Islamic Finance Awards 2015

Best Islamic Bank, Algeria
Al Salam Bank Algeria

Best Islamic Bank, Bangladesh
Islami Bank Bangladesh

Best Islamic Bank, Egypt
Al Baraka Bank Egypt

Best Islamic Bank, Indonesia
Bank Syariah Mandiri

Best Islamic Bank, Jordan
Jordan Islamic Bank

Best Islamic Bank, Kuwait
Kuwait International Bank

Best Islamic Bank, Lebanon
Al Baraka Bank Lebanon

Best Islamic Bank, Malaysia
CIMB Islamic Bank Malaysia

Best Islamic Bank, Oman
Bank Nizwa

Best Islamic Bank, Pakistan
Bank Alfalah

Best Islamic Bank, Qatar
Barwa Bank

Best Islamic Bank, Saudi Arabia
Saudi Hollandi Bank

Best Islamic Bank, Turkey
Türkiye Finans Katılım Bankası

Best Islamic Bank, UAE
Emirates Islamic

Best Islamic Bank, UK
Bank of London and The Middle East

Special Global Recognitions

Islamic Banker of the Year
Loai Muqames, CEO, Kuwait International Bank

Business Leadership & Outstanding Contribution to Islamic Finance
Musa Shihadeh, Vice Chairman, CEO & General Manager, Jordan Islamic Bank

Best SME Islamic Finance Provider
Qatar Islamic Bank

Best Takaful Provider
Dar Al Takaful PJSC

Best Retakaful Provider
Saudi Reinsurance Company

Best Islamic Asset Management Company
KFH Capital Investment Company

Best Islamic Fund Management Company
NCB Capital

Best Islamic Finance Advisory Firm
Al Rajhi Capital

Best Islamic Private Wealth Management Company
SEDCO Capital

Best Sukuk Deal
Midciti Sukuk Murabahah, CIMB Islamic Bank Malaysia

Best New Islamic Fund
BIMB i Flexi Fund, BIMB Investment Management, Bank Islam

Best Islamic Finance Training Institution
Ethica Institute of Islamic Finance

Going against convention

Just over a decade ago, most people would have given a perplexed look if the phrase Islamic banking was uttered, but in a relatively short space of time proponents of this unique form of finance have forced the world to take notice. One of the key components that has led to a rise in global recognition of the sharia-compliant form of finance is due to the remarkable levels of growth that the sector has generated, with the global consultancy and accounting firm, Ernst and Young calculating that Islamic banking assets with commercial banks would exceed $778bn by the end of 2014, and that the global profit pool of Islamic banks is set to triple over the next four years. Much of this impressive growth emanates from seven rapid-growth markets (RGMs) – Bahrain, Indonesia, Malaysia, Saudi Arabia, Turkey, UAE and Qatar – which will no doubt continue to be crucial players in increasing the internationalisation of Islamic banking in the coming years.

But probably one of the most obvious indicators of Islamic banking’s proliferation into international markets has to be its rebranding. Financial institutions that adhere to the practices laid out in accordance with sharia law are now more commonly referred to as engaging in what is known as participation banking – most likely to take the emphasis off the religious element and helping to attract a wider audience. Those less familiar with participation banking may also have misconceptions about the composition of its members. For example, you would be wrong in thinking that the majority of those subscribers to Islamic banking do so for strictly religious motives. In fact, in Saudi Arabia, a country with a particularly high Muslim population, the total assets of Islamic banks represent just 48.9 percent of the overall market. What are of greater importance to consumers are the products and services on offer.

Sukuk’s success
One of the biggest success stories of the last decade for Islamic finance has been the substantial growth it has seen in the sukuk market (the Islamic equivalent of bonds). Rating agency Moody’s contended that the strong growth in the sovereign sukuk market that was seen in 2014 should be sustained into the next, as a result of Islamic and non-Islamic governments eager to make the most out of the high levels of demand for the sharia-compliant financial assets. Such sentiments are likely to help drive the market further, by increasing investor confidence that will no doubt bring increased volumes and, therefore, greater liquidity.

Increased global acceptance of Islamic financial products is crucial if it wishes to maintain its impressive growth figures. But that should not be a problem, at least that is the opinion of Khalid Howladar, Moody’s Global Head for Islamic finance who saw 2014 as a “landmark year” for the soverign sukuk and Islamic finance in general. His sentiments came in a year where the UK became one of the first non-Islamic countries to issue sharia-compliant bonds. Britain’s endorsement of Islamic financial products helped in attracting a lot of interest from global investors from other non-Islamic states and brought orders of over $3bn in sukuk bonds. Hong Kong and South Africa also concluded sales of sharia-compliant bonds in the same year. “All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth and liquidity of this market”, said Howladar.

Moody’s predicts that we will see many more new Islamic and non-Islamic sovereign issuers begin to enter into the sukuk market in 2015. Since 2001, 16 governments have issued sukuk instruments, a trend that is set to continue, with Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya all making their intentions known to begin issuing sukuk bonds in the short term and medium term. Australia, the Philippines, Russia, Azerbaijan, and South Korea have also shown considerable interest in the sector too, which will provide growth for the industry in years to come.

New initiatives
A key development in conventional banking in recent history has been the implementation of new digital technologies, particularly the increased sophistication of online banking. Participation banking is no different. In order to engage with a wider range of potential customers and keep pace with its competitors engaged in traditional banking practices, many institutions have focused towards a technology based, service-driven value propositions. This digital transformation within participation banks is aimed at tackling a larger trend within the banking sector: the shift from cash to digital payment economies. Presently, there is a drive by Islamic banks to expand their range of digital products, with the intention of improving their customers over experience, as well as hopefully having the added benefit of coaxing new customers looking for an alternative to orthodox institutions.

Social media is another avenue that has been employed by institutions engaged in Islamic finance, as it is a great way to communicate with customers, both prospective and existing. Social media analytics have proven extremely useful for leading banks in the industry, acting as an effective method for identifying client expectations, levels of satisfaction with the products on offer, as well as assisting participation banks in fine-tuning the experience in order to better accommodate customers’ needs.

Capitalism’s saviour
Since the financial crisis, conventional banking has seen its public image take a nosedive. Many consumers have lost faith in traditional banking, a sentiment that has been exacerbated by those institutions seemingly unable to stay out of the press, with many of the biggest conventional banks receiving record fines for the part they played in fixing foreign exchange markets.

Unsurprisingly, it has many people questioning if there is any room for morality in a sector seemingly obsessed purely with profits. But where conventional banks have made mistakes, participation banks have the opportunity to prosper. Interest-free banking that ensures bank loans are limited to the financing of physical assets, which offer a safer alternative should buyers default, as well as Islamic finance’s prohibition of speculative investment, offer a breath of fresh air for consumers who have grown tired of traditional banking practices.

There has never been a better time for an alternative to the economic model and business practices of conventional banks. Consumers are looking for institutions that promote a more ethical version of capitalism and Islamic finance could be the answer to banking’s current PR nightmare. Increased international issuance is only going to help attract larger numbers of global investors to the Islamic brand of finance and assist in deepening this relatively new sector. As more and more investors become comfortable with sharia-compliant products, spurred on by non-Islamic governments’ acceptance, it will improve overall liquidity, assisting in making Islamic finance a viable contender for conventional banking.

Will CSR take you to heaven?

World Finance speaks to Jeremy Josse, author of Dinosaur Derivatives and Other Trades on risk, uncertainty and the Faustian pacts we all make.

World Finance: Jeremy, you discuss at length risk and uncertainty. Do you haver an alternative, what are the better methods for circumventing risk?
Jeremy Josse: I really talk about the concept of risk and uncertainty through the very ancient story of Joseph, and how he was a sort of insider dealer, not that the Bible called him that, but that he was a sort of insider dealer inasmuch as God had given him this view about seven good years and seven bad years, and this allowed him to circumvent risk. He knew the future, as opposed to having to make a bet on the future.

So the reality is that unless you’re Joseph and have a line to God, which most of us don’t, risk is an absolutely intrinsic part of the financial game, that’s why financiers are of course speculators. The trick is all about managing risk, and that partly depends on your investment strategy. It partly depends in your appetite for risk, it partly comes back to some of those financial products we’ve been talking about, many of them are actually originally created to mitigate risk, even if some of them were subsequently misused. Derivatives, credit default swaps, are really there to mitigate credit risk for banks.

[R]isk is an absolutely intrinsic part of the financial game, that’s why financiers are of
course speculators

World Finance: You refer to the term ‘legal fiction’ in describing financial instruments. Can you explain this?
Jeremy Josse: That chapter really deals with the old concept of prohibition on usury. As people will know, back in Talmudic Jewish times there was created this idea that you shouldn’t lend on interest, and that got incorporated into actually all medieval law, into Christianity, into Islam. It created a great deal of innovation in finance, which took the form of a legal fiction.

It’s not really possible to lend money without charging interest. There is always an intrinsic time value of money. So if I lend you some money and don’t charge you interest, the cost of the money is still there, it’s just I’m giving you charity.

In the Renaissance, what really happened, as industry exploded, was that people had to find ways of lending on interest without it appearing to lend on interest, and therefore what they created were a lot of legal fictions. A modern legal fiction, say, is the corporation. Corporations are deemed to be persons, legal persons and human persons, but of course they’re not really persons. They’re a device to mitigate risk, they’re a device for people to pool their capital into an entity and only be liable for the amount of money that they injected into that entity.

And then legal fictions have been used, or were used, to circumvent all sorts of usury prohibitions. So that leases are a legal fiction, they’re really a way of lending but without charging interest. Instead you lent an asset, and you were paid a rent. So it replicated lending but it did it in another fashion, and indeed leases are still used very actively under Sharia law as a form of lending.

If you look at a lot of financial innovation, it’s usually taking a problem, taking these very old concepts of debt and equity, but somehow recasting them in a mirror image to solve a particular problem, and that’s what legal fictions are really about.

World Finance: On the subject of predictions now, and what are your thoughts on behavioural economics, which is gaining popularity in certain governments?
Jeremy Josse: The rational market hypothesis wants to believe that that gap between market value and fundamental value will be arbitraged away, but it just ain’t. Sometimes it is, but regularly it does not get arbitraged away. So you just can’t deny that fact, and the behavioural finance guys have tried to recognise this fact and tried to quantify it, and tried to explain it.

[W]e’re always jumping onto herd patterns
of behaviour

One of the quintessential observations of behavioural finance is this famous test that, if you’re given the choice, would you take $100 when your buddy takes $150, or would you take $80 and he takes $80? If we were pure profit maximisers we’d say “well I’ll take $100, I don’t care about him having $150,” but actually all the behavioural finance tests show most people choose the 80-80 option.

They do that because, yes, we’re not simple profit maximisers, we’re very social beings, we’re always spending our time looking over our shoulders seeing how the next man is doing, we’re always jumping onto herd patterns of behaviour. It’s all these things that behavioural financiers try to understand, quantify, and show how they function in the market.

World Finance: You’ve mentioned modern shareholders in terms of a Faustian pact. But with organisations increasing CSR and attempting to present themselves in terms of sustainability, surely some shareholders are buying themselves into heaven?
Jeremy Josse: Look, social responsibility is very important, but I think one of the things about a Faustian pact and why I write about it quite a lot is that, again, it’s something we can’t really get away from. No one needs to go around selling their soul to Mephistopheles, right, and completely throwing away their life to materialism, becoming a sort of Dorian Gray. But, actually, to do any business, to do any professional service, we’re all entering into small elements of Faustian pacts.

I’m always, in order to earn money, throwing away a little of my autonomy, a little bit of my time, a little bit of my time with my family, sometimes I have to put up with a not particularly pleasant boss, the regime of a particular company, I’m undermining my own autonomy to a certain extent. So one of the things I wanted to bring out in the book is that, ok, Faustian pacts can be seen on these very macro terms, in terms of environmental impacts, but actually Faustian pacts are really very personal things, and we do actually all enter and need Faustian pacts in a small way in our everyday business life.

Time to invest in infrastructure

For all the talk of a wave of dazzling new infrastructure that will reshape the world, the last few decades have shown that the appetite for actually delivering such schemes has waned. According to the IMF, spending on infrastructure over the last three decades has fallen so much that it is desperately needed if global growth is to improve over the long-term.

The report, published in September, said that countries needed to look at projects that would help to ensure long-term economic growth. Singling out both Germany and the US, the IMF said that infrastructure projects would not prove costly in the long run. “Debt-financed projects could have large output effects without increasing the debt-to-GDP ratio, if clearly identified needs are met through efficient investment. In other words, public infrastructure investment could pay for itself if done correctly.”

Talking about infrastructure schemes is one thing. Actually getting them done is quite another. Regulatory hurdles, political wrangling, and local resistance mean it is incredibly hard to get approval for such costly projects. Despite the challenges, however, calls for governments to look at infrastructure have grown in recent months.

A recent Standard & Poor’s report showed that there has not been a better time for investment into infrastructure projects, with a global shortfall worth trillions of dollars. The report says, “With global infrastructure investment needs now in the tens of trillions of dollars – figures that are essentially incomprehensible to most of us – it’s easy to see the problem as insurmountable. The result is that too often, we forget that even a relatively small increase in spending on infrastructure can yield outsized returns – especially if investments are executed in a wise, targeted way.”

Talking about infrastructure schemes is one thing. Actually getting them done is quite another

Former British Prime Minister Gordon Brown echoed those sentiments during January’s World Economic Forum summit in Davos. Addressing world leaders, Brown said that momentum behind such schemes was gathering pace, thanks in large part to the extremely low interest rates being experienced in economies throughout the world. “There’s big momentum now at a time, as I keep saying, when interest rates are low. This may be the best time in our history to do this. And the need in America and Europe, as well as emerging markets, is obvious.”

Continuous upgrades
The difficulties faced in infrastructure schemes vary depending on how developed a country is. Whereas older, established countries like the UK have to continuously invest huge sums of money in ensuring that their creaking old infrastructure networks can continue to operate, developing nations like China are able to start from a relatively clean slate and invest in the latest technologies.

For the UK, getting any form of infrastructure scheme off the drawing board has been an arduous task. Years of political bickering and nimbyism have prevented an expansion to the over-stretched airport capacity near London, while the rail network still lags behind European rivals in terms of speed.

Throughout Europe things are little better. Germany’s supposedly flagship new airport in Berlin has been beset with problems, running wildly over budget and experiencing severe delay. Originally planned to open in 2010, it is still under construction and the reported costs are currently at €5.4bn ($6.1bn) – as much as €3.2bn ($3.6bn) over budget. Despite such shortcomings on the continent, a recent EU simulation revealed that just a one percent increase in public investment in 2015 would provide over one million jobs across the union (see Fig. 1).

The US is in particular need of new infrastructure, according to the IMF. A country that dragged itself out of the Great Depression in the 1930s through massive investment in infrastructure investments has allowed things to stagnate in recent years. “As the American Society of Civil Engineers notes, 32 percent of major roads in the US are now in poor or mediocre condition, and the US Federal Highway Administration estimates that between $124bn and $146bn in capital investment will be needed annually for substantial improvement in conditions and performance – considerably more than the $100bn spent on capital improvements at all government levels.”

Clean slate
Infrastructure projects across Asia have had a very varied success rate in terms of implementation. China has fuelled its economic growth over the last decade by pumping money into expanding its airports, rail networks, energy and many other forms of infrastructure. While an attempt over the last year was underway to rebalance the country’s economy away from such heavy investment, 2015 began with the news that China will fast-track 300 infrastructure projects during this year in order to boost its flagging growth. Both central and local governments, as well as state-owned firms and some private sector involvement, according to Bloomberg, will fund the $1.1trn worth of projects. These schemes are likely to involve oil and gas pipelines, clean energy projects, transport, mining, and healthcare services.

For years, India has talked enthusiastically about its desire for new infrastructure projects, but the reality of getting them built has proven particularly troublesome. Last year the World Bank released a report into how India and its neighbouring South Asian economies were not spending anything like enough on improving their infrastructure networks. The report stated that even though the region had experienced huge economic growth over the last decade, the sort of infrastructure investments that would help improve the living standards of the regions’ poorest people was not matching this.

According to the World Bank, the funding gap in infrastructure amounts to around $2.5trn. Luis Andres, the Lead Economist for Sustainable Development in South Asia, said in the report, “If South Asia hopes to meet its development goals and not risk slowing down growth and poverty alleviation, it is essential to make closing its huge infrastructure gap a priority.”

Dan Biller, the report’s co-author, said that funding in South Asia was well below that of other developing parts of the world. “For the past 20 years, the South Asia and East Asia regions have enjoyed similar growth rates. Yet South Asia’s access to infrastructure services lags significantly behind both East Asia and Latin America with some access rates comparable only to Sub-Saharan Africa.”

Long-term thinking
Perhaps change is afoot in some countries. The UK’s opposition leader Ed Miliband recently commissioned a report into a potential National Infrastructure Commission that would take the decision making of such big and vital projects out of the hands of politicians. The current coalition government is said to be in favour of such a scheme, as are the construction industry, but whether politicians actually have the guts to hand over control of such costly projects remains to be seen.

In the EU, regulations that have prevented much headway in big cross-border schemes are being looked at. Indeed, a report by the EU Task Force on Investment was published in December revealed that there were as many as 2,000 potential projects that had stalled across the EU which governments should look to get underway. Worth around €1.3trn ($1.47trn), around €500bn ($565.5bn) of these projects could be started within the next three years. According to the report, the first and most important step is removing regulatory barriers that are holding up these projects, such as deeper integration of regulations and less fragmented capital markets.

Public investment

The years ahead will prove increasingly interesting in the global construction market. While there are a huge number of projects that have been proposed, turning them into a reality will prove difficult unless there is a clear, coherent and long-term plan.

S&P say that all countries, regardless of the stage in their development, need to invest in infrastructure. They also argue that improvements in how these projects are selected, appraised and delivered will go a long way in ensuring governments are more confident in committing to costly, large-scale infrastructure schemes. “It’s vitally important for countries to improve the quality of their infrastructure investments in addition to simply increasing spending – regardless of where economies stand in their development. Among other things, this could entail better project appraisal and selection, perhaps through independent assessment, comprehensive cost-benefit analyses, and improved project execution.”

Whether the private sector or governments will take the lead in this area depends on the region. With austerity holding back government spending throughout Europe, for example, it is the private sector that has been looking to pick up the slack. But they can only do so if regulations are reformed and things are made easier for them to raise the necessary finance.

“This is especially important given that governments are spending a much smaller portion of their budgets on infrastructure – particularly in the west. In the US, government spending on projects as a percentage of GDP has tumbled to the lowest in more than 20 years, and in the eurozone, governments’ austerity measures have significantly eaten into spending on infrastructure development and repair”, add S&P.

With interest rates throughout the world so low and governments either getting fed up with austerity or through the worst of it, investing in rebuilding infrastructure could prove to be a vital way of getting economies growing again. Jobs will be created in the short-term, while countries will benefit from modern, long-term new projects that will support them for years to come.

Everything you value is broken

World Finance speaks to Jeremy Josse, author of Dinosaur Derivatives and Other Trades, to dissect the brains and the blood of the financial system to explore the philosophical puzzles often-confusing markets

World Finance: Well Jeremy, your book highlights the hypocrisies and moral dilemmas at the centre of the financial system. What are we looking at exactly?
Jeremy Josse: Finance is actually very important, our system depends on it. But it’s also, in one sense, a subject where people constantly suffer this sort of existential crisis. What is the point of all of this? That could be said of many things in life, but it’s true of finance particularly, because finance is not really dealing with the real economy. It’s dealing with these representative tokens, fictions, that reflect the underlying economy. And it’s parasitic on the underlying economy.

When the money stops flowing, it’s the brains and the blood of the whole system

On the one hand, it can be a somewhat venal activity, but on the other hand when it goes wrong, everything goes wrong. We saw that in the credit crisis. When the money stops flowing, it’s the brains and the blood of the whole system.

So you genuinely have this dichotomy at the centre of finance, which on the one hand is really a very important activity, but on the other hand it can be very venal.

World Finance: Has the financial system become so convoluted that we’ll get to the point, or we’ve even got to the point, that it’s unusable, or do financial professionals just need to get a better grasp of it?
Jeremy Josse: You’re right, one of the things that I think has happened over the last 20-30 years is, actually, a vast amount of brainpower went in to finance in London, in New York, potentially to the detriment of other industries, and it’s created enormous complexity, and unmanageable complexity in certain cases.

I do think, though, that the credit crisis has flushed out some of that. What we’re trying to move toward today is more of a balance, where there is still creative financial innovation, because it’s required, but it needs to be done in a way that is still pragmatic, should not be usurped by sort of otherworldly geeks, should not also be pushed too aggressively by rapacious brokers as we saw leading up to the credit crisis.

World Finance: Well I want to look at Orange Country – Detroit. These are two example of establishments that had arguable no right to get involved in the complex financial tools, because they didn’t have the expertise. Then there was Enron, a great example of an organisation that had the right to get involved, but not to the extent it was exposed, and certainly not in the way it was forcing itself with no options, or their underlying values. So, is the problem of the financial industry solely at the door of the regulators?
Jeremy Josse: No it’s not solely down to the regulators. One of the things about financial innovation is there’s no such thing as a social laboratory. If you want to buy a new drug, or a new car, or a new hammer, these things can typically be tested well before they hit the market.

Financial products cannot really be tested before they hit the market. When they come out, we are the guinea pigs, and Orange County started to play with derivatives at a fairly nascent stage in the development of the derivative product, and the result was very bad.

I think we have much deeper understanding of derivatives and how they can be used both for hedging and leveraging, but back then it was still in sort of a try and test phase, and that was a problem with Orange County.

Enron I think is a different case. Enron was profound fraud. The Enrons of the world do need regulation. Let’s not be too socialist, let’s not be too capitalist. The financial markets absolutely need regulation, if you don’t regulate then all sorts of bad patterns of behaviour develop. People can be very greedy, all sorts of bubbles form.

But equally, it isn’t just about regulation, if you can too much regulation it can be very very constraining on growth.

World Finance: Have we got to the point where there’s a misconception of the intrinsic value of assets?
Jeremy Josse: What’s happened I think with value in today’s financial world is that there is what’s called intrinsic value, the real value of assets that’s typically there. But there has been a huge dislocation on a regular basis and in many cases between market value and fundamental value.

That’s become very prevalent in today’s world. It was true in the internet bubble. I believe we have another internet bubble at the moment with social media stocks, again whose valuation cannot possibly be justified by reference to fundamentals.

We had that in the credit crisis with CDOs and some of these debt products got totally divorced form their underlying value. But we have it throughout life with valuation. Gold is considered extremely valuable in recessionary times, investors pile in to gold, and yet today gold is just a useless chunk of metal sitting in the vaults of the Bank of England or Federal Reserve.

World Finance: Financiers are constantly searching for liquidity, but with financial scientists such as Black-Scholes and technological advances on trading platforms rendering opportunities for arbitrage more and more limited, it’s a bit like an arms race with many players, no?
Jeremy Josse: There is a small percentage of the industry who I think are probably doing really innovative things. In fact, probably some of the greatest innovation in terms of sort of macro-economic forecasting and the forecasting of the performance of assets is done by some very niche hedge funds which most of us know nothing about, people like Renaissance Technologies, and they are at the sort of cutting edge of the arms race that you’re talking about.

But having said all of that, there are also guys who are sort of traditionalists and still make it work. If you look at the Warren Buffets of the world, Warren Buffet is really not interested in many of these new forms of trading, many of these new forms of arbitrage, many of these new forms of use of technology.

All he does is he just looks at fundamentals, back to what I was saying about the fundamental value versus market value. He’s not interested in market value, he just wants to find businesses that are good businesses, that keep on generated cashflows, that are sustainable and replicable, and he’s the greatest investor in the world. So that’s an interesting message to us, that sometimes these much more traditional approaches to investing are the deepest.

Standard Chartered CEO to leave in dramatic shake-up

London-based global banking group Standard Chartered has revealed it will undergo a dramatic shake-up of its leadership team in the coming months. This will include the appointment of Bill Winters, the former head of JP Morgan’s investment banking division, as its new CEO.

Sands has faced mounting criticism of his leadership over the last two years after a series of dismal results

Winters will replace the outgoing Peter Sands in June, bringing to an end a tumultuous period for the bank. Appointed Group CEO in 2006, Sands has faced mounting criticism of his leadership over the last two years after a series of dismal results. The Asia-focused banking group has faced a declining share price in recent months, alongside some hefty fines from US regulators over money laundering allegations.

The new CEO has developed a strong reputation during his time at JP Morgan, where he was widely expected to eventually replace CEO Jamie Dimon. However, a dispute between the pair in 2009 saw London-based Winters leave the firm. He would eventually set up his own asset management firm, Renshaw Bay.

Also departing is Chairman Sir John Peace, who is expected to step down at some point in 2016. Peace has faced considerable criticism for his role in overseeing the downturn over the last couple of years. However, no replacement as chairman has been announced yet.

Announcing the changes, Peace spoke of his admiration for Winters. “Bill is a globally respected banker and has the right experience and skills to drive the group’s new phase of growth. He brings substantial financial experience from leading a successful global business and has an exceptional understanding of the global regulatory and conduct environment. He’s also a proven leader with a strong track record in nurturing and developing talent.”

Other members of Standard Chartered’s board are also set to leave, alongside Jaspal Bindra, who currently heads up the bank’s Asian division. Bindra was criticised last summer when he complained that US authorities were treating banks like criminals.

Fossil fuel clampdown could finally be on its way

In the summer of 2009, G20 leaders reached an agreement in Pittsburgh to phase out needless government-given support for fossil fuels – and so began a concerted global effort to rein in wayward emissions and focus instead on renewable development. “All nations have a responsibility to meet this challenge, and together we have taken a substantial step forward in meeting that responsibility”, said a fresh-faced Barack Obama. And in what was then a milestone commitment to tackle climate change, those in attendance pledged to “rationalise and phase out over the medium-term inefficient fossil fuels that encourage wasteful consumption.”

The pledge appeared to mark a turning point for the global energy market and a key stepping-stone to a low-carbon future (see Fig 1). “Phasing-out fossil-fuel subsidies represents a triple-win solution”, read one report, co-authored by the IEA, OECD and World Bank, outlining a roadmap for the fossil fuel retreat. “It would enhance energy security, reduce emissions of greenhouse gases and bring immediate economic gains.” However, while the optimism shared at that time led many to believe that G20 leaders were about to let up on the costly endeavour that is fossil fuel subsidisation, the inaction on the issue since has shown that the promises have come to nothing.

The main case against fossil fuel subsidies is that they distort energy prices and serve only to handicap the renewables sector

As it stands, any predictions that say major oil producing nations might soon turn away from fossil fuels are sorely misguided, and though the savings – financial or otherwise – are well documented, the obstacles standing in the way of reduced subsidies are too great. To the tune of only minor opposition, world governments have shied away from fossil fuel pricing policy reform, yet a number of individuals and organisations have recently taken it upon themselves to re-evaluate and re-present their findings on the subject.

Broken promises
In the period from 2009-12, global oil prices doubled, and in a desperate attempt to keep pace with the uptick, government money spent on subsidies increased to $544bn, from $312bn previously, according to IEA estimates. As opposed to “phasing out” fossil fuel subsidies, as was suggested in 2009 and again in 2013, G20 leaders have deemed it necessary to actually increase the already-colossal sums spent on subsidisation.

Worse still is that these same incentive systems are draining public finances at an alarming rate, and recent IMF findings show that the supporting costs, coupled with any tax losses, equate to some $2trn – or eight percent of government revenues. According to Chris Beaton, Research and Communications Officer at the International Institute for Sustainable Development (IISD): “Fossil-fuel consumer subsidies hamper economic growth by taking away scarce resources that could be put to better purposes.”

There are some countries, however, that have responded quickly to this new low price environment, particularly in the case of Indonesia, whose government has not only introduced a semi automatic pricing system but slashed petrol prices at the pumps.

At the turn of 2015, President Joko Widodo abolished subsidies on premium gasoline and introduced a fixed subsidy on solar diesel, for which the government is expected to fetch a budgetary saving of approximately $16bn in 2015.

India, meanwhile, is living proof that an inflexible fossil fuel pricing policy can bring with it economic and social consequences. According to the IISD’s second India Fossil-Fuel Subsidy Review, the government and any associated public sector enterprises lost $23.4bn to subsidising diesel, LPG and kerosene. Not only that, but the programme serves to distort prices, inflate demand, and boost emissions, while also disincentivising energy efficiency improvements and stifling the national appetite for clean energy development. This immovability is, of course, relative, and subsidies typically vary from year-to-year, owing chiefly to swings in fuel prices. Yet rarely do governments choose to roll back subsidy payments by significant degrees, and it is this decision, shared between G20 nations and beyond, that has created a fossil fuel market that nears on subsidy dependency.

Nowhere else is this overly generous support for fossil fuels more obvious than in exploration, which receives more in subsidies than oil and gas companies spend on the pursuit themselves. Collectively, G20 nations spend $88bn on an annual basis in supporting exploration, almost double what the IEA estimates the population needs for universal energy access before 2030. What’s more, the total amounts to more than double what the world’s top 20 private oil and gas companies spend on exploration in any given year, which suggests that the endeavour is propped up by public financing.

“The big problem with producer subsidies is that we can’t afford to use all of the fossil fuel still buried in the ground – not without triggering a runaway climate change”, says Beaton. “Claims that helping the fossil-fuel industry is good for the economy and jobs are often inflated, or simply not substantiated with published analysis.”

Carbon content of fossil fuel reserves

Distorted reality
The main case against fossil fuel subsidies is that they distort energy prices and serve only to handicap the renewables sector. However, should authorities rebalance the system in a way that more realistically reflects market conditions, subsidies can play an important role in aligning incentive systems with sustainable development. The fact that demand for coal is slipping and oil prices are plummeting reinforces the point that overly generous subsidies are painting a distorted picture of where opportunities in the energy market lie.

“Governments should price carbon to reflect the social, economic and environmental damage associated with climate change, and to reduce emissions to levels compatible with the globally agreed 2oC target”, according to one report co-authored by Oil Change International and the Overseas Development Institute, entitled The Fossil Fuel Bailout. “Governments in the G20 and beyond should act immediately to phase out fossil fuel subsidies to exploration.”

Still, exploration subsidies represent only a small part of a much wider debate on the role of fossil fuel subsidies in dampening economic opportunities, impeding growth and stalling renewable development. Whereas fossil fuel subsidies amount to a mammoth $550bn per year, renewable subsidies have barely tipped the $120bn mark. Many critics are of the opinion that the cost competitiveness of renewables is obscured by the imbalance, not least of these being Beaton, who believes wayward subsidies are “locking us into a high-emissions climate pathway.”

The criticism most often levelled at fossil fuel consumer subsidies is that they take away precious resources that might otherwise be spent on ‘better purposes’, namely infrastructure, healthcare and education. What’s more, overly generous sums spent on propping up fossil fuel consumption can negatively affect the way in which investors perceive any given country. Producer subsidies, however, “tend not to hamper economic growth particularly, but they do take up resources that could be spent on promoting new and green industries that may be the source of future economic competitiveness.”

The realisation that fossil fuels enjoyed a pick-up of around $550bn last year, four times the amount dedicated to renewables, sits uncomfortably with some – chief among them the IEA – who insist that the disparity between the two makes little economic sense. Chief conomist at the organisation Fatih Birol told a London news conference last year that renewables will account for close to 50 percent of new power generation between now and 2040, despite the subsidies thrown fossil fuels’ way.

Surely now is the time to re-evaluable the reasons for the imbalance that exists between fossil fuel and renewable energy subsidisation, and question the grounds on which the gap has widened. There is reason to believe that propping up the fossil fuels business is a thankless task, and with emissions gaining and oil prices plummeting, some are asserting that fossil fuels, at their current price, are being kept afloat only by subsidies.

What critics have been quick to overlook, however, is the influence of the political economy in blocking any attempt to reduce the handicap. Without support from all parties, reducing the said handicap will always prove difficult to implement, and campaign financing by those in the industry has succeeded many times in bringing proceedings to a standstill.

Impact of fossil fuel consumption

In the US, for example, Obama’s Climate Action Plan contained a distinct focus on developing sustainable energy sources ahead of fossil fuels, which the administration conceded would be ‘long and sometimes difficult’. However, following through on the actions set out in the plan looks unlikely in that the government has attempted to reform its fossil fuel subsidies policy in every budget since 2009, only to come unstuck at the hands of political process.

The figures show that the steps taken to phase out inefficient subsidies so far have been modest, yet there is a growing pressure to develop renewables and reduce dependency on fossil fuels. With a string of recent reports detailing the damage inflicted by rising emissions, individuals, organisations and governments are beginning to realise the importance of renewable investment.

Even the IMF’s Christine Lagarde and the World Bank’s Jim Yong Kim have outlined the economic case for removing subsidies that incentivise the use of fossil fuels, stating that the future of energy investment lies with renewables (see Fig 2).

By redirecting investments to mitigation goals, the landscape is shifting in favour of low-carbon alternatives, and the IPCC estimates that annual investments in fossil fuel technologies will decline $30bn, whereas the amount put into low-carbon electricity will rise $147bn. Divestment in fossil fuels, therefore, will play a crucial part in pushing much-needed reforms through and – more crucially – in levelling the playing field between the two. With the pressure mounting on governments to revisit unwarranted subsidies, doing so could finally spark the shift to a low-carbon economy.

Assuming that the gap between renewable and fossil fuel subsidies closes, the barrier that is cost competitiveness – or lack thereof – will begin to fall down, and the overwhelming appetite for carbon-intensive resources will subside.

Detail Commercial Solicitors on Nigeria’s PPPs

PPPs in the power industry are burgeoning in Nigeria, with the government working to ensure the environment is more robust and welcoming. On hand to help companies negotiate the legal aspects of these sectors is Detail Commercial Solicitors. World Finance speaks to its representative, Partner Dolapo Kukoyi, to find out more.

World Finance: Dolapo: Nigeria has the strongest of all African economies. How well set up are the incentives and regulations surrounding PPP and foreign investment?
Dolapo Kukoyi: Foreign investment – I would say that investors are well incentivised. Our foreign exchange laws and regulations allow for foreign investors to repatriate their capital, our company law is also set up such that investors are actually able to own 100 percent of a Nigerian subsidiary or a Nigerian business.

Coming down to PPPs: first of all, the Infrastructure Concession Regulatory Commission, for example: it totally prohibits expropriation, which is the major, major concern for a new investor who is actually making an investment in countries like Nigeria or in Africa. And we now begin to see more to encourage investment; we begin to see that a lot of our agreements are looking a lot more at risk allocation, which is so static in current investment. And I’ll give you a few examples.

But in terms of the opportunities: the opportunities are ripe

In the power sector for example, you’d find that performance agreements: things like expropriation are actually events of default, or sometimes what we call local political force majeure. Expropriation is defined so that it’s not just the usual expropriation, but some things which could be termed expropriation. And in the event that there’s an expropriation, you’d actually have the private parties being compensated.

So I would say that right now, they’re well incentivised.

World Finance: How well developed is Nigeria’s infrastructure, and where are the main investment opportunities?
Dolapo Kukoyi: It’s clear that there’s currently a dearth of infrastructure. And this is across oil and gas, across power, bridges, transportation, even when you talk about health, education and housing. So there is obviously a dearth of infrastructure.

But in terms of the opportunities: the opportunities are ripe. But I think what’s most important is that when an investor is looking to invest in Nigeria, you need to look at where governments’ priorities are, and then be able to do a needs analysis on that basis.

World Finance: Security is of course a challenge in Nigeria; what challenges does this pose for your clients, and what advice do you offer in this department?
Dolapo Kukoyi: There is obviously a security problem, but I would say however that it’s predominantly in the south-eastern part, or the north-eastern part, of Nigeria.

That said, for everyone who’s investing in Nigeria… if you’re doing portfolio investment for example, I would say there’s really no risk. But if you’re actually investing in an operating business in Nigeria, then I would say investors need to look at where they’re investing, look at what risks exist, and then look at ways of mitigating those risks.

There are some things that you need to think about, that are key. One is choosing the right partners. And two is choosing the right professional advice; you know, advisors to help you navigate through the issues.

World Finance: You actually head Detail’s power practice; what does your firm offer in this area, and how established is the power sector in Nigeria?
Dolapo Kukoyi: The power sector in Nigeria is growing; it’s growing very, very quickly. And that’s because we are trying to get somewhere in a very short time, because we need to get somewhere in a very short time.

We offer advice around power sector development. So whether it is an IPP startup, or first of all the power sector privatisations which we’ve been involved in since 2010, since it was restarted. So we’ve been involved in the PCM privatisation; we are also currently involved in the privatisation of what we call the Nigerian integrated power projects.

We also do a lot of gas supply and gas transposition and gas purchase agreements. We also deal with the financing side and financing. So while we are on the project development side, we are also on the financing side as well, throughout the whole value chain.

And we’ve become known, very well known, for our power sector experience, and our power sector knowledge. So much so that as a testimony to that, we recently got engaged on the CBN intervention fund, which is about NGN 213bn, which is supposed to be across the power sector value chain. There’s been debt accruing in the power sector value chain, which needs to basically be dealt with so that we can have a power sector that’s viable, and can have proper investment in there.

It’s very interesting times for us at the firm.

World Finance: Looking to the future now, and how do you see Nigeria’s power and infrastructure sectors developing?
Dolapo Kukoyi: For me it’s very bright; the first thing that the present administration has done is that they’ve actually done what everybody else has been afraid to do. Which is privatise generation and distribution, and in the process also privatised to some extent our transmission.

So right now there’s a lot that is going on. The generation companies, which have been privatised now, are trying to overhaul their assets to make them more productive. The distribution companies are also trying to overhaul their assets and refurbish their assets. Also looking at how more private sector players can come in to invest in gas supply and gas infrastructure.

I would say that a lot is going on, with all the moving parts going on. We are likely to see exponential growth in our power generation, in our distribution, in our transmission.

Intercorp: Multi-jurisdictional legislation pays off

Challenged daily by having to deal with the difficult task of preserving wealth by helping both individuals and corporations legitimately minimise their tax liability, the tax management profession in Brazil is not always plain sailing. Very few firms are skilled enough to contend with the many business, social and political challenges contained within, and, for tax management consultants, navigating national tax infrastructure is far from a trivial task.

Intercorp Group has set a high marker for others in the industry to aspire to, and World Finance named it the best tax firm in Brazil as part of its annual Tax Awards. Intercorp has a strong heritage in tax consulting, and the scope of its expertise has evolved and developed alongside ever-changing client requirements by keeping to a tradition of outstanding client service and intelligence.

Founded on the premise that consultants should be responsible and accept the risk of their own advice, Intercorp’s typical clients are high-net-worth Brazilian individuals and families who have international business operations, and therefore, a global – rather than purely domestic – exposure to taxation legislation.

Keeping assets a priority
Intercorp has a unique way of operating in how it addresses the issues of taxation, accounting and the international transactions of its clients. Once the firm has worked with its clients to ascertain their precise needs, the firm then proceeds to facilitate and co-ordinate a fitting strategy for the clients’ interests.

191,703

HNWI in Brazil in 2013

+17%

HNWI growth in Brazil by 2018

It achieves this objective by assigning to each of its clients a qualified co-ordinator, who acts in an advisory and consulting role in developing a customised solution and asset preservation strategy. Each of these co-ordinators has access to an international network of professionals and specialists, informed by a deep understanding of tax systems across the globe. Intercorp can guarantee that each of its consultants will guide the client with integrity, and present them with the best possible solutions in a transparent and efficient manner. Fundamentally, Intercorp decodes extremely complex approaches, ignites debate and encourages considered action based on often unique circumstances.

Owing to years of experience in the industry, the firm has developed an exceptional understanding of the solutions available to families looking to structure their assets across multiple jurisdictions in a way that is tax efficient, and preserves wealth for future generations. The firm’s consultants, therefore, work tirelessly to clarify any questions clients might have, and provide the best solutions they possibly can. Made up of a team with decades of experience in designing and implementing complex structures and instruments, Intercorp’s clients are safe in the knowledge that their assets are protected as best they can be.

This confidence derives in part from the firm’s co-ordinators, but also from the knowledge that clients enjoy direct or indirect access to Intercorp’s unique global network of specialists and professionals. The industry in which Intercorp acts leaves no room for obfuscation or lack of clarity, and the company prides itself on its transparent procedures and practices.

To further the firm’s cause, the Intercorp team has no allegiances or biases when it comes to the investments themselves, which puts it in a valuable and constructive position to advise objectively on the most suitable solutions. With a wealth of experience to its name, the firm’s shared expertise means that clients can be comfortable any decisions made on their part are backed by years of industry expertise. The consultants will ensure they assess and properly protect invested assets, and effectively structure any business to ensure the risks fall directly and solely on the investment capital.

As a highly experienced consultant, I specialise in international tax, real estate planning, wealth preservation, fiduciary advice, implementation and management of international structures and projects. I begun my career as a trainee at the consulting firm Arthur Anderson, and later became a Senior Manager in the tax consulting area, working in many significant parts of the firm and in collaboration with several international Arthur Anderson offices on very large global projects.

Today, I have built a strong network of specialists across the globe and led a number of milestone projects in various industries, including oil and gas, telecommunications, real estate, international services, investment funds and asset management.

Brazil’s tax system explained
Intercorp Group offers global services and expert advice. It has direct access to a unique network of professionals around the world that dedicate time to develop customised solutions, aiming to meet tax planning needs and asset preservation strategies for its clients. The fact is that taxes are an extremely significant element in the costs of doing business. As Brazil’s own economy, and the economies of the world continue to globalise, the proper management of tax costs have naturally become a priority for the executive teams of large corporations and also for business owners.

Since its foundation and over the years, Intercorp Group has been working hard at an international level to develop tailored techniques that can be applied to its clients’ businesses, allowing it to offer the most efficient, effective, and pragmatic solutions to major international organisations’ taxation needs.

Historically, a wide range of factors have driven the complexity of the Brazilian tax system. From different layers of tax jurisdictions (in Brazil this includes federal, state and municipal), to intense legislative activity; the significant time it sometimes takes for a view on the interpretation of tax legislation to be officially expressed by the tax authorities; and the fact that the tax administration is frequently seen as taking an aggressive position towards taxpayers, with poor channels of communication between the tax authorities and the business community.

Much of Intercorp’s work is – like the taxation situation in Brazil and beyond – highly technical, and demands only the highest intellectual abilities, as well as an in-depth knowledge of not only tax legislation and infrastructures, but also of how businesses maximise their success at a practical level. The firm has taken steps to understand the balance between the investment structures used by clients to make their tax situation more efficient, and the investors’ main investment objectives. It is vital that the investment vehicles used provide certainty to investors that their needs will be met, and transparency is a key part of Intercorp’s business in gaining the trust of its clients.

Naturally, legislation can change, and a major part of Intercorp’s time and expertise is dedicated to monitoring legislative changes and ensuring, at all times, that clients receive a highly effective service based on the current state of tax legislation in the jurisdictions that concern them.

Tax planning requires a detailed knowledge of multi-jurisdictional legislation. Tax efficiency is, in practical terms, only possible when accompanied by a very specific knowledge of clients’ operations and of the regulations in the corresponding jurisdiction. Intercorp Group has a highly strategic position that covers most of the tax-related aspects of multiple jurisdictions.

As for the future, the key issue for Intercorp is to build client relations and continue to grow in stature in the industry. Underpinned by in-depth analysis and extensive expertise on the subject, the firm will continue to offer tax-planning services and build its renown in the region and beyond.

How minimum wages can hurt employment

The age-old argument surrounding minimum wages has long divided the crowds. While the political left argues that raising it would improve quality of life across the spectrum vastly, the opposing argument from the right – that it can be damaging to employment figures – is equally as convincing. Of course it’s a notion that always gets more or less full support from the public – few would argue against workers being paid a higher rate.

But the bottom line is that there’s so much more to it than each minimum wage worker getting a bigger pay slip one month and therefore having a bigger disposable income to inject into the economy, and a better life as a result of that. Many view raising the minimum wage as a tactic often employed by politicians in the run-up to elections in an attempt to win over voters, claiming that it’s an artificial method of raising the price of labour that is often impossible to sustain, as it cuts demand for workers and increases unemployment as a consequence.

It’s a complex debate, and the impact on employment is notoriously difficult to identify, fundamentally because there are so many varying factors that affect a firm’s ability or desire to employ staff, many of which are numerically immeasurable. When firms are forced to pay workers more, it obviously increases their outgoings and means that cost-cutting measures must be employed elsewhere to somehow make the money back.

Lifting the pay floor can often end up having the most negative impact on those it’s intended to help

Balancing the figures
Often that will be seen in a price rise across products or services, but the majority of the time, it will result in job cuts – and the part-time, entry-level and less-skilled workers are almost always the first to go. This is why when the pay floor is lifted and the squeeze is felt in a firm’s ability to hire, it tends to impact younger workers the most.

High youth unemployment is troubling for a variety of reasons. Younger, less skilled members of the labour force will eventually become the most skilled members, and if the opportunity to develop those skills from early on is not available to them, the quality of labour in the future becomes a worrying prospect. Because so many of those less skilled roles are held by younger people, any economic boost it may provide will often be felt only on a somewhat limited scale. In terms of price rises, getting paid slightly more per hour hardly makes a difference if the general cost of living goes up.

Essentially, lifting the pay floor can often end up having the most negative impact on those it’s intended to help. By increasing the efficiency and quality of performance expected from them and boosting competitiveness within the labour market, it raises the hurdle any worker has to jump just to earn the minimum rate. So considering 60 percent of people living on the breadline in the US aren’t in work at all, all it would do is make finding a job harder for them.

There are endless arguments for and against, but much of the research on the subject comes from advanced economies where the working classes make up a much smaller proportion of the overall population. However, new research from the IMF, which draws on evidence from China – the largest emerging market in the world accounting for 25 percent of the global labour force – could prove a more relevant representation.

The IMF found that on average across all firms assessed, a small decline in employment was detected: a 10 percent increase in the minimum wage rate led to a decrease in employment by just over one percent. For Beijing, the results could be a cause for concern: consistent minimum wage hikes have formed a central characteristic of its government, in the attempt to reduce the income gap and increase domestic demand as it tries to move away from its export industries. Plus, as Chinese demand for labour is so high, provinces are competing with each other to show they’re the most worker-friendly and prevent employees from migrating to more generous regions.

highest minimum wage countries

If the minimum wage continues to increase at the rate of recent years, it could eventually have a wider impact on China’s GDP. Some manufacturing firms have already begun moving operations further inland to less developed areas of China where labour is cheaper, and this could even see companies move overseas to low-wage locations in Southeast Asia – Cambodia, Vietnam and Indonesia are popular locations for textiles firms in particular.

Pre-emptive relocation
In more advanced economies, the research and results vary. A report by the Economic Policy Institute in 2013 claimed that raising the federal minimum wage in the US from $7.25 to $10.10 would create an additional 85,000 jobs, and as recently as September 2014, Britain’s biggest trade union Unite urged the government to lift the pay floor by £1.50 an hour, arguing that it would boost the economy and lift millions out of poverty.

Yet when the pay floor was actually lifted in the US in July 2009 by 10.6 percent, just under 600,000 jobs for teenagers were axed within six months. And if the squeeze isn’t felt in actual employment figures or price rises, that’s not to say it’s not there. Often companies find a way to bypass slashing jobs completely by cutting back workers’ hours, so while actual employment figures do not suffer, the average worker’s pay would either remain the same or even end up decreasing.

Even if employment levels do not suffer, insisting that companies pay minimum wage workers a higher rate can have further negative knock-on effects. If lower paid workers suddenly get a 10 percent pay rise it could encourage internal problems among staff, with higher paid employees demanding an increase at the same rate, for example. “Raising the minimum wage would be detrimental to employment. Forcing firms to pay a higher hourly wage would lead to fewer job opportunities and fewer hours, as companies would find themselves less able to take on extra workers, hitting the young and unskilled the hardest”, said Camilla Goodwin, communications officer at the Institute of Economic Affairs, a UK-based free market think tank.

A nationally enforced pay floor or ceiling in general is a difficult concept to manage and enforce. Living wages can vary dramatically from cities to more rural areas: London’s is £9.15 per hour at present, while for the rest of the UK, its £7.85. To counter this, Goodwin suggests regionalising the rate: “Regionalising the minimum wage would prove far more effective at helping those on low incomes without having a damaging effect on job creation, taking into account local economic conditions and the employer’s ability to pay.”

While the move to raise the minimum wage does more often than not come from a good place, it’s a fundamentally damaging policy that tends to pinch the people it’s intended to help the most. A blanket rule is evidently not appropriate as the effect can vary drastically between countries and even regions.

However, the situation in China is simply proof of how political tactics can be cleverly disguised as left-wing economic reforms.

IMF: Senegal emerging economy status ‘achievable’

The West African nation shows promise for faster economic growth, particularly with regards to its highly educated population, level of political stability and advantageous geographic location. Although conditions are favourable, growth has been slow over the past decade due to a number of varying factors, including adverse business conditions and poorly managed public spending. The IMF’s Plan Sénégal Emergent (PSE) was unveiled in 2014 in order to provide a much-needed impetus to the economy and improve the areas that have held back the country’s development thus far. Implementing structural reform, increasing exports and encouraging foreign investment are key measures cited by the IMF for achieving the goals laid out in the PSE. The IMF’s comprehensive strategy will run until 2023, during which time it aims to guide the developing nation to achieve middle-income status. 

Experience of other countries across the world suggests that Senegal’s ambition to rise to an emerging economy status within the next two decades is achievable

The IMF’s Senior Desk Economist for Senegal, Alexei Kireyev, spoke to World Finance about how the Senegalese economy is fairing and its prospects of becoming an emerging economy. 

What are the most important areas of reform for Senegal at this stage of its economic development?
The most important areas of reforms are specified in the authorities’ recent development strategy, the Plan Sénégal Emergent (PSE). The plan aims for Senegal to become an emerging market economy by 2035 by making it a hub for West Africa. The PSE is articulated around three pillars: (1) higher and sustainable growth in the range of seven to eight percent, based on foreign direct investment (FDI), export-driven structural transformation and widening the circle of opportunity to provide space for SMEs; (2) human development and social protection; and (3) improved governance, peace, and security. The PSE calls for continued fiscal consolidation, constrained public consumption, and increased public saving to generate fiscal space for higher public investment in human capital and public infrastructure. It also envisages structural reforms to attract FDI and boost private investment.

To reach these objectives, 2015 must mark a turning point from the mediocre growth of the past to the higher, sustainable, and inclusive growth envisaged by the PSE. The PSE presents a unique opportunity to disentangle from lacklustre policies of the past and to unlock a broad-based and inclusive growth that will make Senegal an emerging economy. Economic policies and structural reforms included in the PSE should allow Senegal to achieve and sustain high and inclusive growth. Economic and social emergence requires the maintenance of a sound economic framework and the acceleration of reforms to enhance productivity and improve the business environment whilst improving public service delivery and raising the quality of public spending.

How can Senegal increase its export revenue?
The PSE identifies the path to success. Senegal can increase export revenue by crowding in private investment, including foreign direct investment, and improving the business climate to provide space for SMEs. In pursuing this goal, Senegal could learn from African middle-income countries that have succeeded in this transformation (Cape Verde, Mauritius and Seychelles), and foster joint action in West African Economic and Monetary Union (WAEMU) to achieve emerging market status. Moreover, the key differences between those countries that reached the middle-income status and those that just built debt and still have little to show for it is in the openness to FDI, facilitation of the entrance and growth of SMEs, and orientation to globally competitive production, particularly exports. Senegal’s many strengths include an open society and democratic traditions, political stability, a well educated labor force, a solid civil service and a good geographical location to export to the two largest global markets, the EU and the US. With the right policies, Senegal should be able to attract investors seeking platforms for global production, including those who may delocalise from China as costs of production rise.

Why has Senegal’s economic growth in the past decade been slower than other countries in sub-Saharan Africa?
Senegal’s growth was less favourable than that of fast-growing sub-Saharan Africa (SSA) countries, although it has been better than in a number of WAEMU countries. Also, Senegal’s growth was strong enough to ensure a modest increase in per capita income, but it has fallen short of the authorities’ target under successive poverty reduction strategies and has been much lower than that of fast growing SSA economies such as Cape Verde, Ethiopia, Rwanda, Tanzania, and Uganda.

The PSE provides a good diagnostic for this unfavourable outcome. It points out that the main contributors to below par growth have been a poor business climate and the low quality of public spending. The business climate handicaps new entrants, whether SMEs or FDI, through the lack of clarity on the rules of the game and too much emphasis on ex-ante authorisations instead of ex-post compliance. This has limited the rate of diversification of the economy and worked against increasing the value added per worker through insufficient integration into global value chains. Consequently, growth has been too dependent on public investment, which in turn has proved to be of low quality with a significant share more akin to public consumption than capital formation. Remittances have been significant but in the absence of an attractive regulatory framework have fueled private consumption rather than an expansion of SMEs. At the same time, the majority of population, in particular in rural areas have not been provided the incentives or the means for more active personal contributions to development or to improve their productivity.

A growth accounting exercise confirms this analysis of the PSE and suggests that growth is mostly explained by factor accumulation, rather than by increased productivity. Total factor productivity (TFP) actually declined before the mid-1990s, and again since 2006. It grew only modestly during the decade of robust growth (1995–2005). A number of factors could explain this poor productivity performance. First, the TFP decline in the past five years coincides with the deterioration of Senegal’s doing business and governance indicators, which could have affected the productivity of both public and private investment. Second, large and increasing remittances might have been invested in sectors less likely to spur growth (such as housing and informal trade). In addition, delays in critical reforms, such as the reform of the energy sector, and slow reforms of the public financial management and the business environment have also had a negative impact on growth. Finally, a series of exogenous shocks starting in 2006 (i.e., food and fuel global prices, global financial and economic crisis, the electricity sector crisis, and drought in the Sahel, and more recently regional security tensions and the Ebola epidemics), have led to growth deceleration.

The good news is that the authorities have begun to go from the diagnostic in the PSE to action to address these bottlenecks by measures to improve the quality of spending and to create a better business climate. These reforms need to be broadened, deepened and accelerated to reach the seven to eight percent growth achieved by fast growing economies in Africa and elsewhere and targeted under the PSE.

What risks exist for Senegal in opening up its economy more so to foreign investment and the global market?
The goal of a seven to eight percent annual growth is feasible for Senegal in the medium term but would require a broadening, deepening and speeding up of structural reforms as well as constraining public consumption to create the fiscal space for implementation of PSE-related projects. In parallel the quality of public spending will need to be raised, particularly for public investment. However, the danger for Senegal is that the required reforms are neglected whilst emphasis is on increased spending. The IMF encourages the authorities to broaden and speed efforts to improve Doing Business rankings and to identify regulatory changes required to attract investors who may currently hesitate to invest in Senegal. Accelerating electricity generation projects may require reconsideration of accountability and project responsibility. Reform implementation could be facilitated by peer learning arrangements with successful comparator countries which the fund could facilitate. None of the countries that have gone down this path have failed to unlock high growth but many countries have faltered by failing to embrace openness and have ended up with debt instead of growth.

What lessons can Senegal learn from other developing economies?
Experience of other countries across the world suggests that Senegal’s ambition to rise to an emerging economy status within the next two decades is achievable. Historically, countries that have embarked on important investment programmes have experienced mixed fortunes. Those that have embarked on ambitious structural reform to unlock foreign direct investment and create space for SMEs have become emerging economies. Those that ramped up public spending without sufficient accompanying reforms have just built up debt with little improvement in per capita income. Unleashing Senegal’s growth potential would require strong action on supply constraints, such as the regulatory framework and cultivation of a business climate friendly to FDI and small and medium enterprises (SMEs), together with investment in human capital and infrastructure; reduction in inequality by expanding private employment opportunities in the formal sector and broader access to education and health services; and planning for adverse shocks to ensure adequate fiscal space to sustain the PSE investment plan. Senegal can work with countries that have moved on the path to emerging economy status to adapt to its specificities the institutional and policy reforms that enabled these countries to move from low-income status. Again, it is encouraging that the authorities have begun to embark on this path.

How to navigate transfer pricing in Brazil; Deloitte advises

The economic view of Brazil has always been two fold for investors: on the one hand, there are good opportunities for sustainable growth; on the other, there is suspicion and concern about the direction in which Brazil is marching, economically and politically.

The latest downturn decreased the country’s growth rates while bumping up inflation – just two of the uncertainties Brazilian investors face. With one of the world’s highest tax burdens, a complex tax structure, a highly bureaucratic environment, and continuous government spending, Brazil is stumbling through a period of high institutional risk and shrinking foreign direct investments.

The most obvious challenge is the fact that Brazil is not a member of the OECD, which often causes misunderstandings and unexpected tax and transfer pricing issues

Brazil only spends one-third of the average amount spent by other countries in infrastructure, even though the need for advanced investments in infrastructure is high. Generally, the country seems to focus more on keeping private consumption high, instead of having a strategic view of market development with a perspective of sustainable growth.

The most urgent problem Brazil must tackle is the steep decline in competitiveness; to do this, it will need private-sector involvement to improve its infrastructure. In spite of these issues, Brazil still offers one of the world’s best investment opportunities.

The country’s GDP growth is no longer thriving as it was five years ago (see Fig. 1), but the economy overall remains solid. It has a clean energetic matrix and a large domestic market. As the world’s seventh largest economy, the country also plays a leading role in South American economy and politics, standing out with increased attractiveness on the international scene. Brazil’s major competitive advantage includes social and economic growth, combined with stability and environmental sustainability; macroeconomic structure; a strong domestic market; richness of natural and cultural assets; open market; and democratic stability.

These positive factors helped Brazil benefit from sizable foreign investments over the last two decades. In 2012 the South Korean automaker Hyundai invested $273m, and established its first factory in South America in Piracicaba, São Paulo, Brazil. The global President of Hyundai, Chong Mong Koo, stressed the compact HB20 was developed exclusively for the Brazilian market. He said the new subsidiary will “contribute to the development of the Brazilian automotive industry and the local economy.” German automaker BMW chose the state of Santa Catarina as the site for its first factory in Brazil. BMW will invest about £249m in the initial installation, which started operations in 2014.

Driving Brazil’s economy forward
The automotive sector represents about 20 percent of GDP of the Brazilian economy, and the German and South Korean automakers’ investment will attract new companies in the automotive supplier industry. Those companies are often subsidiaries of international conglomerates, and engage in purchase and sale transactions for goods, services, and rights. Those related-party transactions are subject to Brazilian rules of transfer pricing.

These rules can substantially increase companies’ tax burden if not previously considered when making an investment decision, that is, before setting up business in Brazil. The additional costs of higher taxes or double taxation can substantially reduce the expected profit from investment in Brazil. When considering the Brazilian tax and transfer pricing regimes, the most obvious challenge is the fact that Brazil is not a member of the OECD, which often causes misunderstandings and unexpected tax and transfer pricing issues.

The transfer pricing methods for testing the pricing of intercompany transactions established by Brazilian law vary according to the nature of the transaction – for example, import or export operations – rather than according to the taxpayer’s functional profile. Brazil’s transfer pricing methods establish maximum import prices and minimum export prices.

To avoid transfer pricing adjustments, the import price charged should be lower than the parameter price; conversely, export prices should be higher. Brazilian legislation on transfer pricing has always given rise to discussion and controversy. The law has recently been changed to avoid misinterpretations of the rules and possible uncertainties in the future, reducing controversial topics.

However, the biggest and still remaining difference between the Brazilian approach to transfer pricing and the OECD approach is the consideration of single product prices, whereby offsetting is not possible. In practical terms, this means that as long as intercompany pricing on a single product line meets the transfer pricing requirements, the overall net profit at year-end does no longer play a role from a Brazilian transfer pricing perspective.

Unlike the OECD approach, under Brazilian law market conditions are predetermined and set by the authorities. That is, fixed margins are to be used for transactions, leaving changing market conditions and multiple-year analyses unconsidered. The economic circumstances of an individual company are not taken into consideration to determine whether transfer prices are at arm’s length.

The arm’s length rule
The basis of the OECD transfer pricing guidelines is the arm’s length principle, taking into account the individual analysis of each company in terms of economic circumstances and market conditions. Companies freely stipulate the structure of their business according to such market conditions. The OECD transfer pricing guidelines seek to achieve a transaction value established between related parties as practiced between unrelated parties under the same, or similar conditions.

While Brazil imposes fixed margins, the OECD transfer pricing guidelines consider variables, such as business risks borne, functions performed, market conditions of the area of operations, and especially profit margins of comparable third-party companies.

Intercompany pricing policies adopted by economic groups are often inconsistent with the Brazilian legislation. Pricing policies adopted globally are generally based on the OECDs transfer pricing approach and thus not accepted in Brazil, which at times can give rise to high transfer pricing adjustments.

For this reason, many multinational enterprises have set up different pricing policies for Brazilian entities, than those used for the rest of the group. When making the decision for or against business in Brazil, it is therefore important to adjust and align intercompany pricing policies according to the Brazilian requirements.

The alignment of two divergent systems is a challenging task for multinational groups. Sometimes companies accept double taxation, because the creation of an aligned policy would require a high degree of sophistication and professional involvement. For some companies, it might not be worth investing in this legal certainty, if the complexity of an aligned transfer pricing system would generate higher costs than the expected tax exposure.

The current transfer pricing rules have great potential to cause double taxation situations, which in turn would discourage investment in Brazil. One would expect the tax authorities to increasingly adapt to the economic approaches espoused in the OECD transfer pricing guidelines; however, when this may happen remains uncertain. Adoption of the OECD transfer pricing guidelines would facilitate business decisions, and the rates of foreign direct investment could surpass the expected. Moreover, this change would facilitate understanding of the rules and controls for both Brazilian companies operating abroad, and for international companies that invest in Brazil.

Ways to increase investment
High tariffs on imports and the complexity of customs procedures represent another major obstacle to foreign investment. From a Brazilian perspective, a reduction in legal uncertainties and protectionist behaviour may be less effective in the short term, but would certainly increase investment and sustainable growth in the long-term. Encouraging foreign investment would render business in Brazil more competitive, especially if commodity prices are unlikely to bail out Brazil’s economy with another growth spurt.

Mergers and acquisitions – as one possible form of foreign investment in Brazil – raise a number of issues in relation to tax and regulatory compliance, assessing and influencing the choice of business structure. The determination of the allocation price of tangible and intangible assets of target companies has a key role in the interaction between transfer pricing and purchase accounting.

Brazil's investment-to-GDP ratio

Determining an appropriate market price for asset transfers during restructuring operations requires consideration of transfer pricing issues in the countries involved. This includes the choice of financial structure, as well as finding a tax-effective business structure. When pricing assets – especially intangible assets – from a transfer pricing perspective, it is usually difficult to identify appropriate market prices.

Therefore, a hypothetical arm’s length range of prices – a maximum price that the buyer would be willing to pay and a minimum price the seller would be willing to sell for – may be considered. These can usually be determined using discounted cash flows of expected profits or losses.

The simple relationship between risk and opportunities for investments in the Brazilian economy is easy to confirm. Great potential opposes high levels of bureaucracy and complex tax structures, which in turn increase the risk of failure.

Brazilian transfer pricing regulations are no exception, but stress the importance of local tax and business planning when deciding whether to invest in Brazil. In the years to come, tax practitioners expect further changes to Brazilian transfer pricing legislation and harmonisation with the OECD approach applied in most other countries.

Meanwhile, despite the differences between the Brazilian transfer pricing rules and the OECD guidelines, it is possible for Brazilian taxpayers to mitigate double-taxation issues through proactive transfer pricing planning. Many multinational groups operating in Brazil are succeeding in mitigating transfer pricing adjustments by marrying – to the extent possible – the Brazilian transfer pricing rules to the international transfer pricing standards.

For more information email carlosayub@deloitte.com

Greece wins bailout extension, but faces tough road ahead

The much-anticipated negotiations between the Greek state and the Troika concluded on February 20, as the latter agreed to extend the country’s bailout agreement. Despite this small respite granted to President Tsipras and Finance Minister Varoufakis, the complex steps that must be overcome over the next six months indicate a treacherous road ahead for the struggling economy.

Failing to reach each of these goalposts could result in a default of Greece’s bailout extension and a possible withdrawal from the Eurozone

The first and most pressing is the short-term bailout extension, which is currently under discussion and pending approval from the Eurogroup. As agreed, Greece submitted its proposed list of structural reforms on February 24 to Eurozone leaders in order to secure the bailout extension. The six-page document submitted to Brussels includes plans to combat tax evasion, which is rife across the country, along with much-needed improvements to the mechanisms for tax collection. Also promised is a concentrated effort to combat petroleum and tobacco smuggling, together with other pledges made by Tsipras during his pre-election campaign; raising a level of uncertainty regarding the document’s approval.

The next phase and obstacle to overcome involves agreeing upon the terms and conditions for completing the bailout agreement, as well as the resolution of pending items. The outcome of negotiations must be approved by the Greek parliament sometime in March or April, which has sparked fears of discord within the governing Syriza party and a potential governmental collapse.

In the event of a smooth ratification of the agreement, a new programme will be negotiated, which includes the adoption of stringent fiscal measures aimed at debt relief. This once again has to win the support of the Greek parliament, a difficult feat given the likely antithesis of such reforms to the populist promises made by Tsipras.

Failing to reach each of these goalposts could result in a default of Greece’s bailout extension and a possible withdrawal from the Eurozone. Such an outcome would be disastrous for the Greek economy and the country’s citizenry, who have lived with years of poverty-inducing austerity measures. Despite the difficult road ahead, many experts believe that a Greek exit will not transpire. This is further evidenced by the general consensus as shown by a survey published by Eleftheros Typos newspaper in January, in which 74.2 percent of those polled, agreed that Greece should stay in the Eurozone at all costs.

Lies and prejudice: The politics of austerity | Video

Governments in both Europe and the US have succeeded in casting previous government spending as reckless wastefulness that has destroyed economies. In contrast, they have advanced a policy of draconian budget cuts – austerity – to solve the financial crisis.

World Finance: Mark your book was published in 2013, which basically says that austerity doesn’t work. However, fast forward two years, and it seems that he Uk measures, for example, have paid off, with our economy growing. Do you still stand by your findings?
Mark Blyth: The United Kingdom stopped doing austerity in late 2011, before they even got the warning from the IMF to tell them to do so.

If you look at central government consumption, it contracted in 2009 and 2010, and then balanced out in 2011 and accelerated at the end. They’ve been hacking away at the welfare budget, with one third of the cuts falling on disabled people, and that’s made for good press, but they’ve got a budget deficit of around four percent.

The eurozone has cut, and the ones that have cut the most have lost 30 percent of GDP and seen their debts balloon

So if the United Kingdom has been doing austerity, whilst doing quantitative easing, whilst doing help-to-buy, whilst doing funding for lending, it’s a funny definition of austerity.

World Finance: You book says following the financial crisis we were told that we had lived beyond our means, and now need to tighten our belts. This view conveniently forgets where all the debt came from, bailing out the broken banking system. But that’s a bit easy isn’t it, why doesn’t anyone ever acknowledge the huge borrowing of the former government. What about Gordon Brown selling all of our gold, what about that?
Mark Blyth: Well what about Gordon Brown selling gold when it was at an all time low? It seemed to be a rather pointless asset at the time and I believe that was 13 years ago and has very little bearing on the current moment.

We have to remember the United Kingdom had four banks that were over 400 percent of GDP, and two of them went insolvent. If it wasn’t for the Treasury bailing out those lenders, because you can’t have over-borrowing without over-lending, you wouldn’t have had this mess.

Simply go to stats.oecd.org or whatever database you want and plug in ‘oecd debt.’ Check when it rises. It’s kind of flat going in to 2007, and then it rockets afterwards as we start to cut, and the more you cut the smaller the economy gets and the more debt you have, which kind of explains Greece.

So this is ultimately still a story about the banks, particularly in Europe, and the lazy thinking is to go “well, isn’t Gordon Brown overspending?”

World Finance: You’ve painted yourself out of the picture, but these strike me as socialist views, so your book, is that just a reflection of your political beliefs?
Mark Blyth: What’s a socialist view on the economy? If it’s a socialist view to say that when the private sector is contracting and de-levering its balance sheet, and the public sector simultaneously does the same thing, the only thing that can happen is a recession, then sign me up as a socialist. But then you’d have to sign up half the phds of the University of Chicago.

World Finance: You argue that historically austerity has been done over and over without the best results, yet governments still turn to it. Is it the lesser of evils, or is there a better solution out there?
Mark Blyth: Well yes. We’ve run a giant natural experiment across the world over the past several years. The sequester apart, which was $7-8bn a year over ten years on a $17tn economy, which they eventually stopped, the United States at a federal level didn’t cut. It’s growth rate is currently five times that of the eurozone.

The eurozone has cut, and the ones that have cut the most have lost 30 percent of GDP and seen their debts balloon. I’d say that’s pretty much conclusive evidence, yet again, that this doesn’t stick. So why do we keep doing it? Because it’s easier than telling democratically elected governments that they have to bail out the banking sector yet again, which is what they’ve done already and what they’re continuing to do.

World Finance: Does austerity work better in certain countries, or would you say it’s flawed the world over?
Mark Blyth: What is often seen as austerity is when governments cut and then they have growth afterwards. The classical cases of this happening are in small open economies such as Sweden, Canada, and Denmark in the 1980s. The only reason that happened is because the rest of the world took their exports, and they did a massive devaluation of their currency at the same time, an option which is not open to the eurozone.

Once you look at the facts of this case, there is nothing left standing for it. It’s simple prejudice.

World Finance: So your book traces the rise and fall of the idea of expansionary austerity. So are we headed for another crash?
Mark Blyth: Well one doesn’t necessarily lead to the other. The expansionary austerity is a very simple idea called the confidence fairy, which goes like this:

You have a precarious job at the moment. Your wife has one too, and the economy is tanking. Nonetheless, you lie awake at night worrying about government debt, because of course it’s such a terrible thing, and you’re delighted to hear that the government is slashing the welfare budget and contracting the economy now, even though it’s about to cost you your job, because you will pay less tax ten years from now. Given this, you’re so buoyed by the confidence effects, you run out to Ikea and buy a couch.

That’s literally the horse manure that was being sold by the European Commission in 2009 as an economic theory. Now, if you continue to behave like this, you’ll find you’re in a crisis. Guess where Europe is just now. In a crisis.