Hildegunn Kyvik Nordås: Why Do Countries Regulate Differently and How Does It Affect Trade?

The case of professional services in the European Union.

[caption id="attachment_5574" align="alignright" width="253"] The Eiffel Tower, Paris, France[/caption]

Explicit barriers to cross-border trade in services are rare…
Since services have been considered non-tradable in the past, explicit policy barriers to cross-border trade in services are rare. Nevertheless, in the words of the EU Commission ‘.... a decade after the envisaged completion of the internal market, there is still a huge gap between the vision of an integrated European Union economy and the reality as experienced by European citizens and providers’ [Directive 2006/123/EC (3)]. This is a remarkable observation in the region where services market integration arguably runs the deepest. Already the Treaty of Rome of 1957 granted full market access for the signatories through cross-border trade as well as movement of capital and labour, while the Internal Market Act aimed at removing barriers to the implementation of the letter as well as the intention of the treaty of Rome. However, domestic regulation turned out to be a formidable obstacle to the integration of services markets. Hence, a services directive aiming at lowering regulatory barriers to trade was introduced in 2006.

…but the level and differences in regulation fragment services markets
Regulation can be divided into two broad categories: Regulation that aims at protecting consumers; and regulation that aims at restraining dominant firms from exploiting their market power. Licensing and related quality and qualification requirements in professional and financial services are examples of regulation in the first category. In professional services regulations are typically related to licensing and qualification requirements, which is the subject of this article.

“Professions in the health sector are regulated in almost all countries.”

Professions in the health sector are regulated in almost all countries. Beyond these, it is surprising how countries differ regarding how many and which services sectors they regulate. EU directive 2005/36/EC on the recognition of professional qualifications takes this kind of regulatory diversity as a given and aims at making it as easy for a professional services provider to offer services in other EC member countries as it is in his or her home country, provided that the qualifications are obtained in an EU country. For the purpose of monitoring the implementation of the recognition directive a comprehensive database has been established. It contains information on which professions are regulated, the number of decisions on recognitions by country, profession and year, the level of education needed to qualify for the profession and the nature of the recognition regime [1]. The database shows that the number of regulated professions ranges from 47 in Estonia to 404 in the Czech Republic; and the un-weighted average is 157.

One factor explaining differences in the approach to regulation may be differences in legal origin. The literature distinguishes between the British, French, German, Scandinavian and socialist legal origins [2]. Calculating the average number of regulated professions separately by legal origin shows that the average is lowest in the socialist group (127), followed by the Scandinavians (140) the French (146), the British (150) and the Germans (174). These statistically significant results are perhaps surprising since the socialist group and the Scandinavians are not known for their laissez faire as far as regulation is concerned. Note however, that Poland, the largest country in the socialist group, is the second most regulated country in the European Union and way above the average.

Be that as it may, there are also other factors that are strongly associated with the number of professions being regulated. Countries with a small population size tend to have fewer regulated professions. On average a 10% larger population is associated with 1% more regulated professions. Since regulation requires resources for regulatory bodies, the administrative cost of regulation increases with the number of regulated professions. Assuming that some of those costs are independent of the number of services providers within the regulated profession, administrative costs are higher as a share of total value added created by the profession the smaller the country. It is therefore not surprising that small countries tend to have fewer regulated professions.

Another factor that is strongly associated with the number of regulated professions is contract enforcement as measured by the Fraser Institute’s indicators of economic freedom. Countries that do better on this indicator tend to have fewer regulated professions, suggesting that the disciplining effect of private contract enforcement to some extent substitutes for government regulation. Contract enforcement is closely related to legal origin, and it is difficult to distinguish clearly one effect from the other, however.

[caption id="attachment_5577" align="aligncenter" width="581"] Figure 1: Number of regulated professions in the European Economic Area.
Source: Calculated by author based on European Commission database.[/caption]

Recognition of qualifications and market integration
Lack of recognition of qualifications obtained abroad implies that individuals or firms that wish to provide services in a foreign country must retrain in the host country, or engage local staff with the required qualifications. Differences in regulation can therefore be a considerable barrier to international trade in its own right. The European Union’s Services Directive of 2006 aimed at eliminating or at least reducing such barriers. The first draft introduced the country of origin principle, which meant that a service supplier that complies with the home country regulation should be able to provide services in all EU countries without being subject to licensing or other forms of permits or authorization in the host country. The country of origin principle was, however, met with fierce opposition and was dropped from the final version of the Services Directive. The mutual recognition directive therefore became one of the most important pieces of legislation supporting the integration of markets for regulated professions.

Professional services tend to be provided through several modes of supply at the same time. Establishing a commercial presence is important, even for information-intensive professional services that can be easily digitized and communicated across electronic networks. Thus, in spite of the IT-revolution commercial presence remains the most important mode of supply, while online trade is seldom the sole mode of supply.

After having established commercial presence professional services providers need flexibility to send staff from headquarters to affiliates and across affiliates, to visit customers, follow clients abroad and to provide services on-line across borders. Thus, modes of supply are typically complementary and regulatory barriers to one mode of supply impede trade through all modes of supply. Recognition of qualifications is therefore relevant not only for the movement of professionals but for all modes of supply of professional services. It is therefore interesting to relate the information on bilateral recognition entailed in the EU database to bilateral trade flows in professional services.

Does recognition of foreign qualifications stimulate trade – or is it the other way around?
Our analysis suggests that there is a two-way relationship between trade and recognition of qualifications. Demand for a foreign recognition appears to be partly motivated by the desire to engage in cross-border exports, but recognition of qualifications also stimulates trade in services in its own right, generating a virtuous circle of trade expansion, a larger number of applications for recognition, and positive decisions generating more trade and so on. Furthermore, not only does recognition of qualifications obtained in country A by country B stimulate exports of professional services from A to B, it also stimulates imports of professional services by A from B. This probably reflects multi-modal trade where for instance establishment abroad generates intra-firm trade as well as deeper specialization.

The analysis uses a broad brush relating the total number of recognitions by country pair and year to total cross-border trade in “Other business services”, which contain a host of professional services. More detailed analysis is difficult due to the absence of more disaggregated trade data as well as differences in classification of professional occupations across countries. Results should therefore be seen as indicative. With this caveat in mind, it is found that a 10% increase in the number of positive recognition decisions is associated with about 7% more exports from the country of origin to the host country, whereas a 10% increase in exports elevates the number of recognitions by about 5%. The same estimation procedure shows that countries that share a common language have about 2.5 times as many positive recognition decisions as those who do not share a language; and countries that share a common border have about twice as many positive recognition decisions than those that do not. The estimates are based on the so-called gravity equation where the variables explaining exports or imports and recognition of qualifications were determined simultaneously.

We also estimated the relationship between the total number of positive decisions on recognition and trade in technical services such as architecture, engineering and other technical services; and legal services, accounting and other administrative services separately. The results are similar to those obtained from aggregated data, but recognition of qualifications appears to be a stronger driving force for exports in these sectors. Thus, a 10% increase in the number of recognitions raises exports by about 9% for technical services and 12% for legal accounting and other administrative services. In both cases a 10% increase in exports is associated with about 6% more recognitions.

Exports of technical services such as engineering and architecture is less sensitive to distance than most other services, but less standardized services such as legal services and consultancies are highly sensitive to distance also within the European Union. Finally, similar results were found for the relationship between recognition of qualifications and imports by the origin country from the host country.

Trade policy implications
The experience of the European Union shows that the elimination of explicit barriers to services trade and investment is essential, but not sufficient to generate integrated services markets. Thus, both the level and the heterogeneity of domestic regulation contribute to fragmented markets even in the event of free movement of capital, workers and services.

Harmonizing regulation, for instance through international standards should in principle eliminate or substantially reduce regulatory barriers to trade. But this requires consensus on what constitutes best practice. Examples from the services sectors are the Basel agreements on regulation of financial services and the international telecommunications regulations (ITRs) under the auspices of the ITU. But even in these cases best-practice is not established once and for all and events such as the financial crisis may lead to a rethink and temporary divergence from international standards.

In cases where regulatory principles are less well established and where there are different views on whether or not regulation is necessary, mutual recognition of qualifications and standards may be a better option. Mutual recognition reduces regulatory barriers to trade and investment, while allowing for regulatory discretion and diversity. Mutual recognition is not without problems, however. It was for instance not politically possible to introduce the origin principle in the EU Services Directive. What is not politically possible within the EU may be difficult in other regional trade agreements, the GATS or a possible new international services agreement as well.

In professional services the main purpose of regulation is to ensure a minimum quality of services and to protect consumers. Do the countries with the smallest number of regulated services (e.g. The Baltics and Sweden) have lower quality of services or consumer protection? If not, could other countries deregulate without harmful consequences as well? Or do the countries with the fewest regulated professions obtain their objectives through other means that cannot easily be replicated in other countries? These are important questions for the architecture of international services trade agreements.

References
 This article is based on and extends Hildegunn Kyvik Nordås: “Domestic regulation: What are the costs and benefits for international trade in services? Chapter 2 in Aik Hoe Lim and Bart de Meester (2013) WTO, domestic regulation and services trade: putting principles into practice, Cambridge University Press. It is written in the author’s personal capacity and views expressed in it do not reflect the views of the OECD or its Members.

[1] See http://ec.europa.eu/internal_market/
 qualifications/regprof. The database contains information on regulated professions in the European Economic Area and Switzerland.
 [2] Among the EEA countries the legal origins are as follows: British: Cyprus, Ireland and the UK; French: Belgium, France, Greece, Italy, Luxembourg, Malta, the Netherlands, Portugal and Spain; German: Austria, Germany, Switzerland; Scandinavian: Denmark, Finland, Iceland, Norway and Sweden; Socialist: Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland and Romania. The Czech Republic, the Slovak Republic and Slovenia are not categorized under any of these.

About The Author

Hildegunn Kyvik Nordås joined the OECD in 2005 where she leads a project on services trade restrictions, their measurement and impact. Before joining the OECD she worked at the research division in the WTO Secretariat, and she has held positions as senior researcher and research director at Christian Michelsen Institute, Norway. Her areas of research and analysis are international trade, economic growth and economic development. She has published a number of journal articles and book chapters in these fields. In addition she has led a number of projects providing technical assistance and policy advise in developing countries, including developing a macroeconomic model with the Planning Commission of Tanzania. She has taught international economics and development economics at the University of Bergen, Norway, public finance at the School of Government at the University of Western Cape, South Africa, and she has been a visiting scholar to Stanford University, USA. Ms Kyvik Nordås holds a Ph.D. in economics.


Andrew Alli: Helping Unlock a Continent of Opportunity

Africa is still in desperate need of investment. The World Bank estimates that Africa requires $93 billion annually for the upkeep and expansion of its infrastructure. With governments the world over slashing foreign aid budgets, the pressure is growing to secure more funding locally. Providing those homegrown investments is the mission of Andrew Alli, CEO of the Africa Finance Corporation (AFC).

Nigerian-born Andrew Alli originally studied engineering in the UK but moved to accountancy and management while working at Coopers & Lybrand, the company that would later become PWC. After obtaining his MBA in 1995 at INSEAD business school in France, Mr Alli travelled the world as an investment officer for the International Finance Corporation (IFC), part of the World Bank Group.

However, in 2002 Mr Alli returned to Nigeria to take up the position of IFC country manager. Four years later, he was to move again; this time to South Africa. Same function, different country: His experience in Africa’s financial world gained considerable depth. This made Mr Alli the top candidate for the top job at the Africa Finance Corporation where he took over in 2008.

The AFC is a finance organization set up by a number of West African nations on the basis of a multilateral treaty celebrated to forge closer cooperation between the signatory countries. The corporation is entrusted with the mission to generate investments destined for major infrastructure projects throughout the continent.

"Mr Alli and his AFC are in the business of sustaining the continent’s momentum."

Operating out of its head office in Lagos, the AFC is now majority owned by private sector shareholders (57.5%). The remainder of shares is held by the Nigerian central bank. Under Mr Alli’s leadership, AFC has been involved in projects all over the continent. From wind farms in Cape Verde, which now supply over 25% of that country’s energy demand, and a toll bridge in Ivory Coast to an undersea fibre-optic cable running from Portugal all the way to South Africa with hookups to a number of places along Africa’s west coast.

Part of AFC’s mission is to do the financial and regulatory engineering that is required for any project that aims to attract the attention of foreign investors. The challenge AFC faces is that many infrastructure projects lack bankability. While these undertakings are often very attractive as far as projected returns on capital are concerned, they lack the regulatory framework that ensures the minimization of political risk and compliance with contemporary accounting and regulatory standards.

AFC aims to provide these assurances through cooperation with national governments. The corporation also helps develop comprehensive business plans and provides authorities and other stakeholders with the knowledge and experience needed to successfully pitch projects to outside investors.

Africa is on to go and rising fast. The continent suffers no shortage of exciting – and potentially exceedingly profitable – opportunities. Risks may be slightly higher than elsewhere, but so are expected returns. Mr Alli and his AFC are in the business of sustaining the continent’s momentum. Should the push required to do that come from within Africa, so much the better. It’s called pulling oneself up by the bootstraps.


Shazia Bashir: Reaching Out with Integrity - Banking on Society

Contrary to popular perception, it is never quite easy for children of successful entrepreneurs to make their own mark in the business they were born into. Few actually achieve this. Shazia Bashir is one of those select few. She belongs to a new generation of financiers that is now making its mark on investment banking in Pakistan. Shazia Bashir aims to bring higher levels of both compassion and integrity to her business.

The Escorts Group of companies was founded by Mr Bashir Ahmed, a family member. Given her background, Ms Bashir’s academic success is perhaps unsurprising culminating as it did with an MBA from a US college. However, it may well be that the greatest gift of Shazia’s upbringing was the sense of integrity which was instilled from an early age.

Ms Bashir has been involved with the family business since 1996. She developed her leadership skills and business acumen to the point where she was able to take over management of the investment banking division of Escorts Group in 2010. At this time, the company was still recovering from the effects of the 2008 global financial crisis.

"Under her leadership, the Escorts Group is working to open up investment opportunities to many Pakistanis who are generally considered to be un-bankable by more traditional financial institutions."

Ms Bashir has skillfully re-balanced the bank while building a dynamic and empowered management team to plot a return to profitability through a strengthening of the fundamentals. All of this is what we should expect from effective leadership.

What sets Ms Bashir apart from many of her peers is the direction in which she has now steered her bank. Ms Bashir is identifying and developing a range of opportunities that would not generally be considered traditional territory for a relatively small investment bank.

Under her leadership, the Escorts Group is working to open up investment opportunities to many Pakistanis who are generally considered to be un-bankable by more traditional financial institutions. She is also finding ways to provide money transfer services at a fraction of current costs. There is no doubt that Ms Bashir is driven by the bottom line as much as the next banker is. However, she also has an eye for the society as a whole and seems genuinely willing and able to provide services that not only generate a healthy profit but also help fight societal ills.

It will be particularly interesting to see what Escorts Group will achieve over the coming years. Ms Bashir is disarmingly modest about the future prospects of her enterprising bank. That notwithstanding, it would appear that the no-nonsense approach to the bottom line and her well-developed sense of corporate responsibility make Escorts Investment Bank a company to watch. The bank will be reaching out to many Pakistanis in an attempt to assist them in their quest to join the swelling ranks of the country’s middle classes.


European Investment Bank: “Vienna Initiative” Keeps Credit Flowing

International financial institutions have joined forces to help calm economic turbulence and avert a collapse in the provision of credit to Central and South East European countries. Now in its second phase, the “Vienna Initiative” by the European Investment Bank, World Bank and European Bank for Reconstruction and Development has proven vital to safeguarding financial stability and supporting growth and jobs in Emerging Europe.

As the global financial crisis developed into a full-blown economic crisis across much of the European Union in 2008 and 2009, the EIB was asked by its shareholders - the EU Member States – to respond in a counter-cyclical manner and significantly increase its lending to the real economy.

This sharp increase – the EU Bank’s “extraordinary response to extraordinary times” – took place, in the first instance, within the framework of the European Economic Recovery Plan adopted by EU leaders in late 2008. This engagement reflected the need for enhanced solidarity and social justice at times of hardship, when those already vulnerable require increased assistance.

“The EIB has assisted economic development in the region for several decades.”

The recovery plan established a twin-track approach – short-term action to avert a full-blown collapse of the economies and banking systems, and long-term measures to reinforce the financial architecture and boost competitiveness, with the ultimate aim of putting Europe on a path of smart, sustainable and inclusive growth.

Part of the initial anti-crisis response of the EIB focused on countries in Central and South Eastern Europe, a mixture of the EU’s newest member states and emerging economies hard hit by the downturn as capital inflows slowed and export markets collapsed. The EIB has assisted economic development in the region for several decades, providing not only vast sums of money in loans but also indispensable technical and financial advice to support capacity building and ensure successful implementation of large-scale investments.

Given this experience, it was natural for the EIB to act as a key contributor to the “Vienna Initiative” seeking to safeguard the stability of the financial sector. The goal of the initiative, launched in January 2009 together with the EBRD, the European Commission, World Bank, IMF and other financial institutions, was to prevent a withdrawal of international banking groups with large exposures in the region and maintain a steady flow of credit to the economies affected, in part by securing funding from the EIB and its fellow public financiers.

“The policy choices made during the current crisis will have an impact on the economy for years to come. And we can say that our institutions have coped well under extremely difficult operational circumstances.”

This plan was integrated with the IMF and EU macro-financial support programs. In return for the commitment of countries to fiscal consolidation and for financial support from the international financial institutions, large multinational banks active in the region pledged to keep local subsidiaries capitalized so that they could continue lending to businesses and households.

[caption id="attachment_5690" align="alignleft" width="160"] Warsaw Metro: EIB supports upgrade with EUR 139 million.[/caption]

The initial pledge by the EIB, World Bank and EBRD – EUR24.5 billion for crisis-related support to the financial sector over 2009-2010 – was exceeded. By end-2010, the three institutions provided loans of more than EUR33 billion under the Joint IFI Action Plan stemming from the Vienna Initiative. Around that time, economic prospects of the countries in the region started to improve, with positive implications for the banking sector.

The recovery was, however, short-lived. As the sovereign debt crisis intensified in the euro area in 2011, turmoil on the financial markets coupled with anticipation of Basel III led to the implementation of new prudential standards by a number of cross-border financial institutions with significant exposures in Central and South Eastern Europe. This gave rise to a fresh wave of concerns about the level of capitalization of subsidiary banks. At the same time, the paradigm of doing business in the region changed, with the lending by subsidiaries increasingly financed by domestic funds.

Faced with these new challenges, the “Vienna Initiative” evolved into “Vienna 2.0,” addressing not only a number of specific banking issues such as the alignment between home and host regulators, but also, in a more targeted way, seeking to help rekindle economic growth after five years of sluggish performance. The new Joint Action Plan for Growth in Central and South Eastern Europe launched in November 2012 reaffirmed the commitment of the EIB, World Bank and EBRD to the region. Lending for growth and jobs has been a key mission of the EIB since its inception in 1958 as a public bank of the EU, making it well-placed to take the lead in the action plan.

The EIB Group – comprising also the European Investment Fund, a specialist provider of risk finance for SMEs - will contribute two thirds of the EUR30 billion in long-term loans pledged by the three financiers for 2013-2014 to support SMEs; renewable energy and energy efficiency; large infrastructure project; research and innovation; and the knowledge economy.

Initial results show that we are fully on track meeting this target. A number of global loans for SMEs was signed recently with partner banks in Bosnia-Herzegovina, FYROM, Bulgaria, Latvia and other countries covered by the initiative; railways and motorways are being built and refurbished across the region with the help of EIB funds; almost EUR1 billion has been provided for R&D activities in Polish research institutes, universities and business enterprises.

[caption id="attachment_5693" align="aligncenter" width="354"] EIB supports construction of high-performance power station in Poland.[/caption]

The value of the participation of our institutions lies not only in the provision of large volumes of competitively priced senior debt at long tenors. Our presence also gives confidence to other investors – indeed, in the midst of the economic downturn, a number of important projects would not have reached financial close without participation of the EIB or fellow public banks.

The policy choices made during the current crisis will have an impact on the economy for years to come. And we can say that our institutions have coped well under extremely difficult operational circumstances. Calls for a multilateral response have not fallen on deaf ears, as illustrated by the various synergies and coordinated actions in the region. We have played a counter-cyclical role, complementing national support packages and granting access to attractively priced loans in countries with insufficient resources to stimulate their economies and offer social protection to their people.

About the Author

Wilhelm Molterer is a Vice-President and Member of the Management Committee of the European Investment Bank. Among other responsibilities, he oversees lending to Germany and Austria, the Eastern Partnership countries and EU cohesion. He also is the EIB’s Governor to the EBRD.

Mr Molterer took up his duties at the EIB in 2011 after a long career in Austrian politics which included the posts of Vice-Chancellor and Federal Minister of Finance (2007-2008); Federal Minister of Agriculture, Forestry, Environment and Water Management (1994-2003); and two decades as Member of Parliament.

What is the EIB?

The EU’s bank: The EIB is the European Union’s bank – the only bank owned by and representing the interests of the European Union Member States.

As the largest multilateral borrower and lender by volume, the EIB provides finance and expertise for sound and sustainable investment projects which contribute to furthering EU policy objectives. More than 90% of its activity is focused on Europe, but it also implements the financial aspects of the EU’s external and development policies.

Lending, Blending and Advising
• Lending: The vast majority of EIB financing is through loans, but we also offer guarantees, microfinance, equity investment, etc.
• Blending: EIB support helps unlock financing from other sources, particularly from the EU budget. This is blended together to form the full financing package.
• Advising: Lack of finance is often only one barrier to investment. The EIB can help with administrative and project management capacity which facilitates investment implementation.

Priorities
The EIB supports projects that make a significant contribution to growth, employment, economic and social cohesion and environmental sustainability in Europe and beyond. The Bank’s priorities are:
• Supporting SMEs
• Addressing economic and social imbalances between the regions (cohesion)
• Protecting and improving the natural and urban environment (environmental sustainability)
• Promoting innovation through investment in ICT and human and social capital (innovation)
• Linking regional and national infrastructure of transport and energy (Trans-European Networks)
•Supporting a competitive and secure energy supply (sustainable energy)

The EIB raises the bulk of its lending resources on the international capital markets through bond issues. Our excellent rating allows us to borrow at advantageous rates. It is thus are able to offer good terms to our clients.

Multiplier Effect
The EIB generally finances one-third of each project but it can be as much as 50%. This long term, supportive financing often encourages private and public sector actors to make investment which might not otherwise be made.

What Makes the EIB Different?
All the projects the EIB finances must not only be bankable but also comply with strict economic, technical, environmental and social standards. The Bank’s 1,950 staff build on more than 50 years’ experience and expertise in project financing. Headquartered in Luxembourg, the EIB has a network of local and regional offices in Europe and beyond.

The EIB Group
The EIB Group consists of the European Investment Bank and the European Investment Fund (EIF). The EIF focuses on innovative financing for SMEs. The EIB is the majority shareholder with the remaining equity held by the European Union (represented by the European Commission) and other European private and public bodies.

Combatting the Crisis
In 2012, EIB shareholders (the EU Member States) decided to increase the bank’s capital by EUR 10bn. This boosted the bank’s stability and allowed it to plan for EUR 60bn additional lending between 2013 and 2015. Previously, when the financial crisis erupted in 2008, the EU asked the EIB to offset falling investment. This led to a more-than one-third increase in the total value of on-going, outstanding loans by 2011.


BlackRock: Bridging the Gap - The Rise of Infra Funds in Privately Financed Infrastructure

By BlackRock Infrastructure Debt Team

In the wake of the global recession, privately-financed infrastructure has become a hot topic for policy makers from Berlin to Paris, London, and Washington. The attractions are not hard to see – private infrastructure is a way of encouraging investment in the economy and providing efficient essential services to the local population without further encumbering already stretched national balance sheets. According to the OECD, governments will need to raise about US$40trn by 2030 to fund infrastructure projects. But there is also a problem. The traditional funders of infrastructure projects – the large commercial and wholesale banks – are pulling back. This retrenchment is providing institutional investors and asset managers such as BlackRock with an opportunity to step into the breach.

Perfect Storm
Historically, industry surveys of project finance put banks’ contribution at 75-80% of funds raised according to ratings agency Moody’s. But banks are now facing something of a perfect storm when it comes to long-term lending. New Basel III regulations will increase the capital charges that are applied against long-term infrastructure loans, which make them less profitable. On top of this, regulators and bank executives are looking hard at banks’ liquidity profiles after the events of 2007 and 2008 demonstrated the challenge of funding long-term, illiquid assets with short term liquidity. Finally, despite the political attractiveness of infrastructure finance, it often comes behind lending to SMEs and mortgages, the benefits of which are more tangible and more immediately felt by the general public. Many banks have decided that what capital they have left can be more effectively used in other areas, such as lending to finance mergers and acquisitions. Numerous banks have reportedly been offloading their portfolios of infrastructure loans. In June, Bank of Ireland announced the sale of a €270m portfolio to a Danish pension fund and other banks are expected to follow suit in the near future. This retrenchment has meant that financing roads, railways, and schools has become significantly more challenging.

“For insurance companies and pension funds, however, infrastructure debt looks much more attractive. It offers the potential for steady returns, diversification, and an attractive yield compared to asset classes with a similar risk profile.”

For insurance companies and pension funds, however, infrastructure debt looks much more attractive. It offers the potential for steady returns, diversification, and an attractive yield compared to asset classes with a similar risk profile. It is also backed by real assets that provide an essential service such as drinking water or education. In a market environment where bond yields are at historic lows, the opportunity to gain a yield premium is particularly sought after. Infrastructure debt can also provide a more efficient way of investing. Under insurance company capital rules, for example, infrastructure debt is treated in the same way as corporate bonds, but generates an illiquidity premium of as much as 1.25%, allowing insurers to improve their return on capital metrics. It also provides a good match for institutions that have long-term committed liabilities, such as life insurance companies. Perhaps not surprisingly, institutional investors are showing strong interest in the infrastructure debt market. From the docks at Liverpool to French Universities, Dutch prisons, and American power plants, institutional investors have been keen to provide financing.

Complex Business
But as well as being eye-catching, infrastructure finance is a complex business. Transactions are often private, requiring investors to be “in the flow” to originate opportunities by having an on-going dialogue with industry players, particularly banks. Despite the balance-sheet retrenchment of banks, the depth of experience and market knowledge within these institutions means that they will continue to play a pivotal role in structuring and arranging transactions. Institutions will have to continue work together with banks in a complementary fashion to provide finance to projects. Banks will continue to use their structuring expertise, providing shorter-term funding, and ancillary services such as swaps while looking to institutions to provide longer-term capital. Banks are also the main channel for sourcing secondary loans as they look to shed assets and recycle capital. Having a close relationship with project finance and syndication teams at the major banking institutions is thus crucial to success in the infra debt space.

[caption id="attachment_5710" align="aligncenter" width="516"] The Gherkin[/caption]

Sourcing investments is not the only challenge, however. Infrastructure loans also require large amounts of due diligence and upfront work. Third party technical, legal, commercial, tax and other advisors are usually engaged to fully understand the risks involved in building and maintaining a bridge or running an electricity distribution network. Due diligence reports and legal documentation usually run to hundreds of pages of complex analysis that need to be reviewed to ensure that the transaction is appropriately structured. As private, illiquid transactions, the debt is also usually unrated, and so investors need a way to score the credit profile and price the investment as part of the investment process. In the past, institutional investors have sometimes been tempted to enter projects after only minimal due diligence, relying on a high-level overview of the asset from the arranging bank or on a rating from a rating agency if one is available. But this approach is rarely prudent. Recently, for example, Spanish gas storage project Castor announced that it was suspending operations following a small earthquake a matter of weeks after issuing debt to investors. Several institutions had bought the bonds but were given very limited time to perform meaningful due diligence.

And as the case of Castor shows, although assets are usually buy-and-hold, they are certainly not ‘buy-and-forget’. Once investments are made, they require on-going monitoring throughout their (long) lives. Amendments and waivers to the documentation are common as the transaction evolves and investors must be on hand to ensure that these are dealt with effectively.

Meeting these challenges is where investment managers, that have dedicated teams with long-standing industry experience, contacts, and knowledge, come into play. It is usually more efficient for institutional investors to use an intermediary for origination, due diligence, and monitoring rather than developing this expertise in house. Investment managers are able to aggregate capital from several clients, creating economies of scale not available to an individual investor, for whom infrastructure debt may make up a fairly small part of a portfolio. They are also able deal with the complex cross-border tax and regulatory issues that can arise when lending to infrastructure projects in different countries.

A Variety of Formats
Portfolio construction is a key area that institutions will look to the expertise of specialist managers. Infrastructure investment comes in a variety of formats and categories, each of which has different liquidity, risk, and return dynamics. Generally speaking, the infrastructure sector consists of assets or companies that provide essential services for the general public and is characterised by stable cash flows, long life spans and capital intensity. Yet there is a significant difference between investing in a UK airport, a Canadian pipeline, and a Spanish toll road. Institutions will usually be able to construct bespoke managed accounts (rather than a generic fund), and will have to carefully consider the structure and parameters of their portfolio. Managers can help them make decisions on issues such as the types of regulatory and sovereign risk, revenue risk, and concentration risk they are willing to accept when investing in the asset class.

One of the key decisions for investors is whether to invest solely in operating assets – so called “brownfield” projects – or whether to include “greenfield” projects that are under construction in an infra debt portfolio. Historically, institutional investors have been somewhat reluctant to take construction risk, preferring assets with a proven operational track record to more complex construction risk investments. Certainly, there are additional complexities to financing the construction of a suspension bridge compared to a school that has already been built. However, greenfield assets potentially provide attractive relative value. These assets are higher yielding than operating projects, and the spreads put in place at the start of construction usually last for the twenty or thirty year life of the investment. By putting appropriately-structured construction support packages in place, such as guarantees or letters of credit, many of the main construction risks can be effectively mitigated. Mixing greenfield and brownfield assets can also provide diversification benefits to a portfolio. Understanding these risk and reward dynamics is an important service that asset managers can assist with.

On Choosing a Manager
If institutional investors can best access the market via a dedicated manager, given the complexity and opacity of the infra debt market, it is important to recognize managers approach the market in different ways. An important decision is therefore to choose a manager to ensure that funds are being put to work in a way that maximizes relative value. For example, a manager may focus on a particular jurisdiction, such as the UK, or specific asset types, such as greenfield projects, which could limit the investment universe. Similarly, managers may be large investors in the equity or mezzanine debt of infrastructure projects, which can mean that they are not able to look at certain debt investments or because they are conflicted or because sponsors are reluctant to share potential investments with competitors.

Some managers may use a co-investment model, where they put their own capital to work. This gives them ‘skin-in-the game’ but may create conflicts of interest between internal and external stakeholders as the investor seeks to balance the interests of shareholders, policy holders, and clients. A fiduciary model, by contrast, seeks to limit conflicts of interest by acting only as a dedicated third-party asset manager and not investing for its own account. This model provides better access to banks and more closely aligns the goals of the manager and investors.

Bridging the infrastructure gap remains a key priority for governments, infrastructure providers, and investors. But ultimately the success of the process will depend on the institutional investors finding a way to access the market that works for all parties. It is this access that BlackRock, and other infrastructure managers, can provide. Choosing the right manager, who is able to provide access to the market in the most appropriate way, will be an important consideration for institutional investors looking to capitalize on the opportunity that exists in infrastructure debt.

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Muhammad Yunus: Enabling the Poor to Rise and Prosper

Muhammad Yunus is a soft-spoken gentleman with a South Asian accent. When he speaks, presidents strain to listen. Being one of only seven people to have won the Nobel Peace Prize, Presidential Medal of Freedom, and the Congressional Gold Medal, Mr Yunus does not need the praise of CFI.co to boost his profile. However, we are going to give praise anyway.

Muhammad Yunus is the founder of Grameen Bank, a Bangladesh-based bank and a pioneer in the world of microfinance. In the mid-seventies, while visiting the poor villages around his native Chittagong, a port city in Bangladesh where he was head of the economics department at the local university, Mr Yunus took an interest in the business practices of villagers. He observed that very small loans could have a disproportionate effect on their lives.

Traditional banks were unwilling to give out loans, however small, to the poor because of the high risk of default, leaving many at the mercy of loan sharks. Mr Yunus believed a viable business model could be made for offering loans to these poor and so he set out to test his theory. He gave 42 women small loans amounting to a grand total of 27 US dollars. All the women made a small profit on their loans.

In 1983, after finally securing a loan from a government bank, Mr Yunus established the Grameen Bank, which today offers financial services to very poorest in Bangladesh. Through the Grameen Foundation he has now set up similar projects across the world.

Grameen Bank works on a few basic principles. Firstly, most of their borrowers are female; this is partly an exercise in women empowerment and partly because it is believed that women make for more dependable clients. Secondly, Grameen Bank adheres to a system of solidarity lending. In every village the bank operates, local agents offer separate loans to individuals. Together, these are managed as a group in which members are collectively responsible for each other’s payments. The theory holds that this practice eliminates the need for collateral, gives lenders a support group, and cuts down on administrative and management costs.

Mr Yunus has been heralded as a pioneer in the world of microfinance, and his work has gained tremendous recognition from governments and private sector institutions alike. He sees microfinance as the most effective method yet in poverty reduction. The idea is that these loans, as small as they may initially be, will give these poor unskilled entrepreneurs a foot on the economic ladder. The expectation is that the seed so planted will snowball them out of poverty and drive their children into school.

Today, Mr Yunus travels the world spreading his vision through talks and feature-length documentaries. However, Mr Yunus does have his share of detractors, and has had them every step of his journey.

From fundamentalist Muslim preachers warning villagers against accepting loans which they perceive as un-Islamic, to Marxists rejecting his practices as an affirmation of neoliberalism. There have even been accusations of embezzlement, but these were later found to be without merit. More serious and harder to ignore are the accounts of loan shark practises on the part of Grameen’s local agents resulting in lenders ending up in debt traps. Some cases of suicide have even been reported, though it is unclear to what extend this is down to Grameen Bank policy.

Perhaps even more damming to the core idea of microfinance are a number of studies reporting microfinance as largely ineffective in both poverty reduction and the empowerment of women.

The idea of the unskilled, illiterate poor of the world simply working their way out of poverty via a tiny loan that enables entrepreneurial endeavours doesn’t really stand up to reason. Exactly how many unskilled low-level entrepreneurs can an already dirt poor village sustain? Solidarity lending may even exacerbate the problem: Far from being a support network, most of these women - being of a similar skill level and all starting from the same place - are essentially competitors.

As such they depend on each other’s payments for obtaining subsequent loans. This results in peer-pressure and harassment for struggling members trying to keep up with payments. The sad truth is that in all likelihood most of these women would trade their loan for a job in a sweatshop in a heartbeat.

It would appear that microfinance is not the panacea against poverty that Mr Yunus and many others consider it to be. But that doesn’t in anyway lessen his accomplishment. Financial services are a great benefit to society, and Mr Yunus has found a viable business model to supply such services to the bottom 2.6 billion of this world.

To the odd entrepreneurial soul featuring in one of Mr Yunus’ many success stories, this is a tremendous benefit. By their success they may in turn benefit the larger community. Spread over a population of 2.6 billion, those benefits add up.

Microfinance may not singlehandedly elevate the world’s poor, nor should we expect it to, but neither is it the enemy of good. Through Grameen Bank and other programs such as Grameen Telecommunications, Mr Yunus has placed powerful tools and information in the hands of the poor of Bangladesh. Through his many global initiatives, Mr Yunus is now spreading his ideas to the rest of humanity: A man trying to make a difference and succeeding marvellously well at it.


Siegmund Warburg: People and Passion First - Profits to Follow

These days, far too often loan applications for the funding of promising business ideas are rejected out of hand by bank computers that spits out a resounding ‘no’. Algorithms lacking intelligence, senses and - indeed - sense, now rule the financial world. Bankers, traders, analysts and other assorted money handlers just do as they are told by the computer. Human emotion, gut feeling and first impressions no longer play any role of significance. The banker has become an automaton, albeit an exceedingly well-paid one.

Siegmund Warburg (1902–1982) would probably have despised his modern-day peers for their apparent lack of personality. And of courage: It is rather cowardly to blame a soulless computer for one’s own misses.

Mr Warburg was first and foremost a relationship banker. Numbers, statistics and ledgers did not really excite him as he cared for the people behind the digits; their passions, skills, integrity and overall personalities. He was also a man with the courage to accept first impressions as the basis for decisions. Would-be borrowers often need not explain in great detail their business plans. More often than not, Warburg would size up a client in the first few seconds of an initial meeting.

He would have been quite disgusted at the decline of relationship banking and the shift to the more heartless transactional banking which was such a significant factor in the lead-up to the recent global financial crisis.

Siegmund Warburg fled the Nazis in 1934 to found the firm S.G. Warburg alongside Henry Grunfield. As so often, Hitler’s loss was London’s gain. Warburg was a colourful man, full of flair and quite the opposite of the dreary, stuffy bankers then inhabiting the City. He was not liked or admired by his peers. Mr Warburg was very much the creative thinker and prided himself in finding a solution to most any problem, no matter how complex. However, his creativity did not extend to cheating and fooling the market (i.e. investors) as is so depressingly often the case with today’s bankers that try to experiment with out-of-the-box thought processes. It simply wouldn’t have occurred to Mr Warburg to chase profits through deceit.

A passionate advocate of European financial integration and managing director of his bank until the 1970s, Mr Warburg established singlehandedly the EuroBond market which was to massively enrich the firm. As author Niall Ferguson remarks, “Warburg led the western world back to the free market after the mid-century excesses of state control.”

Warburg’s lending decisions were based largely on his impressions of the man or woman seeking his support rather than on cold, bare figures on a sheet of paper. Did he see passion and drive in the owner and employees of a given company? If so, Mr Warburg would likely be suitably impressed and ask how he could help sustain and expand the business. “Tell me what you need” was his way of honouring any well-argued request for credit.

It was the people themselves who were important to Mr Warburg. His detractors sometimes point out that he often showed more concern for producing a profit for his clients than for his own bank. However that is a tribute to the man, rather than a weakness. Of course, Mr Warburg owed his success to enabling all-round profit-making.

As with most successful men, Mr Warburg could be quite brutal and had a ferocious board room presence. Famous for hostile take-overs in the mid-1950s, he threw out the directors of British Aluminium after wrestling control of the company from them. He has no time for losers, bloated egos or incompetence.

Sixty years ago Warburg wrote a memorandum setting out what he felt to be the most important qualities for a bank: Moral standing, a reputation for efficiency and high-quality brain work, connections, capital funds, personnel and organisation. He also advised bankers “not cry over spilled milk”; encouraged them to “cross bridges before you come to them”; and “never to indulge in wishful thinking”.

The world would be such a better place if only modern bankers could take a cue from Siegmund Warburg.


Maha Al-Ghunaim: Enterprising Ladies - Investing in Future Entrepreneurs

Maha Al-Ghunaim is chairperson and managing director of Global Investment House (GIH) - one of the largest such operations in the Gulf Region. She co-founded GIH in 1998 and just ten years later saw her business become the very first Kuwaiti company to be listed on the London Stock Exchange.

Mrs Al-Ghunaim received her education at San Francisco State University and previously held an executive position at the Kuwait Investment Company. She appears high on all the power lists though as a hands-on female leader of a major financial organisation she is still something of a rarity in this part of the world.

Known and admired for her courage and determination in times of difficulty, she unveiled in summer this year a successful restructuring programme that resulted in GIH becoming debt-free. Previous to that, there had come some issues to the fore in the years following the global financial near-meltdown of 2008: GIH had become overstretched and had to book heavy losses. The other good news Mrs Al-Ghunaim was able to share concerned the exceptionally strong performance of the GIH Saudi Equity Fund which now is the second largest of its kind in the kingdom.

A board member of several Gulf Region institutions, including the Qatar Foundation, Al-Ghunaim set out to have her business “make a difference to society, our clients and ourselves”. The daring vision statement of GIH places special emphasis on an ethical approach to business at all times and under all circumstances.

Corporate social responsibility (CSR) is also high on the agenda and taken very seriously by the chairperson and her colleagues. An example of a successful CSR initiative undertaken by GIH is the Ghalia Club that not just works for the empowerment of women, but also concerns itself with a wide range of women’s health issues including breast cancer awareness.

"Mrs Al-Ghunaim is also a key figure at the Kuwait chapter of Young Arab Leaders and has shown great interest in furthering access to education and encouraging entrepreneurship."

Maha Al-Ghunaim stands as a shining testament to what perseverance and skill development can achieve. There are no glass ceilings for her though her ascent to the very top cannot have been easy: As a particularly attractive young woman, she had quite a few challenges to overcome in order to be considered a serious and highly-competent candidate for jobs she applied for.
She started from the bottom and worked her way up through the corporate ranks not by biding her time, but by merit alone. Not just that, she rose quite quickly as well proving that talent and hard work will be amply rewarded. If any luck comes into this equation it is perhaps that Mrs Al-Ghunaim was fortunate in having found mentors that strongly believed in her capabilities.

The career advice she now dispenses to young people is quite simple and straightforward: Plan for short-term objectives by keeping in mind that flexibility in personal development is essential for success. “Do not plan a life for the person you used to be. Be flexible, change with the environment and grab opportunities. Then make a move as soon as you’ve discovered your passion.”


PwC, South Africa: Contributing to the Development of South Africa

All businesses need to know about Broad-Based Black Economic Empowerment (B-BBEE).

[caption id="attachment_5739" align="alignright" width="189"] Michelle Govender[/caption]

Following the demise of the apartheid regime in South Africa in 1993, the new government introduced Black Economic Empowerment to promote positive discrimination in an attempt to counter the effects of inequality among the inferior racial groups in South Africa. The apartheid regime commenced in 1948 when blacks, coloureds and Asians were segregated from the whites through land demarcations with the aim of making the whites the majority nation in South Africa.

This also resulted in blacks losing their citizenship in South Africa and all non-whites having access to services and facilities which were inferior to that of the whites. Of course this led to protests and unrest in the country which was controlled for a while by the imprisonment of anti-apartheid leaders. The laying of sanctions against South Africa from the west along with internal unrest and violence caused the South African government to bow to the abolishment of apartheid in 1990. The first democratic elections in 1994, won by the African National Congress, marked the end of the apartheid era and the birth of Black Economic Empowerment.

“South Africa now needed to strive for equality within its rainbow nation. A strategy was to be developed to act upon the injustices in the past.”

South Africa now needed to strive for equality within its rainbow nation. A strategy was to be developed to act upon the injustices in the past. It began by the government effectively procuring goods and services from BEE suppliers. This was supposed to have a massive impact considering the government was the single largest buyer of commodities within the economy. However, this proved insufficient and so began the steps to improve the strategy to promote Black Economic Empowerment.

The Department of Trade and Industry was tasked to implement a strategy and various other initiatives like affirmative action, preferential points system and financial support from government entities were also introduced. This culminated in the final Broad-Based Black Economic Empowerment Codes of Good Practice (Codes) being promulgated in 2007.

This incorporated different criteria which companies should adopt either directly or indirectly at all operating levels to promote B-BBEE. The final codes (Generic) introduced seven elements which are included on the next page together with the scoring of each element:

Ownership – This incorporates black ownership as a percentage of all shareholders. Additional points are gained should there be black women, black people with disabilities and broad-based ownership and employee ownership schemes, trusts with black beneficiaries meeting the subminimum percentage

Management control – Black members on the board of the company or representing top management in an entity. This is calculated using the adjusted recognition for gender formula.

Employment equity – Black representation in the entity’s workforce using the adjusted recognition for gender formula. An entity can only obtain points under employment equity when the sub-minimum of forty percent of the targets has been achieved.

Skills development – A measured entity’s spend specifically for the development of black employees through formal/informal training. A learning programme matrix is specified to assist in the allocation of points in this element.

Preferential Procurement – Spend from suppliers according to their B-BBEE status where the recognition level is used to recalculate the supplier spend. There are certain exclusions which incorporate certain public- sector spend, taxation, employee costs.

Enterprise development – This encompasses contributions made to beneficiary entities with the ultimate aim of assisting or accelerating the development, sustainability and financial and operational existence of the entity. This may entail grants, loans and guarantees to beneficiaries or investments in beneficiaries. A popular use is the preferential credit and procurement terms or discounts provided that are unique to black beneficiaries.

Socio-Economic development – Non-recoverable contributions made with the objective of creating sustainable access to the economy. Grants, securities, direct and overhead costs to beneficiaries as well as development capital advancement and time spent on training and mentoring black beneficiaries are included as socio-economic development contributions. The effective score is then inserted into the table below to provide the entity with its status and recognition levels.

The above scoring creates a competitive advantage for a company with a higher B-BBEE status during the tender process, especially for Government contracts. In order to improve your score, you were required to procure from suppliers with a higher recognition level. This therefore had a snowball effect in terms of black economic empowerment as it forces companies to try to maximize their status to retain and increase their customer base.

Companies now strive to employ black people, train and develop them, procure from black entities, assist emerging black entities and sustain the socio-economic environment. Fronting becomes quite prevalent because of the specific criteria of all elements in the scorecard. This will however be curtailed by the new legislation to incorporate audited B-BBEE certificates.

Apart from the Generic Codes of Good Practice that is applicable for entities with an annual turnover/revenue above R35 million, the Codes also cater for smaller entities. Entities with an annual turnover of less than R35 million (Qualifying Small Entity - QSE) may choose any four of the seven elements to be scored against. The criteria in each element are also less stringent than that of the Generic Codes. All entities with an annual turnover below R5milllion are exempt from obtaining a scorecard (Exempt Micro-enterprise – EME) and automatically obtain a level 4 contribution status. EME’s can be a level three should the black shareholding exceed 50%.

The points in the generic scorecard (entities exceeding R35 million) proved difficult to obtain for certain industries due to the nature of the entities operating therein. Industry sector codes which were based on the Codes of Good Practice incorporated differences in either the scoring or the criteria in certain elements were then brought into legislation. In certain cases, even the annual revenue thresholds were decreased.

South Africa had issued Draft amended Codes in 2012 which is awaiting approval. There are several differences with the New Codes with the most significant for multinationals being:

The seven elements may be reduced to five with management control and employment equity being merged as well as Preferential Procurement and Enterprise Development being merged;

There may be subminimum criteria introduced for certain elements with prospects of your total score being reduced thus dropping in recognition levels should these not be met;

Annual turnover thresholds for EME’s and QSE’s may be increased;

Mandatory elements will be applicable for QSE’s; and

Goods and services procured from foreign entities irrespective of whether the commodity can be obtained locally may not be excluded from the Preferential Procurement element resulting in a decreased score.

As a foreign investor with a subsidiary in South Africa, there are various implications in terms of B-BBEE. Multinationals argued that they did not partake in apartheid and should not be subject to the principles of B-BBEE. They still however, embraced the other elements but found compliance with the ownership element a difficulty. Some entities included black SA residents as minority shareholders or have introduced black employee share-based schemes. The Codes incorporated a special code series for multinationals – the Equity Equivalent Programme which is permissible only if the established global practice of the foreign holding company restricts the sale of shares to other foreign subsidiaries. Furthermore, the entity will not be allowed to assess itself under any criteria of Code series 100 – Ownership.

The Equity Equivalent Programme is subject to approval from the Minister of Trade and Industry before being implemented. A documented detailed description of the objectives and forecasted outcomes of the initiatives with expected timelines and anticipated milestones is required.

The initiatives, according to the Codes, can incorporate accelerated and shared growth, joint initiatives for priority skills, programmes that promote enterprise creation in respect of co-operatives and socio-economic advancement and development of blacks in South Africa. This results in increased contributions in the Skills development, Enterprise development and Socio-economic development elements of the scorecard.

However, the initiatives which are specific to the equity equivalent programme may not be assessed under either the Enterprise development or Socio-economic development Code series. The score for the ownership programme is calculated on the South African entity’s contribution of either 4% of annual turnover (irrespective of profitability) over the period of continued measurement or 25% of the value of the South African operations determined by a standard valuation on a time-based graduation factor as elected by the entity.

The regulations of B-BBEE in South Africa will be more stringent as indicated with the release of the new Codes as the expected outcome of economic empowerment to date appears to be below expectations. Let’s hope that in the spirit of enhancing B-BBEE in South Africa, all individuals both resident and foreign, partake in the process of opting to abide by the Codes and that this concept spreads throughout Africa to alleviate the poverty and suffering of native Africans and historically disadvantaged groups.

PwC South Africa is proudly a Level Two B-BBEE contributor. PwC South Africa is committed to this cause and has been recognised and awarded for its transformation strategy. PwC South Africa won Africa’s Transformation award during the Oliver Empowerment awards.

The Oliver Empowerment Awards recognise outstanding leaders that have exemplified inspiration, vision, innovation, leadership and action for Empowerment and Transformation whose success today is legendary in the world of business. In addition, PwC South Africa has been recognised by ABASA (Association for the Advancement of Black Accountants of Southern Africa) for qualifying the most black accountants in the Gauteng region for 2013.

About the Author

Michelle Govender is a Partner in the Assurance line of service at PwC. She is a qualified South African Chartered Accountant and registered with the South African Independent Regulatory Board for Auditors (IRBA). She has gained exposure in the private and public sector through auditing, consulting and investigations over the past ten years. She currently specialises in Private Company Services (PCS) in Gauteng. This division caters for the typical family businesses, not-for-profit entities and non-listed entities by servicing the client as a Trusted Business Advisor. We consider a Trusted Business Advisor to be “the person you turn to for objective support at every stage of running your business without compromising our independence.” Michelle has also completed her certification in B-BBEE. She is an approved IRBA registered B-BBEE auditor.


Bentley Motors: Keeping Assembly at Home

The Bentley SUV

[caption id="attachment_5751" align="alignright" width="302"] David Cameron visiting the Bentley factory in Crewe[/caption]

Bentley Motors recently confirmed that it will proceed with the development of the Bentley SUV, the company’s fourth model line. The SUV will be made in Crewe and will go on sale in 2016. It will create over 1,000 jobs in the UK. Over the next three years Bentley will invest more than £800 million in its headquarters at Crewe and the development of new models.

UK Prime Minister David Cameron was present together with Dr Martin Winterkorn, Chairman of the Board of Volkswagen Group, for the announcement at Bentley headquarters and said: “This £800 million investment and a thousand new jobs from Bentley is fantastic news for both Crewe and for the UK as a whole. It is another important milestone in strengthening our economy.”

“One sector that we know is sprinting ahead in the global race is our booming automotive industry. One vehicle rolls off a production line somewhere in the UK every 20 seconds and we have just launched the Government’s Automotive Industrial Strategy to help continue this success for years to come. I am delighted that Bentley will be building their new vehicle here, not only creating a thousand jobs, but safeguarding many more, as well as increasing training opportunities for highly skilled apprentices.”

Dr Winterkorn later added: “The Volkswagen Group believes in the UK as a competitive location for industrial production. Bentley fans all around the world are looking forward to the brand’s first SUV. Together we will make this new model another true Bentley – powerful, exclusive and successful.”

“This £800 million investment and a thousand new jobs from Bentley is fantastic news for both Crewe and for the UK as a whole. It is another important milestone in strengthening our economy.”

Business Secretary Vince Cable commented: “This is a welcome commitment to the UK from a major international car maker. Our automotive industrial strategy proves this government’s commitment to working with world-class companies like Bentley to create jobs and promote exports. This was the first firm I visited as a government minister and it serves as a real example of high-value manufacturing. They export more than four out of every five cars they build in the UK.”

Bentley’s Chairman and Chief Executive, Dr Wolfgang Schreiber, added: “This is excellent news for Bentley and for the UK. The company is increasingly successful and this new fourth model line will leverage the success of the global SUV market. The support of everyone involved with the company has been fundamental to this decision, which will ensure sustainable growth path.”

[caption id="attachment_5750" align="aligncenter" width="584"] Bentley SUV[/caption]

The SUV will be a thoroughbred Bentley true to the brand hallmarks of luxury, performance, quality and craftsmanship. The styling will set it apart from any other SUV on the road and will be true to the Bentley design DNA. It will be the most luxurious and most powerful SUV on the market. The response from customers to a Bentley SUV has been extremely positive in the last 16 months.

The Bentley Factory

It was 75 years ago – in 1938 – that the first building block was placed at Pyms Lane, marking the beginning of Bentley’s now famous factory in Crewe.

Originally built to manufacture the Merlin engines which powered both Spitfire and Hurricane fighters, the factory is now home to more than 3,600 Bentley employees who helped manufacture over 8,500 Bentley cars last year for discerning customers all over the world.

Many great achievements have been made, and are still being made, at this factory - from its original construction to producing cars for over 60 years that sit at the pinnacle of luxury automotive manufacturing.

Continued investment, in both product development and facilities, and the dedication of many thousands of highly-skilled workers paved the way for Bentley’s business success.

In the months leading up to Monday June 20, 1938, Rolls Royce – then-owners of Bentley – was looking to expand production of its famed Merlin engine. The business considered different locations but ultimately picked Crewe for the quality and ready availability of engineers, and the existence of strong transport links.

Merrill’s Farm, Pyms Lane, was the chosen site and 60 acres of land were duly purchased for the sum of £99 per acre. Ground levelling started immediately and in October 1938 production started with 500 engines built. By the end of the following year over 2,000 employees were employed at the plant.

The arrival of the factory also had a considerable effect on the wider Crewe area with some 2,000 new houses built, many of which were to accommodate employees.

Production moved quickly and by 1945, over 15,000 aero engines had been built when the decision was made to shift to mostly car production. Just a year later, the first Bentley rolled out of the gates: The Mk VI.

Car production remained at a pace. Presently, the Crewe factory’s output continues to grow. The Home of Bentley in Crewe is now considered as a Volkswagen Group Centre of Excellence for its Wood, Leather and Trim manufacturing departments.

Developments continue at the Pyms Lane factory, with Bentley keen to invest in new technologies as part of its position as the third largest investor in research and development of UK automotive industry.

The manufacturer recently installed 20,000 solar panels with a power generating capacity of 5MW in what is the UK’s largest roof-mounted solar panel installation. These panels will generate up to 40 per cent of Bentley’s energy requirements and reduce CO2 emissions by over 2,000 tonnes annually.

The panels will also generate enough energy to power over 1,200 households in Crewe, attesting to the valuable contribution the factory has made – and indeed continues to make – to the local and wider community.

Bentley at the Coronation Festival

Visitors to the Coronation Festival in July were able to enjoy a rare opportunity to see one of the most recognisable and elegant cars in the world: Her Majesty the Queen’s State Limousine.

This unique Bentley, presented to the Queen in 2002 to mark the 50th anniversary of her accession to the throne, was the centrepiece of a collection of Bentleys on display in Buckingham Palace Gardens throughout the celebrations.

Whilst the State Limousine is known to millions of people across the world, the Coronation Festival offered a superb opportunity for visitors to take their time to walk around the car and get closer than usually is possible. Her Majesty and The Royal Household kindly made the car available for the occasion.

[caption id="attachment_5762" align="aligncenter" width="356"] The Queen at the Coronation Festival[/caption]

Bentley’s craftsmen, designers and engineers (in partnership with several leading British automotive specialists) started work on ‘Project Diamond’ in 2000 with the clear objective of creating a truly elegant car suitable for every type of royal occasion.

The State Limousine is designed to ensure as many well-wishers as possible have the opportunity to see the Queen. For this Bentley created a ‘panoramic glasshouse’ and provided the vehicle with a significant lift to make it far higher than any other car. Additionally, the rear seat position was determined using a model of the same height as the Queen while the doors are hinged at the rear and open through 90 degrees to enable Her Majesty to almost walk out of the car.

Another highlight from Bentley at the Coronation Festival was the presence of the company’s flagship model: The Mulsanne. Blending refinement and performance with luxury features and technology, the Mulsanne offers the greatest of grand touring experiences. The car takes nearly 400 hours to create over half of which are dedicated exclusively to crafting the luxurious interior. Nearly 120 exterior colours are available as standard as well as 24 colours of leather. The steering wheel alone requires ten feet of thread and 620 stitches to complete.


Sampension: PPP as a Way Forward for a Modern Welfare System

[caption id="attachment_5774" align="alignright" width="178"] Author: Henrik Olejasz Larsen[/caption]

Public Private Partnerships (PPP) can be defined as a long-term contract between the public authority and a private partner. In Denmark it now seems clear that PPP is particularly suitable for infrastructure projects that will further the development of society. This holds especially true in three main areas: Transport, centralized supply and services.

Transport means mostly roads, bridges and tunnels which facilitate the efficient movement of goods and people. Centralized supply facilities, such as power and heat generators plus their transmission lines, ensure proper heat, water, electricity and waste management. Services concern mostly schools, hospitals, day care centres, sports facilities and administrative buildings that support the delivery of the welfare services that characterize developed societies.

International recommendations

This assessment of infrastructure is supported by the OECD’s assessment that economic development will largely depend on the availability of adequate and timely infrastructure facilities. There is thus a potential economic benefit – and a social benefit at the end of the tunnel - which may be harvested. Moreover, in Denmark - as in most of Europe – is faced with an urgent need to upgrade the existing infrastructure, which only partially matches today’s needs and falls short when future needs are considered.

“The capital city Copenhagen is currently experiencing a historically large population growth.”

Major technological developments and demographic and geographic shifts in population composition means a change of the basic infrastructure servicing society is called for. In Denmark, people move from rural to urban areas. The capital city Copenhagen is currently experiencing a historically large population growth. In the past few years, we have embarked on the development of large construction projects such as Metro and DR Byen. We have also adopted new projects, including the Fehmarn Belt link, super hospitals and the City Circle. But there is still an adjustment and maintenance backlog in public infrastructure which in Denmark alone will amount to several billion dollars.

Help for the public?

It is obviously useful to look at how investment in infrastructure can be organized in new ways. Experience shows that cost overruns of more than half of the infrastructure project’s original budget are quite common when the government is the client.

A new way is offered via PPP companies that celebrate a single contract with a public authority and then carries out all aspects of the proposed project: Design, construction, operation and financing. The model is flexible enough to be adapted to any specific circumstances. It may be a hybrid model in which a PPP established by a public corporation is the co-investor. Or with the government as a regulator, drawing up a regulatory framework that allows private incentive to develop, construct and operate a plant or other venture. And finally, the private builder who host the public authority as a tenant of the infrastructure it built and now owns.

Based on the - rather limited - experience with Danish PPP projects, it turns out that all were delivered at the agreed price and on time or even before the deadline. This suggests that PPPs can be a tool for bringing efficiency to large infrastructure projects such as the ones mentioned above.

Notwithstanding all these good arguments, we in Denmark have still not as advanced as much with PPP projects as other countries, or indeed as we would have wished. One of the reasons for this may be that the coordination between the public and private sectors often contributes to an increase in the complexity of already complex deals.
Sampension considers PPP simply as a way to finance public infrastructure projects. PPP should not be seen as a way to bypass budgetary rules (budget law, fiscal compact). It should, however, be a way of thinking, organizing and financing projects. It’s not just that the process becomes more complicated, but also that discipline and a clear allocation of responsibilities and incentives are required. This is probably the reason why the perception of PPPs is that the model has failed to deliver both one cost and time.

The Pension Companies’ Role

It is obvious that pension funds in Denmark can play an important role in domestic PPPs. Danish pension funds control significant assets and represent therefore an important source of financing for long-term projects.

However, the right conditions must of course be present. Sampension’s main purpose is to ensure the best possible returns for its clients. Therefore, we are not necessarily a PPP pension company. But when you can combine favorable economic investments with sensible urban development and infrastructure projects - thus contributing to growth in Denmark as well as in other countries – in monies invested serve multiple purposes simultaneously.

The assumption is that there can be a cooperative model in which different - private and public - players can assume the responsibilities of each is best suited to take on. It therefore becomes essential to maintain a good overall economic assessment so that construction and operation may be successfully combined. Only if these conditions are met, a public-partnership can ensure a good and efficient delivery of a given public service while offering a sensible long-term investment option to the pension company. It requires that both the private operator and the public authority are willing to enter into long-term partnerships that are guided by set rules - a willingness that has so far largely been absent in Denmark.

About Sampension

Sampension manages industry-wide pension schemes for primarily white collar workers in municipalities and central government. The company is organised as a life insurance limited company, but essentially non-profit.

The company strategy is to deliver efficient management of labour market pension funds and investment portfolios ar low administration costs. Sampension’s results prove the thorough success of this.

Sampension manages assets of around 150 bn. DKK or approx. 19 bn. EUR.


UN Concern on International Day: Conflicts and the Environment

[caption id="attachment_5796" align="alignright" width="260"] Ban Ki-moon[/caption]

United Nations Secretary-General Ban Ki-moon yesterday highlighted the importance of protecting the environment in times of armed conflict, and stressed that strong natural resource governance can help prevent conflict and contribute to long-term peace.

“Strengthening natural resource governance and improving monitoring in conflict-affected States can help prevent resources from fuelling conflict, direct much-needed revenue towards economic revitalization and contribute to more lasting peace,” Mr. Ban said in his message marking the International Day for Preventing the Exploitation of the Environment in War and Armed Conflict.

Conversely, he said, “failing to protect and manage these resources in an equitable way only exacerbates the vulnerability of those who depend on them the most, especially the poor,”

Established by the UN General Assembly in 2001, the International Day was created to spotlight the tenuous link between global and regional conflicts and the environment.

According to the UN Environment Programme (UNEP), at least 40 per cent of all internal conflicts of the past 60 years have been linked to the exploitation of natural resources, whether high-value resources such as timber, diamonds, gold and oil, or scarce resources such as fertile land and water. In Somalia, for example, it is estimated that the illegal trade in charcoal represents annual revenues of up to $384 million for insurgents and terrorist groups.

“Strengthening natural resource governance and improving monitoring in conflict-affected States can help prevent resources from fuelling conflict, direct much-needed revenue towards economic revitalization and contribute to more lasting peace.”

Against such a backdrop, UNEP used the opportunity provided by the Day to launch a new website providing users with free access to dozens of case studies as well as teaching and training materials on the role of natural resources in peacebuilding. It will serve as a global platform for sharing information, experiences and learning on the links between natural resources, conflict and peace.

The contents of the site were produced as part of a broad collaboration led by Environmental Law Institute (ELI), UNEP, McGill University and the University of Tokyo, together with 225 researchers and practitioners around the world. Six books including 150 case studies and other analyses examining experiences from 60 conflict-affected countries and territories are being released to the platform, with 76 case studies already available online.

In his statement, Mr. Ban said: “On this International Day, we stress the critical importance of protecting the environment in times of armed conflict and restoring the good governance of natural resources during post-conflict reconstruction.”

“We also recognize the important role that natural resources play in supporting the livelihoods and resilience of all members of society, especially women, and the implications of sustainable natural resource management for conflict prevention and peace,” he added.

Mr. Ban also pointed to the challenge of safely disposing of weapons of war without harming the environment, which is currently being tackled by the Organisation for the Prohibition of Chemical Weapons (OPCW) in Syria. “Environmental contamination also includes land mines and unexploded ordnance, which pose a particular threat to women and children who are often more vulnerable due to their daily activities,” he added.

Meanwhile, UNEP and Interpol are marking the Day by holding a high-level meeting in Nairobi, Kenya, this week on the impacts of environmental crime on security and development. The two-day Executive-Level Environmental Compliance and Enforcement Committee Meeting will look into developing and implementing innovative strategies to combat environmental crime, working with Governments, international organizations and local communities.

In a joint news release, the agencies stressed environmental crime such as illegal trade of wildlife is a growing international problem. Wildlife crime alone is estimated to be worth $15-20 billion annually, and profits are largely used to help finance terrorism and organized crime across the world. In addition, illegal, unreported and unregulated fishing accounts to 11-26 million tonnes a year, equivalent to 15 per cent of world catches.

“The theft of natural resources by the few at the expense of the many is rapidly emerging as a new challenge to poverty eradication, sustainable development and a transition towards an inclusive green economy when one looks at the scale and breadth of these criminal activities,” said UNEP Executive Director Achim Steiner.

“Whether it be timber or fisheries, or the dumping of hazardous wastes, improved intelligence gathering, focused police work, strengthened customs capacity and the engagement of the judiciary are all going to be vital pieces towards our shared ambition of a less crime-ridden and more just world.”


Bullish on Chile: Elections Prompt New Thinking

[caption id="attachment_5800" align="alignright" width="210"] Copper Mining[/caption]

Copper is set for a price rebound. Manufacturing output in China is up more than analysts predicted and that country’s growing demand for refined copper has significantly decreased global stockpiles. Copper prices have already recovered from this year’s low of $7,155 per metric ton and rose 8.2% in the third quarter.

This is excellent news for Chile where state-owned mining company Codelco in October unveiled plans to invest at least $4bn annually over the next five years to open new mines and increase output at existing pits. Earlier this month, mining minister Hernán Solminihac said he expects copper production levels to grow by 5% or more annually, keeping pace with demand as Europe emerges from its recession and Chinese manufacturing picks up.

The ups and downs of the global trade in copper are monitored carefully by most Chileans. While the country has successfully diversified its economy over the past thirty-odd years, copper mining still represents fully 20% of GDP and accounts for nearly 60% of exports. Chile’s growth rate closely tracks the copper price on the world commodity markets with the country suffering two consecutive quarters of GDP contraction in early 2009 as the red metal lost over half of its value.

"Earlier this month, mining minister Hernán Solminihac said he expects copper production levels to grow by 5% or more annually, keeping pace with demand as Europe emerges from its recession and Chinese manufacturing picks up."

Since then things have improved significantly. As Chileans head to the polls on Sunday, November 17, to elect a new president, the economy is humming along nicely allowing most of the nine contenders to promise voters the coming of a welfare state that trumps anything ever seen in Latin America. This year, GDP is expected to grow 5.7% while unemployment levels and inflation are kept in check. Next year, the economy is forecast to expand 4.5%.

This enviable performance may suffer on the outcome of the election. A columnist for Chile’s leading daily El Mercurio earlier this week kicked up a dust storm with the contention that too much social democracy will inevitably lead to Chile losing its competitive edge. Writing in Forbes Magazine as a guest columnist, Alex Kaiser accused front-runner Michelle Bachelet of following the populist path beaten by the late Venezuelan president Hugo Chávez: “Bachelet’s new socialist platform promises to make radical changes to the current Chilean economic system.”

Mr Kaiser, executive director of the free market think-tank Fundación para el Progreso, argues that Michelle Bachelet’s plans to rewrite the Pinochet-era constitution will herald the end of Chile’s economic miracle: “Bachelet proposes to create a massive welfare state that provides all sorts of benefits to the people and will replace the market as the main engine of economic growth with government-led industrialization.” Even Steve Forbes himself got into the fray that followed, tweeting – somewhat less coherently – that US president Obama must feel “delighted” about a free market bastion “falling to socialism.”

Analysts with less of an ideological axe to grind are far less pessimistic. A recent report by JP Morgan Latin America Equity Research concluded that the policy platform of Ms Bachelet’s centre-left New Majority coalition is “surprisingly moderate” and does not contain any proposals that would alter the fundamentals of Chile’s economic system. JP Morgan analysts concluded that Ms Bachelet’s ideas are rather timely as the country still leads Latin America when it comes to income inequality and wealth distribution.

Public opinion polls place Ms Bachelet firmly ahead of the pack with 47% of the vote. Runner-up Evelyn Matthei of the centre-right Independent Democratic Union (UDI) is stuck at slightly over 22% of voters’ intentions.

Previously, Ms Bachelet occupied the presidency of Chile between 2006 and 2010. Her administration is generally considered to have been exceptionally successful. She left office with the highest approval rating of any Chilean president ever.

Pundits now expect a repeat performance. Guillermo Larraín, economics professor at the Universidad de Chile, argues that Chile has progressed so far in its development that the country is ripe for the sort of social reforms made decades ago by developed nations and which resulted in a new economic impetus. “We need to give a fresh impulse to our development by addressing the social inequities that still linger. Far from damaging, this process could in fact set an agenda for taking Chile’s development to the next level. The growth-at-all-cost model has now run its course and seems exhausted. New thinking is required.”

OECD secretary-general José Ángel Gurría agrees. During a recent visit to Chile, Mr Gurría ruffled a few feathers by drawing attention to the country’s skewed social makeup. In fact, Chile displays the greatest inequality gap of any member state of the Organisation for Economic Development and Cooperation. While offering lavish praise for Chile’s economic performance, the near absence of corruption, the quality of governance and the country’s competitive prowess, Mr Gurría cautioned that social imbalances may yet undermine future growth prospects.

Meanwhile investors remain bullish on Chile. While the IPSA index of the Santiago Stock Exchange has lost 9.23% of its value over the past year, it has recovered some of that lost ground in the last month. Most analysts expect the rally to continue no matter the election’s outcome. Just last month, the Chilean Central Bank unexpectedly cut its benchmark interest rate by 25 basis points to 4.75%. That cut may signal the start of an easing cycle that well could take the interest rate down to 4%; weakening the peso, contributing to an uptake in direct foreign investment and decreasing the balance of payments deficit.