Hermès: Corporate Savoir Vivre

Horse & Hound magazine recently rated the Hermès Cavale among its top ten saddles in the world – and at almost £5,000 – if you’re looking for sturdy luxury, you would expect to pay nothing less. This particular saddle, hand-crafted by skilled artisans employing the finest leather, is highly prized among today’s most serious show jumpers.

It is a symbol of the longevity of Hermès, the Paris-based luxury goods business, stretching back to 1837 when young Thierry Hermès set up a small workshop in the city’s back streets, fashioning reins, bridles, harnesses, and assorted other tackle for the horse-dependent transport systems of the age.

The fact that Thierry’s company still manufactures high-quality saddles in the 21st century might suggest that Hermès is a traditional business, able to somehow survive in a changed and turbulent world.

In fact, if old Thierry could see what his little family firm produces these days, he would probably be bewildered. The Hermès brand, while holding fast to a commitment to quality and tradition, has another secret for success – its ability to adapt and change with the times while remaining, essentially, a family firm. So, how did a small Parisian saddle-maker become a globally renowned fashion house and high-end purveyor of luxury merchandise?

“Not only does Hermès seek to acquire prized leather workshops, it also recruits some of the best artisans to work in them.”

The Hermès trademark of an elegant horse and carriage is recognised across the globe as an emblem of luxury; not just in saddlery, but everything from status symbol scarves and handbags, leather goods, jewellery and accessories, footwear, perfumery, porcelain, crystal, and ready to wear fashions – an impressive 30,000 separate items in total.

Throughout most of the 19th century, Hermès remained true to its origins in saddle-making, with the crucial difference that, even in the early days, it targeted the top end. Dedication to the highest ideals of craftsmanship and superior materials, meant that Hermès attracted custom from the super-rich of the times. No French nobleman worth his salt would saddle up with anything less than a Hermès.

Hermès rode the choppy waves of the middle of the 20th century, finding new markets, producing new lines and exploiting the reputation of its brand. It already had a strong identity in the USA, thanks to its equestrian heritage, but now it launched an invasion, setting up iconic stores, most notably in Madison Avenue, New York. The American love affair with French chic, class, and style, helped cement the company’s dominant status in the luxury market – a position it still occupies.

No Compromise

In the 1970s, Hermès looked to be in a decline of its own making. Refusing to compromise on its principles of using only the highest quality, natural, and fairly sourced materials, it was being overtaken by competitors who were following the fashion for all things man-made. Fortunately, fashions change, and the Hermès star began to rise again with a change in consumer habits.

As the trend for ecological awareness grew, natural goods once again became sought-after badges of greenness. Hermès also recruited, in 2003, the famed fashion designer Jean-Paul Gaultier to guide the company’s creative drive. His flair and style helped keep Hermès ahead of the game in haute couture. But underlying the glitzy façade, Hermès remained, and remains still, a very traditional operation.

Hermès carries out its own tanning and finishing of hides and skins. It seeks out dependable sources of fine leather, including calf, buffalo, and ostrich. There’s also crocodile from Africa and alligator from the USA. Hermès owns its own tanneries: four in France, one in Italy, and a specialised reptile tannery in Louisiana. The company’s most recent tannery acquisitions, in the Rhone Valley in 2013 and the iconic Tanneries du Puy in Auvergne last year, were, according to a company statement at the time, “in line with the strategy of preservation and development of sources of supplies and knowhow related to them.”

Not only does Hermès seek to acquire prized leather workshops, it also recruits some of the best artisans to work in them. The company has always rejected the mass-production ideal. All items are manufactured in France; often a single artefact being created by hand by one worker, from start to finish. It is the antithesis of the modern business instinct which sees the streamlining of production methods as the best way to maximise profits.

And yet, how many other luxury brands can fetch such high prices – even on the second-hand market? This is just another example of how Hermès contradicts the modern world; relatively small factories dotted across France, turning out expensively produced merchandise, using costly, ethically sourced materials, and selling at eye-wateringly high prices.

The Birkin Bag

Somehow, this strategy has worked, through good times and bad. The company has an unerring ability to spot a trend or development, and react quickly. It also takes advantage of quirky opportunities. When, in 1981, the then chief executive, Jean-Louis Dumas, found himself seated next to Jane Birkin, the English-born actress and singer so beloved of the French, on a flight from Paris to London, he noticed she was having trouble with her hand luggage – a straw bag. Mr Dumas promptly went back to his workshops and had a leather alternative created for her, known ever since as the Birkin bag.

You can’t buy that kind of publicity. And when that icon of fifties style, Princess Grace of Monaco sprained her wrist, she famously used a Hermès silk scarf as a sling. How imaginative – and what a PR gift. Quick-witted and keen-eyed, it was Jean-Louis Dumas who was responsible for turning around the fortunes of the family firm in the 1980s. Trained at Bloomingdales in New York, he decided to concentrate on silk and leather goods, and ready-to-wear, adding new product ranges, but adhering to traditional manufacturing techniques.

The scarf is an illustration of the company’s belief in tradition, but also of its ability to adjust. Hermès had, by the 1930s, already adjusted its operations to take account of the horse’s decline and the rise of the motor car. Saddlebags gave way to luggage, designed specifically for the adventurous new breed of motorist. Hermès designers travelled to North Africa and began a relationship with the Tuareg tribes that continues to this day. From them the company adopted, and adapted, age-old designs for its scarves, made from mulberry leaf-fed silkworms, and later applied Tuareg designs to Hermès’ silver jewellery patterns.

Market analysts were not surprised when Louis Vuitton Moët Hennessy (LVMH), the world number one in luxury goods, made a move on Hermès in 2010. What began as a corporate courtship turned into something much more unpleasant. The Hermès dynasty dug in for a long siege which lasted for four years until a truce was called.

Hermès complained of the apparently underhand way LVMH had secured a large stake in its company. Claim followed counter-claim, and the whole affair was heading to the courts when an agreement was finally reached, and both parties went their separate ways. Axel Dumas, the sixth-generation Hermès chief executive, described the event as “the battle of our generation.” But the fight illustrated the precarious perch occupied by Hermès. Can an essentially family-run business maintain its independence in the shark-infested waters of 21st century big business?

Timeless Opulence

The luxury goods market has taken full advantage of the emerging Asian markets, particularly China, where demand has surged in recent years. But with gloom settling on China, Hermès, together with other elite brands such as LVMH, Chanel, and Dior, are braced for heavy weather. Indeed, in February this year, Hermès warned that the global slowdown would weigh heavily on its sales.

Conventional wisdom has it that, in any economic downturn, the market for luxury items tends to hold up well, even as wealthy consumers consider the wisdom of extravagant spending. As the curve on the graph begins to climb again, opulence comes quickly back into fashion. And Hermès, among other brands, sensibly understands that trading with the Chinese is a long game.

Chinese consumers want quality, and they want internationally-known brands, too – which sees Hermès well-placed. The company is already in the top twenty most searched-for luxury brands in China. Timing, as ever, is all-important. Hermès is still in the process of expending capital in China to establish itself. Holding that line in this climate may prove to be challenging.

But Hermès has a reputation for adapting to the changing climate of commerce. It has recognised, for instance, that Internet trading is fast becoming the norm; the Internet’s share of the market is beginning to eclipse traditional store sales in practically all sectors. Hermès has responded with a series of internet “pop-up shops,” which have proved to be a useful and sophisticated alternative route to market.

Hermès has survived almost two centuries in which turbulence has been the norm. There’s no reason to suppose that it has lost the ability to be savvy and quick to respond to changing circumstances.

Not everyone is in the market for a new saddle, but they say that every 25 seconds, somewhere in the world, someone buys a Hermès scarf. If you’re looking for a measure of business success, that statistic is hard to beat. Whatever the future holds for Hermès, one imagines that the world’s silkworms are going to be kept busy munching mulberry leafs for a long time to come.

[caption id="attachment_11181" align="aligncenter" width="138"] Author: Tony Lennox[/caption]


PwC: Nigeria - Prosperity Beyond Oil

PwC recently published a report in conjunction with the Lagos State Chamber of Commerce and Industry (LCCI) on the key macro-economic challenges in Nigeria. PwC reviewed the impact of low oil prices on economic indicators and also considered the question of priority sectors that Nigeria should target for diversification efforts. This analysis also points to areas rich with investment opportunities.

Nigeria has the largest economy in Africa and the 22nd largest globally. Many experts have predicted that the economy has potential to rise through the world rankings to top 10 by 2050 with a projected GDP of US$6.4 trillion, surpassing Germany, the United Kingdom, and France. This cannot be achieved if the country continues to rely heavily on crude oil. Diversification of the economy is required as Nigeria’s intrinsic potential lies beyond oil.

“Despite the negative statistics, several sectors are considered to hold huge opportunities for investment. Based on PwC research, these are agriculture, downstream petroleum, retail, and ICT.”

The devastating impact of the slump in oil price on the economy over the past 18 months is an eye opener. Harnessing the potential of the country outside oil has become imperative and the only way the predictions can ever be achieved.

Half Full or Empty?

Nigeria’s economy grew by 2.7% in 2015, which represents the slowest growth in the past five years – much lower than the 5-year real GDP average of 4.8% annually. Real growth decelerated sharply to 2.1% in Q4 2015, reflecting the weakest quarterly performance following a contraction in growth across industries and moderation in the services sector.

[caption id="attachment_11187" align="alignleft" width="343"] Top Business Challenges[/caption]

The slow growth is largely due to the real growth in the crude petroleum and natural gas sector which was -5.4% in 2015, even as oil exports declined by 49% in 2015. The performance of the manufacturing sector was also unimpressive with real growth at -1%. This was largely due to the impact of the unavailability of foreign currency for raw materials and intermediate products. The drop in the country’s foreign currency revenues from crude oil means that the Central Bank of Nigeria (CBN) has struggled to meet the foreign currency needs. The current account is in deficit.

Measures have been implemented such as limiting the products for which foreign currency can be obtained at the official rate of exchange and unplanned delays in meeting valid applications for foreign currency through formal banking channels. Many businesses have been forced to look for alternatives in the parallel market which has traded at a 30%-100% premium to the official rate of NGN199/USD since the start of 2016 due to high demand. The impact on businesses is significant costs, due to exchange rate losses on foreign loans or cost of inputs – which the market has not been able to absorb in the form of higher sales prices.

Despite the negative statistics, several sectors are considered to hold huge opportunities for investment. Based on PwC research, these are agriculture, downstream petroleum, retail, and ICT.

Business Reactions

For businesses that are well established in the country, there is a common theme amongst their top executives. PwC conducted a survey to understand their assessment of the current situation and their reactions to ensure survival through these challenging times.

What has happened?

Declining sales – A significant number of companies (61%) experienced declining sales over the past 12 to 18 months with the highest impact across the healthcare, telecommunications as well as the oil and gas sectors.

Investment decision – Close to half of the companies cited the delay in investment decisions as a significant implication of the current uncertain business environment. Other firms have taken a long term view and commenced investments in domestic substitutes (14.8%). Some companies have been forced to diversify across products and/or markets whilst others have cut back on CAPEX plans.

Reaction for sustainable value – Companies are adapting to the current economic realities by improving operational efficiency in the face of declining, or at best sticky, revenue growth. According to the survey, 42% of respondents have embarked on cost optimisation techniques with 14% reducing dependency on imports and 16% sourcing local substitutes. About 18% of companies are retrenching staff.

It is almost a knee-jerk reaction to downsize in these economic times or to delay investments. However, companies should be mindful of their short term actions not to jeopardise long term opportunities. For example, in the ICT and services industries, which rely on innovative ideas from staff for competitive advantage, it may be advisable to identify, retain, and motivate highly skilled staff rather than retrench them. Similarly, some assets and securities are currently under-priced, so it is an opportunity to consider investment decisions now given the significant discounts subject to availability of funds.

Government Response

A few reactions from the government are summarised below:

Monetary easing – In the November 2015 Monetary Policy Committee meeting, the cash reserve ratio was reduced to 20% and the monetary policy rate was reduced from 13% to 11% in order to boost liquidity and credit to critical areas of the economy.

Foreign exchange policies - The CBN harmonised the two existing official rates in February 2015 resulting in the closure of the Wholesale Dutch Auction System (wDAS) and the Retail Dutch Auction System (rDAS) window. As a result, there was a devaluation in the exchange rate from NGN 165/USD to NGN 199/USD. The rate has been somewhat fixed at this level since February 2015. In addition, administrative measures were introduced to restrict some 41 items from official access to foreign currency. There seems to be reluctance by the CBN to further devalue and this has created some uncertainty for investors.

Import substitution – Some areas have been targeted for import substitution since 2012 by imposing customs duties or special import levies on certain agriculture commodities – specifically wheat, rice, and sugar. More recently, the bucket was expanded to the manufacturing and automotive sectors. The greatest constraint in the implementation of the import substitution strategy is probably the lack of trade and logistics infrastructure.

Taxation – The 2016 budget proposal anticipates government spending to increase 35% to NGN 6.08 trillion, driven largely by a 215% increase in capital expenditure and social investment programmes. The government expects to fund a large chunk of the budget by generating more revenue from taxation. Some of the activities of the government towards expanding the tax base and increasing compliance are the introduction of technology, aggressive compliance enforcement, proposed joint tax audits, use of consultants, and more collaborations amongst the various revenue authorities.

The implementation of stamp duty on deposits, payment of corporate tax on interim dividends, and other similar initiatives are expected to boost government revenue while the focus on efficiency will help put cost under control. Recent developments also suggest a trend of imposing fines for noncompliance with regulations to promote respect for rule of law but also to generate revenue.

The Takeaways

The Nigerian business environment is in a state of flux. But the size of the Nigerian market still provides huge opportunities for investors and corporates even in these challenging times. Businesses are being forced to transform themselves very quickly, not just in optimising costs but in changing the way they operate. For example, historic treasury techniques and policies have been ripped apart under the current currency situation.

While businesses have to be innovative to survive, they must also pay attention to their tax and regulatory compliance as the government will be strict with noncompliance. Businesses also need to develop a tax and regulatory strategy that is embedded within their overall business strategy. Some of the opportunities that companies can consider to align with government strategy is to take advantage of incentives available for domestic production and for exports. Some of these include:

Pioneer tax holiday for the company and shareholders for five years if they qualify;

Import duty and VAT exemption for agricultural plant machinery and equipment;

Reduced import duty for completely knocked down items;

Infrastructure incentives which can grant tax relief of 30% of the cost if it is of a public nature plus rural investment allowance of up to 100% in certain cases;

Total profit exemption for exported goods under certain conditions;

The ECOWAS Common External Tariff and trade liberalisation scheme that allows flow of goods free of duty within West Africa under certain conditions and which gives manufacturers access to a larger market.

Overall, preserving existing value and unlocking new ones for investors and other stakeholders will require businesses and their executives to carefully consider how best to navigate the challenging landscape while keeping potential opportunities in focus.


Nick D’Aloisio: Coding Philosopher

Oxford undergraduate Nick D’Aloisio is no average student. The self-taught programmer became a teenage millionaire in 2012 when he sold an app he had built for $30 million. Summly, the monetized app, had attracted a wide range of high profile investors including a number of Hollywood stars and the wealthiest man in Asia, Hong Kong billionaire Li Ka-shing. By the time Mr D’Aloisio sold Summly, it was rated the top news app in 28 countries.

The app uses algorithms to compress long pieces of text from select news sources into a few representative sentences. Summly creates up to a dozen news summaries which are released twice daily and designed to be displayed on a smart phone or tablet. At a maximum four hundred characters, the app provides more information than a tweet, but rather less than a full article.

When Yahoo! bought the news aggregation app the company appointed the teenage Mr D’Aloisio as product manager charged with developing Summly into Yahoo News Digest which went on to become one of the 2014 Apple Design Award winners.

Mr D’Aloisio lived in Australia until he was seven when his family moved to London. His parents – mum a corporate lawyer and dad a company executive – encouraged the kids to develop their own interests. The young Mr D’Aloisio spurned television, preferring instead to make films, build model railways, and dabble in 3D rendering.

Articulate, imaginative, creative, and grounded, Mr D’Aloisio began designing iPhone apps when he was twelve years old, working in the traditional geek manner – alone in his bedroom. He taught himself the Objective C coding language with a view to building apps. “I just saw a massive opportunity and I had lots of ideas. Every app I developed was like a learning exercise and I’d became better at it through trial and error.” The first app Mr D’Aloisio uploaded to Apple’s App Store generated an income from day one.

Mr D’Alsoisio’s curiosity about natural language processing led him to study Russian, Greek, Latin, and Mandarin. He became fascinated by concepts such as grammatical frameworks, morpheme parsing, and linguistics. Scanning the Internet for useful information, he soon realised that he needed a better way to determine, at a glance, what was worth reading. This prompted him to develop Summly. Mr D’Alsoisio’s focus has now switched from linguistics to computer languages. “I’m literate in a few of the latter, but less so in the modern languages used now,” he admits.

He has eschewed the millionaire lifestyle and stepped back from Silicon Valley in order to study Computer Science and Philosophy at Oxford: “I’m not at Oxford for the degree per se; it’s the intellectual environment I most appreciate.”

“What I find refreshing at Oxford, compared to Stanford, is that computer science is seen as very theoretical and mathematical. It is not at all considered an entrepreneurial exercise. In Silicon Valley everybody only cares about making money. At Oxford it’s more the pursuit of knowledge that counts.”

Mr D’Aloisio is a philosophical, self-assured, and mature young man: “Time is the new currency,” he concludes. With an income assured for life, Mr D’Aloisio priorities have changed: “Money is one way of measuring success but the way I prefer to gauge achievement is to discover how far I’m willing to pursue my interests and how well rounded I can become as an individual.”

Mr D’Aloisio is self-assured and happy to carve out his own path in life. “I don’t feel pressure from outside. It’s all my own expectations. I saw that with Summly before it was a success; I had nothing to lose because I was enjoying it. As soon as you stop enjoying what you do, suddenly the outcomes are predicated on money, fame, success, whatever. But when you are enjoying it, they are just a bonus.”


Evan Harvey, Nasdaq: Where the Market Stands

The stock exchange industry has been increasingly active in advocating for smart and strategic disclosure of environmental, social, and corporate governance (ESG) performance data. Investors use these non-financial metrics to evaluate the health, resilience, and sustainability of public companies. And these are no longer the niche investors—those exclusively dedicated to socially responsible investing (SRI) or impact investing. This is common practice at the largest and most diverse investment firms in the world.

Up until recently, many investors would examine companies for ESG red flags: dependency on fossil fuels, conflict minerals in the supply chain, doing business in corrupt markets, and so on. Some investors screened out alcohol, tobacco, and firearms companies as a matter of course. But the trend has turned towards an inclusionary – or positive screening – model. In theory, this method can mitigate risk and generate alpha.

“According to a 2015 report from UBS and the Sustainable Accounting Standards Board (SASB), intangible assets have become the real drivers of company valuation.”

According to a 2015 report from UBS and the Sustainable Accounting Standards Board (SASB), intangible assets have become the real drivers of company valuation. Fluid dynamics, such as brand value, reputation, health and safety controls, are the necessary components of an investment algorithm. Asset managers believe that sustainability metrics in particular can increase operational efficiency, create more value, and boost brand equity.

The audience for this data goes beyond investors. Regulators, index providers, credit rating agencies, and even consumers are asking more questions, digging deeper into the operational efficiency of corporations. Stock exchanges are, in some very fundamental ways, the only institutions that intersect with all of these stakeholder groups – and they, too, have jumped into the fray.

The State of the Industry

The World Federation of Exchanges (WFE), as part of its ongoing commitment to explore sustainable business practices and provide guidance to exchange members, conducts an annual survey on this topic. The most recent data (2015) was provided by 56 stock exchanges, which represents 93% of WFE members and an overwhelming majority of all the exchanges currently operating around the world. Geographically, the survey respondents represented EMEA (43%), Asia Pacific (37%), and the Americas (20%). See the table below for a complete list.

[caption id="attachment_11213" align="aligncenter" width="635"] Table 1: Survey Participants[/caption]

Since stock exchanges are diverse in structure and purpose, it is useful to consider the following: 38% of the exchanges listed above are themselves publically listed companies (on their own exchange); 16% are demutualised entities; and 14% are private limited companies, almost exclusively owned by their members.

When asked if they had ever received specific inquiries from investors on sustainability issues, 22 exchanges answered affirmatively. In response to this result, the WFE urged member exchanges, “to respond to this heightened investor awareness of sustainability issues by ensuring the stability, fairness, and transparency of their markets and at the same time nurture investor confidence by the provision of information.” This dynamic was central to the survey, in addition to the immediacy and acknowledgement of the perils of climate change.

Sustainability Disclosure

Many exchanges (82%) had already been engaged in some kind of sustainability-related initiative or event at the time of the survey. While most of this activity was concentrated at the larger end of the exchange spectrum, 59% of medium-sized exchanges and 51% of small exchanges concurred. Survey authors concluded that, “exchanges feel they have an important role to play in promoting and improving transparency on global capital markets.”

But when you look more closely at specific exchange practices – such as the prevalence of a listing rule or guideline related to ESG disclosure – the results are mixed. Most exchanges enforce corporate governance requirements for their listed companies, but very few go further than that. Only six exchanges had their own ESG-related listing rules on the books at the time of the survey. This number has since grown to ten exchanges. Another 26 have some related sustainability guidance, mostly driven by market regulators or local lawmakers, but most of those are voluntary disclosures. And it still leaves 24 exchanges with no rules and no explicit guidance for listed companies related to sustainability.

[caption id="attachment_11214" align="aligncenter" width="743"] Table 2: ESG Indexes[/caption]

Even the most progressive exchanges are not likely to be stewards of this corporate disclosure data. Most exchanges (84%) counsel public disclosure of the required data, either in part or in full. The survey also highlights the value of a “comply or explain” rationale; BM&FBOVESPA (Brazil) and the Johannesburg Stock Exchange both leverage this approach. It requires companies to either disclose specific metrics – GhG emissions, for example – or publish a reasonable rationale for not doing so.

Indexes

Exchanges are more than just listing venues. Many of them are also financial product innovators, especially when it comes to the indexing business. Exchanges have created or licensed thousands of indexes, but very few that depend on ESG or sustainability inclusion criteria. There were 21 such indexes in operation at the time of the WFE survey. That number has grown over the last year as well.

“It is clear from our analysis of the survey results,” the authors concluded, “that many exchanges are eager to learn more about – and play a role in the promotion of – sustainability and transparency on ESG issues.” Indeed, the WFE itself took a more active role in the promotion of ESG transparency by issuing formal guidance on the subject in late 2015. i

About the Author

[caption id="attachment_11036" align="aligncenter" width="219"] Author: Evan Harvey[/caption]

Evan Harvey is the Director of Corporate Responsibility for Nasdaq. He also serves on the Board of Directors for the UNGC US Network and chairs the Sustainability Working Group at the World Federation of Exchanges.


African Risk Capacity: Africa Takes the Lead in Managing Climate Risk

Climate negotiations in Paris last year focused the world’s attention on the fact that Africa’s vulnerable populations will be shouldering most of the burden of rising temperatures despite having barely contributed to global greenhouse gas emissions.

Greater rainfall extremes and higher temperatures tied directly to climate change are already starting to impact vulnerable countries across the continent, in the form of more frequent and severe weather-related disasters.

These disasters have a devastating impact on the agricultural sector in Africa which employs about two-thirds of the continent’s labour force and a majority of the rural poor. When a natural catastrophe strikes, lives are lost, assets are depleted, and development gains are reversed, forcing more people into chronic hunger, malnutrition, and destitution.

Extreme weather events can force thousands of people to leave their homes for good and to sell or slaughter the livestock on which their livelihoods depend. This deepens poverty cycles and, at worst, can reverse an entire decade of development progress. It also contributes significantly to transnational and transcontinental migration.

While the international community has done much to help respond to natural disasters in Africa, funding is secured on a largely ad hoc basis and rarely matches what is required. By the time emergency relief is mobilised and actually reaches affected populations, much of the damage has been done.

The World Bank Group warned that 100 million more people would be driven into poverty by 2030 if nothing is done to curb the impact of climate change. The international community has been repeatedly called upon to honour the differentiated responsibility for global warming and to drive the necessary adaptations to control its impact.

“ARC uses weather information, such as satellite rainfall or cyclone track and intensity data, to accurately estimate the hazards associated with severe weather events and their impacts on communities.”

But it is Africa itself which has taken the lead in bringing together one of the most collaborative and innovative solutions to extreme weather risk and climate change yet.

The continent is harnessing the powerful tools of risk assessment, management, and transfer, already used in developed countries through insurance, to shift some of the burden of climate risk to the international financial markets, where it can be more efficiently managed.

African governments have joined together through the African Risk Capacity (ARC) to create a continent-wide risk management system which includes integrated early warning, risk reduction through contingency planning, and risk transfer through a catastrophe risk pool.

ARC was established in 2012 through a collaboration of 18 African Union member countries which has now grown to 32. It is made up of two entities, the ARC Agency, a specialised agency of the African Union and its financial affiliate, a mutual insurer capitalised by the UK and German governments with interest-free loans which to date total $95m.

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ARC uses weather information, such as satellite rainfall or cyclone track and intensity data, to accurately estimate the hazards associated with severe weather events and their impacts on communities.

ARC member countries participating in the risk pool pay annual premiums based on the frequency and severity of impacts and the maximum pay-out amount required. An insurance pay-out is triggered when a pre-agreed level of impact is reached in a participating country, based on ARC’s early warning and risk modelling platform, Africa RiskView (ARV). The pay-out increases with the scale of the impact. The funds support the implementation of pre-certified contingency plans, a prerequisite for taking out an insurance policy, which ensure quick and direct assistance to vulnerable communities.

ARV’s early warning component allows authorities to be forewarned as a crisis unfolds, and the parametric nature of the insurance policy enables pay-outs to be made within days of a disaster’s impacts being felt.

With its unique public-private structure, ARC is the first of its kind in Africa and is already starting to make an impact.

In September 2014, satellites detected a major rainfall deficit in the Sahel. Senegal, Mauritania, and Niger – three of the countries that formed ARC’s inaugural risk pool – were able to use ARV to determine the areas and communities that would be worst affected.

The countries immediately refined their drought contingency plans and prepared to assist the identified vulnerable populations. Having paid ARC a combined premium of $8m, these countries received pay-outs totalling more than $26m at the end of their agricultural seasons in January 2015, before a UN aid appeal to finance a response had even been announced.

The pay-outs were used to buy livestock fodder and staples and were given out as cash distributions, benefitting more than 1.3 million people and over half a million livestock.

Studies have shown that every dollar spent on ARC saves over four dollars in international aid. ARC wants to spread these advantages across the continent, aiming to reach thirty countries by 2020. This target will see the transfer of more than $1.5bn of drought, flood, and cyclone risk, indirectly insuring around 150 million people in Africa – a big share of the G7 global goal of insuring an additional 400 million vulnerable people against climate risk.

As ARC expands, more governments will be able to benefit from embedding disaster preparedness and financing in African-owned risk management systems. There are also plans for International Organisations and NGOs to participate in ARC, working together with governments to develop collaborative contingency plans.

ARC is also developing a product to ensure African governments’ risk management investments are sustainable and resilient to future climate shifts. ARC’s Extreme Climate Facility (XCF) will provide climate adaptation financing to countries impacted by major climate change shifts. To do this, ARC is reaching out to donors, such as the G7, to maximise the benefits of the premium payments from African governments.

Finally, ARC also wants to amplify the protection and expertise that insurers can offer in Africa by licensing its software, Africa RiskView, to support agricultural development through better climate risk management. The initiative, in partnership with broker Willis for a pilot phase, will help protect investments in the sector and provide additional innovative finance to help ARC maintain and enhance ARV and to stay financially viable in the long-term.

ARC is a true partnership that brings together scientific and policy communities with private, public and mutual sectors in Africa and across international risk markets. It is a vehicle that will allow Africa to approach the challenges around climate change as an opportunity to take action.

Climate change will have to be fought on multiple fronts, of which one critical tool will be helping countries move from managing crises to managing risks. Through ARC, Africa is ready to take on that challenge.


CFI.co Meets Mohamed Beavogui & Simon Young

[caption id="attachment_14561" align="alignright" width="300"] African Risk Capacity: Mohamed Beavogui and Simon Young[/caption]

African Risk Capacity (ARC), an organisation helping African governments manage natural catastrophe risk, has gained major international attention in recent months. ARC was endorsed by G7 Leaders in May 2015 as the model upon which to expand climate risk insurance across developing countries.

ARC received further pledges of support as a key component of addressing loss and damage from climate change at the Paris UN-FCCC COP21, and is recognised as an embodiment of the UN Secretary General’s Climate Resilience Initiative – anticipate, absorb, reshape – as highlighted in the SG’s report for the World Humanitarian Summit One Humanity: Shared Responsibility.

Two leaders are guiding its rise, directing ARC across its two entities - ARC Agency, a specialised agency of the African Union which engages directly with its member African governments, and its financial affiliate ARC Insurance Company Limited (ARC Ltd), a mutual insurer implementing highly cost-efficient coverage for climate risk for member countries using a strong capital base and tapping the international risk markets.

Mohamed Beavogui has been leading ARC Agency as director general since September 2015 and is already applying his vast experience in agriculture finance and institution-building to shape the future of ARC. He works alongside ARC Ltd CEO Dr Simon Young who has launched and run the insurance company for the past two years after having set up a similar risk pool in the Caribbean.

The management team collectively runs ARC by playing to their strengths, with Mr Beavogui tapping into his development experience and network of high-ranking African officials while Dr Young draws on his extensive natural catastrophe risk modelling skills and his experience working with reinsurance and weather markets on emerging market projects.

The pair have come to ARC from very different backgrounds, both specialists in their own sector.

A volcanologist by training, Dr Young first worked for the British Geological Survey after completing his PhD and was the first director and chief scientist at the Montserrat Volcano Observatory during the peak phase of the volcanic eruption which devastated large parts of the island.

After years of helicoptering over active volcanoes, Dr Young moved into the natural catastrophe risk management and financing field, building a reputation as a leading expert over the subsequent fifteen years.

During this time, he worked with numerous private and public sector organisations on disaster insurance and risk reduction projects in Latin America, the Caribbean, and most recently in Asia-Pacific and Africa.

“I was interested in helping vulnerable communities and countries better understand and manage their natural disaster risk and also wanted to explore and test how financing tools such as insurance could be used as part of the solution to dealing with catastrophe risk, particularly in light of the rapid rise in vulnerability due to economic development and climate change,” Dr Young says.

Dr Young was a leading member of the consulting team which created the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a natural disaster insurance pool for the Caribbean islands. He also advised CCRIF on its expansion into Central America and on structuring and placement of the CCRIF Cat Bond, the first to be placed through the World Bank Treasury, in 2014.

Appointed the inaugural CEO of ARC Ltd in 2014, Dr Young has been managing the operations of ARC Ltd as well as the insurance underwriting and international risk transfer processes. Mr Beavogui, on the other hand, has been working in development for over thirty years with a focus on policy, strategy, project management and the building of public-private partnerships. An engineer and trainee of Harvard Kennedy School, the Guinean national rapidly rose through the ranks of the UN Food and Agriculture Organisation before moving to the UN Office for Project Services as regional director for West and Central Africa.

In 2001, Mr Beavogui joined the International Fund for Agricultural Development (IFAD), becoming part of the management team as director for Africa and subsequently director of Partnerships and Resource Mobilisation, where he delivered lending and grant programmes, managed IFAD’s portfolio of projects, and was senior advisor to the IFAD president.

Last year, ARC’s African member countries elected Mr Beavogui to become ARC Agency’s first fixed-term director general. “I was honoured to have been chosen to join ARC, an entity which is enabling my continent, Africa, to lead in one of the most collaborative solutions to climate change yet,” says Mr Beavogui.

The management duo is united in their drive to make ARC a major instrument in managing natural catastrophe risk across Africa, ranging climate perils such as droughts and floods to potential outbreaks of disease.

“ARC has been developed as an African solution to tackle African problems. The model was proven in its first year when it paid out more than $26m to countries in the Sahel following a drought, helping 1.3 million affected people,” the ARC Agency director general said. “We aim to continue the expansion of ARC across the continent, with a target of efficiently managing $2bn in climate risk by 2020, protecting more than 150 million vulnerable people in Africa.”


Venezuela: Economic Decline Too Steep to Tabulate

[caption id="attachment_11224" align="alignright" width="266"] Government Building in Caracas, Venezuela[/caption]

Venezuelan social media is a curious thing. There are few pictures of parents proudly showing off their kids, or of people buzzing with their hazy pictures of a boozy Friday night out littered with endless LMAOs and LOLs. Instead, the social web in this corner of South America is largely punctuated with desperate requests for life-saving meds, unavailable at hospitals or pharmacies.

Amidst all the obvious signs of a nation on the verge of collapse, Venezuela is awash with little barometers like social media which offer up of clues of the impending implosion.

Seasoned observers of the inner workings of South America may think they’ve seen all this before, and indeed there have been similar breakdowns across a continent which has so often been the main stage for political systems that promise much and deliver next to nothing. However, Venezuela is different. It pushes the envelope of mismanagement.

"Venezuela is on the brink. On the brink of what, exactly, is anyone’s guess."

Public services are faltering with state offices open only twice weekly for limited hours. Inflation has eroded the livelihoods of three quarters of the population with close to 80% of Venezuelans now subsisting below the poverty line. Crime has soared to the point where it can neither be fought nor recorded. Caracas now trumps Tegucigalpa in Honduras as the world’s most dangerous city with 124 homicides per 100,000 inhabitants in 2015.

Price controls have led to shortages of food and consumer products. Most grocery stores feature but empty shelves and racks. The scarce delivery vans that manage to arrive do so under heavy armed guard and with throngs of desperate would-be shoppers in their wake.

Promptly and predictably, a black market filled the void. Here, everything is available, albeit at a price – one quoted in US dollars only available to Venezuelans at the vastly inflated black market rate – over a hundred times higher than the official one of 6.3 bolivares (Bs) for essential goods.

Venezuela operates a tiered exchange rate system split into three categories – Bs 6.3 (essential imports and the most widely used one), Bs 12 (for slightly less essential imports), and Bs 172 (for overseas travel and everything else). Since the central bank has virtually no hard currency left to sell, the entire exercise is one of pure semantics. On the black market dollars may be bought for Bs 1,150.

Depending how it is calculated, the national minimum wage of Bs 7,500 per month represents either a respectable $1,190 or a rather miserable $6.82. Since food, medicine, and many other of life’s necessities are unavailable at official prices, Venezuelans are forced to do their shopping on the black market where most prices are quoted in US dollars or tied to the greenback.

The official price for a kilogramme of coffee is Bs 700. However, no coffee is available for sale at that price. On the black market, coffee may be readily bought, but at Bs 4,000 per kilogramme – $634 per the official exchange rate (that determines the now completely eroded purchasing power of the minimum wage) or a much more reasonable $3.64 which even so represents over 53% of the minimum wage. Whichever way, most Venezuelans can no longer afford to drink coffee.

Venezuela is on the brink. On the brink of what, exactly, is anyone’s guess. Social unrest is the order of the day. Political life, too, has become unhinged with President Nicolás Maduro – a bus driver – refusing to give in to demands for a recall referendum.

When Mr Maduro was ushered into power in 2013 upon the death of Hugo Chávez, the nation expected the Bolivarian populist revolution, unleashed by the paratrooper-turned-president in 1999, to come of age – and leave behind its rage.

Despite the optimism, there was a certain inevitability about the continued demise of the nation. What few could have predicted though, was the depth into which the Maduro Administration would blindly stumble.

Before declaring a state of emergency in mid-May, President Maduro was faced with a country suffering the effects of a prolonged drought. Water shortages hit the entire nation. Dried-up reservoirs shut down most hydropower stations, plunging vast swathes of the country in darkness.

The president’s solution was to impose a two-day work week for civil servants and urge Venezuelan women to refrain from using hairdryers. In Caracas, trucks delivering potable water to shantytowns are now regularly hijacked at gunpoint, their cargoes sold at a premium in more upscale districts.

In fairness to President Maduro, the sinkhole into which the economy is disappearing is not entirely of his own making. Venezuela sits atop the world’s largest proven oil reserves, estimated at anywhere between 300 to 1,200 billion barrels, although most of it in the form of extra-heavy crude from the Orinoco tar sands which is difficult and costly to process.

Since the 1920s, the country is one of the world’s leading oil exporters. It has long suffered from the Dutch Disease – a malady that strikes and paralyses resource-rich nations, and causes economic lethargy. While the Dutch quickly managed to overcome their economy’s sluggishness, Venezuela has not – the country’s manufacturing base is depressingly slim and oil remains the only pillar of note supporting the nation, responsible for 52% of GDP and close to 95% of export revenue.

As the price of oil fluctuates, often wildly, so does Venezuela’s economic fortune. The government’s 2015 budget presumed an average oil price of $100 per barrel. However, state-owned oil company Petróleos de Venezuela (PDVSA) managed to obtain barely half of that for its crude. Worse, deficient maintenance and a dearth of investment conspired to reduce the country’s output to under 2.5 million barrels per day. Notoriously inefficient and plagued by nepotism, PDVSA currently spends more than $20 to extract, process, and transport a single barrel of (light crude) oil. By early 2016, the country was earning a profit of slightly under $4 for each barrel of oil exported. Though profitability has since increased marginally, Venezuela is lightyears away from the oil bonanza it lived before.

With its public finances in disarray and economy floored, Venezuela has run out of cash to pay for essential imports and the settlement of bills. The country owes over $150m to Indian pharmaceutical companies, some of which were bankrupted because of unpaid invoices. Airlines have cut back the number of flights to Caracas after the central bank refused to allot hard currency for the transfer of the receipts from ticket sales. Toilet paper has run out as well. President Maduro ascribed its disappearance to industrial sabotage and ordered the army to seize the few paper mills of the country. However, the generals also proved unable to supply the goods.

Meanwhile, the government has effectively given up on tabulating the economic decline. Inflation figures are no longer compiled. The exact size of the budget deficit is also unknown. The central bank just prints whatever cash the government wants to spend. Though the bolívar (Bs) exchange rate has been fixed at ten to the dollar, no greenbacks are to be had at that price. The black market rate for the dollar hovers around the Bs 1,100 mark. Inflation is now guesstimated to run at an annual clip of 500% and is expected to reach 1,700% next year – provided the present government remains in power and sticks to its failing ways.

Price and currency controls are, however, a boon those select few with the right connections. The central bank suspects up to $2.5 billion from its already dwindling currency reserves may have been siphoned off illegally. Importers of goods deemed essential, such as food and medicines, may buy hard currency at lower exchange rates. By submitting fake invoices for non-existing orders, importers have managed to buy dollars on the cheap, only to immediately sell them on the black market at an astronomical profit.

The country’s economy is in the process of imploding on itself. GDP is expected to contract by 8% this year with further shrinkage expected in 2017.

Curiously enough, China is likely to be the big loser of Venezuela’s meltdown. Beijing has invested massively in the country. Construction of a high speed rail network – set to be a lavish symbol of solidarity between two nominally socialist giants – has shuddered to halt. Thousands of Chinese workers have simply upped and left, deserting the sites and route through the heart of Venezuela for the safety of their homeland. The abandoned buildings, tools, and equipment have long-since been raided.

As matters reach a head, mass protests, looting, and rioting are now the accepted norm around Caracas, prompting calls for outside intervention. Sadly, and this is the reason behind much of the world being reduced to the role of idle bystander, politics may have already created a barrier to external help.

Venezuela has few friends left willing or able to help. The United States is keeping a safe distance from this potential quagmire. Brazil is too absorbed by its own home-grown crises – political, economic, and social – to take note. Way out left field, in the space normally claimed by harmless ideological loonies, Venezuela’s only remaining friend is Cuba – not a country from which to expect any financial solace.

Former Uruguayan president José Mujica, a guerrilla fighter who went mainstream and headed one of Latin America’s most successful and widely respected governments, summed it up nicely when he recently called Venezuelan president Nicolás Maduro “mad as a goat.” Mr Mujica urged the Venezuelan people to “stop fighting each other” but held out little hope of that happening: “They’re all crazy over there.”


European Investment Bank: Investment Plan for Europe

Investment Plan for Europe - Paradigm Shift in the Use of Public Resources

[caption id="attachment_11237" align="alignright" width="300"] Author: Werner Hoyer[/caption]

The Marshall Plan did much to inject life into the post-war recovery of Europe. Initially comprising $13 billion, mostly in direct aid, the plan constituted a substantial economic stimulus package for war-torn European countries. In addition, the Marshall Plan was one of the first elements of European integration, as it erased trade barriers and set up institutions to coordinate the economy on a continental level. This built the framework for the many years of almost unbroken post-war economic growth that were to follow; and for productivity gains and industrial expansion.

The economic success of the Marshall Plan supplied the spark to set a political chain reaction in motion. In 1957, the Treaty of Rome was signed, which launched the European Economic Community. This was followed by several waves of enlargement, the introduction of the single market, and the economic and monetary union, which became the foundation of a stable and growth-friendly economic environment that supported the success of Europe´s economy and people’s jobs for many years.

However, with the advent of the digital revolution in the 1990s, productivity growth in the EU began to slip behind that in the US and other leading trading partners. This trend has undermined the comparative ability of European firms to compete and to provide rewarding jobs and a high standard of living. Low comparative productivity and misallocation of investment, alongside many structural weaknesses, also explain why the global crisis hit Europe so hard, and why EU-wide recovery still presents such a challenge.

"Added together, the investment gap, aggravated by an increasing innovation and competitiveness gap, amounts to several hundred billion euros a year – which gives a clear indication about the challenge Europe is facing today."

Principal among the causes of the continued malaise has been a massive investment shortfall, with private sector firms unwilling to commit to new spending in an unfavourable climate, and public expenditure dramatically slashed by years of fiscal consolidation.

Added together, the investment gap, aggravated by an increasing innovation and competitiveness gap, amounts to several hundred billion euros a year – which gives a clear indication about the challenge Europe is facing today.

Investment Plan for Europe

In order to regain its competitiveness, Europe’s economy requires a concerted approach that looks at enabling factors as well as direct innovation performance and sufficient access to finance for economically desirable modernisation investments. This is where the Investment Plan for Europe (IPE) comes into play. It consists of three components:

Support for strategic investment without increasing public debt

Promotion of investment through improved advisory services

Removal of barriers to investment.

The first and probably most prominent part of the IPE is the European Fund for Strategic Investments (EFSI). This is an EU initiative launched jointly by the European Commission and the EIB Group, comprising the European Investment Bank (EIB) and the European Investment Fund (EIF), to assist in overcoming the current investment gap by mobilising private financing for strategic investments and SMEs.

Despite its name, EFSI is not a separate fund or a legal entity in its own right but a contractual arrangement between the commission and the EIB, consisting of an EU guarantee of €16 billion complemented by an EIB capital contribution of €5 billion. It is expected that EFSI support will secure around €60 billion of additional financing by the EIB Group thus further triggering a total of €315 billion in investment in the union over a period of three years.

EFSI allows the EIB Group to do considerably more than it did in the past in terms of financing innovative, higher risk projects. This will enable the group to address market gaps and encourage other financers, public or private, to participate, unlocking investment that is currently slowed down or hindered by economic uncertainty. Emphasis will be put on key sectors identified under the EFSI regulation, although it needs to be stressed that no geographic or sector quotas apply.

Hence the focus will be placed amongst other things on:

Transport, energy and the digital economy;

The environment and resource efficiency;

Human capital, culture and health;

Research, development and innovation; and

Support for SMEs and mid-caps.

To achieve this, EFSI has two components: An Infrastructure and Innovation Window (IIW) to be deployed through the EIB; and an SME Window (SMEW) to be deployed through the EIF to support SMEs and mid-caps.

The EIB Group will also continue to develop new tailored products to address specific market failures, based on a needs assessment. The main benefits of EFSI are that the EIB can offer:

New products (notably in subordinated debt/equity-type financing);

Scalable risk-sharing instruments with commercial banks as well as national promotional banks; and

Financing for new client groups (e.g. in the field of mid-caps, turn-around financing).

As speed is of the essence, the EIB and the EIF rapidly deployed teams to identify potential projects for EFSI support. This was possible due to the group’s decision not to wait for the EFSI governance structure to be put in place, but to start with the roll-out as quickly as possible through the so-called warehousing of projects – still complying with the legislative process, but accelerating all efforts to get the job and growth engine started.

So far, the EU Bank’s governing bodies have approved 54 projects with a volume of €7.2 billion which should support total investment of around €30 billion.

Of these projects, the majority consists of renewable energy, energy efficiency, and other investment that contributes to low-carbon growth. The others include investment in R&D and industrial innovation, digital and social infrastructure and transport, as well as access to finance for smaller businesses.

In parallel, the European Investment Fund is delivering impressive results benefiting smaller businesses as part of the Investment Plan for Europe. The EIF has already signed more than 150 operations, with total financing under EFSI of €3.4 billion which is expected to trigger more than €45 billion of investments.

Some 125,000 SMEs and mid-caps throughout the European Union are expected to benefit. This clearly demonstrates that the crowding-in of capital works. EFSI increases the EIB Group’s capacity to perform this catalytic function. Through EFSI, the EIB will encourage the launch of economically valuable projects, making them attractive for wary investors, and giving economic recovery a boost at a critical juncture.

EFSI No Silver Bullet

However, the European Fund for Strategic Investments is not a silver bullet that bridges the investment and innovation gaps. EFSI needs to work within the context of the other two strands of the Investment Plan for Europe. Europe needs to better structure projects in order to attract promoters and investors.

The new European Investment Advisory Hub (EIAH), offering a single point of entry, will help identify bottlenecks and build the knowledge and capacity needed to get good projects going, in particular through reinforced use of financial instruments and improved access to finance.

The other key condition for the success of the Investment Plan for Europe is, that Europe needs to improve the overall investment environment by cutting red tape, simplifying regulatory frameworks, and deepening the single market – because market integration is the backbone of Europe’s prosperity. In order to preserve its strength, Europe must return to the global innovation frontier.

Conclusion

Europe has ample strengths: the diversity of its people, an abundance of intellectual, scientific and technological capacities, and a rich history of intellectual and business endeavour.

To rebuild its competitiveness and return to long-term sustainable growth, Europe has no choice but to rigorously implement the Investment Plan for Europe. The EIB Group will ensure that investments are only channelled to commercially sound and economically and technically viable projects in sectors that are critical to Europe’s competitiveness.

The means are there. The EU Bank is the world’s largest international public bank with a balance sheet of more than €550 billion. In 2015, EIB Group financing totalled a record €84.5 billion. The EIB alone lent €77.5 billion, supporting nearly 500 projects and catalysing almost €230 billion of investment. The EU has a powerful instrument in its hands to pursue its political goals.

This is imperative because restoring Europe’s competitiveness is central to re-embarking on the EU success story of cohesion, convergence, and prosperity that began with the Marshall Plan – with the one key difference today that Europe is using public resources in a much more efficient manner, not as grants and subsidies, but as loans and guarantees. This marks a true shift of paradigm in the use of scarce public resources which the EU Bank has advocated for many years and which is of truly fundamental importance.

About the Author

Werner Hoyer is the president of the EIB and the chairman of its board of directors, and has been for the last four years. Prior, Mr Hoyer served as minister of state (Deputy Foreign Minister) at the German Foreign Office, responsible for Political and Security Affairs, European Affairs, United Nations and Arms Control, and as commissioner for Franco-German Cooperation. Also, he has been the deputy chairman and Foreign Affairs spokesman of the FDP (Free Democratic Party) parliamentary group in Germany.

Mr Hoyer holds a PhD in Economics from Cologne University where he has also been an associate lecturer in international economic relations. He has researched at UCLA in the US. He is married with two children.

About EIB

The EIB is the European Union’s bank. EIB is the only bank owned by and representing the interests of the European Union member states and as such works closely with other EU institutions to implement EU policy. EIB is as the largest multilateral borrower and lender by volume, a major player. EIB provides finance and expertise for sound and sustainable investment projects which contribute to furthering EU policy objectives. More than 90% of the activity is focused on Europe but EIB also supports the EU’s external and development policies.

About EIF

EIF is part of the EIB group and supports Europe’s SMEs by improving their access to finance through a wide range of selected financial intermediaries. To this end, EIF designs and implements equity and debt financial instruments which specifically target SMEs. EIF fosters EU objectives in support of entrepreneurship, growth, innovation, research and development, and employment.


UK Independence Day

Great Britain has declared its independence. By a margin of 52 against 48, voters delivered a stunning blow to the establishment and instructed their government to take the country out of the European Union.

The world, as it had been known up to June 23, has ceased to exist. Markets around the globe, confident of a remain victory up to the last minute, plummeted as the first results trickled in. Traders dumped sterling wholesale, driving it to a 31-year low against the US dollar of barely $1.32 – a drop of 11% in a matter of hours. Sterling’s Brexit crash was more than twice as severe as the one that forced it out of the European Exchange Rate Mechanism (ERM) on Black Wednesday in 1992. The pound also lost 8% against the euro.

Early Friday morning, Standard & Poor’s warned that the UK’s AAA rating is no longer tenable. Chief Ratings Officer Moritz Kraemer said the British government will be given a 24-hour advance notice of any downgrade. Predictably, the yield on US treasury paper – one of the few safe havens left and a trusted barometer of market sentiment – dropped as well with 10-year T-bills fetching just 1.5%, the lowest return since 2012.

"Brussels will now have to face a nasty conundrum: it needs to fully respect the sovereign wishes of UK voters and act honourably while doing so; however, the EU also needs to make sure that the British do not receive any parting gifts that the remaining members may resent – or give them ideas."

Whilst Nigel Farage got the independence day he craved, the world’s fifth largest economy and second largest debtor nation shaved a significant slice off its wealth in its quest for liberty. Analysts fear that notwithstanding the current volatility, indicators will hardly improve once the dust has settled and the full spectre of the new reality sets becomes clear.

Politically, the in/out vote split the United Kingdom neatly into its constituent parts with Scotland, and Northern Ireland opting to remain by a significant margin. London voters did so as well. However, England and Wales carried the day and imposed their will.

In Belfast, Sinn Fein’s Martin McGuinness, Northern Ireland’s deputy first minister, lost no time in calling for a poll on a united Ireland, considering that the now open border will need to be closed upon the UK’s exit from the EU. Further north in Edinburgh, First Minister Nicola Sturgeon welcomed Scotland’s “unequivocal” vote to remain part of the European Union and assured that her Scottish National Party (SNP) will now press ahead with the implementation of its manifesto which states that the country sees its future as part of the European Union.

The SNP is widely expected to call for a second referendum on independence arguing that realities have now changed considerably. Holyrood may also try secure a separate deal with Brussels that would allow Scotland to remain both inside the UK and the EU: an opt-in.

However, on the day after, the world’s outlook may have shifted, but in reality little has changed other than the big money entering into a momentary tailspin. The United Kingdom much remains a member of the EU and, in fact, has not officially informed the Council of Ministers in Brussels of its intention to depart.

Prime Minister David Cameron’s successor must eventually invoke Article 50 of the Treaty of Lisbon that puts the exit process in motion. European Commission President Jean-Claude Juncker does not wish to wait long and urged the UK to depart the union double-quick time. Mr Juncker said he gave the commission’s legal department instructions for findings ways to speed up the UK’s exit.

While there is no timeframe for notifying the EU of its intention to leave, once Article 50 has been raised, the UK government has two years to conclude negotiations. An extension may be obtained only if the 27 remaining members unanimously agree to prolong the process. If they refuse, the UK is to be unceremoniously booted out of the union. However, the entire process represents unchartered territory. Never before in its 59-year history has the union dealt with a member state extracting itself from the bloc. Upon gaining independence in 1962, Algeria – up to then part of Metropolitan France – ceased to be part of the common market, and in 1985 Greenland – an autonomous part of Denmark – voted to exit the EU in order to regain its say over fishing rights.

The morning after heralds the beginning of a new experiment in statehood for both the United Kingdom and the European Union. Whilst the UK battles financial uncertainties with an economy that sorely lacks competitiveness and needs a massive influx of foreign capital in order to keep afloat, the European Union likewise needs to, quite literally, keep its act together and get to grips with the stark naked fact that it is not very popular and consistently fails to inspire.

Brussels will now have to face a nasty conundrum: it needs to fully respect the sovereign wishes of UK voters and act honourably while doing so; however, the EU also needs to make sure that the British do not receive any parting gifts that the remaining members may resent – or give them ideas.

The union needs to ensure its preservation not for the sake of political perpetual motion or even for pursuing some mindless status quo held in place by a misguided institutional survival instinct; rather, it must raise its head above the Brussels parapet and tell people what it does and why this is important.

From its earliest beginnings, the European Union has been a project aimed at reinvigorating a tired old continent ravaged by repetitive wars and at risk of losing its relevance. Though it did not say so explicitly, the 1957 Treaty of Rome which started the project was always about forging an ever-closer union between the peoples of Europe.

Great Britain, perhaps naively, has never properly understood the purpose and intent of the common market which it so desperately wanted to join in the 1960s. Brexit leaders vehemently argued that their country in 1973 did not signed up for anything other than a free trade zone. That may have been the impression at the time, but it was widely off the mark.

The European Union constitutes nothing less than the greatest nation-building enterprise in the history of man: it seeks to unify a fractured continent not by the force of arms, but by appealing to reason and the self-interest of member states. For the price of a slice of sovereignty, handed over to the common cause, European countries are able to secure lasting democracy, prosperity, and – yes, indeed – peace.

Continental Europeans know their own history; they have been crushed by tyranny, booted around by marching armies, and held down by poverty resulting from bad governance. Even the long-suffering Greeks refuse to entertain the thought of tearing loose from the union’s fold. Perish the thought, for the outside world is large, merciless, and – big surprise – dominated by large players who habitually boss the little guys around at will.

The European Union changed the balance of global power: it is the world’s largest market and produces more cash than any other large country or player. In a world where money does the talking, the EU carries the biggest stick. However, Brussels has utterly failed to wield that soft power in ways that appeal to the average voter. The EU has been made into an easy scapegoat for whatever ill is bothering the common man/woman. Pouring blame on “faceless unelected bureaucrats” in Brussels – since when are bureaucrats elected? – has become an easy way out for incompetent governments and bumbling politicians to deflect attention away from their own failings.

Leaving the union is a right each of its sovereign member states enjoys. Great Britain turning its back on the EU is well within its remit. The only problem is, of course, that Britain may become a little bit less great by doing so. Farewell, Tommy, and thanks for all the fish.


CFI.co Meets the Chairman & CEO of Image Nation Abu Dhabi: Mohamed Al Mubarak & Michael Garin

[caption id="attachment_15732" align="alignright" width="300"] Chairman Mohamed Al Mubarak and CEO Michael Garin[/caption]

Mohamed Al Mubarak and Michael Garin were appointed chairman and CEO of Image Nation Abu Dhabi in 2011, three years after the company was established. Over the past six years, Messrs Al Mubarak and Garin have mapped the company’s business plan and strategic vision which has led to the development and growth of Image Nation, creating one of the leading media and entertainment companies in the Middle East today.

As Mr Al Mubarak likes to say: “There are two sides to show business – the show part, and the business part.” The CEO’s and the chairman’s combined experience have produced a winning combination.

Mohammed Al Mubarak – Chairman

As well as heading Image Nation, Mr Al Mubarak holds the title of chief executive of Al Dar properties. He was integral to the development of Aldar’s operational businesses as well as that of the fast-growing Sales & Leasing, Property & Asset Management, and Facilities Management units within the organisation.

Prior to joining Aldar, Mr Al Mubarak worked with the corporate and investment bank Barclays Capital in London, focusing on investment and finance in the MENA (Middle East and North Africa) Region. Mohamed Al Mubarak also played an integral role in the development of Yas Island, making it one of the premier destinations in the UAE.

In 2015, Mr Al Mubarak was named chairman of the Abu Dhabi Tourism & Culture Authority which oversees the conservation and promotion of Abu Dhabi’s heritage and culture, leveraging them to develop distinctive Abu Dhabi experiences designed to enrich the lives of visitors and residents.

Mr Al Mubarak is a graduate of Northeastern University (USA), with a double Major in Economics and Political Science.

Michael Garin – CEO

With over forty years as a highly-respected industry executive, Mr Garin oversees Image Nation’s strategy and operations and has played a vital role in managing and forging key international partnerships.

Mr Garin’s media career began at Time Inc. where he worked for TIME, Fortune, and Time-Life Television for over a decade. From there, he helped to found what would eventually become Lorimar-Telepictures – a leading independent television company which became the largest TV company in the US and produced such iconic shows as Dallas, The Waltons, and Full House.

His previous roles included CEO of Central European Media Enterprises (NASDAQ:CETV) and global head of Telecommunications and Media Investment for Dutch bank ING.


Delta Group: Helping the World Save on Energy

Delta, founded in 1971 and headquartered in Taiwan, is a global leader in power and thermal management solutions and a world-class provider of industrial automation, building automation, telecom power, networking, EV charging, data centre infrastructure, renewable energy, and display technologies. Delta’s worldwide group revenues have grown at a compounded annual growth rate of 31.8% since 1971 to $7.6 billion in 2015. Delta has 153 sales offices, 61 R&D centres, and 40 manufacturing facilities worldwide.

In the Europe, Middle East & Africa (EMEA) region, Delta’s human capital currently totals 2,700 people in 37 sales offices, 11 R&D centers and 2 manufacturing sites. Delta EMEA’s first office was established in 1987 in Switzerland and has been growing significantly ever since, both organically and through M&As. Delta has successfully built a business development network with channel partners in over 66 countries across the EMEA region. In 2003, it acquired Switzerland-based ASCOM Energy Systems, a specialist in power systems with more than 100 years of history, and in 2015 it acquired Norway-based Eltek, a global leader in energy conversion for the telecom, data center and industrial sectors.

Delta is devoted to its corporate mission – “to provide innovative, clean, and energy-efficient solutions for a better tomorrow,” by delivering technologies boasting industry-leading energy efficiency capable of realising significant energy savings and higher productivity for our customers. From 2010 to 2015, Delta’s products saved 17.3 billion kWh of electricity for its customers, equivalent to a reduction of 9.2 million tons of CO₂ emissions. By 2014, the electricity intensity of Delta’s major plants decreased by 50% compared to 2009. The company’s goal is to contribute to the mitigation of global warming by empowering the low-carbon economy.

[caption id="attachment_20293" align="aligncenter" width="460"] Delta’s M50A PV inverters: featuring energy efficiency of up to 98.6%, used in Namibia’s largest solar PV power plant.[/caption]

With a long-term focus on innovation, Delta commonly invests 6% of its global revenues into R&D in order to improve the energy conversion efficiency of its products. Most of Delta’s power supply products have an energy efficiency exceeding 90% with telecom power equipment featuring the world’s highest efficiency of up to 97.5%; solar PV inverters with industry-leading efficiency of up to 98.8%; and server power supply with up to 96% efficiency (world’s first 80 Plus Titanium).

Leveraging Core Competencies

By leveraging its core competences in power electronics and energy conversion efficiency, Delta integrates its diverse portfolio of technologies in both hardware and software to realise systems and solutions for its customers worldwide. In recent years, Delta has delivered more than three hundred success cases around the world in a wide range of fields, including automated factories, green data centres, smart green buildings (22 constructed over the past decade and some donated to academic institutions), telecom power systems, smart monitoring and displays, EV charging networks, and renewable energy power plants. These projects realise, on average, 20% to 40% energy savings as well as meaningful OPEX reductions.

Remarkable examples of these green solutions are:

[caption id="attachment_20294" align="alignright" width="236"] Delta’s 150kW DC Ultra-fast EV Chargers, capable of enduring harsh climate conditions, are currently being deployed as part of a country-wide EV charging network in Norway.[/caption]

EV Charging Solutions to support Norway’s fast-growing green mobility: Norway is one of the world’s largest markets for electric vehicles (EV) and in the past few years, Delta has been supporting the country with its highly capable EV charging solutions. Delta’s ultra-fast 150kW DC EV Charger is capable of charging up to four cars simultaneously as it supports CCS-200A, CHAdeMO-125A, Type2-63A as well as Type2-32A standards, meaning practically all EVs.

Delta Contributes to the Construction of the Largest Solar Power Plant in Namibia: In 2015, Delta provided its M50A series photovoltaic (PV) inverters, featuring industry-leading efficiency of up to 98.6%, to the Obmuru Solar Photovoltaic Park, the largest solar power plant in Namibia with 4.5MW capacity. The project is expected to generate a total of 13.5 million kWh hours of clean electricity annually, equivalent to a reduction of 6,750 tons of carbon emissions and to approximately 1% of the annual electricity generation in the country. Delta’s M50A inverters are characterised by a robust and reliable design with a IP65-rated casing made of high quality aluminium, thus, making them an ideal choice for the rugged environment of Namibia.

Net-zero energy green building in Fremont, California, USA: As a long-term advocate of green buildings, Delta completed the construction of its headquarters building for the Americas region, a state-of-the-art green building designed to meet LEED Platinum and net zero standards. It incorporates many of Delta’s own leading technologies such as building automation and power conversion to achieve an elite level of sustainability. Through Delta’s solar photovoltaic (PV) power system, over 1,000,000 kWh of electricity are expected to be generated annually. The building also boasts a geothermal heating and cooling system that reduces HVAC (heating, ventilation, and air conditioning) energy consumption by 60% compared to traditional systems. Other key energy-saving solutions by Delta include building automation systems, smart LED lighting, variable frequency drives, elevator power regeneration systems, InfraSuite Datacentre Infrastructure, and an energy monitoring system.

Corporate Social Responsibility

Delta is also focused in building its world-class Corporate Social Responsibility (CSR) capabilities, not only to maximise shareholder value, but also to realise meaningful contributions to society and the environment. Facing the crisis of global warming, Delta has voluntarily reduced its corporate carbon emissions with concrete actions as mentioned above, and has committed to a new goal of further reducing its overall electricity intensity (major plants, data centres, and office buildings) by an additional 30% by 2020.

In 2015, Delta actively participated in the Paris UN Climate Change Conference (COP21), held in Paris, France. At this influential world-class stage, the company shared its experience in constructing green buildings with an international audience.

The Delta21@COP21 green buildings exhibition fully showcased Delta’s concrete results in energy saving and green buildings and highlighted its corporate endeavours to reduce the energy consumption of buildings and to provide environmental education. During the many official forums at COP21, Delta called on countries to value the benefits of energy efficiency and to further reduce carbon emissions. The opportunity allowed Delta to share its experience with UN members and opinion leaders in the environmental sector, and enhance its corporate standing.

Throughout its history, Delta has received many global awards and recognition for its business achievements, innovation, and dedication to corporate social responsibility. Since 2011, Delta has been selected as a member of Dow Jones Sustainability™ World Index (DJSI World) for five consecutive years. In 2014, Delta was ranked by CDP (formerly the Carbon Disclosure Project) on the highest A-level of the Climate Performance Leadership Index (CPLI), and is the only one from nearly 2,000 listed companies in Greater China that makes it onto CPLI list.

For Delta, corporate sustainability is an ongoing road. The company will continue to carry out its corporate commitment and provide smarter and more environment-friendly lifestyles for future generations.

Meet the President: Jackie Chang

[caption id="attachment_20295" align="aligncenter" width="744"] President: Jackie Chang[/caption]

Jackie Chang was appointed president and general manager of Delta’s EMEA and Russia operations in January 2010. Mr Chang joined Delta in 1992 as a sales representative and relocated to Delta UK as the regional manager in 1996. In 2004, Mr Chang was promoted to general manager responsible for EMEA operations and based in the Netherlands.

Mr Chang strives for change while maintaining work group unity and actively creating innovative business models. Mr Chang is accustomed to working in a variety of different cultures.

In addition to creating business on the European continent, Mr Chang has made significant contributions to Taiwan’s diplomatic relations. From 2001 to 2002, he served as the president of the Scottish Taiwanese Chamber of Commerce. From 2003 to 2005, he actively participated in the Overseas Compatriot Affairs Commission as the United Kingdom’s overseas consultant. In this way, Mr Chang has helped to create a tight-knit network of foreign diplomatic relations for Taiwan.

Mr Chang graduated from Taiwan National Central University and was awarded an Outstanding Alumni Award in 2011.


Artificial Intelligence in FinTech

From Product Marketing, through RoboAdvice, Compliance and Fraud Detection activities, Artificial Intelligence is finding its place, but for the forseeable future will make more efficient, rather than replace human activities.

Artificial Intelligence (AI) has been getting a lot of attention in FinTech circles this year and rightly so, as when implemented well it can help retailers market and sell their products more efficiently, whilst helping weed out instances of misselling and fraud.

Seen by many as a panacea for increasing profitability despite an increasingly onerous regulatory climate, however rather than replacing human effort, AI is primarily finding its place in ensuring that new, disruptive FinTech is implemented with caution and controls.

So what exactly is AI?

Whilst there are many definitions, today’s AI mainly comprises a single but broad computer-science discipline, that of “Machine Learning”.

Machine Learning essentially ingests data about what has happened in the past, along with some non-obvious outcomes or results, then uses some pretty advanced mathematics to build up a range of statistical and ‘data-network’ models, in order to then predict outcomes or results based on a new set of input data.

This differs from the traditional use of computers that have to be programmed according to rules created by humans, which are invariably limited by the scope of the programmers to correctly define every difficult combination of input data that might produce some anticipated outcome.

That was a little technical, I know, but another way to think of it is that the Machine Learns through ‘watching’ humans, or other systems, evaluate data and through watching the decisions they take, then tries to do it for itself given new data, that might not be exactly the same as the data that the humans originally worked with.

Profiling and Targeted Marketing

This is the area of AI that we are all invisibly exposed to daily.

From Google, through Facebook to the myriad of online advertising networks, AI systems are predicting our buying behaviour based on our browsing and purchasing history, based on our social media posts, tweets and ‘likes’ and based on what ‘people like us’ also seem to like buying.

However, such use of machine learning and purchase prediction is not limited to the social media giants, with banks and insurance companies all increasingly targeting their product marketing at us based on our financial history and, where they can get it, our social profile.

This form of predictive marketing often makes us feel a little uncomfortable, but when it comes down to it, it is really little different from a financial product vendor choosing to advertise in a Sunday Paper that I, and people like me, read, based on my socio-demographic profile.

Such profile-based marketing could even be considered as endorsed by the UK Financial regulator, the FCA, as their TCF (Treating Customers Fairly) regime states as its ‘Outcome 2’ that “Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly”.

However whilst some other industries also use such AI profiling to affect the product itself as offered just to me, such as the purchase price or terms, or perhaps with regards bundled extras, based on how good a customer they think I might be, this is a complete no-no in financial services as this would contravene the spirit of the overarching TCF ‘Outcome 1’, that requires that all customers are treated fairly.

AI in FinTech can be used therefore to decide what products to create, and where to market them, as long as the criteria as to what gives consumers access to that product and at what terms must be clearly stated. However AI profiling cannot be used to give an individual more preferential (or less preferential) terms than anyone else who wants to buy the product who also meets the required and disclosed purchasing criteria.

AI’s Utility in RoboAdvice

If there is one other hot-topic this year in retail FinTech, it is that of automating the advice process: so-called ‘RoboAdvice’.

At first glance, AI could be considered as applicable to such an automated advice process - the advice has traditionally been given by humans after all, and the job of Machine Learning is to learn from humans and to try to replicate it, isn’t it?

However, if you consider the advice process in more detail, the application of AI is not where you might first consider it, i.e. in advising a suitable set of products from which the customer can make an informed choice.

This is because each principal has quite a stringent set of rules as to what products can be offered based on a customer’s needs, objectives, circumstances, affordability and attitude towards risk, based on their own research and criteria and married with the criteria of each product vendor.

And if these rules are hard and fast, then traditional computer ‘If-this-then-that’ logic can be applied. The RoboAdvice service would therefore follow these rules, programmatically, in the same way that a human adviser has to - and this is not AI.

If you think about the great financial advisers that you’ve met, their art is demonstrated in the fact-find meeting, where you talk to them about who you are and what you need, and they interact with you to extrapolate the information that you provide into the ‘input’ that their principal requires against their product selection criteria; and, very importantly, they can draw out the pertinent information that you may think is less unimportant, or that perhaps you may have misunderstood in your representation.

So my belief is that the role of AI in RoboAdvice will not be in the area of product selection, but instead, will be more applicable in the area of understanding the inputs from the customer - i.e. in ensuring that the needs, objectives, circumstances, affordability and risk-appetite are fully understood from the wide variety of ways that the self-serve customer might present them, or on occasion, might misrepresent them.

Detecting Misselling

If we work on the basis that most advisers, along with the principals that they represent, act with integrity and a clear set of rules with regards product selection, then, other than the occasional industry-wide scandal, such as the poor marketing and sales approach of the PPI industry, then the conclusion must be that occasional day-to-day misselling must primarily be down to mistakes made in the information ingest process.

That is, ad-hoc misselling occurs mainly when an advisor misinterprets information gathered from the customer, misses the collection of pertinent detail, does not explain product nuances, such as financial charges, term durations, excesses or risks, fails to take into account supplementary circumstances, such as the customer vulnerability, or occurs when the customer does not understand the questions being asked of them or the information being provided.

Humans are prone to error - yes, even the best advisers - whilst the majority of the fact-finding-then-presentation process is a skilled and subjective exercise.

Therefore, every adviser-customer relationship is unique.

Where there is such one-to-one uniqueness in every financial transaction, this is an area where programmatic, rules-based logic, simply can’t be used to detect the myriad of circumstances that might be construed as misselling.

This is a prime target for AI therefore, and in-fact, is the very reason I created RecordSure - an AI product suite that uses Machine Learning to ‘listen’ to the audio recording of a telephone call or of a face-to-face advice session, in order to pick out sections of conversation where key information may have been missed or misinterpreted.

Although the complexity of working with natural discussion in an audio recording is far greater than the complexity of working with text data, as would be generated in a RoboAdvice application, the fundamental Machine Learning principles are the same.

We use compliance subject matter experts to listen to a ‘training’ set of real audio recordings made during our clients’ customer interactions, and to mark up the good and the not-so-good behaviour.

Our AI systems then learn from this, in order to automatically spot and raise alerts to our clients against similar behaviours in future recordings.

This is proving to be a far better approach than checking compliance from the paper records around the transaction, such as the fact-find and suitability letters, as these documents are merely an interpretation of the information exchanged during the conversation, whereas the audio is a wholly authoritative record as to what really occurred.

Despite the efficiency gain in using AI to review recordings, rather than humans, we don’t consider this to be a replacement for human compliance checking activities.

Instead, the role of AI here is to prioritise the reviews for the humans. So, if your systems and controls allow for 3% of your customer transactions to be reviewed by your 1st-line compliance team for misselling and other undesirable behaviours, then the purpose of the AI is to review 100% of the recordings, and provide as output the 3% that are most likely at risk for said team to review.

Preventing Fraud

Using AI to detect potentially fraudulent activities is something that is widely done in capital market transactions, where, let’s face it, the trader community has taken quite a hit in the public eye from a number of rate-rigging, insider-trading and other high-profile scandals.

Increasingly, Machine Learning will also be applied to detecting fraud in the retail product environment, whether that is in uncovering fraudsters who claim to have lost their credit card immediately prior to making an expensive purchase, or in finding those rogue consumers who make false insurance claims, or even in trying to make connections between people who may be involved in organised money-laundering rings.

AI that targets these applications will need a wider scope of training and operation, as the behaviours involved in fraud can’t easily be predicted - after all, if there were obvious signs, then regulations and controls would quickly come into place to detect the bad apples.

Instead Machine Learning will need to ingest everything from the spoken word, through the audit trails of transactions, and even related datasets such as consumer behaviour on, say, social media, aligned with ‘environmental’ data sources such as everything from the time of year, the geographic locations of transactions and news feeds that may provide some influence or opportunity for scamming.

Along with a range of visualisation and mathematical techniques collectively known as ‘data-mining’, skilled compliance teams will use all such data and machine-learned findings as the primary weapon in the arsenal against fraud.

Developing Financial Markets

Throughout Europe and in other highly developed markets, such as the USA, Singapore and Japan, regulation has matured as vendors have evolved their range of products and made their occasional mistakes in the eyes of the consumer or state.

In developing financial markets, the financial regulators may not always be quite so mature, however, if the local vendors are to build consumer trust for their operations and products, then they will need to act as if the state regulations were as strong as in, say, Europe.

The advantage such developing-nation vendors have over more mature markets is that they do not have the legacy of systems and products of the past, and can therefore can focus their management time and resources on ensuring that products are correctly specified, marketed, sold and audited from day one.

AI will play a key role in this, whether home-grown, or whether accessing the tools and techniques developed in mature markets like ours.

I, like many of my peers in the financial community, hope that the Machine Learning technologies we develop for ourselves today will be accessible to the developing markets of tomorrow; in a form and at a price-point that will help vendors in such markets create the consumer confidence in financial institutions that is so necessary for any form of economic stability and consumer choice.