Year: 2017

Driving banking’s digital revolution

Posted on by Max Tomlin

From blockchain to Apple Pay, technology is rapidly transforming the banking sector. For many consumers, mobile banking has become the new norm, allowing them to quickly make payments with ease.

The convenience of such on-the-go banking is dramatically shaping consumer demands, with customers now expecting fast responses and 24/7 support as standard. This sudden rise of remote banking has in turn seen customers shift away from traditional bank branches, putting banks under significant pressure to adapt to their client’s evolving tastes.

The sudden rise of remote banking has seen customers shift away from traditional bank branches

According to a 2014 survey by consulting firm Accenture, four in 10 people aged between 18 and 34 would even prefer to switch to a bank without a physical branch. In response to this new reality, banks around the world are focusing on refining their digital strategies and optimising their mobile services.

As the banking sector undergoes a technological transformation, Santiago-based Banco de Chile is fast establishing itself as a leader in online financial services. Besides offering traditional mobile banking options, the Chilean bank has also developed a range of innovative, multi-channel apps to help customers manage their different financial needs. “Our objective is clear”, Rodrigo Tonda, Marketing and Digital Banking Division Manager at Banco de Chile, told World Finance. “We are looking to continuously innovate with different products, services and channels in order to respond to and meet our customers’ new needs quickly and easily.”

Everything online
As customers opt for mobile banking over taking a trip to their local branch, Banco de Chile is rapidly expanding its digital channels. With more than 93 percent of its customers making use of its online options, the bank provides a 24-hour service, 365 days a year. Recently, Banco de Chile launched its new online banking portal, which along with being easier to navigate, boasts a host of new features including the option to authorise bank transfers from a mobile device. However, this focus on mobile innovation won’t see the bank compromise on safety. “All of our new transactions take place without neglecting security”, said Tonda. “Banco de Chile has long been at the industry forefront in protecting customers from fraud, and continues to implement a variety of security protocols and software.”

In addition to its revamped website, the bank also offers a wide rage of easy-to-use, fast and secure mobile apps to suit customers’ different needs. With the main Mi Banco app, customers can manage all of their transactions and banking-related enquiries in one convenient place. Mi Pass is the sister app to Mi Banco, enabling users to authorise transfers and transactions from the main application. As the bank works to optimise Mi Pass, customers will also be able to complete online transactions through the app.

In order to speed up tedious bill payments, the bank has created the innovative Mi Cuenta app, which allows customers to easily pay their bills at the touch of a button. The application will even send customers automatic alerts when a bill is due, thus helping users avoid frustrating late payment charges. Furthermore, when it comes to micropayments between individuals – such as splitting a restaurant bill or buying a gift among several people – the bank has developed the Mi Pago app, which lets customers securely collect or make payments to other Banco de Chile customers.

A new generation
As part of its new digital strategy, the bank has also launched two one-of-a-kind apps in Chile. Mi Seguro focuses on making insurance assistance accessible for customers, allowing users to remotely submit insurance claims from the site of an accident or quickly purchase travel insurance through their mobile phones. The bank’s second unique app, Mi Plata, enables customers to manage their children’s allowances by creating debit accounts online.

“With this collection of apps, we want to make mobile banking as safe and convenient as possible”, said Tonda. “We understand our customers have busy lives and limited free time, and we are constantly working to create a banking system that evolves with consumer needs.”

With its impressive portfolio of apps, Banco de Chile is hoping to appeal to a new wave of younger, tech-savvy customers. Indeed, the bank is also looking to take on younger hires as part of its growing team, as it aims to position itself as the top choice for first-time banking customers.

“Digital services are especially important for younger generations”, said Tonda. “Over the coming years, we will continue to work on our technological innovation, ensuring that our customers can meet their financial needs safely, comfortably and quickly.”

Coca-Cola sued for alleged misleading advertising

Posted on by Helen

On January 4, a lawsuit was filed against the world’s largest beverage company, Coca-Cola, claiming it made misleading claims to consumers. Non-profit organisation Praxis Project has accused both the beverage giant and the American Beverage Association of downplaying the health risks of sugary soft drinks in order to bolster sales.

Such marketing has continued apace in spite of scientific evidence that proves the link between high-sugar beverages and various afflictions, including type 2 diabetes, obesity and cardiovascular diseases.

Coca-Cola has been accused of promoting the idea that obesity is caused by a lack of exercise, as opposed to what we consume

Coca-Cola has also been accused of promoting the idea that obesity is caused by a lack of exercise, as opposed to what we consume, through the use of ambiguous phrases such as “calories in, calories out” and “balance”, which are allegedly promoted to children in particular.

It is this point Praxis Project has focused on in its lawsuit, claiming Coca-Cola lures in customers from a young age in order to encourage them to develop a lifelong habit. The organisation stated in its complaint: “Coca-Cola needs to replenish the ranks of its customers, and it tries to recruit them young.”

In the lawsuit filed in an Oakland, California federal court, Praxis Project likened Coca-Cola’s marketing strategy to that of the tobacco industry in days gone by. Not only does Praxis Project accuse Coca-Cola of promoting products to children, it also argues that, like tobacco corporations, the firm seeks to undermine scientific evidence that has revealed the harmful consequences of consuming its products.

This is but the latest blow to Coca-Cola and the industry as a whole, as regulatory hurdles against soft drink producers continue to increase around the globe. Most recently, the UK enforced a sugar tax that is intended to put off customers, joining a growing list of countries including Mexico, Hungary and France.

The trend is also gaining ground in the US, with cities including San Francisco and Chicago also implementing a similar taxation based on the grounds that soft drinks have a disproportionate impact on residents’ health.

Morocco launches Islamic banking services

Posted on by Helen

Morocco has become the latest Muslim-majority country to authorise Islamic banking. The central bank announced on 2 January 2017 the approval of five banks to provide Sharia-compliant products and services.

The new legislation uses the wording ‘participatory’ banking, rather than ‘Islamic’ banking, in a bid to encourage private firms to operate independently from the question of religion.

So far, 2017 has seen the approval of five requests to open Islamic banks in Morocco

Three of the five newly authorised institutions are leading national banks: Attijariwafa, which is linked to the royal family; state-owned Banque Centrale Populaire; and private-owned BMCE Bank of Africa. CIH Bank and Credit Agricole du Maroc were also given approval to begin operating Islamic financial services.

The Bank Al-Maghrib, Morocco’s central bank, has also given approval for the subsidiaries of three leading French banks – Societe Generale, BNP Paribas and Credit Agricole’s Islamic Development Bank – to sell Islamic products.

The central bank’s decision fulfils a longstanding promise by the Islamic party-led coalition, which had been delayed due to reticence over engaging in the politically sensitive issue. Four years after the Rabat campaign made its initial promises in 2011, the legislation was finally passed, authorising independent Islamic institutions. In addition, 2015 saw the creation of a board within Morocco’s Supreme Council of Islamic Scholars to oversee the conformity of financial products and services to Sharia law.

So far, 2017 has seen the approval of five requests to open Islamic banks in Morocco, while further proposals directed to the central bank are likely over the coming months. It is also expected that 2017 will see the issuance of the first ever Islamic bond in the domestic market

Key features of Islamic banking include a prohibition on interest, an emphasis on ethical standards that embrace moral and social values, and the overarching principle of fairness when handling liability and business risk. The system’s popularity in many North African and Middle Eastern countries stems from the less speculative nature of its products.

During the past few decades, the Islamic banking industry witnessed sustained growth that resulted in its total asset size exceeding $2trn. Islamic finance is operational in over 75 countries worldwide, and its robust performance has attracted a wide range of major multinational financial institutions.

At present, Morocco’s financial market lacks liquidity and foreign investment. The introduction of Islamic banking should therefore help increase financial inclusion, investment stability and accelerate economic development for the nation. It has also been predicted that there will be a rise in the use of contactless payments and Sharia-compliant credit cards.

These efforts to facilitate access and harmonise finance signposts Morocco’s path toward becoming an important economic crossroad between Africa and the rest of the world. It is also an important development for the global Islamic finance industry, as its rapid expansion over the past decade has seen a surge in interest from both Muslim and non-Muslim countries.

The benefits of an alternative citizenship

Posted on by Max Tomlin

Imagine you want to take your partner out for a shopping weekend in Paris. If you are an EU or US citizen, no problem. If you are a Russian, UAE or Chinese citizen, however, you face a challenge: you need a visa. You could also have the same issue in the case of an urgent international business meeting.

Delays in issuing visas often force people to cancel flights and accommodation bookings, so the luxury of a global lifestyle and world travel – which is ‘normal’ for Europeans and Americans – is often associated with difficult visa requirements. However, there is an alternative available.

Some countries not only offer the common routes to citizenship, such as jus sanguinis and jus soli – they go one step further and offer their citizenship through an investment, similar to the residence-by-investment practice many countries currently have in place.

Citizenship-by-investment programmes offer investors and wealthy individuals easier ways to attain citizenship through economic investments. Citizenship-by-investment programmes are nowadays viewed as perfectly reputable, thanks to their having a proper legal framework in place and providing the certainty an applicant needs. With a rise in economic and political instability around the world, an alternative citizenship gives people threatened by political, religious or ethnic persecution independence and freedom. Should the situation arise, a second passport is the best preparation to be able to immediately leave one’s home country and relocate anywhere within the EU. Furthermore, diplomatic protection abroad is also available to legitimate passport holders.

Alternative citizenship gives people threatened by political, religious or ethnic persecution independence and freedom

In certain situations, an additional citizenship can simplify or make a person’s tax situation clearer; naturally, this should always be discussed in detail with a tax expert. Usually, tax lawyers refer clients to Citizen Lane for different reasons, including tax optimisation in regards to income tax and inheritance tax.

A second passport may be a particularly useful asset for French and German citizens, as both countries’ politicians are seeking to force the payment of income tax on international income irrespective of the tax residence. Much like in the US, renouncing citizenship may be necessary to avoid double taxation. The practice of renouncing citizenship has been on the increase in the US. According to publications by IRS, instances of US citizens renouncing their citizenship increased by more than 460 percent between 2005 and 2015.

In the right lane
Citizenship-by-investment programmes do not automatically enable someone who has the funds to ‘buy’ their citizenship; beyond sufficient financial resources, it is essential to have a clean criminal background and a good reputation in order to qualify.

These citizenship programmes maintain tough application procedures, and applicants are subject to far deeper checks than anyone else applying for residence or citizenship in a country. Thorough background checks on applicants ensure that together the client and host country’s government create a mutually beneficial, strong and trustworthy partnership. These conscientious background checks are also essential for third-party countries, to which the second passport grants visa-free travel. The countries offering citizenship-by-investment programmes are absolutely aware they would risk their foreign relations and visa waiver agreements if they were to grant citizenship and issue passports without such thorough background checks.

Impunity is essential, which is why at Citizen Lane we internally use the same background checking tools as Swiss banks, while the due diligence checks of the governments are even more profound. A criminal background will rule out an applicant straight away. Some governments, including those in Cyprus, Malta, Vanuatu, St Kitts and Nevis, and Antigua and Barbuda engage private investigation firms, such as IPSA International, BDO and others, to check the history of applicants. There are also checks against international wanted lists. Even negative media reports about an applicant can prompt the authorities to reject an application.

In short, any citizenship application by a person who might be considered as a potential risk to a country’s reputation will be denied. Here I will outline three possible options for those eligible for citizenship.

The European citizenship solution
The Cypriot citizenship programme is currently one of the most attractive options. It is a very popular scheme, since Cyprus is a well-established western country with a relatively large economy. Furthermore, processing times are just three to four months on average, making it one of the most efficient citizenship programmes in the world. Acquiring Cypriot citizenship has relatively low related costs as the majority of expenses can be considered an investment. The minimum investment amount needed is €2m ($2.1m), which could take the form of government bonds, real estate or a company.

Cyprus’ corporate tax rate is among the lowest in the world at 12.5 percent, which is another huge advantage. Foreign investors are also attracted to the island as it has signed a number of agreements to avoid double taxation. Cyprus is a member of the EU and currently has agreements in place for visa-free travel with 157 countries. It also grants citizens the rights to seek residence and work, and do business in every EU country and Switzerland.

Between 2010 and 2015, the average growth of tourists visiting Cyprus was almost four percent per year. This influx of visitors has created an increase in lodging requirements and higher property values, which has in turn created the opportunity for property holders to rent out their properties during key parts of the year.
Property prices in Cyprus dropped following the financial crisis, but they have been steadily recovering during the last couple of years. We have a broad network in Cyprus and know the real estate market very well. We see this growth trend continuing. Needless to say, all investments carry risks – but this is exactly the reason clients prefer to talk to us for independent advice.

The secure hideaway option
The Vanuatu Economic Rehabilitation Programme (VERP) – Vanuatu’s citizenship programme – was introduced in 2015 to raise money for the reconstruction of infrastructure destroyed by Cyclone Pam. According to our sources, the VERP will be terminated very soon, but is expected to be replaced by another citizenship programme. The short processing time of just one to two months makes the programme probably the most efficient in the world. Currently, the required investment amount for a family of four is $230,000.

citizen-lane-fig-1Vanuatu is well known as an offshore jurisdiction, which of course offers lots of possibilities. Investors in Vanuatu appreciate the fact they have no income tax, no capital gains tax, no wealth tax and no inheritance tax. Nevertheless, one of the main drivers for the Vanuatu citizenship programme is that most citizenship investors deem it to be a secure destination in our uncertain times, far away from terrorism and warfare.

In the past, Vanuatu has been criticised for not being à jour with anti-corruption compliance, but it has recently made great strides in catching up. In September 2016, in a meeting with the ambassador of Vanuatu in Brussels, HE Roy Mickey Joy, we extensively discussed the topic of anti-corruption compliance. As with many other countries, Vanuatu has realised anti-corruption efforts are essential for a prospering economy and has an unwavering commitment to keeping the country’s reputation for integrity spotless: in 2015, there were several trials during which more than a dozen high-ranking Vanuatu officials received lengthy prison sentences. This commitment to integrity safeguards the best economic interests of Vanuatu and its citizens, while countering financial crime both within the country and elsewhere.

The real estate opportunity
The twin islands of St Kitts and Nevis are currently developing well in regards to both their tourism industry and real estate market. According to an IMF report published in July last year, tourism earnings in the country increased between one and 9.9 percent – with an average of six percent – between 2010 and 2015, while GDP grew by 99 percent between 2004 and 2015. The real estate market has also experienced continuous growth, with some huge investment projects during the last years.

Following the financial crisis and as a consequence of the competition from other citizenship-by-investment programmes that have emerged in recent years, the real estate market is currently consolidating and shows a decline in investment amounts to a healthy level. As an additional security, the law specifies that real estate investments of least $400,000 qualify for a citizenship application, which indirectly guarantees a minimum price level. The investment is secure if there is no drop in prices. The fact that the property can be sold after five years assures that an artificial investment bubble will not be created. The minimum investment amount of $400,000, which is set by law, guarantees a lower threshold, so if the investor purchases a property close to this threshold, it is very unlikely that he or she will lose the investment.

From this perspective, the least expensive and most secure citizenship option comes with a real estate investment in St Kitts and Nevis. Some of the government-approved developments are very attractive investments. Furthermore, just last year the Caribbean’s new superyacht marina opened, so undoubtedly St Kitts and Nevis is developing into a prudent jet-set destination. Besides the property investment, the sum of additional related expenses would only total around $100,000 for a single applicant.

Alternatively, investors can choose to donate to the Sugar Industry Diversification Foundation, which subsidises government projects in sectors that promote prosperity in healthcare, education, culture, environmental protection, infrastructure and others. If one chose the donation option, total costs of about $290,000 would arise for a single applicant.

The GMO debate: sowing the seeds of controversy

Posted on by Max Tomlin

Having been voted “the most evil corporation” in the world by readers of the NaturalNew website in 2013, there’s no denying Monsanto has had some reputation problems. That said, the poll result could be seen as quite an achievement – given the company itself is not consumer-facing.

Monsanto may be one of the biggest producers and sellers of genetically modified organisms (GMOs) in the world (see Fig 1), but by no means does it have the lion’s share of the global market. It has, however, struggled to always manage its public relations as best it might and has a controversial track record of suing farmers, both of which factors have made it a target for critics of GMOs.

monsanto-fig-1GMOs are plants or animals that have had their DNA adapted by transferring individual genes from a source organism to a target organism. In doing so, breeders are able to produce crops and livestock with certain beneficial traits, such as pesticide resistance or enhanced nutritional value. Glenn Davis Stone, Professor of Anthropology and Environmental Studies at Washington University, said: “Herbicide tolerance is by far the most widely planted GM trait. Its advantage is not in yield – it actually tends to have a yield drag – but because it makes the use of cheap herbicide convenient.”

Though at first glance it may seem genetically modifying plants and animals is a logical step in modern agriculture, numerous multinationals have come under fire for ‘messing with nature’, with critics claiming such tampering could have unintended and damaging consequences. Monsanto has been at the centre of this debate, having been the biggest target of anti-GMO groups and campaigners since the 1990s.

Monsanto’s controversial history
To understand why the company has attracted so much ire, it is necessary to go back to the very beginning. Monsanto was established in 1901 as a chemical company deep in the American Midwest (in St Louis, Missouri to be precise). Things moved quickly for the group once it expanded into drug manufacturing and by the 1920s Monsanto had become the world’s largest producer of aspirin.

It was during this time that Monsanto introduced polychlorinated biphenyls (PCBs) to its portfolio. At the time, PCBs were considered to be a wonder chemical for hydraulic fluid and lubricants, prized as an oil that didn’t burn or degrade. Once again, Monsanto had reached the pinnacle of market success, becoming the globe’s biggest manufacturer of PCBs. Despite the seeming benefits at the time, it would later prove a very controversial move.

Monsanto has been the biggest target of anti-GMO groups since the 1990s

Things didn’t get much better when, in the 1960s, Monsanto became one of the few companies to produce the biochemical weapon Agent Orange. The company’s dealings got even more complicated in the 1970s, when the US and numerous other countries banned the production and use of PCBs, which had been linked to birth defects, immune system disorders, cancer and fatalities. In fact, Illinois – where Monsanto’s first PCB factory was based – had one of the highest rates of birth defects in the US at the time. According to the University of California, even three decades after their ban, PCBs could still be detected in the bloodstreams of pregnant women living in the state.

Also prohibited during the same decade was DDT, a chemical commonly used in pesticides, which Monsanto had been manufacturing for years. DDT was linked to cancer, miscarriages, male infertility, developmental delay, liver and nervous system damage, adding further damage to Monsanto’s reputation.

Delving into agribusiness
Perhaps because so many of the company’s products had been banned, the executives at Monsanto decided an overhaul was needed; by the 1980s, the group had let go of both its chemical and plastic departments. Monsanto then headed in a new direction as it began buying up seed companies while also investing in biogenetic research.

With approval from the US Department of Agriculture in the bag, in 1994 farmers began growing soybeans with Monsanto’s GM seeds, making their crops immune to the most commonly used weed killer in the industry (another Monsanto product: Round-Up). The firm has been profiting handsomely from products of this nature ever since (see Fig 2).

monsanto-fig-2Monsanto also developed a way to ensure crops could not produce viable seeds: sterile seed technology prevented second-generation crops, prompting the nickname ‘terminator seeds’. According to Monsanto’s website, the company has never commercialised this technology, and in 1999 made a decision never to do so. Despite this, backlash from anti-GM activists resulted all the same, with many accusing Monsanto of preventing farmers from using their best seeds – a practice that has been in place for centuries.

While terminator seeds may not be in general circulation, it is true Monsanto does not allow its customers to reuse seeds for a second season. Despite criticism, the company maintains banning second-generation crops is necessary in order to prevent the spread of glyphosate resistance among crops. Nonetheless, over the years, many have argued this rule is simply a clever sales tactic.

Public outcry
Despite the company’s chequered history, the general public was largely unaware Monsanto even existed for many years. That all changed in 1996, however, when Monsanto attempted to sell its first products in Europe. With the UK still reeling from an epidemic of mad cow disease, the tide of public opinion at the time was very much against modern farming techniques. And so, despite regulatory approval from the EU, consumers in the UK rebelled against Round-Up Ready seeds, leading supermarkets to boycott GM foods and tabloids to coin the term ‘frankenfoods’.

Monsanto was caught off guard, dubbing the British the “sad sacks of Europe” for querying the use of GMOs – hardly a masterstroke of public relations. Modern Farmer reported that, in an anonymous interview, a former employee of Monsanto had said the company’s attitude at the time was “if they try to block it, we’ll sue them” – a tactic the company would be accused of pursuing a number of times in the years to come. A subsequent and ill-advised campaign (which read, “Food biotechnology is a matter of opinions – Monsanto believes you should hear all of them” and included the phone number of Greenpeace) ran into trouble with both environmental activists and industry watchdogs; the UK’s Advertising Standards Authority found Monsanto had presented “as accepted fact” what were merely its own opinions and that some of its scientific claims were “wrong” and “unproven”.

Environmental organisations encouraged the fallout with a series of high-profile campaigns against the company and GMOs in general. To name but a few examples, in the mid-1990s the Organic Consumers Association founded the Millions Against Monsanto campaign in a bid to “fight back against Monsanto and other biotech bullies”. In 1999, Friends of the Earth introduced a campaign entitled: “How safe is the food you eat?” It concluded that “the scary answer is, no one really knows”, playing on public fears.

Such a debate is not constructive, it’s not informative and it definitely doesn’t really mean much

“NGO opposition originally crystallised around two primary issues: the social and ethical aspects of designing life, and the potential impacts on seed diversity and control”, Stone explained to World Finance. “A secondary set of issues concerned safety and the integrity of systems for evaluating safety.”

Further criticism was levelled at Monsanto’s interactions with farmers. Vanity Fair reported that in 2008 Missouri shop owner Gary Rinehart had recalled how six years earlier, anonymous men in suits had turned up at his convenience store, accusing him of planting Monsanto soybeans without consent. They reportedly advised him to “come clean and settle with Monsanto… or face the consequences”. The article described a fear among farmers of the company’s alleged behaviour towards those it believed had infringed its copyright. “Farmers call them the ‘seed police’”, wrote Donald L Barlett and James B Steele, “and use words such as ‘Gestapo’ and ‘Mafia’ to describe their tactics”.

The most prominent of such cases was that of Percy Schmeiser, a Canadian farmer who was sued by Monsanto in 1998 for refusing to pay a licensing fee for Round-Up Ready Canola. Schmeiser argued the seeds had blown onto his farm, and so growing the crop had been unintentional. The story blew up when it was made into a documentary called David vs Monsanto, reinforcing in the public imagination the idea of the company as a Goliath using its deep pockets to prosecute poor farmers.

For its own part, Monsanto has never denied investigating those it believes to have unlawfully used its seeds. In a series of articles published on its website, the company described the process by which it goes about investigating possible cases of “farmer seed patent infringement”; the company says its investigators are polite and open about who they are and who they work for, that they only collect samples with farmers’ permission, and that lawsuits, though possible, are not probable. “There’s nothing good about seeing a farmer or a family upset”, the site quotes investigator Larry McDowell as saying.

A lot of the bad press about GMOs lacks scientific evidence and makes nonsensical comparisons

Whatever the truth of such cases, arguably Monsanto’s biggest mistake has been its failure to understand the cultural significance of farming, or that many people feel strongly about the idea of ‘patenting nature’. In an attempt to squash this notion, Monsanto has often compared its GM seeds to software, stating the technology is proprietary and belongs to the creators.

Stone described the resultant nature of the debate as “self-amplifying”, a phenomenon known as ‘schismogenesis’: “I take an extreme position in reaction to your extreme position, leading you to take a more extreme position, and so on… The polarisation feeds on itself as nuanced differences become disagreement, then disapproval, exasperation and eventually hatred. For example, GMO promoters accuse GMO sceptics of crimes against humanity, in part because the sceptics make the same claim [of them].”

You can’t mess with science
It has taken some years, but the evidence in favour of GMOs is beginning to take hold in the public consciousness. “The National Academy [of Sciences] in the US has done a really thorough study that once again shows that there is no evidence of harm for human health or for the health of the environment, so these studies have been pretty exhaustive over the last 20 to 30 years”, said Dr Sarah Davidson Evanega, Director at Cornell Alliance for Science, an organisation that supports “evidence-based decision-making in agriculture”.

She continued: “We’ve had a lot of studies that have suggested there’s no reason to think that the nature of how these plants are bred would pose any danger to human health and the environment, and that of course is based on the crops we have today.”

220

The number of acres covered by Monsanto’s primary research campus in Chesterfield, Missouri

$46.5bn

The value of Monsanto’s failed bid for Syngenta in 2015

$66bn

The amount Bayer paid for Monsanto in 2016

436

The number of cities that took part in the March Against Monsanto in May 2013

In response, the media is beginning to change its tune. “Increasingly, the coverage of tech by reputable media outlets is very much based in science – and people don’t want to get on the wrong side of science”, Evanega told World Finance. “There is a scientific consensus around climate change, and there’s a scientific consensus around safety of GM crops, and you can’t deny one scientific consensus and embrace the other; you’re either on the side of science, or you’re not.”

Indeed, a lot of the bad press about GMOs lacks scientific evidence and makes nonsensical comparisons. Take the American chestnut tree, for example: in an attempt to bring the tree back from near-extinction, it has been engineered using a gene from wheat, which protects it from a fungal disease known as ‘chestnut blight’.

“[This is] a blight that has basically killed every nut-bearing American chestnut tree on the planet over the last 100 years”, Evanega explained. “If we think about the efforts that have been made to repopulate the forests of the eastern US with what is now a nearly extinct species, that’s very different than Round-Up Ready corn, so how can we compare those two products?”

Evanega also raised the question of whether we should even be having such a global debate at all: “It’s not really useful for us in the global north to be debating about whether or not a banana farmer in Uganda should have access to choose whether or not she wants to grow a genetically engineered crop – that should be a decision that is left to the Government of Uganda and the farmers of Uganda. So, to engage in a global GMO debate over this huge amorphous bucket of aggregated things called GMOs is not constructive, it’s not informative and it definitely doesn’t really mean much.”

More and more people now seem to understand the distinction between different GM products. Through a gradual shift in the media, the public is also increasingly aware that genetic modification is a tool used by farmers in order to develop new, healthy crops, with the aim of optimising their quality.

“I do know they [Monsanto] have spent billions on public relations and have surely made some progress by enlisting academics and other scientists, who appear to be objective, to praise GMOs”, Stone added.

Necessary progress
Underpinning much of the GMO debate is the role of technology in agriculture, which is something many people are instinctively afraid of. With numerous campaigns and media outlets telling us we are consuming poisonous chemicals and feeding them to our children, it is no wonder many worry about what they eat each day. A lot of this, however, is hyperbole, and in many cases simply fallacious.

The truth is, science helps to bridge the widening gap between the escalating demand for food and its production. With a global population that has reached 7.4 billion – and is expected to reach 11.2 billion by the end of the century – more and more pressure is being placed on agricultural systems to feed the planet. Worryingly, our current infrastructure and farming methods are buckling under that pressure. A trust in science is therefore desperately needed if solutions are to be found and implemented – solutions that work with limited space and resources, and do not spoil our landscapes any more than is necessary.

monsanto-fig-3
And science has an answer: genetically modifying crops can help alleviate some of the stress we have placed on our planet, while also feeding billions (see Fig 3). Although products such as Round-Up Ready do not directly increase yield for farmers, GM crops generally require fewer herbicides and pesticides, thereby reducing the exposure our food and environment have to them. By making crops more resilient, we create a more sustainable system for farming, which in turn can help to enhance food security across the planet.

Throughout the centuries, society has always had a strong affection for farmers and profound respect for their practices – it speaks to most of us on a number of levels. Food is deeply personal; it provides a vehicle for communication, community, celebration and comfort. While western civilisation has become somewhat detached from the source of its food, most of us are still aware of how much work is required to produce it. Unsurprisingly, therefore, we disdain those who we believe take advantage of farmers and threaten their livelihoods.

It is perhaps this that lies at the core of derision for Monsanto: the company is, in the minds of its critics, the big bad guy that picks on hardworking farmers, squeezing pennies out of them and suing them.

Yet Monsanto’s reputation for bad spin control and tendency to sue, together with some questionable decisions in its earlier years, should not muddy the reputation of GMOs in general. For there is something to be said for the good GMOs can bring: science can help us grow crops that are less prone to disease and more likely to thrive, while scientific evidence suggests they do not in fact cause any harm to humans or the environment. Finally, the media is beginning to realise the benefits of GMOs, and as a result, more people are becoming aware of the fact that the battle against genetic modification is not one we should be waging at all.

Coming of age in Asia’s growing insurance sector

Posted on by Max Tomlin

In the past few decades, Hong Kong has become a major hub for insurance. By the end of June 2016, 161 insurers – including 14 of the world’s top 20 – were authorised to conduct business in Hong Kong. The insurance market in the region has come a long way since 1981, when HSBC Insurance (Asia) was first founded. Hong Kong is a mature insurance market, with talented professionals and a well-established legal structure. As of the end of 2015, the industry’s gross premium amounted to HKD 374.1bn ($48bn).

As part of the Pearl River Delta, Hong Kong is in a good position to be an important insurance and risk management centre for investments under the Chinese Government’s Belt and Road Initiative. Furthermore, as mainland enterprises are seeking to ‘go global’, they will favourably consider the advantages in establishing captive insurance companies in Hong Kong for insurance arrangements and risks management of their overseas businesses.

World Finance spoke to Candy Yuen, Chief Executive Officer of HSBC Insurance (Asia), to discuss Hong Kong’s insurance sector, HSBC’s position within it, and the challenges the industry is currently facing.

How has HSBC managed to become such a strong contender in Hong Kong’s insurance market?
We are well positioned with regards to the nature of Hong Kong’s insurance market for a number of reasons. First, we have a strong heritage and a strong brand both globally and locally, where we as a bank have been serving customers for 150 years. Second, we are a global and universal bank. The group serves customers worldwide from over 6,100 offices in 73 countries, in territories both in Asia and around the globe. This gives us, the insurance business in Hong Kong, the advantages of leveraging and synergising the strength, experience and learning from other markets.

Third, we already have a leading presence in the Hong Kong insurance and Mandatory Provident Fund markets; we ranked first in the Mandatory Provident Fund market as of June 2016 in terms of total assets under management, and we are a leading insurance company in terms of both in force and new business premiums. Finally, we have been enjoying a long and strong relationship with our customers built from our customer-centric services, offerings and extensive customer touch points, including in-branch and digital. Doing the right thing for our customers is paramount to the maintenance and deepening of this bond, and is accomplished by knowing our customers.

Hong Kong remains a high-growth sector in the region as those in the city look to fill their protection gap with insurance products

At HSBC, we excel at consumer insights, where we dedicate ourselves to producing consumer surveys, reports and tools, such as The Future of Retirement, The Value of Education, The Power of Protection and the HSBC Retirement Monitor, among others.

How has the recent economic slowdown in Asia impacted Hong Kong?
Recently, impacts from an economic slowdown in Asia are a very real concern for those in Hong Kong. Hong Kongers are now more vulnerable than ever to the protection gap created upon the loss of a breadwinner. According to Swiss Re’s Asia-Pacific 2015 Mortality Protection Gap report, Hong Kong’s mortality protection gap in 2014 was approximately HKD 4.2trn ($538bn), up from HKD 3trn ($391bn) in 2010.

According to a HSBC customer survey, 70 percent of our customers have a protection gap and require on average around three times their current coverage to achieve adequate protection. One can imagine the breadth of coverage needed to protect their loved ones in the event of an unfortunate incident.

However, Hong Kong remains a high-growth sector in the region, as those in the city look to fill their protection gap and fulfil their goals, hopes and dreams with insurance products. The continuous low interest rate environment has spurred high net worth individuals to see universal life insurance products as an attractive savings option, while enjoying life protection. The life insurance industry is recording historic growth, primarily driven by demand for Hong Kong insurance products by non-resident customers.

What is the most important issue affecting the insurance industry in Asia today?
hsbc-fig-1Like many parts of the world, demographic change is a prominent issue affecting the insurance industry, with far-reaching social implications. It is forecast Asia will account for 62 percent of the aged population globally by 2050, and so the need for pensions and old-age protection will stimulate demand for insurance coverage.

Healthcare reform is also on the agenda of several Asia-Pacific countries. This will create incentives for insurers to develop a wider variety of medical and health insurance products and better position themselves in formulating their marketing and pricing strategies.

In particular, society is currently experiencing an increased exposure to ‘longevity risk’. What this means is people are living longer than expected (see Fig 1), and hence run a higher risk of outliving their savings in light of increased healthcare costs as they live longer. According to the latest Power of Protection report by HSBC, 69 percent of Hong Kong residents worry most about their health, with healthcare costs posing the biggest health-related concern. As such, besides life protection products, HSBC Insurance has been addressing this concern through launching new health products, such as critical illness insurance plans, in 2016.

What sort of challenges does this present to the insurance sector and how can they be resolved?
Hong Kong has the highest average lifespan in the world (81.2 years for men and 87.3 years for women), according to recent Hong Kong and Japanese Government censuses. In a world of extending lifespans, it has become increasingly difficult for traditional pension plans to be the sole source of retirement funds. In Hong Kong, the burden to support the elderly has increasingly shifted to the younger generation, with mounting pressure as the number of senior citizens grows.

This will also result in increased stress on age-related spending for governments, as the population aged 60 or over will outweigh young citizens by 2050, resulting in a smaller tax base. This will mean defined benefit pension plans will be more likely to become underfunded, and this will be exacerbated by a low interest rate environment. Our survey also shows more than 63 percent of people with self-paid life cover do not know what the pay-outs from their policies would be, or do not think they are enough. The survey results also identify 53 percent of Hong Kongers think someone else should take responsibility for funding the cost of their personal healthcare, and 60 percent of people believe someone else should be responsible for ensuring their family’s financial stability.

To cope with this challenge, insurers will need to deploy a holistic retirement strategy and a new business model to address retirement needs. We will also need to be aware of the limitations of protection plans offered by employers, as they usually only provide a basic level of protection.

Our survey also shows that people who plan most actively are more confident in their future than those who do not. It is important to conduct personal planning and hold a regular financial ‘check-up’ with a trusted financial advisor. To help society further plan for their life after work, HSBC launched the Retirement Monitor, becoming the first and only firm to release retirement spend indicators using real statistics in the market. This information is publicly available and updated quarterly to reflect the latest changes in prices and consumer behaviours. We aim to help our customers achieve their ambitions, hopes and dreams, including their retirement aspirations.

Where do you see the Hong Kong insurance sector going in the next few years?
Insurers will be deploying digital as an enabler to improve customer engagement and experience, and as a key distribution channel. Fintech and digitalisation have become the main focuses among governments, regulators and insurance companies. These present ample opportunities for the industry to leverage new technologies to improve customer offerings and enhance its omni-channel experience.

Traditional insurers are expected to face much competition within the industry, while smart deployment of technology can capture the tremendous opportunities in this rapidly growing insurance space. Both regulators and industry players have been striving to catch up with the latest technology in order to serve the best interest of our customers in Hong Kong, as well as to ensure a healthy industry growth. As an example, we have also launched a simple term product, sold online, which has been well received by our customers.

We expect the industry to introduce more lifestyle-centric offers to relate insurance to the daily lives of customers. Insurers strive to use lifestyle offerings to build long-standing, meaningful relationships with customers. New ecosystems will be evolved. Lastly, there will be changes in the regulatory landscape in Hong Kong, as the Office of the Commissioner of Insurance transits to the Independent Insurance Authority. We look forward to continuing to work closely with the Insurance Authority for the future and the betterment of the community.

Value of Bitcoin soars to three-year high

Posted on by Helen

The price of Bitcoin reached a three-year high of $1,000 on the first day of trading in 2017, marking a strong start to the year for the digital currency. Bitcoin’s value rose by 125 percent in 2016, outpacing its central bank-issued counterparts to become the best performing currency of the year.

Increased demand for Bitcoin in China – where the majority of global Bitcoin trading takes place – is thought to have bolstered the currency’s value. While its price rose impressively in 2016, the Chinese renminbi fell by seven percent during the same year, marking the Chinese currency’s worst annual performance in more than two decades.

Increased demand for Bitcoin in China is thought to have bolstered the currency’s value

Bitcoin, which is used exclusively in web-based transactions, provides customers with a way to move money across the globe quickly and anonymously. The surge in Bitcoin usage in China has led experts to speculate that Chinese customers could be using the cryptocurrency to get around capital controls and strict government regulations that restrict money from leaving the country.

There are currently around 15 million Bitcoins in online circulation, with 12.5 new Bitcoins added to the system every 10 minutes. The total value of all Bitcoins in circulation is now at a record high of more than $16m.

The value of Bitcoin has been somewhat volatile since its launch in 2009. In 2013, the digital currency was trading at a high of $1,000 until the Tokyo-based Mt Gox Bitcoin exchange was hacked, sending its value plunging to less than $400.

While the present price remains just shy of Bitcoin’s all-time high of $1,216.70, which was set in 2013, the currency’s soaring value could see its strong run continue long into the New Year.

Brazilian laws need to match economic order

Posted on by Max Tomlin

Insolvency procedures are among the most complex and challenging in today’s business environment. In most cases there has been a breach of contract, bringing together a series of collateral effects that should be addressed. However, when it comes to the insolvency processes, the question is: should the laws meet the demands of the economic environment, or should the economy follow the dictates of the laws? Maybe the most appropriate answer is to establish a balance between the two points.

In the case of the laws that govern insolvency processes, for those that are dissociated from the reality of the economic environment, the market will find ways to correct such distortions. Other important points include the application of laws, the understanding of their principles, the establishment of jurisprudence, and their correct application. Nevertheless, talking only about the application of the law by the judicial branch may not be sufficient for a balanced analysis of its efficiency.

In light of a series of recent macro and microeconomic events, Brazil is at a moment of great reflection with regards to the insolvency processes and laws that were implemented 11 years ago. Many initiatives to introduce changes in the law are currently in progress from a variety of sectors in the economy. Part of these proposals is aimed at creating an environment with a greater balance of power in the relationship between the debtor and its creditors. Another part suggests the submission of all debtors’ creditors to the insolvency procedures, since the current laws provide for credits that are not subject to the recovery process. For example, the fiduciary liens and tax debts, which may hamper the finding of a global and integrated solution.

Moving forward
On the part of entrepreneurs in the industry, the greatest challenge to be faced is the cultural change that occurs with the postponement of corrective measures – the so-called ‘denial period’, when it is expected that a fact will suddenly arise and reverse a company’s decline process. Unfortunately, we still see some companies resorting to formal insolvency processes when they are undercapitalised and have few alternatives for their reorganisation. This can even happen when they have already missed the required deadlines.

Contrary to what we assume, a modest number of successful reorganisations are largely due to such mistimings, rather than the structure of the law itself or its application. Nevertheless, in my view, there is room for improvement in both.

In light of a series of recent macro and microeconomic events, Brazil is at a moment of great reflection with regards to its insolvency processes

Taking bad timing into consideration, aligned with the cash crisis of most of the companies that are submitted to the reorganisation process, the creation of stimulus to the entry of liquidity becomes an essential factor for us to achieve more success. A simple solution would be to qualify credits granted to the entities under reorganisation as a priority, including in bankruptcy.

Regarding the need for cultural change among entrepreneurs, we still frequently see inadequate levels of transparency and symmetry of information. In recent years we have already seen good progress, but there is still much to move forward with in order to create greater efficiency.

Local law
Another point that still needs to be addressed is the organisation of creditors and creditor committees, the latter of which remain underused. Better organisation by creditors could substantially help the process, since creditor committees have greater supervisory and bargaining powers compared with individual creditors.

With regards to the application of the law, the creation of specialised courts with regional operations may be an alternative of great relevance. Through this, we could prepare and apply specific training to the involved parties, exercise better control and have a more consolidated jurisprudence that would result in the legal certainty and predictability that is necessary to the economic environment.

It is clear that in Brazil we have seen complex processes in terms of the reorganisation of companies, recovery of credits and all related social benefits. Fortunately, we have achieved much success in these last 11 years, but we must push on further still for the continued improvement of the culture and procedures involved in reorganisation.

Click here for more from Deloitte Brazil

Brazilian trade regulations ‘too complex’

Posted on by Max Tomlin

Approximately 20 years ago, in order to discourage tax evasion, the Brazilian Government introduced a series of rules aimed at avoiding the undue transfer of profits through transactions conducted between multinational companies and their parents or associates abroad. Since then, all movements of goods, services and rights between entities belonging to the same group have been subject to transfer pricing rules.

Naturally, there are many countries in the world that also have transfer pricing regulations and guidelines. However, the Brazilian laws are unique and are considered by specialists to be too complex, especially given their clearly revenue collection-oriented nature.

Introduced by Law 9430/1996, these rules became effective in 1997. Although they were significantly revised in 2012 with the enactment of Law 12715, there are still numerous challenges for taxpayers, including with regard to foreign exchange fluctuations, which occur mainly during severe economic instability.

One of the assumptions underlying transfer pricing calculations by Brazilian entities is that such calculations must be made in Brazilian reals. At the same time, the methods that are most used both by Brazilian importers and exporters are those that require minimum profitability margins in import and export transactions. These methods are the resale price less mark-up (PRL) method and the acquisition or production cost plus taxes and income (CAP) method respectively.

Differing methods
The PRL method – which is applicable to imports – requires that a local entity reports a statutorily predetermined gross profit generated by goods, services or rights imported from related parties when resold to third parties. This can range from 20 to 40 percent, depending on the industry. However, these profits can vary significantly since they are directly linked to how foreign exchange fluctuation affects the import prices and, consequently, the cost of sales. In other words, every time the local currency depreciates, the import price in the Brazilian real increases and, as result, profit margins drop, thus leveraging potential taxable adjustments.

The Brazilian transfer pricing laws are unique and are considered by specialists to be too complex

On the other hand – and based on the same reasoning – there can be an adverse impact on exports in the case of an appreciation of the Brazilian real. This impact occurs when the CAP method is applied, since this method requires that the Brazilian taxpayer adds a fixed gross mark-up of at least 15 percent to the cost of all the goods, services or rights exported to its related parties.

However, specifically with regard to the CAP method – as well as one of the waivers of proof criteria applicable to export transactions – the federal government allowed exporting taxpayers to use the adjustment mechanism applicable to transfer pricing under administrative rules, so as to mitigate the impacts arising on the appreciation of the Brazilian real against foreign currencies. Therefore, in conformity with said administrative rules, taxpayers have been able to apply foreign exchange adjustment factors on revenue generated by exports to related parties in different calendar years.

In summary, the Brazilian Government has allowed exporters to add targeted percentages, which vary depending on the year, to the prices actually charged in order to increase the sales prices. As a result of this, an exporter can decrease or even eliminate a possible gap between the price charged on exports and the benchmark price, whether by applying the CAP method or the waiver of proof criterion.

We must highlight that the administrative rule currently in force does not provide for the use of the same mechanism when other transfer pricing methods – such as PVEx (export sales price), PVA (wholesale price in the country of destination, less profit) and PVV (retail price in the country of destination, less profit) – are applied. This is because, if the goal is to mitigate the impact of foreign exchange fluctuations, it does not make sense to apply this adjustment in methods that already use foreign currency-denominated amounts as a pricing basis and, consequently, somehow already contemplate some type of adjustment in light of the foreign exchange rates used. This is not the case, however, for CAP, which uses the costs incurred in Brazil for pricing purposes.

From an economic standpoint, the federal government’s approach of seeking to eliminate – or at least alleviate – the distortions caused by foreign exchange fluctuations to avoid making unreal adjustments to exports price is quite reasonable, not to say commendable. We emphasise, however, that the government does not allow the same type of flexibility in the case of imports, which often exposes the taxpayers who conduct import transactions to economic hardships that are beyond their control and cannot be mitigated with good management or a sound transfer pricing policy. Even though foreign exchange is a variable that escapes taxpayers’ control, there are some alternatives and procedures that could be adopted to mitigate or even eliminate the possible transfer pricing tax adjustments, even in a foreign exchange fluctuation scenario.

New alternatives
One of these alternatives is for the Brazilian entity’s management to negotiate the possibility of conducting import and/or export transactions in Brazilian reals. This way, the foreign exchange risk would remain overseas and the profit margins could be negotiated in advance in order to comply with the prevailing laws and regulations, while being maintained without any interference from economic drivers.

The use of simple price benchmarking methods – or other methods that size the maximum profit margin earned by related companies abroad – could also constitute an option for organisations that seek to scale down their own taxable adjustments. Since there is no benchmark for a price charged in a foreign currency with a benchmark price calculated on costs incurred or revenue recognised in Brazilian reals, as is the case with the CAP and PRL methods respectively, foreign exchange fluctuations do not tend to have any impact on taxable adjustments.

However, the use of any other method basically requires having access to foreign information, which in practice could be a barrier, especially when the relationship between the Brazilian entity and the related parties that hold such information is not close.

Credit notes
When a taxable adjustment to transfer pricing is identified, it is not uncommon to resort to the use of so-called ‘credit notes’ as an alternative to reduce such taxable adjustment. It is worth noting, however, that Brazilian tax legislation does not acknowledge or address the use of credit notes and, consequently, such use for the purpose of scaling down transfer pricing adjustments could be challenged by the tax authority.

Even though many address the matter rather simplistically, there are numerous aspects that should be taken into consideration when assessing the use of a credit note to ensure the intended outcome is achieved, with a high level of certainty that it will be accepted. The most relevant of these aspects include: the note issue timing; supporting documentation for the imported goods to which the note will make reference; the technical treatment used to calculate the price charged and the benchmark price; and customs and other impacts.

Even though, as mentioned above, the use of a credit note requires care, discretion and moderation, this alternative should be considered, especially when the primary goal is to reduce or eliminate the impact of the double taxation commonly produced by transfer pricing adjustments.

Price watching
Without disregarding the possibilities described above as alternatives to soften the impact of transfer pricing, the periodic monitoring of import and export prices is key for any taxpayer subject to these rules.

Even though there is an annual obligation to file transfer pricing calculations, adopting price monitoring as a recurring practice on a monthly basis, or at least every quarter, coupled with price renegotiation is still one of the most efficient ways of avoiding transfer pricing adjustments.

As the calculations are made using average prices charged per item, theoretically these could be renegotiated, adjusted or previously offset against each other, according to the outcomes of the partial adjustments determined for each calculated period.

Obviously, in order for this to happen it is necessary to monitor impacts from a customs standpoint and, essentially, make sure the foreign related companies are flexible enough to engage in such price renegotiations throughout the year. Based on this quick, skimming approach of the impacts of foreign exchange fluctuations, we can see how important it is for a taxpayer to have a detailed knowledge of the Brazilian transfer pricing rules and be aware of the paths that can be treaded to soften its impacts.

Finally, we emphasise that the foreign exchange impact is but one of the numerous aspects to be observed, and that there are many other equally or even more complex issues that, if not appropriately grasped, handled and addressed, could result in a high tax burden or severe penalties.

 

Click here for more from Deloitte Brazil

China set to grind down its salt monopoly in market shake-up

Posted on by Max Tomlin

China’s state control of the salt sector – thought to date back to the seventh century BC – was officially dismantled on January 1 as salt producers were exposed to market forces.

The monopolistic system was previously under full state control, with producers required to operate under a national quota. Under the new reforms, licensed companies will now be permitted to set their own production rates and distribution patterns, as well as being able to run their own marketing campaigns. Companies will also be permitted to operate outside their previously designated areas for the first time. Additionally, the reforms will allow new openings for private capital to be invested in the sector.

The salt monopoly… once provid[ed] the funds for emperors to built parts of the Great Wall of China

The industry will remain heavily regulated, however, with no new licenses being issued for table salt producers. The government will also retain some level of supervision over pricing, in order to “prevent abnormal fluctuations”, according to the official plan published last year. Furthermore, regulations will ensure that distributors provide good quality salt – which must be supplemented with iodine – to 90 percent of the market. The addition of iodine to table salt has been part of a health drive to reduce iodine deficiency in the Chinese population.

Shortly after the reforms were announced, Zou Jialai, a Shanghai-based lawyer, told The Wall Street Journal: “It’s a milestone for China’s salt reform. The removal of state controls over price and distribution is big progress for the industry.”

The move is part of a much broader effort to move away from central planning in the Chinese economy, and the ruling party has pledged to carve out a “decisive” role for the market over the coming years. Given the history and former financial significance of the monopoly, the decision certainly has symbolic value. The salt monopoly has witnessed a rich history while in state hands, once providing the funds for emperors to built parts of the Great Wall of China.

However, despite this symbolism, the industry has less financial clout than other, more lucrative state-controlled industries. Larger state dominated sectors like tobacco, energy and banking are yet to experience a substantial overhaul, which would mark a more convincing shift towards market forces in the slowly transitioning economy.

People’s Bank lights the digital banking torch for Sri Lanka

Posted on by World Finance

Sri Lanka’s People’s Bank has been a key partner in the country’s post-independence journey. But being a bank for the people comes with its challenges. Today’s people are millenials: that means digital, and it means mobile. The bank has taken on the challenge of carrying Sri Lanka’s digital banking torch, with a goal of becoming the most digitalised bank in the country. CEO and MD N Vasantha Kumar, and Deputy General Manager of Banking Support Services B M Premanath explain the roadmap for the strategy, and how changing attitudes – both of staff as well as customers – is the biggest challenge. They also explain the efficiencies and environmental sustainability that going digital will bring, as well as the opportunity to capitalise on the growing foreign direct investment in Sri Lanka’s infrastructure development.

World Finance:  Sri Lanka’s People’s Bank has been a key partner in the country’s post-independence journey. But being a bank for the people comes with its challenges. Today’s people are millenials. That means digital, and it means mobile. Joining me are N Vasantha Kumar and B M Premanath.

You’re working to become the most digitalised bank in Sri Lanka; what’s the current state of the market?

N Vasantha Kumar: At the moment, four million people are using internet banking, and internet banking users are growing annually. But still payments, things like that, are not taking place through internet banking. Very few – about 10 percent, I’d say.

Other banks also, in little areas they’re digital, but we can’t say they’re completely digitalised banks. So certain providers maybe they have internet banking, mobile phone banking, things like that. But that is the reason we at People’s Bank want to have the entire thing digitalised. As a state bank I think it’s our duty and our responsibility to take this into the market.

World Finance: What’s your roadmap for driving this strategy forward?

N Vasantha Kumar: Our roadmap is first changing the mindset of our staff, then the customers. Of course, this is a real challenge. One thing is, our people are used to the brick-and-mortar type of banking. They like to come to the bank to do their transactions. To change that concept, it’s a bit of a difficult thing. And bank staff also, it’s a big leap forward from normal banking.

So we’ve already started changing their attitudes. Then the procedures and the manuals need to be changed.

For younger customers – the up and coming, young generation – I think it will be very easy. But as a state-owned bank, we have a branch network covering the entire country. So in rural areas, for those people it’s much easier to come to a branch and do their transactions. That’s very important for them. So changing their mindset will be the real difficulty.

The roadmap is starting. Already we have started the introduction, the installation of digital banking, will take place early next year. At least five branches will be digitalised.

World Finance: Digitalisation is also going to improve your environmental sustainability, which is increasingly important to you. Tell me about some of the projects you have there.

N Vasantha Kumar: As a state bank, we have a responsibility to the national development programmes. So at this moment, we have embarked on an ambitious programme of green banking. That means to paperless banking and environmentally-friendly, reducing carbon usage. So we have already started Green Pulse and Green Banking.

Green Pulse: we have started sending e-statements. Making minimal usage of paper.

Other environmental things in Green Banking are our buildings. Green Banking takes solar power energy – those types of things we are doing in the Green Bank building concept.

Premanath, where did the new building, where we were going to start the first building of Green Banking?

B M Premanath: We are planning to start that in the Tafta Plant.

N Vasantha Kumar: The Tafta Building. That is our regional office and branch located up north. That is the first building accorded the Green Bank concept.

World Finance: And the digitalisation strategy is also going to position People’s Bank as the go-to bank for international investors?

N Vasantha Kumar: Yes – the government wants to attract more foreign investment, to develop the country. Especially in infrastructure development, IT hubs, tourism. And the government has announced the Colombo Megapolis – they want to make the entire Colombo district one mega city, having an IT hub, a maritime hub, an aviation hub, and also the financial city there.

So the People’s Bank has the largest branch network and is one of the largest state banks, we’ll have a major role to the play in the government’s developments.

Once the market is improving, and as the government ought to have a new financial centre, so in that case People’s Bank will be an active partner. So the entire international banks are mostly digital, so it’ll be a good opportunity to take the lead.

World Finance: Kumar, Premanath, thank you very much.

N Vasantha Kumar: Thank you.

Scaling the wall of Trump’s doctrine

Posted on by Max Tomlin

“As democracy is perfected, the office of president represents more and more closely the inner soul of the people. On some great and glorious day, the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned
by a downright moron.”

HL Mencken

As President-elect Donald Trump approaches his inauguration on January 20, world leaders are no doubt wondering with some apprehension how an America led by a property developer and reality television star will act on the world stage.

After all, there’s no precedent in modern times for a political novice with little international experience occupying the White House at such an unusually complex and tense period. And yet organisations such as the G20 will expect the new president to have effective ideas for a delicately poised world with much of the Middle East and North Africa in turmoil, an Asia-Pacific region concerned about China’s claim to most of the South China Sea, a shaky eurozone, international terrorism on the rise, a muscle-flexing Russia, and the urgencies of global warming.

Overall, most commentators declare themselves perplexed and confused by Trump’s views of the world beyond the Statue of Liberty

In short, will a Trump administration have an international or xenophobic perspective on these and other pressing issues that, by definition, require the full engagement of the US? Based on the candidate’s campaign speeches, here’s what we know.

Taking the terrorism threat first – if only because Trump hammered it to death while on the campaign trail – the fight against jihadists would go up several notches. “Containing the spread of radical Islam must be a major foreign policy goal of the United States”, he announced at frequent intervals.

This would occur on several fronts. Assuming the president-elect means what he says, ISIS would be bombed out of its various strongholds and “extreme Muslims” would be expelled from the US. Co-operation with countries that have produced radical Muslims would cease forthwith. By implication, these would include Belgium, the UK, France, most of North Africa, much of sub-Saharan Africa, and parts of the Asia-Pacific, among other regions and countries that, deliberately or inadvertently, have harboured jihadists in the past. However, provided they cooperate fully, Trump’s America would also work with “our allies in the Muslim world”.

Second, America would re-arm rapidly. Impatient with what he decries as President Barack Obama’s “gutting” of the US’ nuclear arsenal and running down of the armed forces, the incoming president said: “Our ultimate deterrent… is in need of modernisation and renewal.” In terms of firepower, Trump clearly sees his mission as restoring the US to the status of the world’s greatest military force: “The Russians and Chinese have rapidly expanded their military capability, but look what’s happened to us.”

Furthermore, America’s allies would be expected to foot a greater share of the bill. Claiming the US has borne the brunt of defence spending that’s now protecting Asia and Europe, Trump would require other countries to boost their defence budgets if they ever want help from America. For instance, he has argued only four of NATO’s 28 member countries are spending the obligatory two percent of gross domestic product on their armed forces. If they don’t take more responsibility, he warned, “the US must let these countries defend themselves”. On the same subject, he warned that America would take a long, hard look at its defence treaties with Japan and South Korea, among others.

A bad deal for America
In matters of trade, Trump has foreshadowed a modern version of isolationism, in spite of the overwhelming evidence of the benefits of the free global exchange of goods. He has already repudiated the Trans-Pacific Partnership (calling it “a terrible deal”), which had just been agreed between 12 Pacific Rim countries, excluding China. He has also slammed the 22-year-old North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico for “emptying” the US of jobs. He also appears to hold the World Trade Organisation (WTO) in scorn.

The incoming president’s rationale for setting up import duties against other countries’ goods is that President Obama’s “open borders” policy has created a $1trn trade deficit in manufacturing, with the rest of the world having stolen countless jobs from Americans. This statistic is questionable, to say the least. “We’re rebuilding other countries while weakening our own”, he argued.

276

seats were gained by Trump in the Electoral College vote

0.7%

The dollar’s rise in the ICE US Dollar Index following Trump’s victory

1,900

miles – the length of the US-Mexico border

$25bn

The Washington Post’s estimate for the cost of Trump’s infamous wall

But, as the respected independent Washington-based think tank Cato Institute warned: “His threat to dismantle NAFTA and to use import duties to force our trading partners to bend to his will would tank any economic recovery and have severe constitutional implications.”
In trade, as in its wider relationships with the outside world, America hasn’t been tough enough for Trump’s liking. As he put it: “In negotiation you must be willing to walk. The Iran [nuclear] deal, like so many of our worst agreements, is the result of not being willing to leave the table. When the other side knows you’re not going to walk, it becomes absolutely impossible to win.”

On the positive side, he added: “At the same time, your friends need to know that you will stick by the agreements that you have with them.”

Third, in all his administration’s decisions, the interests of America will come first, second and last. “I will view the world through the clear lens of American interests”, he promised to thunderous cheers on the campaign trail. “I will be America’s greatest defender and most loyal champion.”

Trump’s repeated references to “America first” concerned other world leaders, as it amounts to a complete reversal of Obama’s US foreign policy, which has engaged much more fully and openly with the outside world than that of the Bush administration. The subtext behind “America first” is Trump’s conviction that the interests of the nation state should triumph over transnational organisations – never mind that these bodies have been created to harmonise the efforts of individual countries in the achievement of mutually beneficial goals.

As we’ve seen, Trump has little respect for the WTO. But many commentators believe his low regard for transnational bodies may extend to NATO, financial organisations such as the World Bank and the IMF (both of which rely greatly on US support), and perhaps even to political organisations such as the UN and EU. “I am sceptical of international unions that tie us up and bring America down”, he said. “I will never enter America into any agreement that reduces our ability to control our own affairs.”

To many, that sounds very much as though he’s got no patience with the UN – an organisation which, it is claimed, frequently ties American hands.

Taking down the bogey states
In Trump’s worldview, there are ‘bogey’ nation states: China, for one, cropped up frequently during his campaign. He virtually blamed the entirety of America’s purported haemorrhage of jobs on the nation, accusing it of supporting North Korea (roughly 90 percent of the latter’s trade is with China). Indulging in some additional Obama-bashing, Trump also blamed the president for “allowing China to continue its economic assault on American jobs and wealth, refusing to enforce trade rules or apply the leverage on China necessary to rein in North Korea”. As a result, Trump told voters, China had lost all respect for America.

On safer ground, he also faults the Obama administration for allowing China to “steal government secrets with cyber attacks and engage in industrial espionage against the United States and its companies”. Although that’s generally true – as experts on cyber attacks unanimously agree – it’s also true that the Pentagon and other similar agencies run active worldwide espionage campaigns that are considered to be at least as effective as those of China.

Iran is another enemy of Trump’s America (he would immediately dismantle its nuclear capability, for instance) – and so, of course, is Mexico, because so many of its citizens live illegally across the border.

To Russia, by contrast, he has handed an olive branch. During his election campaign, Trump expressed admiration for Vladimir Putin and said he was looking forward to meeting Russia’s sanctions-hit president. This has worried some commentators, who cite the Russian leader’s guile and cunning. “Does [this mutual admiration] mean US-Russia relations will suddenly be repaired, giving Putin a free hand in Europe and a proxy in the White House?” international lawyer and political commentator Robert Amsterdam asked in November. “Not so fast.”

But we might find out all too soon: Amsterdam fears Putin could move quickly to test the boundaries of his relationship with the Trump White House by invading, for example, the Baltic countries, thereby drawing Trump into a trap “in which confrontation with Russia is unavoidable”. As financial and other sanctions over the invasion of Ukraine bite deeper into the Kremlin, the fear is Putin could strike in the early weeks of the Trump presidency, before the incumbent has his feet firmly under the table.

Until – or if – that happens, the new president believes he could strike a rapport with Putin. “Some say the Russians won’t be reasonable”, he said. “I intend to find out. If we can’t make a good deal for America, then we will quickly walk from the table.”

But despite his aggressive rhetoric, Trump insists he’s not spoiling for a fight with nations he doesn’t count as friends: “We desire to live peacefully and in friendship with Russia and China. We have serious differences with these two nations, and must regard them with open eyes, but we are not bound to be adversaries.” He cited common ground with Russia, for instance, based on shared interests including the fight against Islamic terrorism.
But if he openly dislikes some countries, Trump has a soft spot for others. Israel – “one of our greatest allies” – would certainly qualify, and so would Scotland, the birthplace of his mother and the home of the Trump golf course near Aberdeen.

But so far, at least, his worldview does not encompass Europe or the Asia-Pacific. And it certainly doesn’t embrace Latin America, for which he has not articulated a coherent policy – if you exclude the running battle with Mexico over the infamous wall that would be built (by Mexico, insists Trump) to keep “illegals” out. It is a strategy that contributed to the rapid drop in the Mexican peso’s value during election night in November (see Fig 1).

True or false?
In any examination of the entrails of what has euphemistically been described as the ‘Trump doctrine’, the problem is whether the president-elect meant what he said in the run-up to his stunning election victory – or whether he was simply saying what he wanted voters to hear. Certainly, the soon-to-be 45th president’s various expositions of foreign policy were riddled with errors. The question is whether these were deliberate or not.

As several news organisations hastened to point out, he was plain wrong in some assumptions, half-right in others, and on the mark in very few. For example, he promised the US will put a stop to the “era of nation-building” – that is, attempts to install democracies in Iraq and Afghanistan – that Obama had allegedly practised. In fact, as ABC News noted, the statement was “mostly false”, because Obama had actually phased out most of the large-scale nation-building efforts that originated with the Bush administration.

Trump also repeatedly misrepresented his own position on some big issues, such as the war in Iraq. He insisted throughout the campaign he had opposed the invasion from the beginning, despite the fact, as ABC News reminded him, that he’d sat on the fence. Other news organisations proved he had supported the invasion of Libya, even though he repeatedly lambasted Hillary Clinton for allegedly prosecuting the war that toppled Gadaffi. They also cited several falsehoods about the role of the Obama administration in the coup in Egypt in 2013, and other upheavals in North Africa during the ‘Arab Spring’ of 2010.

Overall, most commentators declare themselves perplexed and confused by Trump’s views of the world beyond the Statue of Liberty. Describing one speech, popular current affairs site Vox Media fulminated: “The bulk of it was dedicated to demagoguery, xenophobia and bizarre lies about status quo immigration policy in the United States and Hilary Clinton’s proposals for gun regulation.”

However, according to his audience, Trump can change tack. When, for instance, the Prime Minister of Pakistan, Muhammad Nawiz Sharif, called to congratulate him on his election victory, Trump was pleasantly effusive, despite Pakistan being one of the countries that would be on his banned list for harbouring terrorists. According to the Pakistani Government’s transcript of the conversation, the incoming president told the prime minister he was “a terrific guy” who was “doing amazing work” in “an amazing country with tremendous opportunities”. Further, “all Pakistanis I have known are exceptional people”.

And, far from informing his caller that he regarded Pakistan as a rogue nation, Trump told the probably-startled prime minister that he was “ready and willing to play any role that you want me to play” to address his nation’s problems.

The global superpower
If Donald Trump is true to his rhetoric, world leaders should expect him to behave as though America is the world’s superpower with the dominant role in global politics. Indeed, his “America first” motto has led him to make exaggerated claims about his country’s role in world affairs. For instance, he appears to believe America won the Second World War single-handed: “We have a lot to be proud of. In the 1940s, we saved the world”, he insisted in April last year. “The Greatest Generation [a description he borrowed from a 1998 book about Depression-era soldiers] beat back the Nazis and the Japanese imperialists.” Though, as countless war historians have pointed out, this statement completely ignores the contribution of the other Allied powers.

The subtext behind “America first” is Trump’s conviction that the interests of the nation state should triumph over transnational organisations

Trump also stated as fact that Mikhail Gorbachev acted under instructions from Ronald Reagan when the Soviet Union was dismantled. “Then we saved the world again, this time from totalitarian Communism”, he declared. “The Cold War lasted for decades, but we won.”

Because of sweeping and frequently inaccurate statements such as these, foreign policy specialists are nervous of how the new president will act and behave in the future. “It’s impossible to tell from his stated agenda what his foreign policy would actually look like”, noted Vox Media. “But it’s easy to see that it’s going to be a muddle driven by impulse and catch phrases, unguided by actual understanding or reliance on the support of anyone who has it.”

Others are slightly more sanguine, suggesting Trump will be more pragmatic once he takes office. “Trump’s foreign policy will be much more fluid than anticipated, but we are still potentially looking at some fundamental, tectonic shifts in the post-Second World War international system”, predicted Amsterdam.

Surprisingly, business and finance professionals in Shanghai and Hong Kong are also optimistic. According to a poll conducted by the deVere fund management group two weeks after Trump’s election victory, a healthy majority of 650 top executives believed the new president will have “a positive effect on the world economy”, citing Trump’s expected dismantling of some of the regulations imposed on Wall Street and his softer attitude to global warming, which, they expect, will boost the extractive industries. There’s also talk that he may emasculate the FATCA tax evasion laws that are widely resented in several regions, including the Asia-Pacific.

trump-fig-2They could also have mentioned Trump’s promise of individual and corporate tax cuts. Along with regulatory reform, these “hold great promise”, according to the Cato Institute. But whatever Trump’s foreign policy turns out to be, it will certainly be diametrically different from that of the Obama administration. “Our foreign policy is a complete and total disaster”, Trump said of the current regime. “[It has] no vision, no purpose, no direction, no strategy.” The big question is what it will be replaced with.

Part-term president
Hovering over the 45th president is the possibility he may not last a full term. Even as he prepares to take office, a powerful groundswell of opposition is building against his policies, his personality and his lack of the popular vote (see Fig 2). In late November, the left-wing magazine The Nation began organising a full-scale, America-wide, volunteer-led campaign with the sole purpose of destroying a Trump presidency. The Nation sees this as nothing more nor less than a mission to save the country. It said: “Passionate, moral and urgent opposition to Trumpism could represent the greatest opportunity for mass participation in politics since the anti-war movement of a half-century ago.”

There’s also serious opposition in government circles, even from within Trump’s own party. Insiders report a powerful bloc within the Grand Old Party is so concerned about the damage a loose-cannon president – if, indeed, that is what Trump turns into – will do to the Republicans that they feel they cannot support him, or the party will be tainted by association and lose all chance of winning the election in another four years’ time.

One thing is for certain: if President Trump lasts the distance, it will undoubtedly be a turbulent four years.

Growing infrastructure: the international agenda

Posted on by Max Tomlin

As the world meets in Davos to survey the economic situation around the globe, a fairly consistent view emerges: countries have generally high levels of public debt, lower-than-desired rates of economic growth and job creation, and historically low interest rates providing little incentive to save. Added to this, many also have acute problems of youth unemployment as the world has moved to globalised, automated and streamlined production and services alike.

Looking at Europe, these issues are compounded by social and economic pressures, due to unfavourable demographic trends and high migration levels produced by conflict and economic distress in neighbouring countries. Viewed through the lens of emerging market countries, the imperative to achieve economic growth – while encouraging quality investment that raises living standards and competiveness – is a real-world issue that, if left unfulfilled, will negatively affect political and social stability.

And yet, while many emerging market countries do appear to be stuck in transition at present, these same countries currently have opportunities to attract investment due to a unique set of circumstances.

The infrastructure gap
New infrastructure is undoubtedly necessary in emerging markets to enable economic growth, but it is well established that the difference between the infrastructure needed and the current level of actual investment is very sizeable. The emerging market ‘infrastructure gap’ is estimated by the OECD, WEF, IMF, World Bank and various academic institutions to be somewhere between $2trn and $3trn per annum, when taking into account the dual need to modernise and expand infrastructure, as well as the need to make green investments called for by the UN Sustainable Development Goals (SDGs).

The difference between the infrastructure needed in developing economies and the current level of actual investment is very sizeable

Today, around 20 multilateral development banks (MDBs) are active, including the newly created Asian Infrastructure Investment Bank and the New Development Bank. According to recent G20 estimates, the operational commitments of major regional MDBs and the World Bank Group total around $80bn to $90bn annually. But despite this substantial balance sheet potential, MDB operations cover less than five percent of the total infrastructure gap for emerging markets.

The gap between the ability of MDBs to provide direct funding and the latent and real demand in emerging markets has focused international debate on how MDBs can catalyse more third-party financing – particularly private finance from commercial banks and non-bank financial institutions – to cover more of the financing needs. Given constrained fiscal balance sheets, it is clear much of this new investment will need to come from the private sector.

Growing interest
Following the global financial crisis, a downward trend in interest rates set in across most developed countries, a situation that persists to this day. Given the duration of such low rates, even naturally risk-averse investors, such as pension funds and insurance companies, have become increasingly interested in diversifying a portion of their portfolios into higher-yielding investments in emerging markets.

Due to the unique nature of infrastructure projects – very long-lived assets with relatively stable revenues – such investors have woken up to emerging market infrastructure as a type of investment where they would like to increase their share, which currently stands at just 1.1 percent. A 2016 survey by EDHEC and the G20 Global Infrastructure Hub (GIH) revealed that 70 percent of institutional investors want greater portfolio exposure to emerging markets infrastructure. With some $50trn of assets under management belonging to institutional investors, a two percent asset allocation by this massive pool of capital would account for $1trn.

In 2015, Moody’s published an influential report reviewing the performance of some 1,400 PPP projects from the mid-1980s to 2014. The report showed they have a comparatively low default rate of three percent – lower indeed than the default rates of some 6,000 general project finance loans (six percent) during the same period. Furthermore, it was shown there is no statistically significant difference between the default rates of infrastructure in emerging market countries versus developed countries. This conclusion should help close the gap between ‘perceived risk’ and ‘real risk’ for investors.
The passage of SDGs in 2015 has focused the need for cleaner investment that deals with both climate change mitigation and adaptation. Donors, international financial institutions (IFIs), international banks and industrial players have all committed to ambitious investment targets, where resource efficiency and sustainable infrastructure will be central to the action plan over the next 15-20 years.

Supporting the infrastructure agenda
If there is such need for clean, high-quality investment with higher yields, and the emerging market infrastructure sector offers a place for capital to be attracted, why isn’t more happening? The answer is simple to identify, yet complex to solve: due to weak institutional capacity in the public sector, there are not enough investible projects available.

This deficiency leads to projects that are too often presented to the market with unacceptable structures and unpalatable risks. Multiple barriers curtail investment in emerging market infrastructure: major risks are related to local currency and convertibility, political and regulatory uncertainty, and a lack of certainty surrounding revenues, tariffs and project-based cash flows. The result is too many failed tenders leading to, ultimately, underinvestment in infrastructure.

The response that has formed over the past four years, led by IFIs, the G20, OECD, WEF, key bilateral donors and other key development finance organisations (DFIs), has coalesced around a multifaceted joint agenda for infrastructure support. There are four primary areas of support for this agenda: first, a number of project preparation facilities (PPFs), with some $300m committed in total, have been formed to create a deeper pipeline of well-prepared, investible projects for the benefit of emerging market countries. In addition, many of these countries have created national-level PPFs to boost pipeline development.

The external support for deeper and better prepared pipelines can only be sustained if emerging market governments invest in the institutional capacity to select, plan, prepare, tender and monitor quality infrastructure. As a complement, the International Infrastructure Support System (IISS) is a platform for project pipeline dissemination led by the local country managers and supported by all major IFIs, using standardised templates for each subsector project type.

Second, there is an acute need to disseminate leading practices and build capacity. The PPP Knowledge Lab is an online space that consolidates all major policy outputs across IFIs, and features outputs by the PPP Infrastructure Resource Centre, the Public-Private Infrastructure Advisory Facility and regional IFIs. OECD’s extensive programme of research and policy advice has focused on infrastructure in emerging market countries. The PPP Certification Programme, supported by the IFIs, provides for the first time a standardised body of knowledge emerging market governments can use to train their key staff on PPPs.

Third, policy initiatives are critical to sustaining the lessons learned across countries and regions, while also stimulating innovation. Building on the successful ‘PPP days’ organised by IFIs since 2004, the Global Infrastructure Forum, which held its inaugural meeting in 2016, is set to annually bring together the heads of all IFIs with the UN Secretary General to provide high-level direction.

The G20’s GIH, created under the Australian G20 presidency in 2014, is producing a suite of knowledge products, ranging from the PPP guide to the capability framework to boost private sector investment in particular. The WEF’s Strategic Infrastructure Series, meanwhile, provides insights informed by its Global Agenda Council on Infrastructure. Finally, the Global Infrastructure Connectivity Alliance, created by the G20 in summer 2016, was established to disseminate lessons learned on critical cross-border corridor development that facilitate global trade and inform major new efforts, such as the Belt and Road Initiative.

Finally, risk mitigation, credit enhancement and blended finance are particularly active agendas for IFIs. The World Bank’s Multilateral Investment Guarantee Agency’s panoply of risk insurance products is now complemented by new credit enhancements, such as the Managed Co-Lending Portfolio Programme, where the Swedish International Development Cooperation Agency provides first-loss coverage at scale for IFC loans which are offered on an automatic pari-passu basis to institutional investors, such as major insurers.

The Sustainable Development Investment Partnership includes some 50 entities (donors, IFIs, DFIs, global banks and other international organisations) that seek to provide coordinated credit enhancement and other means of support to accelerate investment in emerging market countries. Convergence, which has been backed by the Government of Canada, WEF, OECD and the Ford Foundation, also provides risk mitigation for particular project finance deals, especially in lower income countries.

Local expertise
With over $300m available, there are enough resources in IFIs’ PPFs to prepare and tender out more than 150 complex infrastructure projects over the next 24 to 30 months across emerging market countries. If successful, the global project capex result would be approximately $30bn, assuming a $200m-per-project capex value. But for this to happen, the PPFs need to become fully operational by getting the mechanics right.

They need to be selective by subjecting each project request to a vetting process, so as to understand the basic business case, verify the readiness of the legal framework, analyse affordability, and do an initial assessment of the main risks to identify potential deal-breakers. Once this ‘phase zero’ vetting is done, high-quality advisors are needed. The European Bank for Reconstruction and Development’s (EBRD’s) IPPF, for example, has a roster of four internationally experienced and pre-selected external ‘framework consultant’ consortia which are able to be called off and mobilised in eight weeks. Part of this accelerated delivery is about such basic mechanics.

Another key aspect is knowledge transfer: the PPFs should make a conscious effort to work closely with clients using local experts. As countries like Chile, Korea, Singapore and Taiwan know from their respective development pathways, capacity building takes a dedicated long-term investment in your own people. There is no shortcut.

The PPFs should also seek to collaborate wherever possible, including joint funding and joint preparation of complex deals. Finally, IISS holds great promise, with a minimum target of 500 projects to be uploaded onto its cloud-based platform by 2020, in an effort to make IISS the go-to place for project pipeline information.

Knowledge that sticks
Knowledge platforms, such as the innovative PPP Knowledge Lab, have great potential to become primary destinations for public sector officials seeking to understand leading practices and lessons learned. However, IFIs, DFIs, donors and other international organisations need to follow up this offer with frequent regionally specialised ‘policy seminars’ that focus on real-world cases: what works, why and how.

The PPP Certification Programme offers the potential for a critical mass of emerging market and developing economy officials to learn the same set of PPP basics that the private PPP industry knows and employs when entering into contracts.

Due to the unique nature of infrastructure projects, investors have woken up
to emerging market infrastructure

The programme should help reduce the level of knowledge asymmetry that exists today, which can lead to unbalanced PPP contracts that are prone to restructuring. The aim should be to have 50 countries with 20 people each – 1,000 key figures in emerging market countries – PPP-certified by the end of 2018.

As noted in a report by the WEF, IFIs have developed a wide array of formal risk mitigation instruments to crowd in institutional investors. However, the uptake of those products seems to be limited, with risk mitigation instruments accounting for a mere 4.5 percent of total financing operations undertaken by major IFIs in 2013.

What is striking is there seems to be little standardisation across the formal MDB risk products offered. What is also apparent is the annual mobilisation contribution of these instruments has been extremely limited, making at best a marginal contribution to crowding in
private sector finance.

As a key enabler of global economic growth and jobs creation, achieving accelerated infrastructure investment in emerging market countries will require a deeper pipeline of bankable projects coming to market, supported by a suite of streamlined, standardised and comprehensive risk mitigation products to credit enhance projects. These efforts will need to be reinforced by policy dialogue and sustained capacity building, focusing on local expert networks and officials committed to the agenda.

And let us remember: the wall of institutional money waiting and wishing to move into emerging market infrastructure will only do so if the project opportunities to do so are clear, transparent and backed by enduring public policies and regulations.

This leads to a final consideration: governments must summon the political will to create the institutional and market conditions that in turn provide fertile ground for infrastructure investment. EBRD’s more than 25 years of experience of development banking has proven there is no substitute for a strong and committed local counterpart on the other end of international development projects – and infrastructure
investment is no different.

US strikes oil export deals

Posted on by Max Tomlin

In February 2016, the US completed its first major export of natural gas, with an American ship setting sail for Brazil. Cheniere Energy, the US firm that orchestrated the shipment, said the occasion represented a significant turning point in US global trade, with the energy company predicting “the US will be one of the biggest three suppliers of LNG by 2020”. In July, two further cargoes left Cheniere’s Sabine Pass plant in Louisiana, venturing to the Middle East – with Kuwait and Dubai the destinations. These shipments were symbolic of a major change underway in the world economy; they signalled the US’ increasing importance in the export of hydrocarbon fuels.

Better out than in
According to US Energy Information Administration (EIA) figures, February 2016 saw the country export 884,000 barrels of propane and propylene gas per day. At the time, this was the highest figure on record. The US has seen an almost constant year-on-year increase in its export of gas. Exports took a slight dip in the months following February’s record figure, down to 673,000 per day in March, before rising again to 700,000 in April. Data for May showed this number rising again, taking it to 894,000 per day, and beating February’s record figure. These numbers are a long way from the humble 127,000 barrels per day exported by the US in January 2011.

The world’s current top exporters of oil tend to be ranked poorly in terms of corruption and transparency

The trend is clear: the US is becoming an ever more significant exporter of propane and propylene gas. According to analytics provider IHS, cited in The Wall Street Journal, US oil and gas producers are “on track this year to export more propane than the next four largest exporting countries combined – OPEC members Qatar, Saudi Arabia, Algeria and Nigeria, which have long dominated the trade”.

The same is true for crude oil exports. As noted by the EIA: “Since the removal of restrictions on exporting US crude oil in December 2015, the number of countries receiving exported US crude has risen sharply. In 2010, the US was exporting 42,000 barrels of crude a day. By 2013 this surged to 134,000, and in 2015 it totalled a massive 458,000 barrels per day. In the first five months of 2016, US crude oil exports averaged 501,000 barrels per day, 43,000 barrels per day (nine percent) more than the full-year 2015 average.” The destination of these exports has also changed notably; prior to the December 2015 restrictions being lifted, the majority of exported US crude oil went to Canada. However, as the EIA noted: “In March, total crude oil exports to countries other than Canada exceeded those to Canada for the first time since April 2000.”

Shale trail
The bulk of this growth has come from the monumental increase in shale oil and gas extraction in the US. Technological advancements took off in 2008, quietly seeing US production of both natural gas and oil surge. A cocktail of high energy prices and cheap credit (due to a loose federal monetary policy) caused a flurry of investment in shale production. While softened oil prices have since seen many of the less cost-effective shale projects shut down, the US’ capacity to produce – and therefore export – hydrocarbons has seen rapid growth in the past eight years.

US oil exports in 2016 (barrels per day)

884,000

February

673,000

March

700,000

April

894,000

May

According to some commentators, the US’ newfound position as a major energy exporter will come with major geopolitical benefits for the country. For one thing, the country’s growing ability to export gas and oil to Europe will seriously dent Russia’s sway over the continent. Many European nations have been beholden to Russian natural gas – but with the US’ renewed ability to export this commodity to Europe, Russia’s influence will likely dwindle. The same is true for oil. According to a Manhattan Institute report by Mark Mills, entitled Expanding America’s Petroleum Power, more than “60 percent of Russian oil exports currently go to Europe”.

Europe currently imports roughly 90 percent of its oil needs, and European governments are keen to increase the amount sourced from the US. “During the 2014 EU-US trade negotiations”, noted Mills, “a leaked memo revealed European eagerness for access to American oil.” Becoming a major exporter of oil will also give the US leverage over an increasingly assertive China. The latter is both the world’s second-largest economy and the world’s biggest importer of oil. If the US were to increase its exports to China, it would further wed the countries economically, and provide the US with a powerful bargaining chip to counter any sway held by China’s ownership of US debt.

Good for the goose
The US becoming a major oil exporter not only puts it in a stronger geopolitical position, but also brings benefits to the global economy. Its increased role in oil deals should bring greater transparency and stability to markets. The world’s current top exporters of oil tend to be ranked poorly in terms of corruption and transparency. As Mills noted: “Because America scores well in these categories, as well as in rule-of-law metrics, an expanded role for the US in oil trade would add confidence and stability to global commerce.”

Oil prices will also, in theory, become more stable. Some of the world’s largest oil producers, such as Iran and Iraq, are global political hotspots. Political crises within countries in volatile political regions – be it war, revolutions or sanctions – will, with increased US global supply, be somewhat muted. OPEC’s power to manipulate and force price changes will also further be diminished. In fact, this is already happening, with the ability of the cartel to hold the world economy to ransom, as it did in the 1970s, now long gone.

Although not his obvious intention, under President Barack Obama’s two terms of leadership, the US changed from a major importer of energy to a major exporter. Although Obama’s legacy on energy is often spoken of in terms of his commitment to renewables and reduction in coal use, the shale boom over which he presided is much more significant. The transition will have, and indeed already has had, massive consequences for the wider world.