Year: 2009

The Danish model

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The events that led to the landmark judgment unfolded in the local authority of Vaxholm, Sweden. There, a Latvian construction company Laval un Partneri had won a contract to refurbish a school and posted a team of Latvian workers to Sweden. But the work deadlocked as the Swedish building workers union demanded the same rates of pay for the Latvian workers as those set out in the Swedish collective bargaining agreement – and then tried to force through their demand by mounting a blockade and organising solidarity action.

Believing the collective action to be illegal, the Latvian company issued proceedings in the Swedish Labour Court, which decided to consult with the European Court of Justice (ECJ). It had one question of fundamental importance: Are trade unions allowed to force employers using posted EU workers into negotiations for a collective bargaining agreement or would that be at odds with the freedom to provide services that is enshrined in the EC Treaty?
In other words, the ECJ was asked to decide which principle should outweigh the other: the free movement of services or the right of nation states to allow social partners to agree working conditions and minimum rates of pay through collective bargaining – and, ultimately, collective action.

Community law prevailed in this instance. Thus, Laval favoured community lifeblood over the long cherished labour market practice, and the Danish model seemed to be under threat. Under the Danish model, wages and working conditions are determined in often local collective bargaining contexts and enforced through the right of collective action. The Danish Government set up a committee in which the social partners were represented to map out the implications of Laval and find a solution that would be consistent with Community law but also safeguard the Danish model. The Laval Committee issued its report in 2008, resulting in a new act.

The new Act is an attempt to rescue the Danish model by guaranteeing the right of collective action. The guarantee is subject to the condition that trade union demands to foreign employers must be founded on national collective bargaining agreements that are precise and accessible. The question is if the new measure will deliver this objective; or if it will only provide a short respite to keep the traditional model of collective bargaining and action.

A fight for lifeblood

Laval sparked controversy when it was delivered because the ECJ took sides in a clash between rights that have a history behind them.

On the one side of the scales there is a labour market model which is synonymous with the entire Danish system in the labour market and a favourite of politicians and the social partners alike: the Danish model. The Danish model is characterised by a low degree of codification with respect to pay and working conditions. Instead, the social partners will agree working conditions through collective bargaining. The collective bargaining agreements will often be industry-specific and will very often be supplemented by local collective agreements that can be adapted to reflect local circumstances at individual employers. An important feature of the Danish model is the right of collective action. This ensures that agreement is reached and that pay and working conditions in Denmark are maintained at a high standard.

But the Danish model may clash with another pivotal principle that represents a part of the EU’s very reason for being: the free movement of goods, services, capital and people. That clash is evident in Laval: the ECJ found that forcing the Latvian employer to enter into a collective bargaining agreement constitutes an obstacle to the free movement because the agreement would impose greater obligations on the employer than those defined through Swedish legislation – and obligations that the foreign employer had difficulty realising in advance because the Swedish trade union wanted to negotiate instead of simply demanding that certain conditions were met.

Free movement first

Laval included an interpretation of the Posting of Workers Directive. Foreign businesses posting workers in Denmark must observe our laws or generally applicable standards with respect to employment and working conditions. This means that posted workers are entitled to the minimum rights applicable in Denmark. The problem is that many of the standards applicable in the Danish labour market are not generally applicable. They have been agreed through national or local collective bargaining agreements, except for certain minimum standards. With Laval, the European trade unions, and thus also those in Denmark, felt that the ECJ was sending a dangerous signal. The Posting of Workers Directive enables member states to specify minimum standards that will apply to all employers in the member state in question. Laval held that if the individual country has not used that option, it cannot force foreign employers to sign collective bargaining agreements that are more favourable for workers than the minimum standards. The bottom line is that the accessibility and attraction for a foreign employer to perform work or services in other member states seem to override the right of nation states to have a labour market model with a local collective bargaining process and a right of collective action.

To rescue the Danish model, the Government set up a committee, which issued a report in 2008. The report assessed Laval’s precise implications on the labour market and contained suggestions for a bill that would throw a lifeline to the right of collective bargaining and action. The Bill was passed exactly one year after Laval.

The new Act, which came into force in 2009, secures the right to take industrial action against foreign employers by adding a new section 6a to the Danish Posting of Workers Act. The provision is intended to stave off social dumping by ensuring that “collective action may be taken to secure posted employees a pay that amounts to what Danish employers must pay under the national collective bargaining agreements for the performance of similar work”, according to section 6 a(1). Subsection 1 also refers to subsection 2, which sets out a number of conditions. Industrial action will be legal only if the foreign employer has referred to national collective bargaining agreements: that is, provisions that apply to all of Denmark. The parties to the collective bargaining agreements must be the most representative social partners in Denmark and the pay conditions they provide must have “sufficient clarity”. It will be for the Danish Labour Court to decide in each individual case if the conditions for the right to take industrial action have been satisfied.

The intention behind the conditions attached to the guarantee is to ensure that collective bargaining agreements keep the standards required by the Posting of Workers Directive and Laval – while also securing the right to take industrial action.

Implications of the new Act

The Confederation of Danish Employers was involved in drafting the Laval report. At the Confederation’s headquarters a sense of satisfaction prevails: “In the view of the Confederation of Danish Employers, a balance has been struck during the preparatory stages of the Bill to amend the Danish Posting of Workers Act between on the one hand the conclusion in Laval and on the other hand central features of the Danish model”.

Still, it may be difficult to predict the full implications of the Act. Maybe the future will hold more disputes if it turns out that it does not satisfy the conditions set by the ECJ with Laval anyway. One question is, however, if the new Act is enough to meet Laval’s requirements for transparency. It does not specify how foreign employers are to find out who are the most representative employee organisations in the Danish labour market. Further, in the last year many critics have pointed out that it does not specify statutory minimum wages either.

It may be the Danish Labour Court that will have to decide in such cases of doubt. And if the Danish Labour Court itself is in doubt about how to understand Community law, the ECJ will have the last say again.

A brighter future

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The economic crisis has produced significant social costs in terms of rising unemployment, personal savings diminishing, and loss of trust in financial institutions and regulators. Its effects have spread to the Arab region, impacting different countries, cities, and companies.

How did this happen? The crisis is the result of several failures, but ultimately they come down to a failure of governance systems and ethics, both at the corporate level and at the institutional level.

Writing about good governance as a financial institution at this time is both a humbling and daunting task. But now is also the time to consider what went wrong, what needs to be done to address it, and how we can assure those changes will be successfully implemented. A recovery requires an improved system, in which people can better trust.  

Corporate governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. It provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance. It includes the relationships among the many stakeholders and the goals for which the corporation is governed. As we now know, the appearance of good governance does not ensure its reality. Part of the challenge we now all face is that those countries and companies assumed to have some of the highest standards of governance are precisely those that have failed worst. The basic principles of good governance include rule of law, ethics, integrity, disclosure, transparency, accountability, not only to shareholders but to all stakeholders. The current crisis has shown that there were implementation problems at least in four areas of governance: board practices, risk management, remuneration and the exercise of shareholder rights. Our challenge now is to learn from past mistakes and shape an enhanced international and regional governance system. Four important opportunities follow.

1. Adherence to standards
As a starting point at the regional level, we should aim to meet the highest international standards such as the recommendations of the Organisation for Economic Cooperation and Development (OECD). While many of the worst offenders of the financial crisis may have professed to be using these standards, it is in most cases a failed application of the standards rather than the quality of the standards themselves. These are a good starting point and companies such as NCB have found them to be of significant value having systematically integrated them over the past several years. At the same time, the bank continuously reviews these recommendations and focuses on means to ensure their implementation.

In Saudi Arabia, the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank and the banking supervisory authority, has played a leading role in strengthening governance in the banking industry on issues such as compliance with the International Financial Reporting Standards, anti-money laundering and combating terrorism financing and fraud.

2. Sustainability and corporate governance
As we urgently seek solutions to the crisis, we need to simultaneously take into account a wider set of pressing economic, social and environmental risks that potentially have similar or greater impact on the global system over the medium to longer-term. If we do not, we may find ourselves in an even worse position soon. Leading businesses around the world are adopting sustainability management – the integrated management of economic, environmental and social performance for the purpose of enhancing value for both shareholders and society (ie all stakeholders). The underlying premise of sustainability management is that companies who can better identify, understand, and respond to a wider range of material economic, environmental and social risks and opportunities will outcompete those companies who do not. This will be especially true as social and environmental trends continue to strengthen.
As part of sustainability management, the ultimate oversight of risks and opportunities relating to these wider issues must be specifically assigned at the board level.

3. Benefits of Islamic Finance
The crisis was triggered by excess leverage, by the complexity of financial products, and by a neglect of risk that was thought to be spread throughout the system via new financial instruments.

Islamic banks seem to have been less affected by the crisis than their western counterparts, very likely because they have been more conservative, mostly due to Shariah Law regulations, which restricted debt transactions or investments in toxic assets.

According to research by Standard & Poor’s Ratings Services, Gulf Islamic financial institutions are being less impacted than conventional financial institutions. These preliminary findings are relevant both regionally and globally. Regionally, the banking sector is not under obligation to be Shariah compliant. Both Islamic and conventional institutions are permitted to operate and are regulated by the same regulatory framework. Shariah supervisory boards are usually put in place by Islamic banks.

On a global level, these findings demonstrate that discussion is warranted over the merits of the practices of Islamic banking and how those practices might inform international reforms.

4. Government policy
When practiced properly by large numbers of companies, good governance can enhance the attractiveness, effectiveness, and competitiveness of national markets. Good corporate governance that incorporates sustainability should therefore further strengthen national markets. Several governments in the region are already exploring this link under the banner of Responsible Competitiveness. These countries include Jordan, Egypt and Saudi Arabia. In Saudi Arabia, the leadership has recognised that this has the potential to contribute significantly to Saudi’s ambition of becoming one of the top ten most competitive nations by 2010. As such, they have launched the Saudi Arabia Responsible Competitiveness Index, an initiative that explores the take-up of sustainable business practices by 40 companies and the correlation to national competitiveness. Other countries in the region should also be encouraged to consider the link between widespread uptake of good governance, sustainability management, and national competitiveness, and to modify government policy and regulatory frameworks accordingly.

Beyond policy and regulatory revisions that will undoubtedly arise, governments have another major opportunity to promote sustainability-oriented governance. Most governments worldwide have not taken into account a long-term sustainability-oriented perspective of fully considered economic, environmental and social development. This has included embracing an economic model that is now understood to not adequately account for negative environmental and social impacts.

As the slowdown hits the region, governments are expected to step in with stimulus of major projects. For example, Saudi Arabia is expected to invest USD 400bn in national projects over the coming five years. For all regional investment, there is an opportunity to achieve immediate progress in factoring the wider range of risks into these projects, so that we can implement projects which contribute to stability over the long-term.
 
Towards responsible competitiveness
Now is the time to rebuild governance models and focus on rebuilding confidence. While we can start with the best elements of existing models, there is an opportunity to consider the merits of Islamic banking practices and to incorporate sustainability-oriented risk and opportunity oversight at the corporate governance level. 

We can collectively contribute to greater competitiveness – a more responsible competitiveness – that leads us to a more prosperous and sustainable tomorrow.

For more information visit the Sustainability section at www.alahli.com

Streamlining the system

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Brazil is fast becoming the investment opportunity of choice for foreign investors, but the South American country has one of the most complex tax systems in the world.

The range of tax duties and contributions in the country means tax professionals are required to have in depth knowledge of applicable rules and of the market itself to help keep companies competitive both locally and internationally. 

World Finance spoke to Eliézer Serafini about the reasons behind Brazil’s complex taxation system and to find out what is making Brazil so popular with foreign investors.

Serafini, lead tax partner at Ernst & Young Brazil, is currently leading an award-winning team of nearly 500 professionals in areas as diverse as local taxes, international taxes, expatriate tax compliance and advisory, transfer pricing, customs, VAT and labour, amongst others.

The country’s taxation is a complicated issue, involving more than 60 different taxes and exceptions. The Brazilian Constitution establishes different categories of tributes that may be levied on entities and individuals.

The tax systems’ complexity derives from certain taxes which are not included in the ‘non-cumulative regime’, in addition to a range of sector tax incentives and an extensive list of tax liabilities that tax payers meet monthly and require on-going updates and follow ups by the tax team.

Streamlining the system

Serafini explains: “Brazil’s tax system is very complex, specifically the indirect taxes. We recently had a visit from our global leadership in indirect taxes and they were amazed at the complexity we have here. We have many taxes, tax laws and many formalities that the tax payers have to comply with.

“There are four main taxes and what makes the indirect tax system very complex is we have the non cumulative system in Brazil, so companies have to take tax credit when they buy raw materials.”

Brazil is currently updating their tax system, replacing some of the paper-based methods with a more high-tech alternative. This has created a process which is a lot more streamlined, but may add yet more complexity to the system.

“Our IRS has just adopted the digital system where companies have to comply with all formalities electronically. All information has to go through the digital system, so when you think about all the taxation formalities that the companies have to comply with and then when you consider that all those formalities now have to be adopted by a digital system, it makes life and the process even more complex.”

Award winning tax team

All these tax particulars drive many companies to rely on specialised advisory services, such as those offered by Ernst & Young, to address tax matters, rather than keeping an ‘in house team’ which would be a drain on funds.
This specialised knowledge required to deal with the tax system in Brazil stems from the experience of professionals at Ernst & Young who have had a very ‘hands on’ approach.

Voted Brazil’s Best Tax Team by World Finance magazine, Ernst and Young’s professionals have achieved a level of competency that truly sets them apart from others.

Specialisation is the key, according to Serafini, with tax experts split into teams which each focus on a different aspect of taxation.

“We’ve structured our tax practice so we have people who focus on direct taxes only, people who are experts in international taxation and people who concentrate on individual taxation. In the past, we used to specialise in all parts of taxation, but nowadays our professionals are organised according to the tax system due to its complex nature.

“As a consequence, the entire training programme, as well as jobs and projects, are organised based on the particular specialisation, so that our staff can have enough knowledge and expertise to properly serve our clients.”

Law changes

Keeping up to date with the changes in the law is another ever-present challenge for the team at Ernst & Young and it is a vital part of the service they provide, as companies could miss out on important tax benefits if amends in the law are overlooked.

“We have a specific team who are assigned to follow changes in the law. They share their research and what they have found with the rest of the team so everyone is completely up to date with any changes.

“The tax law in Brazil changes a lot and clients should be updated with the changes because sometimes they bring opportunities. Recently, there was a new law implemented which stated that companies with tax debts can make a settlement with the IRS and gain some tax benefits. If the company was not made aware of that change in the law, they could miss out.”

It is important for foreign companies to get the best advice when it comes to investing in Brazil, continues Serafini:
“One of the main challenges for foreign investors is to be able to effectively manage their taxes, because of the complexity involved. Companies have to comply with many formalities and our tax law changes frequently, so tax payers have to make sure that they are up to date regarding all the changes.”

Brazil, in particular, is becoming more popular with foreign investors, at a time when emerging markets are becoming increasingly attractive to FDI. He believes that Brazil’s healthy financial system, stable economy and a controlled rate of inflation is helping bring investors to the country:

“Brazil is a large market with around 185 million people and it is considered to be a very promising market. The economy is doing well, inflation is under control and our financial system is very healthy; we are stable economically so I would say that our market is very promising and we are very optimistic that Brazil’s economy will grow.”

The country will also be the focus of the whole world when it hosts both the World Cup in 2014 and the Olympic Games in 2016. An increasingly promising sign for Brazil is that an oil reserve has just been discovered, which will almost certainly lead to a lot more foreign investment.

Optimising earnings

Brazil very much realises its own potential and has begun investing in its own future, building and improving transport links and rethinking energy sources.

“We have foreseen many foreign investments from oil and gas companies and have begun to build new seaports, airports, highways, railways and new power energy plants. If you consider all of these elements together, I would say that there are many opportunities available in Brazil.”

For foreign companies planning to invest in Brazil, business structure and geographical location are not to be forgotten when considering an investment plan, according to Serafini.

“Foreign investors need to make sure their businesses are well structured from a tax perspective to take advantage of the benefits available so they can optimise their taxable earnings and be competitive.

“Geographical aspects are also key; they need to find the right place to set up their business.

“It’s important that the taxation experts within the company are involved with some executive decisions of the company; some companies don’t properly involve them when making decisions and if they don’t involve them, they are not able to work out what impact the decision would have tax-wise.”

Brazil is currently, and proudly, adopting the International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB) as a single set of high quality and understandable set of standards.

“We are very proud of what Ernst and Young has been doing for Brazil in terms of IFRS,” says Serafini, “we have assisted both the Brazilian Securities and Exchange Commission and the Brazilian Central Bank to identify the differences between the existing Brazilian accounting rules and the IFRS ones with the purpose to harmonize them. This is a very important step for Brazil as a country.”

Promising future

Brazil’s future looks promising and for the investor, things have never looked better.

All eyes will be on Brazil in five years time when they host the World Cup, followed by the Olympic Games two years later and, unlike many other countries, Brazil’s economy seems to be riding out the recession, with its stable economy and hold on inflation.

The country has major plans for its future; updating its public services, energy plants, modernising its tax system and the recent discovery of oil will, no doubt, be the major factor which will shape the country’s future. Brazil is moving forward, and it’s on the up.

The Kyoto mechanism

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The carbon market is still in its infancy but as private sector investors are discovering this niche as uncorrelated performance driver, the dynamic is shaping up. The Kyoto Protocol set the framework for the “Kyoto mechanism” under which emission targets should be met primarily through national measures. Emissions from greenhouse gases are to be reduced by 5.2 percent based on 1990 levels until 2012. This can be achieved by capping total annual emissions and through trading emission permits, where the market assigns a monetary value to any shortfall.
Nationally allocated credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. The agreed “caps” or quotas on the maximum amount of greenhouse gases from industrialised countries can be met using market-based mechanisms, namely Emission Trading Schemes (ETS), Joint Implementation (JI) and the Clean Development Mechanism (CDM). These schemes trade and settle internationally under the supervision of the UNFCCC allowing emission certificates to be transferred between countries.

It was not until 2005 when the Kyoto mechanism was adopted for CO2 trading by all EU countries under its Trading Scheme (EU ETS) that the carbon market really took off. With the European Commission acting as its validating authority through national registries, what followed in its first three years of operation (phase 1) was a manifestation of the public interest, growing the carbon markets from a trading volume of approximately $8bn in 2005 to $118bn in 2008. The carbon market is currently dominated by the EU ETS which accounts for roughly 70 percent of all trading volume. Whilst a considerable portion of future growth is estimated to come from increasing liquidity in the CDM, a US climate and security act could potentially create a market three times the size of the EU ETS, propelling the global carbon emissions market to $500bn by 2012 and $3.5trn by 2020.

Carbon is more than a new commodity − it is an independent asset class and will be part of every strategic asset allocation.

The landscape is already changing as active carbon management is required on an enterprise level. Although the market is expanding rapidly, global regulation remains premature and the framework is still developing. A multinational company operating in several jurisdictions can be exposed to price differences due to variations between regulatory environments and market inefficiencies.

Investors should investigate how carbon issues impact their investment portfolio and reflect this in the investment policy and risk management. To balance risk with reward, the solution will involve finance, technology and engineering as investments are evolving from simply buying carbon assets to taking equity positions in the underlying projects and benefiting from the revenue stream.

Asset class
Carbon investments as an asset class pose a tempting opportunity for sophisticated investors as it has both, a very low correlation to traditional asset classes and offers diversification. As a growth market, it currently also offers plenty of inefficiencies as well as the liquidity to support a long/short trading strategy. The maturity of the carbon derivatives market now even allows for the creation of portable alpha strategies. Whilst there are numerous ways to invest in the market, the use of private funds as a collective investment vehicle is emerging as the method of choice enabling the investor to share risk, diversify and rely on professional management. Despite the global economic crisis, carbon fund assets under management grew by 25 percent last year. The carbon market offers an attractive risk/reward proposition due to a lack of transparency, fragmentation and volatility. Investing in the market presents opportunities to outperform by exploiting pricing inefficiencies of carbon emission permits, carbon-related projects and cleantech investments.

AtlasCapital Financial Services relies on years of experience as one of the dominant market players on the BlueNext Exchange. It offers a variety of services in the environmental markets from advisory and trading, to structuring and project investment.

For more information tel: +357 25 50 10 00; email: dejongd@ACFS.eu; www.ACFS.eu

The green incentive

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The future health of the planet is at the top of the agenda for politicians, scientists, conservationists, and an increasing number of people in all walks of life, as the evidence of the effects of global warming and pollution becomes ever more apparent. And ominous.

Of course, all eyes were on the UN climate change conference in Copenhagen in December 2009, the aim of which was to deliver the successor to the Kyoto Protocol. But do these events achieve what they set out to? There are critics who believe that they won’t achieve concrete results.

Atradius sees it differently. The role of politicians is that of setting the framework for change and giving clear guidance of what has to be done. That isn’t enough. Arguably, businesses have been instrumental in creating much of the current environmental concerns through their use of traditionally wasteful and polluting processes. These very same businesses can now turn the politicians’ aspirations into reality by adapting more cost efficient, less wasteful and environmentally aware practices.

The white paper cites many examples of companies that have seized the opportunity to become ‘greener’ – and, in the process, increased their profits and enhanced their brand. Wal-Mart, for instance, has adopted an environmentally aware philosophy that runs right through its organisation, and it ensures that its suppliers do likewise. In the process it has been able to pass on savings to customers while at the same time increase profits.

The profitable application of sustainability is by no means exclusive to major corporations. If anything good has come from the economic downturn, it is that businesses have had to focus on eliminating wasteful processes to cut costs; essentially reviving the mantra that gained currency in the 70s and 80s: Total Quality Management, or TQM. But what is sustainability if not a natural development of TQM? Those businesses that have, of commercial necessity, adopted this cost saving stance to see them through the recession, have taken the first step towards making sustainability a central pillar of their business strategy.

Atradius’ white paper also highlights the commercial opportunities that were missed by businesses too focused on continuing to produce traditional products by traditional means. Take, for instance, the energy efficient light bulb: a simple yet potentially powerful weapon in the battle against waste. While the technology was developed decades ago, its blueprint languished on some researcher’s shelf while businesses – who could have marketed it profitably – failed to foresee the trend away from energy wastage.

The message that the Atradius white paper has for businesses is that sustainability isn’t a side issue – the success stories cited in the paper demonstrate that sustainability can be a profit centre, enhancing that most ethereal of assets – brand value, creating real savings that outweigh initial costs, and providing a more attractive commercial proposition: all of which add up to a healthier business. Governments should be praised for the support they are providing for the development of sustainable technologies and the encouragement they offer businesses through positive incentives such as tax breaks.

But the long term value of penalties for exceeding carbon emission targets may not be enough to ensure that the needed changes are made to create permanent reductions in emissions. If confronted by the possibility of a fine for polluting, a business can – and often will – factor that fine into its costs, thus viewing the fine to be an acceptable fee for continuing to pollute. Similarly, the carbon trading scheme that formed a key element of Kyoto, however well intentioned, can be misused as a get-out clause to continue to pollute – at a heavy price.

The carbon emissions penalty and trading scheme do not achieve what is needed to create a sustainable future. They don’t change attitudes, they don’t make countries or businesses consider the rights and wrongs of their processes, and they won’t foster global cooperation, as they simply allow some countries to buy their way out of actually reducing energy usage and carbon emissions.

For sustainability to be achieved, it has to become a boardroom issue, not just government legislation. At the very least, businesses should be able to lower costs by embracing a sustainability policy, but with more businesses choosing green companies as their preferred partners it is becoming evident that this can help brand image as well.

Download a copy of the Atradius white paper at www.atradius.com

Dancing legislation

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PricewaterhouseCoopers is and has been the leading accounting firm in Mexico not only because it is the oldest, established 103 years ago, but also because of its expertise, innovative approach and professionalism.

The tax line of service has always stood out for its dynamism and ability to resolve issues. This is reflected in its size and number of specialists. This line of service has more than 600 specialists, which provides a good measure of its importance in the sector and its leadership among professional services firms.

The legal services area, which is relatively new with only three decades in place, can be seen on its own as a first rate legal firm, to a degree that it is one of the biggest in the country which includes a tax litigation group, that allows PwC to provide all type of tax services.

Taxes in Mexico, as everywhere in the world, have become a priority for businesses. However, frequent changes to the tax framework, together with unclear rules, make providing tax services in Mexico a bigger challenge.

This is in fact a very interesting topic, as Mexican tax legislation suffers changes year on year that generate uncertainty and do not allow companies to properly plan. For example, the new tax rules entering into force in 2010 were discussed and approved in late 2009. As such, companies are not able to have a reliable long term financial plan adequately.

It is true that all systems can be improved, and undoubtedly Mexico requires a better tax system. However, frequent changes have only made it more complex, discouraging investment without fully resolving the revenue problem.
Additionally, the tax authorities issue regulations during the year, attempting to clarify tax rules in their application, which is not always achieved, thus complicating even more the business scenario.

Furthermore, some of the rules are not clear, leading the taxpayer to different interpretations which open a variety of alternative positions that can range from conservative to very aggressive.

In this scenario, PwC continuously offers professional advice to companies so that they can comply correctly with their tax obligations and have sufficient grounds to take a supportable position on any provision that is confusing or controversial.

Companies have also to deal on a daily basis with the taxing attitude of the authorities, who have become very aggressive in their reviews, resulting in the companies’ spending significant time and resources to deal with the requests from and resolve controversies with the authorities.

Mexico, being an OECD member country, participates in the rules and the initiatives such organisation issues, as well as in the exchange of knowledge and programmes that other countries apply. This allows the Mexican tax authorities to be up to date with respect to tax matters internationally, even helping them to take in some cases very aggressive positions that force the taxpayers to turn to legal means for defence, for which the firm has the necessary resources to provide such services.

In this respect, PwC has developed a new area called the Global Dispute Resolution practice, where advisory and support services are provided to companies, starting from the preparation for dealing with the requests from the authorities, and up to applying the provisions of the tax treaties entered by Mexico with more than 30 countries and assisting in the process of negotiating under the mutual agreement procedures with the competent authority of a certain country.

This new area demonstrates PwC’s leadership when dealing with the issues affecting its clients, with the support of the international network of firms, that allows dealing with the matter in the corresponding country (or countries).
The transfer pricing area is another success story as it anticipated the need for such expertise in Mexico by seconding personnel to countries where transfer pricing rules were already in force. As such, when the area was created in the nineties, the firm already had Mexican personnel with the expertise on the matter. Now that the Mexican tax authorities are focusing intensively on reviewing the transfer pricing practices of the taxpayers, the PwC experience of many years in the field allows it to have all the elements to assist clients in dealing with such reviews.

The International Tax Services group has historically been at the forefront in international tax matters and continues to focus in having the lead in the specialised knowledge and in providing value-added services to its clients. These have resulted in the multiple awards received by the group.

Learning and providing value-added services are essential in a world where competition is constant and in cases so aggressive that it exceeds ethical standards.

A quality service with strong technical background that provides PwC’s clients confidence is the basis of the day to day work.

In said environment, the challenge that the firm faces is to maintain the highest quality service standards that as of today have been its trademark, as well as a culture of dedicated service and attention to every detail in our delivery.
For this to be possible it is necessary to continue innovating, taking the lead against the challenges that the business environment raises and anticipating what is to come.

Some people consider the firm arrogant. This is as a common reaction to cases where PwC does not accept changing its opinion to favour an aggressive position or to avoid disclosing certain information.

Unfortunately, that is sometimes the result of sustaining a position that after due consideration and study we consider as correct. However, in the long term this prevails and in many cases clients realise that difference in an answer, as well as the technical arguments and support, always have merit on their own.

The increasingly complex scenarios that Mexico is facing due to the global and local economic and financial crisis, together with its dependence on the US, are challenges that require innovation and the development of alternative ways that make companies succeed, and the tax arena is a good field for finding such ways, keeping in mind always paying the fair share of tax in accordance with the applicable legislation. The complexity in the tax compliance processes, require also having a specific set of skills and updated knowledge to be able to assist and resolve these issues.

Considering this complex scenario, having the most capable human resources allows for a competitive advantage that is reflected in the levels of client satisfaction. The search for such personnel, national or foreign, or their constant development to keep the highest levels of proficiency, is the norm the firm has followed from its incorporation, and the constant measurement of these requires a significant effort and cost that has never been sacrificed. On the contrary, such efforts are constantly increasing due to the competitiveness of the environment and the complexity, and evolution of the rules.

Having the best team not only in technical terms but also with an enthusiasm to stand out, also results in an increasing effort to retain the most talented people in a market that demands qualified personnel. However, these costs and efforts are incurred considering the internal policy of maintaining and increasing the wealth of knowledge required for an excellent service.

In order to support that such a commitment to excellence is fulfilled, PwC carries out surveys and interviews with clients to understand and act on the areas in which it must do so, to pursue such commitment or in which it is required to improve, and also to understand the needs of clients and train the appropriate resources so that it is able to address them with anticipation.

In a globalised world, seconding personnel to and from other countries as well as having frequent contact and exchange of information with offices in countries with large financial or industrial centres provide another advantage in the acquisition of skills, knowledge and experience that can be shared with peers and clients.

As of today, the tax line service of PwC Mexico has a group of members of the firm working in foreign offices, for periods of at least two years. In addition, members of foreign firms are working in Mexico, gaining experience and/or sharing the knowledge they have from their home countries.

Mexico has been one of the countries most affected by the economic crisis, as the GDP will contract -7 percent or -8 percent in 2009. As such, it is necessary to place an extraordinary effort in supporting companies to come out from the crisis and to help the country achieve the levels of growth that it had in the past. The services sector plays an important role in paving the way to come out of the crisis. Hence the important role of PwC towards viewing the future optimistically, as Mexico has historically emerged stronger from prior difficult times.

The firm is also a leader in the corporate responsibility arena, with frequent actions aiming to benefit its personnel, the community and the environment. By measuring the carbon footprint of the firm it commits itself to reduce it. This forces the firm to be creative and to take the relevant actions in order to achieve such commitment. The high levels of poverty also require an effort from the community to reduce them. As such the firm has taken several actions, especially in the educational arena. Even if the PwC contribution may be considered as small with respect to the size of the problem, remaining passive only aggravates the problem.

Taxes play a relevant role in the development of the country, as they are the source of revenues for the government and also a way to discourage harmful habits or to encourage sustainable activities, which are significant in a country with the problems that Mexico has. Providing support to the policy makers, so that they are aware of the situation that companies in Mexico face, which is key in the development of the country considering the issues with respect to tax legislation, is a role that the firm has played and that has helped in many cases to avoid reduction in unemployment rates or even stimulating job creation.

The future is here, together with its challenges. The positive attitude of the firm continues to be the focus of servicing clients and aiding the development of Mexico and its communities.

A specialist team

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Patrikios Pavlou & Co is a multi award-winning international law firm based in Cyprus. The firm’s highly trained legal team specialises in specific practice areas and with their combined skills and knowledge can provide expert comprehensive legal solutions according to the client’s particular needs and requirements. Founded in 1963 by Patrikios Pavlou, a barrister from Limassol, Cyprus, the firm is now one of the most successful in Cyprus and was recently named the Best M&A Team in Cyprus for 2010 by World Finance.

Combined with a multi-disciplinary approach to service delivery and through their associated offices worldwide, Patrikios Pavlou & Co’s experienced lawyers are able to provide clients with distinctive advice on national and international law.

Patrikios Pavlou & Co is one of the leading law firms in the corporate and commercial sector. Senior and Managing Partner, Stavros Pavlou and his team of twelve lawyers handle complicated corporate and commercial matters including large international cross-border as well as domestic transactions involving international private and public companies listed on the Cyprus Stock Exchange and other recognised exchanges like the LSE, AIM, the Hong Kong Stock Exchange, etc. During the current year the department handled complicated matters involving acquisitions of Cypriot and other companies and assisted prestigious international law firms on Cyprus Law issues.

The banking and finance department has been expanded and strengthened in the last year and now ranks in the first tier of prestigious legal international directories, along with the tax, corporate and commercial, mergers and acquisitions and litigation and arbitration departments. Patrikios Pavlou & Co offer expert in-depth legal advice to banks, industrial organisations, multinationals, financial institutions and other companies in the financial services sector. The impressive recovery section of the firm’s banking practice regularly coordinates inquiries from various local and international banks on complicated recovery cases. Indeed last year, Patrikios Pavlou & Co was involved in projects and disputes totaling in excess of USD 14bn.

Global reach

Patrikios Pavlou & Co has close links with reputable law firms worldwide and particularly strong associations in Europe, Middle East, and Asia. The firm has an esteemed network of associates including international law firms such as Freshfields, White & Case, Gibson, Dunn & Crutcher, MacLeod Dixon and many others. Furthermore, the firm is a member of various worldwide associations and in 2007, Patrikios Pavlou & Co became a member of Euroadvocaten, an association of law firms in the EU comprising of offices in 19 countries with 450 lawyers.

The favourable investment and tax environment of Cyprus has led to an increase in international interest in the business services industry and has attracted multinational clients seeking legal and financial services from the Cyprus market. Over the years, Patrikios Pavlou & Co has carefully expanded their client base to allow them to meet the varied demands of today’s cross-border legal market. The firm’s clients include public and private companies, multi-nationals that have their regional hub in Cyprus, institutions, entrepreneurs as well as a host of individual clients from Cyprus and abroad. In the banking and finance sector, the firm represents a number of local and international banks and financial institutions. The aim of Patrikios Pavlou & Co is to provide their clients with high-quality professional legal advice and practical guidance covering the full range of their business activities, in respect of both domestic and international transactions.

Corporate & commercial
– Acting as Escrow Agents for share pledges given as security for two facilities worth in total USD 3.2bn.
– Handling on behalf of a large Russian energy company the preparation of all the documentation for obtaining the necessary permit from the Republic of Cyprus for the construction and operation of an energy plant of value in excess of EUR 250m as well as all legal matters concerning the set up of the project the acquisition of the land and other legal preparatory matters.
– Assisting with Cypriot legal documents in setting up a joint venture for the building and commercial operation of the Pulkovo Airport in St Petersburg.

Banking & finance
– Due diligence work and issuing of a legal opinion to Gazprombank with respect to the provision of facilities to a Cyprus company secured by a share pledge agreement for a total amount of EUR 1.1bn.
– Acting for Gazprombank with respect to the provision of mezzanine facilities to a Cypriot company secured by multiple corporate guarantees and related also to a share acquisition by the lenders with a resultant shareholder agreement and put options.
– Advising an Austrian bank with respect to a loan to the sum of USD 76m to a Cypriot company for the purpose of real estate finance; drafting of Cyprus security documents; seeing to the registration of pledges with the Cyprus Registrar of Companies. Issuing legal opinion.
– Acting for the Cypriot buyers of shares in a Russian steel pipes giant worth USD 1.3bn. Assisting Gibson, Dunn & Crutcher in the structuring of the syndicated loan for the financing of such acquisition of USD 470m, probably the largest shareholder loan granted for the acquisition of shares in a Russian private company; assisting in the process of flotation of the shares in the London & Russian stock markets.

Mergers & acquisitions

– Opining and assisting on the acquisition of two Cypriot companies, drafting of shareholder agreements and other related contracts and assisting in the structuring of the project, offering tax advice on the resulting structure etc – amount involved USD 300m.
– Advising the Purchaser together with MacLeod Dixon in relation to a 75 percent acquisition of two Cyprus companies, including carrying out of legal due diligence, advising on transaction structuring, commenting and/or drafting of SPA, JV agreements, share pledges, call and put options; seeing to and attending closing. The joint venture concerned the construction of a five star Hotel in Minsk and the amount involved USD 60m.
– Advised a Cyprus company in the process of acquiring a Moldavian hotel worth EUR 10m drafted Share Purchase Agreements, conducted due diligence on the target company and provided escrow services (completed).
– Assisting Freshfields of Moscow as Cyprus Counsel for a multimillion (USD 835m) acquisition of shares in the Russian markets dealing in exploration and development of oil fields. Advising on joint venture issues, share purchase agreements, Cyprus pledges and securitisation issues. Due diligence and other legal opinions.
– Acting on behalf of LSR Group in relation to the acquisition of a Cyprus company holding the shares of a Russian subsidiary engaged in construction material production (amount involved EUR 200m).

Future

Patrikios Pavlou & Co invests continually in developing their expertise and high quality legal services in order to further expand the firm both locally and internationally. Today, the firm continues the significant expansion it has enjoyed since 1963 and has a team of 24 advocates and legal consultants assisted by a team of 25 paralegal and administrative staff. The aim is to further grow their portfolio of associates through strengthening current collaborations and creating new ones. The participation of the firm in international professional bodies as well as the prominent relationships with international law firms seeking a reliable Cypriot partner in their multinational projects, are the cornerstones of the firm’s future plans and strategies.

Patrikios Pavlou & Co will always strive to provide high quality legal services with diligence, integrity and professionalism. The firm is looking forward to the future and the challenges it will bring, confident that with team spirit and commitment, they can continue along the course set by the founder, Patrikios Pavlou, 45 years ago.

For further information +357 2587 1599; spavlou@pavlaw.com; www.pavlaw.com

Debt restructuring

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The financial crisis has led numerous corporations (apart from individuals) to financial distress. At this point, the debtor (company), its shareholders and creditors become involved in a situation where their respective rights must be exercised in a way that will enable the most balanced solution to be reached and implemented. For example, even in cases where company assets’ value might seem to cover the debt, creditors should allow the company to be reorganised and continue its operation, instead of leading it to liquidation.

The choice of action, by respective parties, depends on the options provided by legislation and the debtor company characteristics (eg in case of a company with high value assets, situated in the same jurisdiction, bankruptcy might not increase creditors’ risk, whereas, in the case of a company with a large dispersion of assets, in various jurisdictions, creditors’ recovery rate might be considerably reduced, in case the company became bankrupt). A pre-bankruptcy solution, in principle, serves better. Essential for negotiating a solution in such cases are debtor’s and creditors’ points of power: The debtor usually controls the submission of a restructuring plan at the pre-bankruptcy stage, knows how to operate the business, debtor’s management produces the company business plan, controls the relationship with workers, customers and suppliers, understands better future capital needs. In addition, creditors usually want to avoid liquidation in order to preserve the company’s value and goodwill and they also (especially banks and bondholders) want to avoid becoming the owners of a debtor’s business. Creditors on the other hand, can threat company owners with liquidation – although liquidation is a “knife that cuts both ways”, as mentioned before. They can also threaten to attack company owners, based on personal guarantees, or possible criminal liability. Creditors may also deprive the company of new credit, which is essential for its operation and growth, aggravating its financial position, in order to press for the acceptance of a reorganisation plan favouring creditors.

Under the new Greek Bankruptcy Code (article 99 of law 3588/2007), at the pre-bankruptcy stage, the debtor (only) may request the court, based on an insolvency forecast (ie prior to arriving at this point), to initiate a negotiation (mediation) period, by appointing a mediator. The mediator has a two or three month period to come up with an agreement between creditors and the debtor, for the financial restructuring of the latter. The agreement must be adopted by holders of more than 50 percent of existing debt (irrespective of priorities) and then be ratified by the court. The ratification of the agreement leads to:
– An automatic stay of creditors’ enforcement actions, against the debtor and its guarantors, for a period equal to the agreement term, which may be up to two years (stay of creditors’ enforcement actions, against the debtor, may also be ordered by the court, as an interim measure, at the stage of mediation).
– Cannot bind creditors not participating in the agreement. This means that non-participating creditors retain their claims against the debtor (even if the agreement provides for a write-off) but wait until the lapse of the agreement term, in order to continue with enforcing their claim.
– However, six months after the agreement’s ratification, bankruptcy proceedings may be initiated, if the company has become insolvent.

The drawback of this new procedure is that it does not lead to a restructuring deal, which is binding upon all creditors, while it precludes the possibility of direct negotiation (without the procedure of appointing a mediator) between debtor and creditors. As a result, there is a great risk of losing valuable time, without any tangible outcome for the company. In addition, in Greece, creditors may not deprive debtor’s management from its powers, before the company is declared bankrupt, but then again, bankruptcy is detrimental to creditors’ interests, in most cases.

Creditors should examine different characteristics of each jurisdiction and approach each case with a productive spirit. In jurisdictions where they are not considered stakeholders of the debtor and where even pre-bankruptcy proceedings may put at risk the prospect for a good workout, the best strategy would be (i) to ask from the debtor a viable business plan (ii) to facilitate debtor’s cash flow, if required, for the business plan implementation (iii) to keep company owners within corporate governance limits, but use their value for the company management, especially in countries where corporate culture is built around the owners, (iv) to give company owners good incentive to support the restructuring, based on achieving business plan targets. Preserving company value is definitely more important than simply trying to avoid direct or indirect write-offs, or giving priority to the mere acquisition, by the creditors, of high equity participations, in the debtor. Instead of becoming a bigger stakeholder in the “problem” it is better to solve it and thus secure repayment of debt.

For further information +30-210-3670400; dsamoladas@sarantitis.com; www.sarantitis.com

Home advantage

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The Italian economy has been among the fastest in Europe to react positively to the continuing crisis. Whilst only time can tell if this will hold true or not, this will strike many as somewhat surprising, since the Italian economy is generally regarded as the “chronically ill” region of the Eurozone. “But, at times, one should rather think of the Imaginary Invalid, after Molière’s play”, says Enrico Sisti, partner at Rucellai & Raffaelli. “Most Italian banks that were considered “dull” on the international markets and by many analysts, have instead performed amazingly well so far and this proved to be a key factor, as probably Italy could not afford those, more or less disguised, state aids that other countries have offered.”

Another important element may be the fabric of the Italian economy, which is largely comprised of small and medium sized enterprises, with a significant propensity to innovate. “This is correct”, confirms Sisti. “Whilst this state of things can work as a limitation in times of growth and expansion, it can be a formidable asset when a crisis strikes. Agility, focus on customers, innovative products and services, and cost containment are the main strengths of the ‘average’ Italian small or medium sized company”.

It would appear that similar descriptions may also fit Rucellai & Raffaelli law firm itself. “Indeed we are part of that fabric”, says Enrico Adriano Raffaelli, name partner of the firm. “Whilst our clients are for the most part international and multinational groups of the Forbes 500, we certainly consider ourselves as an Italian medium sized enterprise”.
Rucellai & Raffelli was founded by Cosimo Rucellai and Enrico Adriano Raffaelli, in 1979, as a spin-off of the then best known Italian firm with international vocation. Starting with a small organisation, the firm now employs approximately sixty lawyers and has offices in Milan, (in Palazzo Melzi di Cusano, one of the most beautiful buildings of the prestigious via Monte Napoleone), Rome and Bologna.

“I guess one could believe that ours was a fairly slow growth rate”, Raffaelli says, “but one should rather consider that our story is, if not unique, quite unusual on the Italian market of legal services. Our growth has been, and I think will be, exclusively internal. We have not suffered any spin-off. We have not taken part in any merger among competitors. We have resisted many offers to join alliances or networks – or simply to be bought out. As said, this is a very different story from that of many of our competitors”.

A fully Italian law firm with more than 25 years of undisrupted business is probably in the best position to tell how Italy has changed over the years in terms of doing business there.

“To me”, Raffaelli says, “the turning point happened in 1990, with the entry into force of the Italian Antitrust Law. Not because this alone brought dramatic changes, but because it showed that Italy and its law-makers were willing to enter a new era and adopt new approaches to the law, including being less formalistic and more economically oriented”. Raffaelli also heads the antitrust and competition department of the firm and is one of the leading lawyers in this field and speaker at various conferences, including the most important world wide held yearly at the Fordham University in New York. “Of course, it took some time: I can still remember when the Italian Antitrust Authority required notification of also intra-group mergers – that was still quite a formalistic approach, I would say. But now the legal environment and the attitude of the various authorities and powers are absolutely pro-competitive. By experience, they are so much more than in some other Member States, having a longer history for it. I am often quite surprised that this is not always fully appreciated elsewhere”. Rucellai & Raffaelli organise every two year what is probably considered as the main event in Italy by the international antitrust community, the Treviso Antitrust Conference, that is an ideal observation point.

Pro-competitiveness however, does not rely on transparency or fairness of conditions and behaviour among entrepreneurs only: it also massively depends on how a local legal framework responds to the needs of the enterprises and particularly of foreign investors. It may sound strange but is true that until 2003 corporate law in Italy was still, more or less, the same one as shaped in 1942 during the Fascist regime. “And one should consider”, says Sisti who is in charge of corporate and M&A practice, “that in some respects fascism was not unlike a socialist state in its attitude towards economy: for example, it considered issues like governance of a private company to an extent in the public interest and therefore not fully available to the will and decisions of the parties.”

With the Corporate Law Reform of 2003, this has completely changed. For example, in Italy parties can mainly chose between two types of limited liability companies, which now display very different features, with one of them (società a responsabilità limitata) allowing for a really significant degree of flexibility. “In addition,”, says the partner Sara Biglieri “ the società per azioni (which, unlike the former, can issue shares and bonds) can be governed not only through the traditional Italian structure (board of directors, an internal committee of auditors and the shareholders meeting), but also by the so called “dualistic” model (not unlike the governance structure in Germany and France), or by the so called “monistic” model (shaped after English experience). Maybe even too much”.

However, flexibility is not the only feature of the latest corporate developments. “There are also a number of corporate controls” says Biglieri “which aim at closely monitoring the action of the board of directors and of its delegated bodies. Among these controls a special mention is deserved, since 2001, by the vigilance committee for compliance with the corporate model for the prevention of a selected, but increasing number of corporate crimes. In the absence of such model and committee, the company is directly deemed liable for such crimes, whenever committed by executives and employees in the interest or for the advantage of the company itself. For this reason, our law firm is playing a relevant role in tailoring suitable compliance models for corporate clients and in participating in vigilance committees”.

“But giving entrepreneurs legal flexible tools for accommodating their interest is essential to attract foreign investments”, says Sisti. “They flow not only where the business is promising and the broader context is trustworthy, but also were they know that – if and when their trust is breached – they can effectively pursue their interest”. That was not always the case before under Italian corporate law, where many things simply could not be agreed (of if agreed, had to be inserted in shareholders’ agreements – which in Italy are less binding than the corporate by-laws). “And why? Because of a rule dating to 1942, considered mandatory even if no interest of any actual party was jeopardised at all”.

Lawyers can play a role, and an important one, in developing society. This is what Shakespeare meant when he put the words: “First thing, let’s kill all the lawyers” in the mouth of Dick the Butcher in Henry VI – although many often misunderstand and misquote this line as expressing some kind of despise. “We do play a role and we can play it in many different ways”, says Cosimo Rucellai. “I think that a firm like ours, for example, has probably played a role, as some of our other competitors, in shaping and rendering in Italy more international our profession. This was achieved by comparing, integrating and assimilating foreign and international experience, by adopting an open minded professional culture and by stimulating critically the view that clients have of their own business”.

“At times this role has been quite direct”, continues Rucellai, Master of Laws, Harvard. “For example we have done the very first securitisations in Italy, opening the market. And we took a proactive and advisory role in the drafting and enacting of the relevant law, which at the outset simply did not exist”.

Whilst the market of legal services still seems to pursue the path of concentration and cross-border international, or multinational firms, one could wonder what the outlook is of an Italian ‘boutique’ like Rucellai & Raffaelli.

“Let me first say that we do not like the term ‘boutique’ when referred to us – and maybe to law firms in general”, says Sisti. “It makes me think of a small, cosy shop where you go and buy unnecessary, little expensive things. Well, the work we do is instead generally essential for our clients and often vital. We are everything but a ‘boutique’. Besides that, we cover everything from antitrust to labour, from M&A to financial services, from government and administrative law to commercial litigation. Lot of litigation, that – in many respects unfortunately, I should add – remains a huge hit in Italy”.

It is indeed a fact that, in Italy, the success of a litigator is measured not only by the quality of the law-suits handled, but often also basing on their sheer number.

“Italian central and local governments are, unfortunately, not very diligent payers so to speak”, clarifies partner Maddalena Palladino, the litigator who is in charge of debt collection activities. “And, based on surveys conducted by Confindustria (the trade association of large companies), the majority of Italian entrepreneurs consider delayed payments a mean of self-financing. And a “legitimate” one, needless to say. In this context, there should be little surprise if our courts are overloaded with work”. This state of things has lead to certain phenomena that are quite peculiar to the Italian market: “For example, the securitisation or assignment en masse to banks of receivables towards Italian health agencies, held by practically all the pharmaceuticals”, says Antonio Debiasi, the partner who has dealt with most of these transactions also in assisting Farmindustria (the Italian trade association of pharmaceutical companies). “In the end, a whole market in the financial services area stemmed from an attitude which one should consider far from virtuous”.  

“I would expect that those lawyers will continue to do well whose specific work requires skills, intelligence and experience”, says Raffaelli. “For example: commercial litigation reaching a certain degree of complexity and size. Or M&A. I see less all that type of work which is probably more process oriented, like much of the regulatory, but also in part some of the work associated to capital markets and finance. Clients in Italy will sooner or later realise that process work is necessary-but that value added services are worth something else. Here, I refer to the area of practice where a talented lawyer can be really successful. Markets are another story: they will go up and down as they always did. Next, we may be seeing a revamp of IPOs. But who can really tell?”

“This is why we consider the balance between cyclic and counter-cyclic work as essential.” says senior partner Andrea Vischi in charge of the labour department. “For example, our labour and administrative departments – where we feel we are also particularly strong – have done extremely well in the downturn. I guess this may be very specific to Italy, but it is a fact that fully transactional firms have suffered in this context. Happy to say that was really not our case”.

“If we instead look at the economic sectors more broadly”, says Sisti. “Then one that seems as particularly hot, obvious as it sounds, are renewable resources and energy in general. Even if we set aside the nuclear option, which could be the biggest thing in Italy for decades, there is quite a lot of work on renewables. Indeed, Italy is good for wind, good for sun, good also for biomasses. State grants are enticing. Unfortunately what goes wrong is the part that deals with local governments. Too many authorisations, too much time and too much uncertainty. However, as often happens in Italy, a weakness may turn up becoming an opportunity: we are assisting more and more clients possessing know-how and willing to go and do their business elsewhere, for example in the Balkans area, with which infrastructure should also improve in due course. Or in India”.

Italy would look perfect also for a completely different business: private equity. While it has materially developed over the years, at least until crisis stroke, it remains in some manners underperforming if compared with the opportunities. “Probably not huge transactions”, says Sisti, “ but there are myriad opportunities of small or medium sized transactions. Economic fabric, at least in northern and central Italy, looks as a sort of ideal “game reserve” and the new laws help a lot. Here we suffer a gap not due to the PE players but probably attributable to the mindset of local entrepreneurs: which probably is at the same time exactly what makes their companies interesting investments but them reluctant sellers.”

However, also in changing this, Italian lawyers and professionals will surely have a role to play.

Cloud storage

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The IT world stands at the threshold of a paradigmatic shift to cloud computing. According to industry consultancy Gartner: “[C]loud computing [is] begin[ning] to move beyond the pure hype stage and into the beginning of mainstream adoption.” The prospect of storing business critical transaction data in the cloud – a massive centralised and virtualised third party-managed data centre – is seen by some as the panacea to all scalability, agility, and operational efficiency issues. Yet to others it’s an invitation to a massive business disruption scenario, poor user experience and potential loss of extremely confidential data.

From your perspective, why is ECTRM such an interesting starting point for exploring the potential of the cloud for financial institutions?

For three reasons: First, most market offerings, including that of Navita, are fairly old-fashioned compared with offerings from other software categories: large monolithic applications with massive and specialised functional footprints and significant use of proprietary technologies, and typically installed at customer sites. You can ask then if there are structural hindrances to the financial industry accessing the cloud, and if so, why these hindrances would somehow disappear overnight? Second, transaction data in ECTRM space are extremely business sensitive, and I guess that a true litmus test of the feasibility of the cloud is whether a bank or hedge fund would be willing to store its energy contracts, for example, in the cloud. Third, certain parts of ECTRM space seem to have needs that actually resonate very well with what the cloud potentially offers: massive data, flexibility, agility, scalability, and scale advantages.

What differentiates cloud computing from hosted solutions?

There are in my opinion many key differences from a customer perspective: one instance per customer versus one instance for all customers, highly bespoke configuration of system versus choosing from menu, virtualisation within a customer versus virtualisation across customers, seat-based licensing versus metered by use, rigid contracts versus flexible contracts, and fairly loose SLAs versus tight SLAs, often with financial penalties. An interesting observation is that none of these differences fundamentally changes the security issues and the operational risks associated with the cloud.

Does Navita currently deliver ECTRM functionality from the cloud?

As we have not yet seen any demand for it in the market, currently we are not, and I doubt that we will for quite some time.  What we do deliver are hosted solutions in combination with lease-based licensing models. These solutions have turned out to be attractive for smaller players on the physical side, as well as hedge fund start-ups and banks starting up energy or commodity trading desks on the financial side. These players have needs centered on cost variabilisation, scalability, flexibility, agility, and risk containment more than around functional compliance.  Here, hosted solutions answer well.

Longer-term however, I think, and despite all the skeptics, we’ll eventually see cloud-based services also in the ECTRM space. The argument that specialised vertical software combined with highly business-critical data is fundamentally not deliverable as a service from the cloud is simply not true. Reasoning by analogy, I personally believe that salesforce.com, the prime example of SaaS, testifies to this.

Which customers will be the first to move to cloud computing?

As our hosted solution attracted significant interest from smaller physical players and start-up hedge funds, I expect that we’ll continue to see the same trend; again, start-ups with limited funds that want to exploit windows of opportunity through short time to market, preference for OpEx over CapEx, cost variabilisation, scalability, flexibility, and risk containment, all of which are key to delivering shareholder value for these organisations.

Banks and industry analysts alike believe that somehow the finance industry is ‘different’ and that primary concerns like lock-in, latency, compliance, and loss of ownership to data make the cloud unreachable for typical financial institutions. You seem open to the idea that somehow the cloud will be reachable for such institutions?

Personally, I think that the concerns you mention are highly relevant and that short-term we will see a preference for in-house or standard hosted solutions. On the other hand, the facts that some financial institutions are happy to use hosted solutions, that most of the above concerns apply to both hosted solutions and the cloud, and that shared infrastructure technologies like VPN are spreading in the industry, seem to suggest that, yes, the finance industry may be ‘different’, but only as a matter of degree.

What about issues related to security and risk?
I think we need to broaden the understanding of security and risk, beyond that provided by IT professionals. First, most financial institutions are in the business of buying and selling risk, they generally price it, they do not eliminate it. Second, it is not obvious that buying services from the cloud is intrinsically riskier than providing the same services in-house. Third, and most importantly, financial institutions are forced to take into account a much broader set of risks than for example, to put it simplistically, the internet going down. For example, what is the risk associated with not getting a new financial product out to the market; with incomplete reporting of risk, or with not complying with regulatory requirements?

How do you foresee that players in ECTRM space will respond to the challenges of the cloud?

First, I think fundamentally that the days of the thick client combined with an in-house server and operating with a perpetual license, the dominating design paradigm and the dominating licensing model in ECTRM, are gone. Any vendor clinging to this design paradigm and this licensing model is a dinosaur awaiting a slow death.  I also believe that what will come instead is a web-based client, a hosted server, and metered usage. Third, I expect that sooner or later some cloud-based ECTRM offering will be made, likely by a completely new player in ECTRM space, with a focus on lower-tier and mid-tier customers; typically retailers and smaller hedge funds. We saw just the same with salesforce.com. Finally, the cloud has many layers, including databases, servers, services, and bandwidth and various ECTRM players may have different strategies at different layers.

From Navita’s perspective we foresee that, at least until cloud solutions reach a critical level of maturity, a critical level of security, and a critical level of adoption, hosted solutions such as Navita’s will continue to respond effectively and continue to be the preferred solution to the market’s demand for cost variabilisation, scalability, flexibility, agility, and risk containment.
 
What advice will you give to your potential customers with regard to using the cloud to process and storing transaction data for energy and commodity trading?

Firstly, the cloud does not really exist in ECTRM space, and will not exist for some years. Secondly, when making a decision between an in-house, hosted solution and the cloud, I always recommend focus on the business fundamentals: ‘reasonable’ functional support of underlying business processes, short implementation times, flexibility/reconfigurability/scalability, and risk. In the end, these factors drive the RoI of a system selection much more than going from 90 to 100 percent functional compliance. It’s always important to remember that in trading a delayed profit is a foregone profit. When quantifying these factors, the business case most often favors a form of hosted solution.

Environmental liability

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Businesses that have operations with the EU are now being required to take a more proactive approach to environmental risk management in order to comply with the requirements of the EU’s Environmental Liability Directive (ELD). Companies are now required to prevent significant environmental damage from occurring wherever possible, and they will be held liable for the costs of remediation where significant environmental damage is caused. The ELD is based on the Precautionary and Polluter Pays principles with a view to protecting the environment, and is in response to concerns about the potentially significant impacts of business on the environment as a whole, biodiversity and human health. As the ELD becomes progressively embedded into the national legislation at an individual Member State level, the resource, risk management and financial implications for operational businesses under this new regime become clear. Primarily, businesses operating in any countries within the EU are reassessing their responsibilities and potential liabilities as a result of the new definitions of environmental damage, preventative actions and an expanded definition of remediation under the ELD.

The development and roll-out of the ELD requires all operators to take a far more responsible approach to the protection of the environment, and in addition to review the potential for significant environmental damage caused by their operations. For example, where an imminent threat of environmental damage is envisaged, the operator is required to take action to prevent the occurrence of an incident that would cause the significant environmental damage, whilst also being required to notify the regulatory authority (the Competent Authority) where such a threat needs to be eliminated.

The ELD also requires the remediation and restoration of any significant environmental damage that has been caused and this must be undertaken in a timely and comprehensive manner. The enhanced definition of the term remediation is a major consideration for operators as the scope and type of remediation required has been expanded. The ELD requires that the operators accept the concept of a baseline condition, such that the effective quality of the environment on and around the site of operation should be assessed and documented. Once the baseline condition has been described and accepted, it will be this standard which will be used to determine the requirements for clean-up should environmental damage occur. Hence, it will be important to undertake sufficient studies to describe the environmental quality of the site of operation and to work with the local authority to determine the condition of the environment in the immediate vicinity around the operational area.

As and when significant environmental damage is perceived to have been caused, then remediation will be required. In relation to damage to water and protected species and natural habitats, the restoration of the environment to the baseline condition by way of primary remediation will be a statutory obligation. Where remediation back to the baseline condition is not possible, or where primary remediation is expected to take an extended period of time to complete, then complementary and/or compensatory remediation may be required. The three types of remedial activity defined in the ELD are described as follows:

– Primary remediation is any remedial measure which returns the damaged natural resource and/or impaired environmental service, to, or towards, the baseline condition.
– Complementary remediation is any remedial measure required in relation to natural resources and/or environmental services that are required to reimburse for the fact that the primary remediation to be undertaken will not result in the restoration of the damaged resource or service to the baseline condition. Complementary remediation can be achieved through the provision of a similar level of natural resource and or environmental service, including, as necessary, improvement works to be undertaken at an alternative site or sites. Where possible and appropriate, the alternative site for restoration and improvement should be geographically linked to the damaged site, taking into account the interests of the populations damaged by the incident.
– Compensatory remediation is any action taken to compensate for the interim losses of natural resources and/or environmental services that occur from the date of damage occurring until primary remediation is achieved. Compensatory remediation will consist of additional improvement works to natural habitats and protected species or water at either the damaged site or at an alternative site.

In defining the remediation required for a particular environmental damage event, consideration will be given to the requirements to restore, rehabilitate and replace the natural resources and/or impaired environmental services that have been damaged, or to provide an equivalent alternative to those resources or services. Remediation of the environmental damage, in terms of damage to water or protected species or natural habitats, also implies that any significant risk to human health being adversely affected is also removed.

While remediating any environmental damage caused, both the direct and indirect effects of the damage needs to be considered. The ELD acknowledges the choices of remedial options available considering several factors such as the use of the environmental resource, the likelihood of success of the remediation alternative, the cost if implementation of the remedial alternative, the time required to achieve the desired outcome, the geographical link to the site where environmental damage has occurred etc. It also focuses on the use and importance of the natural habitats by the general public, and the importance of complementary ad compensatory remediation in this regard.

In a situation where the operator is unavailable to take action to prevent or remediate environmental damage, the ELD gives the competent authority the right to implement the necessary measures considered appropriate and to recover all expenses from the operator.

The ELD has bought into sharp focus the requirement to assess and manage the risk of causing significant environmental damage from the business operations and requires companies to take a proactive approach to environmental risk management. The enhanced scope of measures required for the prevention and remediation of environmental damage means that businesses must now undertake additional work to quantify the likelihood and significance of potential environmental damage and to put into place procedures to reduce the imminent threat for damage being caused. Businesses must also ensure provisions are in place to remediate significant environment damage where caused. Businesses operating within the European Union are being required to reconsider their position in respect of the potential to cause damage to the environment.

Hakan Kayganaci is the leader of Marsh Risk Consulting for Turkey and Central Eastern Europe. For more information: hakan.kayganaci@marsh.com

Great expectations

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The challenge of Demosthenes Madureira de Pinho Neto, head of Itaú Unibanco’s asset management company, is to overcome the boundaries of being recognised as a Brazilian specialist to consolidate itself as a Latin American expert.
Itaú Unibanco’s main figures are headed to that goal. One example, the $348.2bn total assets, made it one of the largest banks in the Americas. Figures have also helped Itaú Unibanco to obtain important awards that directly reflect how the world’s financial markets and also Itaú Unibanco’s clients recognise its leadership position, such as: Best Brazilian Bank by Euromoney and Global Finance magazines, the country’s best asset manager by Exame magazine and sector leader in Brazil and Latin America by The Banker. This year, the Financial Times voted it the Most Sustainable Bank across Emerging Markets. Besides that, Itaú is also one of the 100 Great Places to Work in Brazil, according to Great Place to Work Institute and Época magazine. Another unique award from Itaú Unibanco is Interbrand’s Most Valuable Brand in Brazil.

Itaú Unibanco Asset Management covers other countries including Chile, Argentina, Uruguay, Paraguay and Mexico. Itaú Unibanco has the largest buyside equity team in Brazil, composed of 10 portfolio managers and 14 analysts who take a fundamental bottom-up approach to optimise long term returns. Asset Management equities’ team covers a 221 investable stock universe. “Our team approach and proprietary research in a region such as Latin America, with growing fast economy and independent domestic level development, enables our clients to live the economic revolution”, points out Walter Mendes, Head of Equities Strategy.

From the Fixed Income perspective, besides high yields due to still high interest rates, Itaú Unibanco has also caught foreign investors’ attention due to the sovereign investment grade. “Brazil is one of the most liquid and sophisticated players in the emerging markets. Our research driven activities, transparent and disciplined investment process and team decision approach form what we consider to be the triad of success: performance, consistency, transparency”, says Ronaldo Patah, Head of Fixed Income Funds.

Recently Itaú Unibanco Asset Management has adhered to the Principles for Responsible Investment, an initiative from an international group of institutional investors reflecting the increasing relevance of ESG issues to investment practices. The process was convened by the UN Secretary General. “The PRI improves our ability to meet commitments to beneficiaries as well as better align our investment activities with the broader interests of society. We have included the PRI into all our investment decisions, selecting opportunities not only in the terms of the expected financial return, but also from the social, environmental and governance perspective. We also expect to influence our clients, partners and employees to consider the principles as an important and necessary role to reach a global sustainability,” indicated Bruno Stein, Head of International Business Development for Asset Management.

With its increasing presence in global markets, Itaú Unibanco has achieved partnerships in four continents. Portfolio investments of foreign investors into Brazilian equities and fixed income markets reached more than $6.7bn this year. From that, Itaú Unibanco had $4.9bn net inflow, calling the world’s attention to its foreign flow attracting capability.

Investor interest
Sum up inflation under control for more than ten years, a stronger currency that maintained stability for almost 10 years and a falling interest rate scenario and you have an amazing macroeconomic history and appeal to investors.

Add the current scenario to the “past history” and you will find out why Brazil has emerged from the global crisis almost intact. An independent and large internal market, unleveraged financial system and a regulated financial sector created the basis for a structure that protected Brazil of being affected by the international crisis.

Liquidity signals are back and a new wave of investments has hit Latin America’s largest economy, and not only from traditional investors. “The typical emerging markets’ investor profile has been increasingly shifted from US and Europe to new financial hubs such as the Middle East as well as Asia, particularly Japan and South Korea,” highlights Marcelo Fatio, Head of Institutional Sales of Itaú Unibanco. Spreading its offices among some of those areas has guaranteed that Itaú Unibanco would be part of this flow. Itaú Securities has offices in New York, London, Tokyo, Hong Kong, and Dubai.

Brazil’s position among other emerging markets has been highlighted. “Itaú Unibanco Asset Management was invited to participate in several RFPs for different strategies’ mandates from endowments, foundations and pension funds around the world” says Stein.

“The fall in interest rates and the new limits, from 50 percent to 70 percent, for local pension funds investment in equities tend to boost a migration to equities from local investment funds that have traditionally parked 85 percent of assets in fixed income. The Bovespa has risen 68 percent in dollar terms this year” says Roberto Nishikawa, Head of Asset Management and distribution for institutional clients. Hedge funds and multi-strategy funds should also benefit from this trend.

“Itaú Unibanco offers a full range of investment management strategies in Brazil such as equities by sector and segments, fixed income, multi-manager through fund of funds and fund of hedge funds, and also hedge funds. Those traditional and boutique products include top shelf products Cayman-based and Luxembourg-based as well as managed accounts where institutional and individual non-Brazilian investors may buy the same products available domestically to Brazilian investors”, adds Paulo Corchaki director and CIO of Itaú Unibanco Asset Management. A top-performing product has been Itaú Unibanco’s fund of hedge funds, which gained more than 26 percent in dollar terms in the first nine months of 2009. The fund, one of the longest-running funds of its kind, was begun in 2005 but built upon research that monitored 100 percent of the 1,000 funds in the country for over a decade. The fund of funds team invests in more than 150 portfolios, and the team also runs an incubator fund of funds for emerging hedge funds managers.

Since 2008, the asset management unit has been receiving a flow of investments for advisory in Latin American products. “We can put together any type of advisory model related to Brazilian investments” complements Stein.
Supported by a strong and rising middle-class, Brazil’s economy is likely to grow at 3.5 percent from 2010 onward, according to the IMF. Reforms and the upcoming sports events to be domiciled in Rio de Janeiro, the World Cup and the Olympic Games, will continue the trend towards Brazil.

For more information + 55 11 3073-3161; Bruno.stein@itau-unibanco.com.br

A dynamic approach

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Jointly owned by Dogus Holding and GE Capital, Garanti Bank is Turkey’s second largest private bank in terms of asset size with total assets exceeding USD 76bn in 3Q 09. 46 percent year on year earnings growth and 26 percent ROAE underscore the robustness of Garanti’s business model.

Garanti is Turkey’s largest lender providing USD 48bn of cash and non-cash loans with its market shares of 15 percent in total cash loans, 12 percent in TL loans, and 22 percent in FC loans. Its total deposits reached USD 44bn, reflecting 11 percent increase since the end of 2008. It is the leader in mortgage products with a market share of 15 percent. Its number of credit cards reached 7.8 million, and including debit cards, the size of its portfolio totaled 13 million cards.

As a universal bank with strong presence in all business lines, Garanti has customers in corporate, commercial, SME, and retail segments, and offers integrated and tailor-made financial services with the help of its subsidiaries operating in Mortgage, Pension & Life Insurance, Leasing, Factoring, Asset Management and Securities businesses. Its subsidiaries abroad, Garanti Bank International NV and Garanti Bank Moscow, complement this vision of offering integrated financial services.

Garanti is also distinguished with its sound asset quality, which is maintained through advanced risk management systems, well-established risk culture and strong collection capability; its NPL ratio is well below sector averages.
With its prudent management and risk approach, Garanti earned strong brand recognition and received awards such as the “Best Bank in Turkey” and “Best Managed Bank in Central and Eastern Europe” from reputable international institutions.

Committed to its customers, Garanti operates an expanding distribution network comprised of more than 750 branches including five foreign branches and four international representative offices, over 2,650 ATMs, an award winning call centre and internet and mobile branches utilising its state-of-the-art technology. Extensive branch network is supported with centralised operations, exceptional data warehousing and management reporting systems and effective use of alternative delivery channels; when per branch productivity is considered, Garanti is the leader amongst top-tier Turkish banks.

Breakthrough products and services

Over its 62 year history, Garanti became acknowledged in Turkey and worldwide for its tradition of providing high quality offerings. Through its dynamic business approach and commitment to technological innovation, it has developed groundbreaking products and services creating value for its customers and increasing bank’s operational efficiency.

To name just a few of these: Garanti is the first bank in the world to offer “Cepbank” a mobile-based money transfer service. It is the first bank in the world to offer securitisation of export receivables. It launched “Bonus Card”, Turkey’s first multi-branded and chip-based credit card. Turkey’s first web-based supplier financing system and first e-commerce web site were also developed by Garanti.

Investing in people

The greatest factor behind Garanti’s success is its belief in investing in its employees. As the first company in Turkey to receive certification from Investors in People (IIP) who certifies the quality of companies’ HR practices, Garanti is now proud to be awarded “silver” status as an additional recognition level for further achievement, which is held by only 0.36 percent of the 35,000 IIP certified companies around the world.

Customers’ visions

To help its customers take advantage of its infrastructure and experience in exploring new opportunities, Garanti conducts a variety of activities and meetings so that its customers can develop their foresight and experience. One of most important of these activities is the “Garanti Anatolia Meetings”, which are conducted in several cities in Turkey. In these meetings, Garanti comes together with entrepreneurs and representatives of regional institutions, discussing ideas that will pave the way for further development of the province and region. Since 2002, a total of 62 meetings have been conducted in 47 Turkish provinces, with participation of nearly 20,000 small and medium sized businesses and commercial entities. In the Basel II informational meetings, where opportunities for change and advantages the Basel II criteria would bring to small and medium sized businesses are discussed, an additional 5,000 entrepreneurs were met in 15 provincial capitals.

Corporate responsibility

Believing that its corporate mission involves more than banking, Garanti is dedicated to sustainable banking practices and to a long-term strategy for creating value to the communities in which it operates. Garanti strives to create the maximum added value to all its stakeholders. It conducts long-term projects or provides sponsorships in different areas such as arts, environmental issues, education and sports to enrich the vision of individuals and society.
Taking its mission one step forward, Garanti aims to improve the life quality of individuals and society with the projects that it supports and the cultural institutions that it has founded.

Platform Garanti Contemporary Art Centre aims at supporting contemporary arts and architecture, and provides its visitors with the opportunity to discover contemporary art exhibitions from all over the world. With its library containing 6,500 publications, the institution serves as a source to introduce artists in Turkey to the international arena. It also enables international artists, art critics and curators who are interested in contemporary art to produce their works and conduct research in Istanbul. Garanti Galeri (GG) undertakes the mission to discuss concepts of architecture and design through exhibitions and other activities since 2003. Priorities of GG consist of city planning, architecture, industrial product design and graphic design.

Garanti founded the Ottoman Bank Museum in 2002 to attract attention to the history of the Ottoman Bank’s rich archive. The historical building in Istanbul, which served as headquarters of the bank for 108 years, now serves as a centre composed of a museum, a library, cinema, exhibition hall and an archive. The museum, where 3,500 objects are being exhibited, does not only tell the story of an institution, but also serves as an exposition itself, and contributes to social memory refreshment with its comprehensive program of activities such as exhibitions, seminars, documentary releases and gatherings.

In the near future, Platform’s historical building and OBM’s historical building will be restored to serve Istanbul as new culture centres. They will be restored by 2010, when Istanbul will host European Capital of Culture events. While these two important buildings will contribute to the cultural heritage of the city by maintaining its architectural identity, GG, Platform and OBM will find the opportunity to expand the depth of their up-to-date projects.

Another important example in the area of corporate responsibility is the Teachers Academy Foundation founded by Garanti, a project initiated to create an exemplary civil initiative for enhancing the personal and professional capacity of Turkish teachers nationwide. Within the scope of the project named “No Limits in Teaching”, the Teachers Academy Foundation has provided training to more than 5,200 teachers in 13 provinces. It targets to increase this number to 20,000 in 2010.

Moving into 2010

During the global crisis which has caused contraction in the Turkish economy and adversely affected the demand for credit, Garanti was prepared for fluctuations and positioned its balance sheet at the right time and in the optimal fashion, thanks to its liquid balance sheet structure. During this period, Garanti continued to be the leading Turkish lender, restructured customers’ loans to relieve adverse effects of economic downturn, and quickly adapted to the changing environment. Starting 2009 with its liquid and sound balance sheet structure and strong capital base, Garanti got through the year at peak performance.

Though the global crisis has subsided somewhat, its effects are expected to continue in 2010. During this period, strategic priorities for Garanti will be to strengthen powerful positions held in core banking products, to remain Turkey’s most productive bank, to maintain sustainable growth and to be the leader in all the profitable areas of the sector. These strategies form the basis for Garanti’s planning in 2010.

A global service

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Chile’s Global Services industry has grown over 86 percent in the last three years putting Chile as the regional leader in this industry. More than 60 world-class companies have chosen the country for their global delivery centres, centres of excellence or R&D initiatives because of the outstanding pro business environment, talent pool and government support.

Given the growing dynamism of this industry and the success stories of countries such as India and Ireland, in 2000 Chile began promoting foreign investment in high technology, highlighting the political and economic stability of the country, its modern telecommunication infrastructure, and the skills of its human resource. As a result, the global services industry (offshoring) quickly developed until it became one of the most competitive ones in the region, gaining the attention of multinational companies such as General Electric, Evalueserve and Equifax. It is the quality of life and the well trained work force, among others, that make Chile an attractive destination for global services.

Chile’s strengths

Chile stands out as an economically strong country with relatively low inflation. In addition, it has a regulatory system that results in relatively low costs and a short time-frame to begin a new business. Likewise, Chile’s infrastructure and quality of life are considered important factors, which are recognised as higher quality than in neighboring countries. In fact, the business environment in Chile is often described as similar to the one found in the US and Western Europe.

Regarding the cost of business, Chile has salary levels in line with the region’s average, and tax rates lower than those in neighboring countries. Due to strong fundamentals and a well managed public surplus, Chile has shown remarkable strength during the global financial crisis.

As regards Chile’s work force, the quality of its professionals and the country’s commitment to promote specialised training stand out. The government has special training programmes focused on English language and information technologies.

The support given by the government, through the Chilean Economic Development Agency’s (CORFO) InvestChile programme, to those companies that settle in the country includes consultancy services and a range of financial incentives oriented to facilitate the investment decision and implementation. Among these incentives are financial support for the pre-investment studies, co-financing of technological assets, and long-term leasing, along with contributions for personnel training.

Global services

Several companies that settled in countries like India have now chosen Chile to open new service centres. Cases like Equifax, JP Morgan, Capgemini, Evalueserve and General Electric figure among those that discovered the necessary conditions to develop their businesses in Chile.

In August 2009, Equifax opened in Santiago, the capital city, their third technological development centre in the world, from where it develops research and technological solutions for risk evaluation. The Equifax centre in Chile works in collaboration with its centres in the US and India doing research and developing software used in financial analysis.

“From Chile, we offer international companies technological applications related to risk evaluation. This allows our clients to make wiser decisions regarding new business opportunities. With this service, we position Chile as a leader in the field”, states Mario Godoy, the general manager of the Chilean branch.

Likewise, another company that chose Chile as a platform is Evalueserve. This company, one of the biggest KPO players with branches in India and China, was attracted by Chile’s infrastructure, well trained work force, and the government incentives, among other reasons.

Located in the Valparaiso Region on the coast just west of Santiago, Evalueserve provides services to its clients in the US, taking advantage of the similar time zone Chile has with that country. From here it can work in unison with its centres in India providing 24-hour coverage.

“There were different aspects that influenced the decision of establishing an Evalueserve centre in Chile. When we were looking for a Latin American country, we had several options, Argentina, Brazil, Chile, Mexico, and Costa Rica, and analysed each one of them. Although we realised that there were cheaper countries than Chile, we chose settling here for various reasons, such as its infrastructure, its low crime rate, the government’s excellent economic policy, and the quality of its labour pool, among others. The support given by the government and InvestChile added an important benefit influencing our decision”, said Mohit Srivastava, Evalueserve Country Manager in Chile.

Srivastava cites the quality of professionals who work in this industry, who are highly qualified and have undergraduate degrees that are in many cases equal to master’s degrees in other countries.

Evalueserve hopes to expand the services it provides. “Our plan is to focus on a new service strategy, creating an integrated platform among our centres. Thus, we expect to triple our operations in Chile, generating job positions for 450 people in the next five years”, concludes Mohit Srivastava.

For more information on CORFO www.investchile.com

The earth’s exchange

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When 18th century chemists such as Antoine Lavoisier in France were exploring the nature of the newly discovered substance “fixed air”, they could not possibly have imagined that just over two centuries later there would be a market for buying and selling millions of tonnes a day of this colourless, odourless gas we now call carbon dioxide.

Two centuries after scientists showed that carbon dioxide was produced by burning fuel such as coal, however, rising levels of the gas in the Earth’s atmosphere are regarded as a serious threat, since they bring in their wake the threat of global warming.

In 1997 the countries of the world came together in Kyoto, Japan, and agreed on a programme to try to cut man-made emissions of carbon dioxide and other “greenhouse” gases, those which contribute to global warming. The “Kyoto protocol”, which came into action in 2005, included, among other schemes for reducing carbon dioxide production, something called emissions trading, otherwise known as cap and trade.

The idea was that governments would issue licences to companies, such as power generators and manufacturing firms, that emitted carbon dioxide, setting a cap on the amount of the gas they were allowed to produce. If those companies produced less than their permitted amount of CO2, they would be allowed to trade their surplus permits, selling them to CO2 emitters who were exceeding their permitted allowances.

If you have willing sellers and eager buyers, of course, you need a market place for them to meet. This is where the Paris-based organisation BlueNext  comes in. BlueNext, which was co-founded by the New York Stock Exchange, EuroNext and the French government-owned bank Caisse des Dépôts to deal in permits issued by the European Union’s Emission Trading System (ETS), now claims to be the world’s leading environmental trading exchange.

Either in their own right or through brokers, thousands of companies across Europe trade in “European Union Allowances”, where one EUA is equal to one ton of carbon allowance. Every day on the European spot market between two million and three million tonnes of CO2 a day are traded, while the futures market, which is dominated by over-the-counter traders, might see six to seven million tonnes of CO2 traded daily.

The chairman and CEO of BlueNext is Serge Harry, who previously worked for the NYSE subsidiary Euronext, joined BlueNext after 25 years in the financial industry because, he says,  “it’s a fantastic opportunity to tackle climate change issues through the cap-and-trade approach.” Although some environmentalists have been critical of cap-and-trade as a way of trying to reduce carbon emissions, Mr Harry insists that the system is working. “The ETS is clearly a success – it’s helped Europe achieve its goal to reduce its emissions. In 2007 in Europe cut emissions by 2.8 percent. Last year, helped a bit by the economic crisis we cut emissions by 3.5 percent.” The plan is, through the use of ETS “carbon credits” to cut carbon emissions in Europe by 6.5 per cent by 2012 and by 20 percent compared to 1990 by 2020. “The only way to deliver this through ETS is to have a carbon exchange through which you can exchange your credits,” Mr Harry says, and with 80 percent of the European spot market in carbon credits in its hands, BlueNext is that market.

The BlueNext team originally included people coming mainly from the commodity business and the energy business, “but we also have people experienced in traditional financial markets – I am one of them – we have people with an international background in marketing and communications, we have former brokers in the energy market, we have people coming from banking backgrounds who were in charge of market surveillance, and so on. We have a very complementary team here and it’s very motivating to lead this team,” Mr Harry says.

The exchange was set up for corporate players which were getting European allowances from the EC and had the capacity to trade their allowances – either they were long and had the capacity to sell or they were short and they had to buy.

“But rapidly we had financial players joining so today we have 100 active members, representing 3,000 corporate companies who in turn represent 11,000 plants across the 27 EU countries,” Mr Harry says.

“Very large companies, especially the big European power companies, are direct members because they already had trading desks for buying oil, gas, whatever, so when we started carbon trading, it was a natural move for these companies to extend their trading to carbon products. So from day one we had all the big names.

“Then you have the classical industrial companies who are also direct members, but they’re not traders so they choose to give a mandate to a broker to trade in their name. That is where we got financial players joining, banks and brokers and we have all the big names of the financial industry from New York, London, and so on, who are members of BlueNext now.”

BlueNext also trades other carbon products, notably what are called Certified Emission Reductions, or CERs, from “emission abatement” projects in developing countries, such as forestry planting to absorb CO2 from the atmosphere.  Mr Harry jokes that the difference between carbon trading and other sorts of commodity trading is that “the goal of our market is to reduce the assets you trade, which would be a bit contradictory compared to more traditional markets. On the other hand it’s a market where the assets are growing because of market internationalisation. But the way you trade is relatively similar to other markets in the sense that you have orders from buyers and sellers, you match those orders and you have to manage the clearing and the delivery mechanisms.

“Where it’s a bit different, is that we are trading assets in a market which only exists because of political decisions in Europe, which is not the case with other commodities. Second, it’s an international market, a fairly young market born in 2005, so you have not yet the same volumes compared to more mature markets.”

The ETS is designed to evolve by 2013 from the current system, where the large majority of carbon allowances are handed out free by the different EU states, to an auction mechanism, where countries will sell allowances to companies who need credits. It will be a big change in the market, Mr Harry says, but “the good point here is that to go through auctioning you need to have a price reference and this price signal will be given by BlueNext and the carbon market across Europe. Second, it will force Europe to use the proceeds they get from these auctions in green projects, renewable energy, creation of green jobs etc. It will be a very big change.”

BlueNext is planning to be involved in the auctions, as well as the price setting. “You need a company able to manage this auctioning process, to have the sophisticated algorithms to determine which of the offers you choose with different parameters and then you have to deliver the credits to the companies and to get the cash from them. That’s exactly what we manage, exactly the experience we have,” Mr Harry says.

It might have been expected, Mr Harry says, that every country in the EU would have had its own carbon exchange, just as every country has its own stock exchange. “The reality today is that you have two big rival players, BlueNext and the Chicago Climate Exchange. The Climate Exchange started its activities in the US and then extended their business into Europe as the European Climate Exchange and they have had great success with the Derivatives market, though we are the leading market for Spot.

“The second point is if you compare BlueNext with its main competitor we are a single entity, extending its business to other continents, and we have the control of the whole chain.

“To have NYSE Euronext as a founder and a shareholder is a key strength, because they know very well how to develop an exchange, and second they have a long-term view which means they are ready to help BlueNext invest in new products, new services, new technology, under their own brand, which is very important, because if you want new members to join you need to explain your capacity to provide what you say you are going to do. That’s exactly what we can do with NYSE and CDC.”

In June BlueNext announced a joint venture with China Beijing Environmental Exchange (CBEEX) to help the Chinese set up a carbon trading operation. “For both sides it was a natural move – CBEEX is the largest in China and they were looking for a worldwide partner with real credibility and from our side we wanted to expand into another big region,” Mr Harry says.

Ultimately Mr Harry’s aim is “for BlueNext to act as a single reference point for carbon pricing. One of our dreams is to achieve this single carbon price across the world. What makes a price difference from one system to another is not the asset itself, that’s the same in Houston or Paris, it’s all the regulatory package you put around your system. If you have the same mechanisms in another region of the world, but with different constraints, you will get a different price. CERs are already traded on BlueNext, and they are used not only by Europe but by Japan and some other countries.

The US will accept international offsets so it means that we have an international product – CERs – which are accepted all around the world, and we are the stock exchange on which you can trade the CERs. That’s the beginning of the future single price for carbon.”