2011 | World Finance

Public-private partnerships – how to do them right

Posted on October 25, 2011August 6, 2019 by

Public-private partnerships (PPPs) are an important tool for delivering public services such as bridges, roads and even prisons and utilities in OECD and non-OECD countries alike. If used correctly, PPPs deliver value for money through lower costs, better outcomes and/or cost recovery. However, for PPPs to be a success for both the public and private sectors, a number of issues have to be acknowledged and tackled. Leading OECD countries have a number of lessons that can guide others as PPPs are increasingly used.

By PPPs we mean a way of delivering and funding public services using a capital asset where project risks are shared between the public and private sectors. A PPP is a long-term agreement between the government and a private partner where the service delivery objectives of the government are aligned with the profit objectives of the private partner.

There is a substantial stock of PPPs in a number of OECD countries and it is increasing. In the majority of OECD countries that use PPPs it covers less than 10 percent of investment, but in Korea, Australia, Mexico and Chile, 10-20 percent of public sector infrastructure investment takes place using PPPs. In the rapidly growing BRICs, large investment needs will require the use of PPPs. For instance, the Russia 2020 programme projects that by 2020 investment in electricity generation and distribution will increase by between 60 and 130 percent; that 81,500km of roads will be built; and that overall fixed investment will increase by about 10 percent a year.

Issues around PPPs
Good PPPs balance three tradeoffs that are inherent in a PPP procurement process. First, the public sector must be a prudent fiscal actor. PPPs should be affordable, represent value for money, and any fiscal risks, such as contingent liabilities, should be limited. However, research shows that for some countries the off-budget nature of PPPs – rather than their value for money – makes them more attractive than traditional procurement of assets. This demands a strong institutional response.

Second, the demands for investment from particular sectors such as transportation, health and education have to be assessed prudently so that the projects picked are those that yield the highest return on investment for society. Third, while private investors wish to make the best deals possible, the public sector must balance the risks taken by the private sector and those retained by the public sector in light of a realistic assessment of the price of these contracts. There is not necessarily one right solution to these tradeoffs; much will depend on the specific circumstances of each project.

Answers to challenges
The OECD countries have met these challenges in a number of ways. One key element is a dedicated PPP Unit. In 2010, 17 OECD countries had set up such units and more countries are following this trend. PPP Units should evaluate a project’s value for money in all its phases. This role should be complemented with the Ministry of Finance’s guardianship of the budget, the procuring agency handling of the project and the Supreme Audit Institution evaluating it.

These roles should ensure that the decision to invest is separate from how to procure and finance the project, limiting the siren song of off-budget financing. Also, PPPs should be treated as transparently as possible in both budgets and balance sheets.

PPPs can be politically controversial. It is therefore helpful if the country’s political leadership understands and supports the involvement of the private sector. This might also be helped if the end users are involved in the design and monitoring of the PPP. Finally, an important precondition is the presence of a clear, predictable and well regulated legal framework enabling a competitive process without integrity problems.

Top gun

Posted on October 25, 2011August 6, 2019 by

Typhoon (Eurofighter Jagdflugzeug/Eads)
Extremely agile and constructed of carbon fibre composites, the Eurofighter Typhoon is a multi-role combat aircraft capable of being deployed in various air operations.

Enthusiasts, like the British Royal Air Force, wax lyrical about the Typhoon, hailing its matchless pre-eminence in the industry. The Indian Air Force has also proven a fan as it considers its decision to contract for 126 combat planes.

More than 260 aircraft have already been built and are used by the German Luftwaffe and the Italian, Spanish and British air forces. Some 471 jets have been ordered.

Eurofighter Jagdflugzeug is largely seen as a Franco-German joint venture which later added a number of other European nations that decided to help develop the Typhoon. It was founded in 1986 and consists of four different assembly lines that roll out 683 aircraft to Austria, Italy, Germany, Spain and the UK. The jets are currently assembled by Eurofighter’s partners BAE Systems, Alenia Aeronautica, and Eads. There is talk however that an expected fifth assembly line will be set up for the production of an additional 48 Saudi jets.

Jas-39 Gripen (Saab)
Saab’s Gripen stands for Swedish reliability and efficiency in contrast. The Jas-39 Gripen’s superior technical specs make it one of the world’s most sophisticated warplanes.

Saab has several ongoing industrial partnerships and successful technology transfer agreements because the jet is seen as an affordable fighter with great flexibility on deployment.

The Gripen has proven to be an incredibly attractive solution for many air forces – it repeatedly makes the shortlist within the export market against some of the best combat aircraft from Europe, Russia and the US.
Predictably, Gripen’s business affiliation is largely centred on the Swedish aircraft industry, which contracts a bulky portion of the order sum. However, Saab has made a strong offer to the industry through continuous efforts and has established an excellent record within countries such as Hungary, Czech Republic and South Africa.

Rafale (Dassault)
One of the Typhoon’s major competitors is the Rafale, a jet fighter manufactured by Dassault Aviation, which offers similar aerodynamic performance to that seen in the Typhoon. The Rafale however has proven itself in the second Gulf War, whereas the Eurofighter is yet to see any combat.

Rafale’s dual functionality as both a land and carrier-based aircraft makes it especially desirable to both the French Air Force and Navy. The jet’s respectable arms capacity, its supercruise capability, and an exceptional aerodynamic performance, catapult it to a leading position in the field.

In addition to targeting India’s Air Force, Dassault has marketed the Rafale extensively within Europe, Brazil and South Korea, but has so far failed to attract any foreign buyers. The generosity of the French military has so far kept the company afloat with an order of 286 Rafales. It remains to be seen if such a large order can be repeated, given France’s strain on budgets.

Dassault has played a significant role in reshaping France’s defence industry thanks to its 26 percent stake in electronics and defence manufacturer Thales. The company is aware that to stay in the running within this competitive market it will have to work closer with its global partners, which include McLaren, CERT, IBM and Jaguar Land Rover.

Dassault’s corporate secretary, Jacques Pellas, famously said: “Our aircraft must not only be of the highest quality and security, it must also be tailor-made to customer specifications. Business jet buyers are a limited club and we have to give them what they want.”

Sukhoi SU-35 (Rosoboronexport)
Another contender to feature in an elite aircraft list is Russia’s Sukhoi SU-35, a highly manoeuvrable multirole fighter with greatly enhanced avionics. It is one of the most respected aircraft and has made the shortlist of China’s and South Korea’s aircraft competitions in the past. China indeed went as far as expressing an interest in co-producing the jet with Rosoboronexport.

More recently, both the Brazilian and Venezuelan air forces reported plans to place an order for the SU-35 but the acquisitions were postponed at the last minute.

Rosoboronexport has an exclusive standing in Russia as the sole intermediary agency for the country’s import and export of products and services related to defence. There is no doubt that its positioning is ranked highly internationally due to its relationship with the Russian government and its leading role in the global arms market.

The company is known to deal largely with defence procurement specialists, air defence commanders and military experts when marketing its air defence system catalogue. It does not have the wide reach however that competitors such as Saab and Boeing offer through their international partnerships.

F/A-18E/F Super Hornet (Boeing)
Boeing’s maritime strike attack aircraft F/A-18E/F Super Hornet is similar to the Eurofighter Typhoon, as both are signature Western fighters. The Super Hornet replaces the F/A-18 A-D Hornet and is a sophisticated upgrade which features new avionics, carrier capability, integrated weapons and powerful radar technology. Each unit clocks in at a price tag of $55m, nearly half of that of some of its competitors’.

It is undoubtedly one of the industry leaders, as around 500 aircraft are currently in use by the US Navy and the Royal Australian Air Force. Interest has also recently been expressed by the UAE, Brazil and Bulgaria.

There are no doubts that Boeing is a frontrunner and has become a key contributor to the aviation and space industry as the third largest defence contractor globally. It relentlessly expands its range of products and offers innovative solutions and cutting edge technology.

F-35 Lightning II (Lockheed-Martin)
Lockheed Martin’s F-35 Lightning II is unusual among its rivals: it is the only aircraft to still be in the system development and demonstration phase, and is currently awaiting the production of 21 test jets.

The aircraft is intended as a core tactical fighter for the US military, and there will be three variants of the F-35 Lightning II to serve the needs of the US Navy, Air Force and Marines. The fifth generation multirole fighter offers air defence and ground attack with stealth capabilities, the first and only one with such features. It is believed that despite budget cuts the US has committed itself to 2,443 jets so far, at a cost of $382bn.

The F-35 is predominantly funded by the US but receives additional financial support from Nato members and US allies.

Lockheed Martin, a frontrunner in the defence industry and the US’s leading federal contractor, has teamed up with BAE Systems and Northrop Grumman to produce and deliver the jets. The craft is thought to be the world’s largest defence programme, as customer orders reached an estimated 3,100 aircraft. Not bad for a jet that carries a price tag of about $90m and has yet to see combat.

From a local voice to a global presence

Posted on October 25, 2011August 6, 2019 by

In 1997 Naguib Sawiris incorporated Orascom Telecom Holding (OTH) to consolidate the telecommunications and technology interests of the Sawiris family. By 1998, OTH was the only company in Egypt with licences in all three privatised sectors: wireless, fixed line payphones and VSAT technologies.

In early 1998, OTH partnered with France Telecom and Motorola to bid for the second GSM licence in Egypt. It first lost the bid to Vodafone but then managed to convince the Egyptian government to sell 51 percent of the incumbent operator, Egyptian Company for Mobile Services, which it rebranded ‘MobiNil.’ MobiNil launched its services to the Egyptian public in May 1998 and now covers approximately 100 percent of the population.

OTH grew mostly through acquisitions: a 39 percent stake in Mobilink in Pakistan, and an 80 percent stake in Telecel Globe, which included 11 licences in Africa (2000), Motorola’s stake in Fastlink in Jordan, and a greenfield licence in Algeria (2001) and Tunisia (2002).

In 2000 the company floated its shares on the Cairo and Alexandria Stock Exchanges, (today simply the Egyptian Stock Exchange), in addition to a Global Depository Receipts programme on the London Stock Exchange. When the telecom/internet bubble burst in early 2000, OTH was a new mobile operator still with limited access to capital and significant financial commitments due to its acquisition spree: it was hit severely by the crisis.

As creditors and suppliers were all putting pressure on Naguib Sawiris, respected investment bankers were advising the Sawiris family: “Sell to a global operator and take your profit now before it is too late.” Naguib Sawiris decided otherwise; he strengthened his financial team, sold some assets (in Jordan and Africa) to restructure OTH’s balance sheet and focus on its core operations: Algeria, Egypt, Pakistan and Tunisia.

With the proceeds of the divestitures, OTH was able to successfully strengthen its balance sheet and renegotiate all prices with its equipment suppliers – and more importantly, invest heavily in its core operations. This strategy proved to be a total success and subsequently the company experienced phenomenal profitable growth across all its core operations.

Regional success
In Algeria, Orascom Telecom Algérie commenced its operations under the brand name ‘Djezzy’ in February 2002. In two months it had achieved positive EBITDA, after 11 months it had taken over as market leader, and over the course of its operation it increased Algerian mobile penetration from 0.6 percent to 77 percent today.

OTH acquired a greenfield licence in Tunisia in March 2002. By October of the same year, the company entered a joint venture with Wataniya Telecom to operate its GSM licence in Tunisia as Orascom Telecom Tunisie, under the brand name ‘Tunisiana.’ The brand was the second mobile operator in the country when it launched in 2002, but swiftly took over market leadership and expanded quickly to reach a coverage of 99 percent of the population. After eight years of operation, OTH sold its stake in Tunisiana to Qatar Telecom for a cash consideration of almost $1bn: corresponding to an enterprise value 6.7 times Tunisiana’s 2009 EBITDA and generating over 40 percent annual return on OTH’s investment in the business since 2003.

In October 2003, OTH undertook one of its more controversial expansions by being awarded a two-year greenfield licence in the central region of Iraq after a highly competitive bidding process. Operations under the brand name ‘IraQna’ were launched in December that year and grew to cover 100 percent of the population in Iraq’s central region by 2006.

The operation presented many challenges, ranging from high security risks affecting its employees and assets, to inconsistent supply of electricity, as well as shortages in gasoline affecting generator performance. Insurance coverage proved difficult, and maintaining sound storage and delivery of equipment led to supply delays. Nevertheless OTH became the market leader, with its market share reaching approximately 40 percent.

In 2007 the Iraqi government auctioned a long-term licence. OTH’s success had attracted a lot of ‘me too’ players in the region, and with every operator in the region expressing an interest, the auction reached an uneconomical level and was ultimately sold for $1.2bn. OTH decided to drop out of the race and was left with a network of 992 sites and approximately 3.5 million customers with a licence expiring two months later. Nevertheless it successfully sold its assets for $1.2bn – after an initial investment of less than $10m four years earlier.

Further expansion
OTH entered the market in Bangladesh in 2004 through purchasing 100 percent of a GSM operator and rebranding it to ‘banglalink,’ commencing operations as the fourth operator in the country in February 2005. In a highly competitive market environment with six mobile operators, banglalink grew to the become the second largest operator by market share (behind Telenor’s Grameenphone) after just three years of operation.

OTH’s Bangladeshi operation managed to evoke an overwhelming response from its customers and to portray a strong brand image, supplemented by an extensive distribution network accessible to 97 percent of the country’s population. As of June 30 2011, the network had more than 20 million subscribers.

In December 2008 OTH opened a new frontier when it was granted a greenfield licence in North Korea with 75 percent ownership of ‘koryolink.’ The opportunity to become the country’s first and only 3G mobile operator drew upon OTH’s longstanding expertise as market pioneer and innovator. Contrary to popular belief, koryolink did not exclusively serve government officials and the elite, but rather recognised the many ways in which mobile telecommunications are used among various segments of society. By June 2011 its network had reached 667,000 customers.

Finally, in July 2008 OTH announced its participation in a consortium, which in turn won a spectrum licence to create a Canadian -owned and -controlled wireless operator together with Globalive Communications Corporation. Once again this was not without a fight, as the incumbents exerted every effort to prevent OTH from entering the Canadian market through highly publicised and protracted legal battles surrounding the ownership of the newly formed ‘WIND Mobile.’

Operations were launched in December 2009, two weeks after getting the formal go-ahead from the regulator. WIND Mobile proved to be the catalyst in introducing new technology and plans to the majority of Canadian urban centres, which had long been characterised by a three-player oligopoly.

An international group
The series of acquisitions OTH has made over the past decade have been as much a contributor to the company’s success as an emerging market specialist in the framework of its mother company, Wind Telecom. Formerly known as Weather Investments, Wind Telecom’s turnaround story of Wind Telecommunicazioni in Italy is a testament to management’s keen eye for opportunities across the markets of the world.

Prior to its acquisition by Wind Telecom, Wind Italy faced fierce competitive pressures, negative cash flow and was plagued with a weak operational strategy. Upon acquisition in 2005, Wind Telecom appointed a new management team, which was able to focus on the key aspects of the business, consolidating Wind Italy into one of the few European operators offering integrated fixed, mobile and internet services. The company also achieved economies of scale, placing it in a more favourable pricing position with its supplier groups. It has now grown into one of the most profitable mobile phone companies in Europe and is regarded as a truly integrated service provider. Despite persistent competition, Italian customers have praised Wind Italy with the highest satisfaction index in consumer mobile and consumer fixed-line business.

The culmination of OTH and Wind Italy’s successful business strategies materialised in October 2010, when Wind Telecom and VimpelCom signed an agreement to combine both entities, forming the world’s sixth-largest telecommunications carrier. This landmark transaction is a true reflection of the high quality of OTH and Wind Italy assets and of the significant value that has been created over the years: from the few tens of millions of dollars invested in 1998, the company was valued at approximately $7.3bn at the completion of the merger.

The combination substantially increased the scale of operations and created a new global telecom player with 193 million mobile subscribers as of June 30 2011. The newly formed group has gained a balanced business risk profile enhancing its ability to pursue profitable growth, including mobile data services.

There is significant potential for value creation from synergies between VimpelCom and WIND Telecom’s operations, with an estimated net present value of $2.5bn.

Banking gets mobilised

Posted on October 25, 2011August 6, 2019 by

It’s a busy day for bankers in a bazaar in Abuja, one of the four cities of Nigeria. But this isn’t western-style branch banking. Indeed there’s not a branch in sight.

Instead customers are lining up at news-stands, corner-shops and kiosks to be helped by a new kind of banker: local businesspeople known as agents who have been trained in the use of mobile phones. Most of the customers have come into the city for the day from outlying districts, and are being given advice on how to transfer money, send remittances back home, deposit cash and cheques, and pay bills – among other normal banking activities. And they’re doing it without even opening an account.

Welcome to the new frontier of M-banking – the provision of financial services by mobile phone – that is transforming the lives of not only Nigerians but much of the world’s population. Some 500 years after Italian merchants opened the first banks – the bancos that did business in the street in much the same way as agents are doing in Abuja today – most people still haven’t got a bank account. In the industry’s jargon, they are ‘unbanked;’ and as a result, sidelined from the broad economy.

But they do have mobile phones. There are 5.3 billion people on the planet with mobile phones, and less than half of them have a bank account. And until M-banking began to gather momentum in the last few years, they had little chance of ever becoming ‘banked’ because of the prohibitive cost of opening branches, especially in remote communities.

In parts of sub-Saharan Africa, for example, the percentage of the unbanked population varies between the merely high and the absolutely catastrophic. In Tanzania, Uganda and Zambia, for example, at least two-thirds of the population have no access whatsoever to western-style banking services, relying instead on informal arrangements or, most commonly, keeping cash in the house or on their person. Physical transfers of money are usually done through the services of a friend travelling on a bus with a pocketful of cash. Even in Kenya, a leader in mobile banking, 38 percent of people don’t have an account; while about half of all South Africans, most affluent of the region’s nations, remain unbanked.

According to some studies, only one percent of the sub-Saharan population as a whole is banked. Swedish academics Dr Lennart Bangens and Bjorn Soderberg point out: “A substantial part of the rest lives in a cash-based, subsistence, barter-trade economic environment.”

High costs for branch banking
But now there’s hope. M-banking is not only spreading into sub-Saharan Africa and beyond, it’s making rapid inroads into many poorer Asian countries – such as the Philippines, Bangladesh and remote Nepal – as well as into Latin America, where it’s revolutionising banking in a way that some authorities, and certainly the conventional, branch-based industry, find disconcerting.

“Mobile banking services are the new animals on the financial services savannah, and policy-makers and central banks are still figuring out what the risks and benefits are,” observe the Swedish researchers.

Asian nations have proved some of the most enthusiastic adopters of M-banking. In the Philippines, for example, an astonishing 95 percent of the population have access to mobile banking in the broadest sense, according to a 2011 report by Asia Development Bank. As well as the usual financial services, Filipinos use their phones to buy a wide range of goods, including hamburgers.

Nigeria provides a particularly compelling example of the transformational effect of banking by telephone. Of the 90 million adults in the oil-rich country, only 20 million have any access at all to financial services. As Prateek Shrivastava, managing director in Africa for Monitise, the UK-based company that is running the M-banking services in Abuja, points out, it costs about $300,000 to open a bank branch and about $500,000 a year to staff and run it. That’s prohibitively expensive for Nigeria’s domestic financial services industry, which much prefers to focus on high-return, oil-based accounts – even though some have fallen foul of the authorities (a number of Nigerian bankers have been jailed on corruption charges).

Here mobile technology has come to the rescue. “There are more than 100 million mobile phone subscribers in Nigeria,” explains Shrivastava. “This is why the mobile is such a vitally important channel to reach a large population with trusted and secure bank-grade financial services.”

Monitise’s M-banking project has taken off. Launched as a pilot project in late 2010 in four cities – the capital Lagos, Port Harcourt, Ibadan and Abuja – under a provisional licence from the central bank, it had signed up 6,700 people by July of this year. Take-up was so promising that in August the central bank gave the green light for a full-scale roll-out of a mobile banking platform that will be shared among domestic and international banks.

Cross-selling opportunity
The implications for sub-Saharan Africa and other regions are seen as far wider than just banking, although it’s certainly good for the latter. Latin Americans, for example, typically start by using mobile banking for basic services such as remittances, and then progress to buying insurance, pensions and loans.

But the broader economic benefits alone are significant and probably transformational. Mobile banking helps grow the economy by oiling the engine of commerce as more agents, merchants and customers are drawn into the network. It boosts tax income, makes the economy more transparent, and serves as a catalyst for employment – Nigeria’s pilot programme alone created 170 jobs.

Then there’s the social payback. According to Shrivastava, “bringing people into the banking system through mobile financial services can make a huge difference to both individuals and families’ lives.”

M-banking, sometimes known as transformational banking, has a short history. First pioneered about 12 years ago by telecommunications companies, it’s generally now practised in a partnership either by telcos working with established banks or, as with Monitise and other mobile payments companies, with a wide range of card companies, domestic and international retail banks, or by new entrants to the market who have spotted its vast potential.

Kenya’s hugely popular M-Pesa, which is backed by phone company Safaricom, is an exception in not having a banking partner – to the annoyance of the traditional banking community. That’s because M-Pesa doesn’t have a banking licence; arguing that as it’s only a remittance service, it doesn’t need one. Kenya’s banking regulator happens to agree but the issue, one of those growing-pain problems identified by the Swedish researchers, remains unresolved.

By contrast South Africa’s runaway success, Mzansi, serves as a platform for the branch banking industry in a country with low internet penetration but high cell-phone ownership (about five million South Africans out of a population of 49 million have internet access, compared with about 35 million mobile phone users).

Mzansi allows mobile-operated accounts to be opened at several retail banks, as well as the Post Office. For most of its partner banks, Mzansi serves as a low or no-profit service that may turn in time into valued accounts. Meanwhile, the value for the phone companies is that it helps keep customers loyal. Once they’ve signed up through a particular company, they tend to stay with it.

A question of trust
M-banking’s rapid adoption in some regions often reflects the population’s general dislike and even distrust of retail banks. In some Latin American countries, the opening of an account is a bureaucratic and time-consuming process. Also, it’s by no means uncommon for people to have no personal identification, a problem M-banking has been able to circumvent by accepting letters of confirmation from village mayors or chiefs.

But probably the main reason why many Latin Americans distrust banks is historical. Most Spanish-speaking countries have experienced long periods of political instability, even turmoil. In some, banks were nationalised or collapsed: a disaster for ordinary citizens, because much of Latin America doesn’t have deposit insurance. As a result, countries such as Paraguay, Venezuela and Peru became largely cash-based societies, especially in rural areas.

For these reasons, many Hispanics and Latinos emigrating to America were for years more likely to trust their money to retail chains such as Wal-Mart, Home Depot and 7-Eleven. After all, there was no possibility they would be nationalised.

Although M-banking has also invaded the US, many of these emigrants still prefer to send remittances back home through these non-traditional channels; as well as more accustomed ones such as Western Union and MoneyGram. And it’s big business – last year remittances by Hispanics and Latinos hit about $100bn.

The next generation of Latin American bank customers are likely to be more tech-savvy, however. Earlier this year Telefonica and MasterCard launched a mobile banking service in 12 Latin American countries under the Spanish phone company’s Movistar brand. A vast project, it aims to make the partners’ portfolio of financial services available to no fewer than 87 million current and potential Movistar customers, probably through so-called mobile wallets or pre-paid accounts.

According to Mastercard, the project will “achieve financial inclusion for the underserved” in the region. It’s also a potentially lucrative business that has passed the traditional industry by. In Latin America alone, the value of mobile transactions is forecast to reach $63bn by 2014.

The project can also legitimately be seen as an assault on the distrustful cash-based economy that has kept many communities impoverished. As Joaquin Mata, Telefonica’s global head of financial service, says: “This initiative arms us with the right artillery to strengthen our war on cash.”

Embracing the unbanked
The enthusiasm for M-banking in Paraguay, one of the poorest countries in the region, shows what it can do. Many rural areas have no access to formal financial services, and yet Paraguay leads the entire region in M-banking take-up. It’s the only Latin American country which has two live mobile-money platforms – Tigo and Personal – and both have posted almost overnight success. According to the central bank, of a total population of six million, about 60,000 Paraguayans already use mobile money services on a regular basis, and the number is increasing.

Market-leader Tigo started it all off as recently as 2008 with Tigo Cash, a multi-functional e-wallet designed mainly for retail payments. The company followed up in 2010 with a mobile money services facility under the brand name Giros Tigo, focused on remittances. It’s an over-the-counter model, as in Abuja, whereby the sender finds an agent to despatch e-money to the recipient. The latter receives a text message advising that the money is available, and then goes to another agent to cash the remittance out using a secure PIN.

Some countries are doing better than others in embracing the unbanked. In Nepal, where the notoriously corrupt and illiquid financial sector (several banks got the thumbs-down in the latest IMF stress tests) has proved largely uninterested in marginal customers, they have just received a belated boost by the central bank. This time though it’s not an M-banking initiative.

The central bank will make it easier for so-called Class C and D institutions – essentially, finance firms – to open branches in 30 districts “with low financial access;” while, unusually, commercial banks will be forced to open two branches outside lucrative Kathmandu, one of which must be in a rural area. The government will also support the spread of the microfinance institutions that have proved so important in impoverished Bangladeshi communities.

Indeed Bangladesh underlines the long-term value that the financial industry can gain by embracing the unbanked. Having missed out on the demand for microfinance there, retail banks have belatedly discovered that today’s low-value customer may be tomorrow’s high-return one. The industry has been caught on the hop by the rapidly growing affluence of Bangladeshis and clamour for all kinds of loans for mortgages, automobiles and marriages. According to research by Standard Chartered Bank, demand for consumer services is 10 times higher than supply. Growth in retail banking has grown by double digits for the last five years.

At present, red tape limits the number of branches that foreign banks can open outside Bangladesh’s main cities, and the expense of opening and running branches in rural areas inhibit the development of nationwide networks. But some retail banks are taking a more conventional route to the unbanked by opening automatic cash machines in rural areas.

But many observers think that, as in other countries, M-banking will turn out to be the better approach in the long run.

Mission impossible – costing an EMU failure

Posted on October 25, 2011August 6, 2019 by

Greece’s exit from the eurozone would inflict untold damage on Europe’s economy, further burnish the attractiveness of a rising Asia, and hasten the emergence of China’s yuan as a global currency.

Doubts over how much more austerity recession-hit Greece can endure are growing by the day. They are matched by doubts as to how long political and public opinion in Germany, the eurozone’s paymaster, will stand for keeping Athens and others on the bloc’s periphery afloat with emergency loans and bond purchases by the ECB.

Some within the bank are equally unhappy about it. If the outcome of the mounting crisis is unpredictable, so are the consequences.

Domenico Lombardi with the Brookings Institution, a Washington think tank, said the economies of the eurozone are so interconnected that the secession of one of the 17 members would open up a Pandora’s Box.

Greece could not quit or be expelled from the bloc in a surgical manner: markets would then line up Italy in their sights. If Rome was then forced out, France’s banks – already under pressure from short-term funding strains – could melt down because of their exposure to Italian debt.

“It would be almost impossible to draw the line. You could devise a framework for an orderly exit in normal circumstances, but we have gone much too far for that,” said Lombardi, a former executive director of the IMF. He put the chances of a eurozone break-up at 50-50.

Echoing that view, President Obama said an even bigger problem than Greece is what may happen if Spain and Italy come under renewed attack.

All eyes on Italy
One starting point in trying to assess the economic fallout is the September 2008 bankruptcy of investment bank Lehman Brothers, which dragged the global financial system to the precipice and tipped much of the world into recession.

The shock was all the more severe because many investors were betting the US government would bail out Lehman, just as it had arranged a firesale of rival Bear Stearns earlier in the year.

By contrast, the market for credit default swaps is pricing in a 90 percent-plus probability that Greece will default on its debt, fanning open talk – hotly denied by Athens – that the next step would be to quit the eurozone altogether.

Even though Greece’s travails are well known, a genuine hint that it might throw in the towel would trigger market mayhem, with Italy particularly exposed, said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London consultancy.

“The fear and panic that this would cause is incalculable,” Spiro said. “The issue is whatever happens in Greece is perceived as a template for what could happen elsewhere. It would be disastrous for Italy.”
A Greek exit is often viewed as positive for the euro’s exchange rate, said William Buiter, Citi’s chief economist.

“We fear, however, that it would be a financial and economic disaster not only for Greece, but also for 16 continuing euro-area member states, and that it would also have severe economic and political implications for the whole of the EU and the wider global economy,” Buiter said in a report.

China watches and waits
The rush to safe-haven assets and to square positions after a break-up of European Monetary Union would be akin to the aftermath of Lehman’s default, according to Seamus Mac Gorain of JP Morgan Securities in London.

In a note to clients, he argued that the dollar would be the currency to benefit most from what would be a “seismic” event.

“For one, heightened volatility would prompt investors to buy back funding currencies. Second, euro break-up would undermine its challenge to the dollar as a reserve currency,” Mac Gorain wrote.

The dollar is also the obvious candidate if importers and exporters, anticipating the collapse of the euro, were to seek to trade in an alternative currency, he added.

Fragmentation of the euro would also open the door for China to accelerate the international use of the yuan.
Beijing started promoting the yuan as an invoicing and settlement currency after Lehman’s bankruptcy led to a drying-up of dollars to finance trade. China’s exports slumped, costing millions of jobs.

About seven percent of Chinese trade is now conducted in yuan, and that share would be sure to jump if the euro broke up.

“Strategically, it would help drive the globalisation of the yuan,” said Ding Yifan, a deputy director of the Development Research Centre, a think tank in Beijing under the State Council, China’s cabinet.

Ding said the risk was that the pace of internationalisation would be too fast for comfort. “This is an opportunity for China, but also a challenge, because China does not want to move too fast,” he said.

Asia cleans up
Rob Subbaraman, Nomura’s chief Asia economist based in Hong Kong, agreed that China was likely to speed up use of the yuan beyond its borders, activate yuan swap lines and take other measures to help Asia’s economies if the euro broke up.

And because the eurozone’s problems are likely to reduce Europe’s long-term growth potential, Asian companies will have an extra incentive to invest more in their own region and in other emerging markets, he said.

But in the short term, Asia could not escape unscathed from a collapse of the euro. Nearly all countries in the region export more to Europe than they do to the US, and the exposure of European banks to Asia ex-Japan, at $1.4trn, is three times greater than that of US banks.

“If there’s a meltdown, the home bias of US and European investors will kick in, particularly European banks. The risk of them cutting their credit lines in Asia could be quite big,” Subbaraman said.

That is what happened after Lehman went bust. Nearly $80bn left Asia in the fourth quarter of 2008 and the first three quarters of 2009. But according to Nomura calculations, in the following 18 months nearly $500bn of capital flowed back.

If the euro’s malaise causes history to be repeated, the reflows of money to Asia are likely to be on an even larger scale, as investors weigh up which region has the brightest prospects, Subbaraman said.

“The relative strengths of Asia and the West are just becoming more and more stark in terms of fundamentals and the room for policy manoeuvre,” he said.

And that could be one of the lasting lessons of the battle for the euro.

China starts to reshuffle engineers of economic boom

Posted on October 25, 2011August 6, 2019 by

Sources and analysts with ties to China’s ruling elite say the political musical chairs among ministers, cabinet officials, agency chiefs and provincial governors is underway and will run its course by early 2013.

In the meantime, with officials unsure of where they will end up, the jockeying could lead to a slowdown in the reform agenda in the world’s second-largest economy. That slowdown could approach policy paralysis as a Communist Party Congress late next year finalises the changes to the teams that have led China’s runaway growth over the past decade.

The heads of the banking and insurance regulator, China’s massive social security fund, and the agency that governs the country’s oil majors, telecoms and other strategic sectors, should all be replaced. New faces also are likely at the central bank, a key architect of yuan currency policy, and the finance and commerce ministries.

Unlike Western countries, where an elected president would appoint cabinet ministers after taking office, sometimes with confirmation hearings to ratify the choice, China’s leadership changes are decided behind closed doors – with senior posts filled by candidates selected by a handful of top leaders.

The Communist Party elite – including those slated for retirement such as Hu, and incoming leaders such as his anointed replacement Xi Jinping – will decide on the appointments at secretive meetings over the coming year.

The changes will culminate in the 18th Congress sometime next autumn. In keeping with the shroud of secrecy, the actual dates are not expected be made public until weeks before the conclave. Government posts will then be rubber-stamped in March 2013 at the country’s annual session of parliament.

“In the end, the final call on who gets in will be up to one or two people. The other people are just there making noise,” a government official with ties to top leadership circles said, on condition of anonymity.

So when Vice Premier Li Keqiang replaces Wen Jiabao as premier and head of the State Council, China’s cabinet, as is widely expected, he will find that many of those who led China on its decade-long development surge to surpass Japan will be gone.

Out with the old
Zhou Xiaochuan, 63, who has overseen monetary policy and the landmark 2005 revaluation of the yuan as head of the central People’s Bank of China since 2002, is expected to depart. Zhou accompanied Vice Premier Li on a visit to Hong Kong in August, sparking talk he would stay on longer to provide policy stability and continuity through the leadership transition. Still, official and banking sources say he is expected to step aside in early 2013, retiring or moving up into the decision-making Politburo – where retirement age is higher.

Guo Shuqing, chairman of China Construction Bank and a former head of the State Administration of Foreign Exchange, has long been tipped to replace Zhou.

China Banking Regulatory Commission chief Liu Mingkang, 65, who led oversight of the troubled banking industry for close to a decade and saw the Big Four state banks cleaned up and listed on stock markets, will also likely go. Potential replacements include Jiang Jiangqing, chairman of Industrial and Commercial Bank of China, China’s top lender and the world’s biggest bank by market value; and Xiao Gang, Bank of China chairman.

Finance Minister Xie Xuren, who will turn 65 next October, is expected to retire and be replaced by Lou Jiwei, who heads up China’s massive sovereign wealth fund, CIC. Lou Jiwei is also a contender for a new state enterprise regulatory agency, sources said.

China Insurance Regulatory Commission head Wu Dingfu, 65, also is due for retirement. Jiang Chaoliang, president of policy lender China Development Bank, is in line to step in.

Others expected to move on include Zhang Ping, 65, head of the National Development and Reform Commission that promotes top Chinese state-owned enterprises to develop and build their business globally, and Commerce Minister Chen Deming, 62, who could still see another post. Their replacements are unclear.
in with the new.

Similar changes are underway at scores of Chinese state firms, banks, oil companies and other strategic industries. Hu Xiaolian and Liu Shiyu, both deputy central bank chiefs, are expected to be appointed to chair state banks, banking sources said.

The sweeping overhaul will follow a formula set when former president Jiang Zemin stepped down as party boss in 2002, taking a swathe of officials with him into retirement, said Li Xiaoning, deputy director of the State Information Centre in Beijing.

“About one third of the current leadership will move in to the new government, another third will stay on the second line (in position), and one third will be fresh blood,” he said.

Some decisions appear closer to final. A high-level ICBC source said on condition of anonymity that Chairman Jiang Jianqing had already completed an economic audit and that staff movements had already been frozen at the banking commission, which he is tipped to run, as well as at the insurance regulatory commission.

But critical posts like the central bank will likely be among the last to change hands, to ensure veterans are on hand to provide stability during the leadership transition, due to the turbulent global economic environment and concerns over China’s own domestic growth and nagging inflation, analysts said.

Xia Minren, a macroeconomic researcher at China Securities Co., said filling financial posts was harder than political jobs, where a vast pool of successors could be tapped in the ranks of provincial, city and county officials. Top leaders would need to “pay special attention to expertise and stress economic backgrounds and financial work experience,” Minren said.

Putting off reform
With so many top leaders on the way out, and young up-and-comers not wanting to take big risks, major policy changes such as yuan reform should become less likely in the months leading to the 2013 Party Congress, said analysts.

Some retiring leaders like Premier Wen may still try to push for policy reform to make a mark before moving on, said Cheng Li, an expert on Chinese politics at the Brookings Institution.

“Nevertheless, most politicians in the country, especially those rising stars in the so-called fifth generation of leaders, will be exceptionally cautious over the next two years,” Li said in a research paper. “Indeed, major policy changes will likely occur after, rather than prior to, the 18th Party Congress.”

Europe’s high-risk gamble

Posted on October 25, 2011August 6, 2019 by

The Greek government needs to escape from an otherwise impossible situation. It has an unmanageable level of government debt (150 percent of GDP, rising this year by 10 percentage points), a collapsing economy (with GDP down by more than seven percent this year, pushing the unemployment rate up to 16 percent), a chronic balance-of-payments deficit (now at eight percent of GDP), and insolvent banks which are rapidly losing deposits.

The only way out is for Greece to default on its sovereign debt. When it does, it must write down the principal value of that debt by at least 50 percent. The current plan to reduce the present value of privately held bonds by 20 percent is just a first small step toward this outcome.

If Greece leaves the euro after it defaults, it can devalue its new currency, thereby stimulating demand and shifting eventually to a trade surplus. Such a strategy of “default and devalue” has been standard fare for countries in other parts of the world when they were faced with unmanageably large government debt and a chronic current-account deficit. The only reason it hasn’t happened in Greece is because Greece is trapped in the single currency.

The markets are fully aware that Greece, being insolvent, will eventually default. That’s why the interest rate on Greek three-year government debt recently soared past 100 percent, and why and the yield on ten-year bonds is 22 percent – implying that a €100 principal payable in 10 years is worth less than €14 today.

Why, then, are political leaders in France and Germany trying so hard to prevent – or, more accurately, to postpone – the inevitable? There are two reasons.

Banks’ fear factor
First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank.

The second – and more important – reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s.

A default by either of those large countries would have even greater disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs, but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks.

The domino effect
If Greece is allowed to default in the coming weeks, financial markets will indeed regard defaults by Spain and Italy as much more likely. That could cause their interest rates to spike upward and their national debts to rise rapidly, thus making them effectively insolvent. By postponing a Greek default for two years, Europe’s politicians hope to give Spain and Italy time to prove that they are financially viable.

Two years could allow markets to see whether Spain’s banks can handle the decline of local real-estate prices, or whether mortgage defaults will lead to widespread bank failures, requiring the Spanish government to finance large deposit guarantees. The next two years would also disclose the financial conditions of Spain’s regional governments, which have incurred debts that are ultimately guaranteed by the central government.

Likewise, two years could provide time for Italy to demonstrate whether it can achieve a balanced budget. The Berlusconi government recently passed a budget bill designed to raise tax revenue and to bring the economy to a balanced budget by 2013. That will be hard to achieve, because fiscal tightening will reduce Italian GDP – which currently is barely growing – in turn shrinking tax revenue. So, in two years, we can expect a debate about whether budget balance has then been achieved on a cyclically adjusted basis. Those two years would also indicate whether Italian banks are in better shape than many now fear.

If Spain and Italy do seem sound enough at the end of two years, European political leaders can allow Greece to default without fear of dangerous contagion. Portugal might follow Greece in a sovereign default and in leaving the eurozone. But the larger countries would be able to fund themselves at reasonable interest rates, and the current eurozone system could continue.

If, however, Spain or Italy does not persuade markets over the next two years that they are financially sound, interest rates for their governments and banks will rise sharply, and it will be clear that they are insolvent. At that point, they will default. They would also be at least temporarily unable to borrow and would be strongly tempted to leave the single currency.

But there is a greater and more immediate danger: even if Spain and Italy are fundamentally sound, there may not be two years to find out. The level of Greek interest rates shows that markets believe that Greece will default very soon. And even before that default occurs, interest rates on Spanish or Italian debt could rise sharply, putting these countries on a financially impossible path. The eurozone’s politicians may learn the hard way that trying to fool markets is a dangerous strategy.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan’s Council of Economic Advisers and is former President of the National Bureau for Economic Research

Are we spending enough on renewable energy?

Posted on October 25, 2011August 6, 2019 by

For any necessary project the biggest question is simple: is enough being spent on it? Certainly, money alone is not enough – good management and organisation can make each dollar stretch further, and the right intentions must be there if there is to be any chance of success. But these count for nothing without resources. Where large-scale effort is needed to develop and deploy new technological capabilities, money makes it all happen.

So, looking at the issue of environmental sustainability, is enough investment flowing? And what do we define as enough?

Some crude calculations point to the scale of the task. Until recently, the rule of thumb in the coal industry was that investment in new capacity cost about $1m per megawatt. Incorporating spending on research and development, the greater cost of alternative energy sources, and the need for entirely new infrastructure, $2-3m per megawatt might be required to replace existing energy sources with renewables. Given that the world currently consumes 15 million megawatts annually and is expected to consume two to three times that by 2050, $60-130trn of investment might be required.

According to the IPCC, in order to put us on track to get 80 percent of our energy from renewables by 2050, the world needs to invest $12trn over the next two decades.

Extrapolating to 100 percent of energy and the entire time period to 2050, assuming greater spending as the target date approaches, we come to a number of perhaps $40trn. Other bodies have estimated that $50trn will be needed.

Taking our estimate of the requirement as $80trn, we face an average annual spend of $2trn for 40 years. This is equivalent to spending about three percent of current global GDP every year. In a typical year, the total of all forms of investment across all sectors is about 20 percent of world GDP – and this number varies by a percent or so from year to year. The amounts needed for clean energy are daunting, but not out of reach – provided we start now.

There is, however, a long way to go. Global investment in renewable energy reached just over $200bn in 2010, a tenth of what is needed. This is on an exponential trend – up from $160bn the year before, and a mere $6bn in 1995. If such momentum continues, we should hit the required rate of investment by 2020. But without more government help, this trend is unlikely to continue. New industries often show spectacular rates of growth at first, but slow down when they are bigger. To ensure favourable development, we must understand the industry’s investment trends.

Where to spend
Bloomberg research shows the breakdown of investment in 2009. Two percent of new investment was in venture capital; 11 percent in equipment manufacture, financed via a mixture of private equity and capital market investment; a further 11 percent in small-scale distributed power generation; 15 percent in corporate and government R&D; and 61 percent in large-scale power generation, funded by project or asset financing.
Europe received 37 percent of investment from the financial sector, China took 25 percent and North America (principally the US) got 24 percent. Wind received 45 percent of investment, solar 25 and biofuels 14.

Corporations spend slightly more than governments on R&D. Both pure-play renewable energy firms such as Suzlon, Vestas and First Solar, and general engineering firms such as Siemens and Sharp, are involved. GE is breaking into solar power in a big way, thanks to its investment in research. It is starting to manufacture cadmium telluride thin film solar cells that can achieve 13 percent efficiency – three percent better than the industry average – and is opening a manufacturing facility that will be the largest in the world. The company expects to halve the cost of manufacture over a few years and may come to play a leading role in solar as it does already in wind.

In getting promising research through to practical application, the Bloomberg data may suggest that venture capital investment is a bottleneck. The reality is that venture capital investment is small-scale compared to other investment (less than two percent of all US investment in 2007), and many exciting funds are active in clean-tech venture capital.

Emerald Technology Ventures manages €300m of investment across a range of clean-tech ventures encompassing renewable energy, water purification and advanced materials. Its investments include Pelamis Wave Power, an Edinburgh-based firm producing wave-power harvesters that consist of huge cylindrical sections joined end-to-end, capable of flexing relative to one another, with hydraulics at the joints to capture the energy of wave-induced movement. These have been tested for Scottish Power and E.ON, and have been deployed in a small wave farm off the coast of Portugal.

Vantage Point Venture Partners has invested around $1bn in technologies ranging from solar cells and lithium-ion batteries to domestic energy efficiency. Generation Investment Management has invested $700m. Larger private equity and venture capital firms such as Blackrock and 3i have also established a presence in clean-tech investment; and PE players such as Climate Change Capital, Guinness Asset Management, and DIF support investment in ventures using more mature technologies.

How to spend
When it comes to exploiting the most mature technologies, project and asset finance are by far the most important investment vehicle. Project finance involves special purpose vehicles (SPVs) set up to build and operate a particular piece of utility-scale generation infrastructure. One or several industrial firms act as sponsors for the project and provide some of the equity capital, but the revenues of the SPV are ring-fenced so as to ensure they are available to repay all investors, while limiting the liability of sponsors in the event the project fails. The whole enterprise may operate under a government concession or with subsidies or tax breaks to support the earnings of the SPV.

Projects are planned so the total debt and equity invested are less than time-discounted earnings by a sufficient margin to support adequate returns. Given ring-fencing, an adequate buffer can be maintained between assets and liabilities to avoid default. The main danger is that the available wind or sunlight is less than expected: electricity produced (and revenue earned) is proportional to the cube of wind speed – meaning that 10 percent less wind generates 27 percent less power.

Private equity funds provide some of the equity capital for project SPVs, while banks provide the debt financing which represents the bulk of the investment. Usually one bank acts as the lead or arranger, hiring the relevant engineering and legal experts, with the investment then being split up between a syndicate of lenders. Leading players in this space globally include Santander, BNP Paribas, BBVA, BDNES of Brazil and the European Investment Bank. The UK is considering setting up a green investment bank of its own. Barclays, HSBC, JP Morgan and other big banks play a major role in project finance generally, but only a small proportion of this in renewables.

Everything possible needs to be done to support project financing of renewables, particularly given that fiscal politics may preclude purely public investment in coming years. There is a danger that new liquidity requirements for banks will militate against project finance investment, which tends to be long-term and illiquid. This needs to be avoided, especially considering that the underlying default risk of such projects can be minimised.

The geographical distribution of renewables investment reflects Europe’s successful initiatives to support the sector; despite the continent’s fiscal troubles, this support should not be reduced. The prominence of Chinese investment is more recent, and reflects a government push to compete in leading industries. If the US and China get into prestige-led competition in this area, so much the better for the industry.

In terms of technologies, it is natural that wind presently takes the lion’s share, since it is the most mature technique for harvesting renewable energy. Going forward, we would expect wind to be overtaken by solar; and for solar and wind generation, and technologies for energy storage, transmission and efficiency, to represent the main areas of investment. The current prominence of biofuels reflects misguided US subsidies for corn ethanol, which is inefficient and competes with food. This investment should focus more on other biofuels, such as those derived from waste or algae.

The industry is growing in broadly the right way and at sufficient speed; but we need to maintain momentum through more intensive government support for research and development into clean electricity, alongside higher taxes for emitting carbon.

Deal bonanza down under

Posted on October 25, 2011August 6, 2019 by

While companies in the rest of the world have found bank lending to be increasingly tight and risk averse, and that they have had to hold on to their cash just to ensure their own working capital requirements are satisfied rather than throw money around in the hunt for new acquisitions, deal activity in Australia is thriving – so much so that analysts are encouraging companies to invest their cash in mergers and acquisitions just to remain competitive.

In August, global private equity firm Blackstone announced that it was seeking AUD 431m ($452m) financing to back its purchase of Australia property firm Valad Property Group, while Peroni brewer SAB Miller has rolled out a hostile £6.1bn offer for Foster’s, Australia’s brewing giant. Elsewhere, Insurance Australia Group is set to buy a 20 percent stake in a Chinese insurer for $107m in a foray into the world’s second largest economy, marking a key step in meeting its targets of earning 10 percent of gross written premium from Asia by 2016.

Interest in Australian companies is also coming from Asia. China’s Bright Food Group is on the lookout for more acquisitions there, particularly in the food, dairy and wine industry, after spending $400m for a 75 percent stake in Manassen Foods.

Vice-president Ge Junjie said: “Recently, quite a few small to medium-sized Australian businesses came to us on their own to talk about potential co-operation. Australia is the area where we are going to focus more. We are trying to understand Australia better. Manassen Foods would be our platform for our international strategy.”

Merger mania
The summer has seen one of the country’s largest M&A deals come to fruition. At the end of August, Australian miner Macarthur Coal backed a revised takeover offer from Peabody Energy and ArcelorMittal after the bidders raised their offer by three percent to AUD 16 per share, valuing the deal at AUD 4.8bn ($5.2bn).
Macarthur, the world’s largest producer of pulverised coal, has been a takeover target in the wake of growing demand for coal, and has fended off four takeover bids in the last years. Peabody and ArcelorMittal had made a formal offer for the Australian miner at the start of the month. But Macarthur tried to raise the sale price by saying that “a number of parties” had shown interest in the company and had taken a look at its business. However, despite the interest, none of those companies made a rival bid.

Analysts said in the absence of any rival bids, Macarthur did not have many options. “How long can you keep a potential bidder out there? At the end of the day Macarthur has decided to move on,” says Jonathan Barratt of Commodity Broking.

Australian Treasurer Wayne Swan had issued a statement of no objection under the Foreign Acquisitions and Takeovers Act to the proposed takeover of Macarthur Coal on August 12. The European Commission had already ruled that the Macarthur takeover bid did not require approval under the EU Merger Regulation. Again, analysts see the lack of regulatory obstacles as being a tacit acknowledgement that merger activity may be a boon to the world’s depressed economy.

The true value of the deal can be best assessed in the strength of the bidders. Peabody is the largest coal company in the US, while ArcelorMittal is the world’s largest steel maker. Analysts said the deal is likely to benefit both companies as the acquisition of Macarthur will help Peabody increase its presence in the coal market even further.

“When you look at the large mining companies, the trend is to expand and reduce the concentration of rivals. That gives them an edge.” Barratt says. “The attraction is for greater profits through greater concentration of prices.”

As for ArcelorMittal, analysts believe the deal will help it secure more supplies of pulverised coal, a key commodity for making steel, at competitive rates.

It certainly appears that merger mania is springing up, down under. A recent study shows that Australian mergers and acquisitions have reached a record AUD 130.3bn ($125.79bn) so far this year, despite the gloomy economic outlook and share market turmoil. This was a 78.1 percent increase from the same period in 2010 and was the busiest year-to-date in terms of the volume of transactions, the Thomson Reuters Australasia Investment Banking Snapshot has found.

Metals and mining
New Zealand inbound M&A this year reached $2.1bn, a 62.6 percent increase from the comparable period in 2010. Japan accounted for $1.4bn, or 66.7 percent, of the inbound transactions in dollar value compared to none in 2010 year-to-date for New Zealand. In August Japan’s Asahi Group Holdings announced it would buy New Zealand’s Independent Liquor, in a deal worth $1.3bn, to expand its overseas presence.

The research found that food and beverages reported the biggest upsurge, with transactions of $18.1bn from 33 deals, bolstered by recent acquisitions of beverage companies. This compared with $118.2m from 25 deals in the 2010 year-to-date. However, metals and mining remains the busiest sector with $27.8 billion of mergers and acquisition activity, up 31.5 percent from the same period last year.

And experts believe that growth in M&A activity in the sector is set to continue. At the beginning of August, Ernst & Young analyst Paul Murphy told delegates at the Diggers and Dealers forum – Australia’s largest mining conference – that mergers and acquisitions within the industry are set to almost double this year, to hit $2bn worldwide by the end of 2011.
Murphy said strong commodity prices are behind most of the movement by companies in the sector, adding that external expansion is one option for miners deciding how to invest their increased cash flow. “Do they bring on projects, organic projects faster, do they engage in M&A activity, do they do share buy-backs and bigger dividend payments?” he asked. “I think what we are seeing is that they are doing a combination of those, to manage all their interests.”

Murphy said smaller players in the industry are a potential target. “You’ve got those smaller players who haven’t got the access to funding as a means of warding off those corporate predators: we’ve already seen the start of some consolidation activity.”

Some industry players are also keen to stress their interest in merger activity. Troy Resources chief executive Paul Benson has said that the group is permanently on the look-out for potential acquisitions: “We’re always interested in M&A,” he told journalists on the sidelines of the Diggers and Dealers conference. “We’re kissing frogs the whole time. We’d like to have an asset in Australia.” Benson added that Troy, which has operations in Brazil and Argentina, would be attractive for other companies looking to do deals because of its history of mine development.

But some experts believe that Australian companies could be missing out on the country’s merger mania if they are too risk averse. According to law firm Gilbert + Tobin, companies will miss out on bargains if they continue a cautious approach to mergers and acquisitions as a result of the federal government’s “radical” policies and overseas debt. Writing in its mid-year M&A review, partner Neil Pathak said that “the catalyst, in our view, to greater M&A and capital markets activity is financial and political stability, which will breed confidence in the business and consumer sector and global markets generally.” He added: “Less radical and uncertain policy from our government and a sustained period of calm offshore and resolution of the foreign debt issues is required. The reality is that this may take some time.”

The law firm says that after a “patchy” first half, the M&A market has improved, with the $4.7bn bid for Macarthur Coal and deals for ConnectEast, Sundance Resources and Eastern Star Gas. Gilbert + Tobin, which is advising Foxtel shareholder Telstra on the pay-TV group’s bid for Austar, expects resources to continue to drive activity.

In contrast, equity capital markets remain in the doldrums, which is putting extra pressure on investment banks. Globally, major banks have shed jobs, while in Australia analysts expect Macquarie to cut staff at its investment banking unit. Merrill Lynch said Macquarie was “well off” its M&A numbers from last year and needed to address “company-specific” issues to arrest the slide in market share. However, Goldman Sachs was the top financial adviser for Australian-involved M&A this year – advising on 27 deals for a 42.4 percent market share, up 8.5 percentage points from the same period last year.

The time is now
Echoing remarks by bankers, Pathak wrote that deals are getting harder and taking longer. But he noted that there are positive signs: “Deals with solid fundamentals are getting done, but uncertainty remains… With foreign financial conditions arguably starting to improve, the time to move may be now.”

Pathak believes that the M&A market will begin to see a number of trends unfold as the year goes on – namely, that offshore suitors will continue to make the most of depressed valuations despite the strong Australian dollar, with inbound M&A up sharply on last year, and that outbound M&A will also grow as local companies use the strong dollar. Other trends to continue will be cash deals, joint bids from multiple suitors and target companies disclosing approaches early, he said.

While the Australian government may not be doing much to encourage M&A bids, it appears that even its attempts to halt a high profile and high-value merger may have backfired, potentially producing a detrimental effect. Competition experts believe that the court defeat towards the end of August of the Australian competition watchdog’s bid to block Metcash’s AUD 215m purchase of the Franklins grocery business and its 80 stores may make M&A easier to process.

The Australian Competition and Consumer Commission (ACCC) took court action because it believed Metcash’s purchase of Franklins would have the effect of substantially lessening competition in the market for wholesale supply of packaged groceries in New South Wales and the Australian Capital Territory.

In a rare move the dispute went to the courts, with Federal Court judge Arthur Emmett asked to rule on the case. However, Justice Emmett dismissed the ACCC’s case and its arguments that the purchase would lead to less competition, ruling that “it is quite likely that the acquisition of Franklins by Metcash will strengthen the capacity of independent retailers operating under the IGA banner to compete more vigorously with the major supermarket chains.”

One of the other key arguments by the ACCC was that an alternative buyer would come forward to buy the Franklins business, but the judge rejected this too. “It is a matter of speculation as to whether, assuming the acquisition did not proceed, a third party, as propounded by the commission, would ever be able to make an offer that would be accepted by Pick ‘n’ Pay,” Justice Emmett said.

ACCC chairman Rod Sims said the watchdog was “disappointed” by the Federal Court decision. “The role of the ACCC is to oppose mergers where we believe there will be a substantial lessening of competition in a market in Australia, and this will not change,” Sims said. “The ACCC’s role is important to avoid inappropriate market concentration and to protect the long-term interests of consumers.”

But lawyers have welcomed the decision, saying that it should smooth the way for further M&A activity in the country. Allens Arthur Robinson partner Fiona Crosbie said the decision made it clear the ACCC had to have strong evidence if it was going to oppose a merger and argue that there could be an alternative buyer for a company. Hall & Wilcox Lawyers partner Sally Scott said that if the decision was not appealed, she expected “a spate of mergers, as many have been holding off awaiting the outcome of this decision.”

S Africa buys into “made in China” brand

Posted on October 25, 2011August 6, 2019 by

Deputy President Kgalema Motlanthe finished a trip to China on Friday by praising how it had mobilised state-owned-enterprises (SOEs) to construct a global power. Pretoria should learn from Beijing’s example, he added.

“Markets on their own cannot lead such fundamental change,” said Motlanthe, regarded as a leading candidate to be the next president of Africa’s biggest economy.

“The state has to play a leading role in reshaping the economy so that it is better able to meet the needs of our people, particularly the working class, as well as the urban and the rural poor.”

Beijing says its SOEs generate about 90 percent of all jobs, and South Africa has tried to embrace the Chinese model by using its state firms as a motor to create employment in a country that suffers from chronic joblessness and mass poverty.

Chronic unemployment
President Jacob Zuma’s “New Growth Path” policy views SOEs, state spending and government direction as the best ways to create five million jobs over the next decade.

Economists say South Africa would be better served averting its gaze from China and instead loosening its labour laws, cutting red tape, fixing a broken education system and using targeted tax cuts to help essential industries grow.

But South African policymakers, many raised in the Labour movement and well-versed in Marx, have grown frustrated with Western economic models and do not believe the private sector is strong enough to reduce the 25 percent unemployment rate or nearly 50 percent poverty rate.

“South African government policymakers, some of whom may have an ideological mistrust of ‘the market,’ are all too ready to embrace a new model that supposedly offers a new way, one that places the state as the driving force of growth,” said Martyn Davies, CEO of Frontier Advisory and an expert on African-Chinese economic relations.

“It is risky to simplify China’s experience and call it a ‘model’ ready for application elsewhere. China’s greatest economic success has been the creation of a vibrant private sector that accounts for two-thirds of its GDP.”

South Africa also cannot embrace some aspects of the Chinese model that have made it so effective, including cut-rate prices for labour, harsh conditions on factory floors and diverting capital to world-class manufacturing.

South Africa relies heavily on foreign capital to prop up its economy, whereas Beijing needs far less – and can therefore play by a different set of rules.

The Chinese model also has its limitations because its economy is devouring capital at an ever-growing rate, thereby capping job growth, reducing labour’s share of the pie and depressing household consumption.

Political poison pill
China is South Africa’s largest trading partner. A measure of its power is shown by Pretoria’s reluctance to grant a visa to Tibet’s spiritual leader the Dalai Lama – whom Beijing accuses of being a separatist – despite pleas to let him in by Nobel Peace Prize laureate Desmond Tutu.

One major constraint South Africa faces in job creation is the close relationship between the ruling ANC and its governing partner, leading labour federation COSATU. Their bond was forged in the struggle to end apartheid and resulted in a raft of union-friendly laws once white-minority rule ended.

These laws make it costly for employers to hire. They have also driven up labour costs, with the average South African factory worker earning about six times more than their Chinese counterpart, despite being far less efficient.

China ranks 13th in the world in terms of the ratio of pay to productivity of its workers, while South Africa ranks near the bottom at 130th, according to the World Economic Forum’s Global Competitiveness.

Cutting wages for entry-level workers to near-Chinese levels could absorb the masses of jobless and increase competitiveness, but it would be political suicide for the ANC, which would alienate its mighty vote-generating ally.

Providing more funds for South Africa’s SOEs would be an unwise investment given their history of losses, management blunders and wasteful spending.

There is also little money available, with more than 40 percent of tax revenues already going to pay for state employees, and more hires are in the pipeline as part of the government’s job plans.

“China’s starting point was very different and growth coincided with liberalisation of that economy. It didn’t happen the other way around,” said Razia Khan, head of Africa research at Standard Chartered.

UBS exceeds $1bn profit despite rogue trade loss

Posted on October 25, 2011 by

UBS on Tuesday said 3Q11 profits fell 39 percent owing to the financial loss of around CHF1.8bn ($2.2bn) from an unauthorised trading incident in September.

The bank’s net profit beat analysts’ predictions however, as a better than expected $1.13bn was announced due to a large accounting gain which offset the shortfall.

Figures were down from the CHF1.66bn reported for the same period last year but were equal to results published in the second quarter of 2011.

The lender said investigations into the loss were continuing. “Our financial, capital and funding positions remain solid and we believe the action we are taking now will strengthen the firm further”, a UBS statement said.

Japan ready to act on yen as exports rise

Posted on October 24, 2011August 6, 2019 by

Japan on Monday showed clear signs of recovery in spite of a weak global economy as it announced exports had risen for a second straight month.

Exports climbed 2.4 percent year-on-year in September, the Finance Ministry said.

The value of exports increased 12 percent and came to ¥5.98trn ($78.2bn) while imports totaled ¥5.68trn ($74bn) with a trade surplus of ¥300.4bn ($3.9bn).

Meanwhile, Jun Azumi, Japan’s Finance Minister, said he will take “decisive steps” if needed to curb the yen’s rapid rise. He referred to the currency’s advance as a “completely speculative move that does not reflect the economic fundamentals at all.”

Stocks higher on hopes of resolving euro crisis plan

Posted on October 21, 2011August 6, 2019 by

Banks recovered from past losses, and stocks in Europe and Asia climbed in early trading Friday, after Germany and France said a eurozone debt deal will be presented no later than Wednesday.

The two countries issued a joint statement late Thursday saying they are to meet the day before the EU Debt Crisis Summit on Sunday to come to an agreement about the imminent bailout plan.

European governments will debate deploying $1.3trn in funds to help calm the sovereign debt crisis at the summit.

Citigroup to settle negligence charges

Posted on October 20, 2011 by

Federal regulators late on Wednesday charged a unit of Citigroup with negligence after they found it had sold $1bn worth of financial products linked to the flagging 2007 housing market.

The bank’s Global Markets division had misled investors when it failed to inform them that the $1bn investment was doomed for failure, the SEC said.

Director of the SEC’s enforcement unit, Robert Khuzami, said: “Investors were not informed that Citigroup had decided to bet against them and had helped select the assets that determined who won or lost.”

Following the ruling, Citigroup agreed to pay $285m to settle the claims. It steps into the footsteps of Goldman Sachs and JP Morgan Chase which agreed to pay $550m and $153.6m respectively earlier this year.

Credit rating cuts for Spain and Egypt

Posted on October 19, 2011August 6, 2019 by

Moody’s Investors Service late on Tuesday cut Spain’s debt by two notches to A1 from Aa2.

The sovereign downgrade was largely due to Spain’s increasing challenge in meeting fiscal targets amid falling house prices and waning growth prospects, according to the agency. It cited “continued vulnerability of Spain to market stress” as a key factor for the cut.

A statement said: “Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential escalation of the euro area crisis.”

The move follows Standard & Poor’s downgrade less than a week ago and a cut by Fitch at the beginning of October.

Meanwhile, Standard & Poor’s slashed Egypt’s long term sovereign credit rating to BB- from BB on Tuesday the agency said. The rating, which has a negative outlook, was partly blamed on the rising risks following “the transition period for Egyptian political reform.”

“These risks centre on the government’s fiscal stance but also encompass price stability and balance of payment pressure,” S&P said.