customer has to be king.

Citizens need to be able to demand improvements in public services and receive a satisfying response. The private sectors’ customer feedback systems and customer responsive processes are already helping to shape development practice, however, we still have a long way to go to mainstream these principles in the public sectors and “deliver on the customer promise.”

To ensure that governments, public service providers and international organizations do more than pay lip service in their commitments, citizens must be empowered to actively hold them to account. Our experiences on the ground are a testament to the fact that this can be achieved.

As Margaret Mead said: “Never doubt that a small group of thoughtful and committed citizens can change the world. Indeed, it’s the only thing that ever has.”

About the Author

Jeff Thindwa, a Malawi national, will be transitioning into the World Bank’s Governance Global Practice being created from July 1st, as part of a comprehensive World Bank reform. He is currently Manager of the World Bank Institute’s Social Accountability Practice.

Mr. Thindwa joined the World Bank in 2000 and has served the bank in a range of capacities in the social development sectors, including as Sr. Social Development Specialist and Team Leader of the Participation & Civic Engagement Cluster and Team Leader of the Global Civil Society Team. Prior to joining the bank, he worked in international development for 17 years, with Civil Society Organizations, and prior to that as a Legal Aid lawyer for the Government of Malawi, and in the private sector. Mr. Thindwa went to Law School at the University of Malawi and University of London King’s College.


Grant Thornton UAE: Bridging the Gap in Private M&A Transactions

[caption id="attachment_7701" align="alignright" width="237"] Dubai[/caption]

The increased appetite for mergers and acquisitions (M&A) is prevalent at both a regional and global level. This trend presents plenty opportunity. However trials and tribulations may precede success when considering the MENA (Middle East and North Africa) current market place. For instance, the second most challenging part of being a regional M&A advisor is being able to secure offers on the firm’s entire pipeline and not being able to close deals quickly due to the bid-offer gap being too large to bridge.

Obviously, the first and foremost challenge is having no pipeline at all, or worse, one of poor quality. Thankfully, the market in the MENA region has changed in the past 6-18 months with each sector, one by one, showing signs of vitality with deals closing.

According to Mergermarket Ltd data, while M&A deal flow in the MENA region in Q1 2014 ($2bn) was down 31% from $2.9bn in Q1 2013, activity in Q1 2014 managed to double the Q4 2013 value of $1bn. The top five transactions alone made up 85.3% of the total M&A value in the region during Q1 2014.

Valuation Trends in the M&A Market

Sectors such as food and beverage, healthcare, hospitality, education and oil and gas are leading the way with valuations potentially running away with themselves. Investors are still shying away from cyclical investments such as contracting companies and real estate developers. Whilst today, debt-raising on asset backed deals can be closed with relative ease, equity fundraising is still challenging in this environment, and it is likely to take another 6-18 months before this trend changes. Green shoots in the regional IPO market appears to be following the same timeframe and pattern.

“Thankfully, the market in the MENA region has changed in the past 6-18 months with each sector, one by one, showing signs of vitality with deals closing.”

In the current market, buyers’ value expectations are still very conservative. Whilst buyers do appreciate distressed sellers have left the market, they still consider a conservative bid should be enough to convert a deal. In contrast, sellers who have weathered the storm over the past five years have now moved into better cash positions. They may also have seen promising revenue and profit growth over the past two years, and may now be considering that this is perhaps not a good time to sell.

This is exacerbated by the media recently producing a flood of good news stories, which really do not affect the sellers’ business valuation today or any time soon. However, it does affect the sellers’ confidence, sentiments and outlook. Some sellers have difficulty letting go of a business where their invested capital is significantly more than the current market valuation.

For direct investments into private businesses, the transition from a buyers’ market to a sellers’ market and vice versa is cyclical. This transition could occur in the midpoint of a change from recessionary times, where there could be a buyers’ market or no market at all, and boom times, where sellers have the upper hand.

In the MENA region, 2014 could well be this midpoint as today’s market appears to be neither a buyers nor sellers. It appears to be slowly heading back towards more positive economic times. Therefore the sellers could soon regain the full upper hand in deal negotiations and terms.

Bid offer differentials in the sale of private businesses in the MENA region can be significant to bridge as M&A advisors. Typically bids range between 50% and 85% of the sellers offer price.

Some Ways to Bridge the Gap

Simply convincing a buyer to increase their offer and a seller to decrease their exit expectations in this transitional market is “easier said than done”. Nevertheless, there are different structures that can be used to bridge the gap and facilitate a deal.

Deal terms could potentially soften the bridging process for both buyer and seller. For instance, to help the seller reduce their price expectations; advisors could assist by negotiating better earn out terms (such as a sliding scale or a reduced percentage), or requesting the buyer to deposit a certain portion of the deal consideration into escrow (which will then be paid if the conditions are met without risk to the seller).

Exchange rates can play a key role for sellers looking to repatriate their sales proceeds to their home country. Discussing the future outlook of their relevant currency can sometimes give the seller perspective; if the foreign exchange rate is expected to appreciate considerably in the months ahead, then the bid-offer differential no longer remains material.

To enable the buyer to raise their offer; an advisor could convince the seller to offer some interest bearing, vendor financing on a certain portion of the offer to be repaid post deal in instalments over 2 to 4 years period; or one could encourage the seller to retain a minority share; or even allow the seller to take a non-core asset with them to alleviate the cash flow effect on the buyer.

As the MENA M&A market transitions to be more active and towards a sellers’ market, there are renewed expectations of increased deal flow and increased business valuations in the coming years; an agreed upon theme between regional M&A Advisors.

About the Author

[caption id="attachment_7018" align="alignleft" width="182"] Author: Simi Nehra[/caption]

Simi Nehra is the Corporate Finance Partner at Grant Thornton UAE. Mr Nehra has over 15 years’ experience in financial advisory services, including expertise in corporate finance, due diligence, business valuations, mergers and acquisitions and debt advisory. Mr Nehra has led several advisory mandates in the Middle East and North Africa region spanning a variety of industries. He has also provided transaction support to high profile IPOs on the UAE financial markets and advisory services to UAE government entities.

Mr Nehra is a chartered accountant and a corporate finance designate from the Institute of Chartered Accountants England and Wales. He also holds a BA from the Manchester School of Accounting and Finance. Mr Nehra practiced alongside leading professionals in London before relocating to the UAE.

About Grant Thornton

Grant Thornton is one of the world’s leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, forward looking advice. Proactive teams led by approachable partners in these firms use insights, experience and instinct to understand complex issues for privately owned, publicly listed and public sector clients and help them find solutions. More than 35,000 Grant Thornton people, in over 100 countries, are focused on making a difference to clients, colleagues and the communities in which they live and work.

“Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires.

Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm forms a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions.


Boris Johnson: Fast and Furious, Reasoned and Smart

 He did inhale. London mayor Boris Johnson did, being – in his own words – no stranger to cannabis. He also argued, in one of many silly moments, that if gay marriage was ok, there should be no reason not to consecrate a union between three men and a dog. Mr Johnson since has become much more gay-friendly.

Boris Johnson thoroughly enjoys rocking the politically correct establishment with shocking statements. He is also a well-known flip-flopper. Just after the 7/7 bombings, Mr Johnson declared Islam to be “the most viciously sectarian of all religions in its heartlessness to unbelievers.” Three years later he boldly urged all people to study Islam, join Muslim neighbours in fasting, and visit the local mosque: “You’ll find Islam to be a religion of peace with which you may share many values.”

At times, Mr Johnson can also display his severe lack of sensibility to the plight of those less fortunate as when he commented that the £250,000 annual income he derives from his columns in The Daily Telegraph were “chicken feed.” Mayor Johnson went on to explain that he writes his weekly columns “very fast” in between other Sunday morning activities. The income from his side job is roughly equal to ten times the annual take-home pay of an average British worker.

“He unfailingly gauges popular sentiment, governs his metropolis with great care, and tackles thorny political issues head-on.”

Still, Boris Johnson is nothing short of brilliant and very much in touch with the times. He unfailingly gauges popular sentiment, governs his metropolis with great care, and tackles thorny political issues head-on. This mayor is not one to avoid the inevitable or, indeed, accept political impossibilities. He speaks his mind and voters across nearly all demographics appreciate the attitude re-electing him for a second term in 2012.

With his trademark unruly appearance, Mayor Johnson exudes a can-do spirit often found lacking in British politics where it sometimes seems that muddling-on has been elevated to an art form. He proved an exceptionally able public administrator hosting the 2012 Olympic Games, widely perceived to have been the most perfect of major events ever. He also reinvigorated London’s aging public transport network with countless out-of-the-box initiatives that increased efficiency, reduced cost and improved service.

Fluent in Latin and well-versed in the classics, Mr Johnson has joyfully injected London city politics, and by extension national politics, with a phraseology previously unheard. During a clash with the London Assembly over the city’s budget, in February 2013, the mayor ended up being expelled from the meeting over a technicality.

Realising that his political foes had made a rather dumb mistake since his budget could now not be questioned, he referred to his hapless political foes as “great supine protoplasmic invertebrate jellies.” It is well-neigh impossible not to like a guy who can instantly come up with such a description.

The last of Boris Johnson has not been heard yet. In fact, it doesn’t require the insight of a pundit to foresee a bright future for Boris Johnson. British politics could possibly benefit from a combination of administrative excellence and irreverence.