Year: 2018

Top 5 ways to encourage more women into senior finance roles

Posted on by Max Tomlin

A study by The Financial Times, in 2017, found that women make up 58 percent of the total workforce at a junior level in finance companies. However, this figure is not replicated when it comes to senior roles. Only a quarter of senior financial positions are held by women and, sadly, this figure is only slowly growing. These statistics make it no surprise that gender pay disparity in finance is among the worst, with the second-largest gap of all industries in the UK.

Only a quarter of senior finance positions are held by women, and this figure is only slowly growing

We have seen numerous countries taking the approach of imposing quotas for women at a senior level in order to improve the various gender parity ratios. However, there are many more ways to push for greater equality and female presence in the financial industry. Quotas are a short-term solution which might have adverse effects, especially for women who will be propelled to senior positions purely because of this political measure, as opposed to recognition of their work.

Having more women at senior level will result in a win-win situation, by improving the firm’s reputation and, more importantly, by acknowledging deserving women with promotion into senior roles. But, how can managers make women see these senior roles as achievable and encourage more women into them?

1 – Shout about women’s successes
Women can be modest when it comes to shouting about their successes. Though modesty is often seen as a virtuous trait, women must be more vocal about their own successes and those of other women in the finance industry. Not only does it help to make their superiors aware of their competency and ability to do the job, it also encourages other women to do the same; whether promoting themselves or their female colleagues.

Shouting about women’s successes will only reiterate their value to the company. This means once there becomes a promotion available, a manager is much more likely to see a woman as suitable for this role if they are already aware of their achievements, as opposed to if they shy away and are too modest.

2 – Be more confident
A report from information technology company Hewlett Packard revealed that women only applied for promotions if they believed they met 100 percent of the qualifications listed for the job, whereas men applied for a role if they believed they met 60 percent of the requirements. This seems to highlight women’s lack of confidence in putting themselves forward for promotions and senior roles.

Unfortunately, many women underestimate their abilities, and also their competence to learn new skills while working in a role. It is important that employers engage with female staff to help boost their self belief. This will ensure that more women are confident in their own qualifications and assured enough to apply for these senior roles, even if they are not 100 percent qualified for them, as there will always be room to learn in a role.

3 – Take more risks
Studies suggest that women are likely to be far more risk-averse than their male counterparts. Women must become more inclined to take risks, whether it be in work-based situations or, as previously mentioned, in their personal development, by applying for promotions even if they do not feel 100 percent qualified.

Those who tend to take risks can not only often see these pay off and end in successes, but are usually seen as bold and assertive in the eyes of their superiors. Although there is a chance these risks may not pay off, it allows an opportunity to learn from previous failures, and to utilise what has been learned in future situations.

For employers, facilitating and accepting opportunities for risk and failure can pay off, creating more proactive and innovative staff.

4 – Female role models
When we think of all the recognisable faces in the finance or technology industries, the majority of the names that are conjured up are most likely to be men. It is important to bring forward more female role models in the finance industry by shining the spotlight on some of the successful women who can serve as role models for others. It is essential to reassure women that these senior roles are not jobs reserved just for men, and there are women in finance who are just as successful as their male counterparts.

Furthermore, enabling opportunities for female staff to access and meet female role models helps to create a positive support network. Alternatively, businesses should promote female industry networks, to create a space for women in finance to meet, engage and inspire one another. The Durham University Business School alumni network, for instance, connects women in finance alumni, allowing them to network and share their experiences.

5 – Teach finance and technology at a younger age
Although there are two million people working in the UK’s finance industry – making up seven percent of the country’s workforce – there is little education of finance or technology at schools. It is important we promote finance and new technology to girls at a young age, in order to encourage them to take an interest in the industry and make them aware of its opportunities.

Indeed, financial technology is bringing a whole selection of opportunities that women should embrace. Given this is quite a new industry, the possibilities are endless and the rules have not yet been set. Equipping girls with these skills at an earlier age will help increase the numbers of women who want to pursue a career in the finance industry later in life, by giving them the confidence that they have the knowledge and ability to compete with their male colleagues for those higher roles.

There are clear obstacles for women in the finance industry, and now is the time to destroy them.

A further resource that has some great data on gender differences can be read here: https://www.websiteplanet.com/blog/the-empowering-guide-for-women-in-tech/. The article offers a lot of achievable solutions so that women may be represented equally.

Unpacking the low inflation conundrum

Posted on by Max Tomlin

In October last year, former Federal Reserve Chair Janet Yellen called it “the biggest surprise” facing the US economy. She wasn’t referring to the country’s booming stock markets or the fact that Donald Trump had presided over the lowest rate of unemployment seen for more than a decade. No, she was referring to inflation; specifically, why it had remained stubbornly low.

A low inflation economy, particularly if it is the result of low demand, could also signify wider economic problems

Across developed economies, the annual rate of inflation has been steadily falling for a number of years. In the US, inflation averaged 7.1 percent in the 1970s, 5.6 percent in the 1980s, three percent in the 1990s and just 2.6 percent across the 2000s (see Fig 1). Over the same period in the UK, inflation fell by 10 percent. A similar story has played out across many post-industrial nations.

Although few are clamouring for the return of the rampant inflation of the 1970s, too little inflation is hardly ideal either. Traditionally, a small amount of manageable inflation has been viewed favourably as a way of greasing the economic wheels and eroding debt. It also encourages individuals and businesses to make purchases today instead of putting them off until tomorrow. This is why central banks, like the Federal Reserve in the US and the Bank of England in the UK, as well as the European Central Bank, all have inflationary targets to meet – usually around the two percent mark.

Despite favourable global economic conditions, this target has, for the most part, proved elusive, leaving economists and policymakers perplexed. With unemployment at record lows and the global economy experiencing a sustained period of expansion, wage growth and consumer demand should be higher than current measurements indicate.

The answer to the inflation conundrum may lie online. Internet giants like Amazon and Google now allow consumers to compare prices at the touch of a button. Digital content providers, such as Netflix, offer inexpensive entertainment at a fraction of the cost of purchasing physical goods. Although technology has undoubtedly boosted economic growth, it may have had the opposite effect on inflation.

The Amazon effect
Despite a loyal customer base in excess of 300 million, Amazon has had to put up with its fair share of criticism. Having been blamed for the closure of once-beloved high-street stores and castigated for its questionable tax dealings, the online retailer is certainly no stranger to bad publicity. And yet, it may have come as some surprise to be held culpable for Japan’s long-running deflationary issues.

Amazon’s huge scale and extensive distribution network allow it to offer goods at lower prices than those offered by physical stores

“Price competition between e-commerce companies like Amazon and brick-and-mortar shops has become fierce in the US and is beginning to turn that way in Japan,” Izuru Kato, President of Totan Research, told The Wall Street Journal last year. “It isn’t so simple that the [Bank of Japan] can spur inflation by just easing monetary policy.”

The theory goes that Amazon’s huge scale and extensive distribution network allow it to offer goods at lower prices than those offered by physical stores. This creates downward price pressures that make it difficult for inflation to reach central bank targets. And, as Kato touched upon, the threat Amazon poses to inflationis not confined to Japan.

“I think a significant portion of low inflation has been caused by the rise of the digital economy – I would call this the Amazon or Alibaba effect,” explained Bilal Hafeez, Head of EMEA Fixed Income Research at Nomura. “In essence, the pricing power of producers has fallen as consumers can now easily see the prices of all goods. Moreover, through sophisticated logistics, the distribution costs of goods and services have fallen, which again is disinflationary. We’ve seen this in the divergence between rising producer prices but stable or even falling consumer prices.”

In the US, research by Adobe Analytics found that average prices of online sales in the furniture and bedding category have fallen by 8.3 percent over the past two years. The consumer price index, which includes offline sales, fell to less than half that amount in the same time. Similar discrepancies were also found in sales of sporting and clothing goods. If causation is difficult to prove, the correlation is certainly pronounced. Between 2012 and 2017, when Amazon’s revenue almost tripled (see Fig 2), commodity prices (excluding food and energy) fell three percentage points.

Prolonged price depreciation
Not all the blame can be laid at Amazon’s feet, however. Other online retailers, like Alibaba in China, are having a comparable impact. The deflationary power of major retailers is also not purely a digital phenomenon. The rise of huge supermarkets and low-cost goods arriving from Asia began eroding consumer prices long before the internet made its mark.

Some of the other major technology corporations also deserve closer scrutiny. Google has made it easier than ever for consumers to comparison shop, making it harder for businesses to raise prices. In fact, with Google Product Listing Ads, online users need not even be actively shopping before they see a price comparison. Greater consumer price awareness has certainly corresponded with a prolonged period of price depreciation, which in turn has had a knock-on effect on the rest of the economy. Last year, it was estimated that falling commodity prices, again excluding food and energy, caused a 0.25 percent decrease in the core inflation rate.

The Phillips curve
In 1958, the New Zealand-born economist William Phillips authored a paper titled The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. As part of his research, Phillips discovered an inverse correlation between unemployment and inflation – as unemployment falls, firms have to increase wages to compete for fewer workers, which leads to higher prices. The ‘Phillips curve’ was born, and economists believed – for a time, at least – that higher inflation was a trade-off that had to be tolerated in order to enjoy lower unemployment.

However, when the 1970s saw many developed countries experience both high inflation and unemployment concurrently, the Phillips curve took a significant hit. Today’s low unemployment, low inflation economy may provide the knockout punch. A long-held criticism of the Phillips curve is that it only holds true in the short term. Over an extended period, employees may begin to pre-empt inflation, arguing for wage rises that compensate for expected price increases. In this situation, inflation will increase, but unemployment will not fall – at least, not for a sustained period.

Supply and demand
The modern-day failure of the Phillips curve to accurately predict inflation has other root causes. The reduced influence of unions has hampered employee bargaining, while technological improvements have created supply-side efficiencies that simply couldn’t have been envisaged back in the 1950s. Because inflation is being driven down by an increase in supply, rather than a fall in demand, it can comfortably exist alongside low unemployment.

When looking at some of the most successful digital businesses, supply-side gains are increasingly prevalent

When looking at some of the most successful digital businesses, supply-side gains are increasingly prevalent. Camera phones and the rise of social networks like Facebook and Instagram have meant more photographs are being taken than ever before, but have also caused a crash in the value of photographs. Digital businesses are also increasingly adopting automation technologies to create greater supply-side efficiencies.

What’s more, where consumer demand remains high, it is worth bearing in mind that digital goods are usually cheaper than physical ones. The new economy has caused an unlikely mix of high demand and falling prices. Not only that, but digital goods can make accurate economic measurements more problematic. “The move to more intangible, digital assets makes the challenge of measuring inflation more difficult than it would have been previously,” Hafeez said. “Brand value, the value of experiences and so on are very difficult to measure.”

Nowhere to go
If the deflationary effect of online giants is still up for debate, then its long-term impacts are even murkier. As the digital economy becomes more developed, it is difficult to say whether downward price pressures will be sustained. Given the monopolistic tendency of online markets, some would say it is unlikely. Amazon already handles 44 percent of all e-commerce sales in the US, Google accounts for nearly 75 percent of online search queries worldwide, and Facebook collects a substantial, and growing, portion of the web’s advertising revenue. As competitors become increasingly insignificant, the incentive to offer free services or low-cost products begins to fade.

More sophisticated use of data will also allow online heavyweights to increase prices. Data, whether it’s harvested from Facebook, Google or any other online platform, could easily be used to create personalised pricing or take advantage of other real-time market dynamics to ensure businesses receive the optimum price for their products. An example of how this can create upward price pressures has already been demonstrated through Uber’s use of surge pricing during periods of high demand. The deflationary power of Amazon and co may prove to be temporary.

Conversely, the rise of the digital giants is also creating, in Hafeez’s words, a “winner-takes-all dynamic” that could be causing a more persistent drag on demand. Labour share across the OECD nations is declining, particularly in the US, and productivity differences between the top five percent of firms and the rest are widening. Altogether, this is contributing to the growing income inequality that is being witnessed across the developed world. If digital firms are indeed exacerbating wealth concentration, they will also reduce demand in the long term as a result of wealthier individuals’ lower marginal propensity to consume.

Not all the blame for low inflation can be laid at the feet of new technology firms – globalisation and the after-effects of the financial crisis are also factors

A low-inflation economy, particularly if it is the result of low demand, could also signify wider economic problems. “A significant problem of low inflation concerns debt,” Hafeez said. “Inflation will erode the face value of debt, which could make it easier to reduce the debt burden of a country. If inflation is negative, then the debt burden remains or even increases, which makes it harder to bring down the debt.”

Not all the blame for low inflation can be laid at the feet of new technology firms – globalisation and the after-effects of the financial crisis are also factors – but the downward price pressures they exhibit need to be studied further. Certainly, economists and policymakers will be keen to understand the root cause of the lower-than-expected inflation we are currently experiencing – and not just so they can meet their central bank targets.

Proactive policy
With inflation stunted, it remains difficult for central banks around the world to raise interest rates, which partly explains why they remain reduced compared with the levels seen before the 2008 financial crisis. This has meant that central banks currently have little room for manoeuvre if another recession was to occur. As a result of the low inflation, low interest cycle we are in, banks may be forced to implement sub-zero interest rates following another crisis – something that is far from ideal.

“The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague,” explained the 19th-century economist Ludwig von Mises. “Inflation is a policy.” So too is controlling the economic impacts of digital giants. If the likes of Amazon, Google and Facebook are pushing prices down and increasing inequality, then governments must try to counteract this by boosting demand and labour share. A policy of doing nothing could be one that markets live to regret, particularly when the next financial downturn takes place.

Fine Wine Report 2018

Posted on by Max Tomlin

The Silicon Valley Bank’s most recent annual wine report issued a stark warning to vineyards the world over: the boom in wine sales may soon be coming to an end. According to the report, this year marks a turning point, with the industry’s growth expected to slow in the years to come. In fact, it even suggests the remarkable growth in wine consumption witnessed over the past 20 years is unlikely to be repeated in the future.

Those who keep on top of fundamental market shifts, harness the latest technology and welcome change can expect to be rewarded as the wine industry
moves forward

The cautionary message came at the end of what has been an incredibly hectic year in the wine world, with extreme weather events in Europe serving a significant blow to global output. And yet, while this may be an alarming thought for wine producers across the globe, the industry is far from being in trouble.

Ultimately, those who keep on top of fundamental market shifts, harness the latest technology and welcome change with open arms can expect to be rewarded as the industry moves forward. Indeed, the report came with the following message: “Successful wineries 10 years from now will be those that adapted to a different consumer with different values – a customer who uses the internet in increasingly complex and interactive ways, is frugal and has less discretionary income than their predecessors.”

Bearing fruit
While younger wine-producing countries lack the reputation that comes with a millennia-old history of winemaking, they are, in many cases, proving successful at creating wines of exceptional quality. Taiwan, for example, now appears to be mastering the quirks of its native soil, environment and climate to produce internationally recognised wines. Considering wineries only began establishing themselves in the country in 2002, Taiwan has given credence to the assertion that winemaking isn’t simply an art to be enjoyed by the industry’s old guard.

Similarly, less-established producers like China, Russia and Portugal are beginning to command a growing share of global production. While the likes of Spain and France continue to dominate the industry, their share of the market is in decline. As this trend continues in the years ahead, shifting production patterns can be expected to alter the nature of competition in the industry.

What’s more, a keen focus on sales from less-established regions has coincided with an upward trend in the volume of wine being traded internationally. In practice, this means consumers are increasingly seeking to enjoy wines produced outside their own country. This trend has been further bolstered by younger generations, who appear unwilling to confine their taste buds to the wines of traditional producers, such as those from France and Spain. Crucially, these younger customers – with more international tastes – will play a significant role in forging the identity of the industry in the future.

A growth industry
As the next generation of consumers emerges, wine producers must concentrate on refining taste without losing sight of sustainability. Every decision must feed into a long-term vision, with present-day decisions dictating the quality of vine stock and clonal material for years to come.

Winemaking is still an art; only true dedication and love can create the magic of a fine wine

Winemakers must have excellent attention to detail when it comes to understanding the particularities of the vineyard, employing meticulous viticulture in order to make the most of the land and environment. Everything from harvest timing, ripeness and acidity levels to growing practices and preparation are crucial moving parts in the art of wine production. Much of a vintage’s success can be attributed to careful timing during the grape picking and winemaking process, making a wealth of experience and skill a prerequisite for success.

As such, it’s perhaps unsurprising that the adoption of technology has ruffled feathers in an industry that has long prided itself on tradition, but it is hard to argue against the benefits these new technologies bring. For many, modern tools have become useful supplements to experience and skill, helping to refine irrigation systems and provide more detailed understandings of the atmosphere, soil and environment. Remote sensors for indicators like water content and sunlight are now employed as standard to better inform growing decisions. A lot can also be gleaned from newly available data sets, which study various interactions between environment and taste, while spectrometers have unveiled some fascinating scientific truths about the chemical compounds found in different wines and how they relate to production and taste.

Often such advancements can reveal valuable information but, as many winemakers are quick to point out, they cannot replace decades of experience and an expert palate. Ultimately, winemaking is still an art; only true dedication and love can create the magic of a fine wine.

Top seed
In the modern market, it is not enough to perfect a refined taste: wine producers must also be wary of market trends. Unfortunately, changes in consumer taste are far from predictable and can be devilishly difficult to plan for. This fact was epitomised by the surprising impact of the 2004 romantic comedy Sideways, a Hollywood hit depicting the ill-fated love affairs of a wine enthusiast who gushed about the merits of Pinot Noir and derided the taste of Merlot, famously declaring: “If anyone orders Merlot, I’m leaving.”

Adaptability will be of paramount importance to both the established elite and the rising stars of the fine wine industry

The film went on to make over $70m at the box office, and studies later revealed the demand for Merlot witnessed a substantial dip in the decade following its release – the price of Pinot Noir, meanwhile, soared. One study, conducted by Vineyard Financial Associates, even estimated the film cost the Merlot industry upwards of $400m in just 10 years.

Certainly, the wine industry in the 21st century is not a simple place to operate in. Market forces are continually dragging the market in new directions, and some fundamental changes lie ahead. Adaptability will be of paramount importance to both the established elite and the rising stars of the fine wine industry, with anything from unexpected economic developments to the release of a popular movie capable of prompting substantial fluctuations in demand and pricing.

The most prominent trend at present is the ‘premiumisation’ of the industry, which marks a distinct shift in consumer preference towards high-end products. More specifically, the market has seen demand grow for wines valued comfortably above the $10 mark, with ‘premium’ wines responsible for all current growth in the industry. In an extension of this trend, fine wine is booming: at the end of last year, the Liv-ex Fine Wine 1000 – an index tracking the price trajectory of 1,000 fine wines on the secondary market – witnessed record highs, while budget wine businesses risked falling victim to
a slump in demand.

Challenges ahead
Evolving drinking habits and the shifting demographics of key markets are also having a significant impact on the future of the wine industry. For instance, the Silicon Valley Bank report collated a vast amount of data on the various behaviour shifts of Millennials (who it defines as consumers aged between 22 and 38 years old), Generation X (39-50), Baby Boomers (51-68) and ‘matures’ (69 and above).

According to the report, the future of the industry will be defined by the fact Baby Boomers’ dominance in the market is gradually fading. While Baby Boomers are still easily the largest consumers of fine wine, Generation X is expected to take this mantle as early as 2021. Millennials, meanwhile, are projected to surpass Generation X just five years later. Most significantly, each generation has a markedly different taste in wine, presenting wineries with a difficult balancing act of short-term and long-term production goals.

Intergenerational distinctions in taste extend beyond mere flavour, however, with the draw of unique packaging proving particularly effective with younger generations. Last year witnessed the emergence of extra-large wine bottles as fashion statements, while boxed wine sales increased by 20 percent – signalling the end of many wine-related taboos. At the more outrageous end of the spectrum, recent years have also seen canned wine emerge as a genuine market reality.

Winemakers cannot afford to underestimate the impact the internet is having on competition and consumption patterns. Younger generations have a different approach to choosing, reviewing and ordering wines, and this has everything to do with the internet. Wine-tasting apps and influential online review sites can be expected to become the new norm. In response, winemakers must continue to adapt their strategies, embracing changes and ensuring their brand receives the recognition it deserves.

Against this backdrop of change and uncertainty, World Finance is proud to raise a glass to the most innovative and business-savvy producers of delectable fine wines the world has to offer. Chin chin.

Fine Wine report winners 2018

Argentina 

Domaine Bousquet

Australia

Amadio Wines

Bosnia Herzegovina

Vina Zadro

Canada

Meyer Family Vineyards

Cyprus

Makkas Winery

France

Champagne Chassenay D’Arce

Greece

Vourvoukeli Estate

Israel

Psagot Winery

Lebanon

Adyar Winery

Mexico

Shedeh Winery

South Africa

Delaire Graff Estate

Spain

Alto Vineyards

Taiwan

Weightstone Vineyard Estate & Winery

Turkey

Kavaklidere Wines

Top 5 most sustainable pension systems worldwide

Posted on by Max Tomlin

Thanks to gradually rising life expectancy and a higher state pension age, pension contributions are set to soar around the world. World Finance explores the top five countries with sustainable pension systems, where retirees can live particularly well with their pension pot.

Thanks to rising life expectancy and a higher state pension age, pension contributions are set to soar

1 – Australia
Australia’s three-tier ‘superannuation’ pension system is one of the most touted in the world. It includes a tax-financed age pension, providing basic benefits, a company pension pot and the individual contribution to a retirement savings account. Employers are required to contribute 9.5 percent of worker’s gross earnings, which totalled AUD2.3trn ($1.8tn) at the end of 2017.

2 – Canada
Canada provides its workforce – especially low-income citizens – with the Canada Pension Plan, which is a universal flat-rate pension plus a supplement based on income. Voluntary pension plans were also recently introduced, and from 2019 until 2025, workplace contributions will increase by one percent to 5.95 percent.

3 – Denmark
The average Danish pension pot is well funded due to its ‘folkepension’ – a universal pension scheme ensuring that pensioners receive a basic retirement income. One notable result of Denmark’s successful system is that, according to an OECD 2017 report, its private pension assets represented 209 percent of Denmark’s GDP in 2016.

4 – Germany
Germany’s pay-as-you-earn state pension makes up its main retirement system, which provides a safety net for low-income earners. Occupational pensions are not compulsory but approximately 60 percent of all German workers participate – a number that is expected to grow in the coming years.

5 – Switzerland
Ranked sixth in the world in 2017 by Mercer’s Global Pension Index, Switzerland’s public pension primarily depends on workers’ earnings. Conversely, the compulsory organisational pension depends on a worker’s age – meaning that with age comes a larger contribution. Swiss insurers and various banking foundations have also put voluntary schemes in place.

Weightstone raising the bar for Taiwanese fine wine

Posted on by Max Tomlin

With a lot of daring and a great deal of passion, Ben Yang created Taiwan’s very first fine wine. In December 2009, at Taiwan’s Ministry of Agriculture, a test wine from a newly developed white grape variety called Taichung Number Three was presented to Yang, a second-generation agriculturalist. He realised immediately that this wine grape cultivar, which had taken two decades to develop, was special. As he sniffed, his eyes sparkled at the aromatic wonders in the glass.

In winemaking, the approach to sustainability is to instil balance by respecting the soil and staying true to each grape

By the following spring, Yang had planted half a hectare of the cultivar. He knew little about winemaking, but from his 40 years in agriculture, he believed in two things: first, Taiwan’s unique soil and climate had successfully grown fruits and vegetables from diverse climate origins and yielded distinctive varieties. Second, a new variety with such uniquely layered and elegant aromas is hard to come by. Yang’s instinctive leap of faith marked the inspiration for and beginning of Weightstone Vineyard Estate and Winery.

A fruitful land
A small subtropical island that rises to a sharp 2,500m in elevation, Taiwan’s diverse climate zones produce an abundant variety of fruits, vegetables and the world-renowned Oolong tea. Such products are exported globally, and known for their rich flavours and distinctive qualities.

Grape growing using the pergola trellis system was first introduced to the island by the Japanese in the early 1900s. By the 1950s, the Chinese Government targeted wine grapes as a high-value crop that could potentially uplift the agriculture industry. Consequently, it promoted and monopolised winemaking in a state-run effort under the public Tobacco and Liquor Bureau. The bureau was mandated to buy contracted grapes at a premium price per tonnage that surpassed the price of rice, which had been the main cash crop at the time. Farmers flocked to plant wine grapes; at its peak, 5,400 hectares of vineyards were growing from central to northern Taiwan. As each farm had, on average, between just a half and one hectare of land, the wine grape growing efforts of the next four decades involved thousands of Taiwanese farm families, and spawned communal practices that spanned two generations.

Unfortunately, this original exercise in Taiwanese winemaking was ill-conceived and simply did not produce good wine. The government’s first mistake was to compensate farmers based on tonnage, which led directly to a narrow focus on quantity rather than quality. To increase yield, farmers embraced vine-stressing practices, harvesting under-ripened grapes with non-existent healthy canopy management. Predictably, the second-rate grapes produced poor-quality wines and the windfalls that the government hoped for never materialised.

In 1996, the bureau stopped subsidising the growers and privatised winemaking. What ensued was an immediate wave of vine-pulling; Taiwan’s growers substituted grapes with highly priced crops, such as dragon fruit. Today, a conservative estimate suggests that only 40 hectares of vineyards remain – and these are quickly diminishing. The remaining vineyards, located in Houli and Erlin, are home to hearty 40 to 50-year-old vines of white Golden Muscat and red Black Queen grapes, nurtured by grape-growers who are now in their late 60s.

Keeping the faith
Yang’s father was an agriculturist who founded the Sinon Corporation in 1955. He eventually took over the business, motivated by a quest to build a sustainable foundation for Taiwanese agriculture. By the time Yang first tasted wine made from local grapes, he had become a visionary, dedicating his life to improving the quality and conditions of agribusiness in Taiwan. His life-long pursuit of building both local and international appreciation for the beauty of this island eventually led him to the chance encounter with Taichung Number Three in 2009. This single glass of wine sparked Yang’s commitment and would eventually lead to an agricultural rebirth and Taiwan’s first ever fine wine.

In 2012, Yang found a site overlooking the Puli Valley at the foothill of Taiwan’s Central Mountain Range. The 4.6-hectare estate perches on a south-east-facing gentle slope at an elevation of 480m, and sits on what was once the shoreline of an ancient lake. The lake has long disappeared, but has left behind signs of pre-Stone-Age civilisation, including 3,000-year-old fishing weights carved from stone. It is for this reason that the estate and winery were named Weightstone – to honour this unique land and history.

For two years, we studied the mesoclimate, along with the soil texture and composition. The soil type is clay loam, with an abundance of small-to-large-scale limestones that provide ideal natural drainage. The estate enjoys a westward breeze and mountain ranges that protect it from fierce wind gusts.

In November 2015, together with a vineyard development crew of 15 professionals from Napa Valley, work began. We installed subsoil drainage tiles and vertical trellises. As stewards of this land, we also built a 100-year storm drainage system to restore our 430m-long riverbank border and prevent further erosion.

The foundation stone
Yang’s next plan of action was to rename Taichung Number Three as Musann Blanc – Mu for its Muscat parentage, and sa¯n meaning ‘three’ in Chinese. Musann Blanc – with its unique origin and distinctive layered aromas of tropical fruits, herbs and spices – is, in effect, the foundation upon which Weightstone was founded.

The initial prospect of grape growing and winemaking seemed dismal at first. For one, there were few local experts, nor industry insiders to help with cost. Second, like everywhere in the world, skilled farm labour in Taiwan was fast disappearing and practically non-existent in specialised viticulture. Third, the market had been trained to drink imported wines; the decades-long project in government-subsidised poor-quality wine had even turned Taiwanese people against Taiwanese wine.

Yang simply ignored the obvious and zeroed in on the precious possibilities instead. He set out to cultivate the highest-quality local grapes and craft unique wine that would showcase Taiwanese terrain and artisanship. He was adamant about growing the grapes himself, incorporating quality viticulture practices and sharing his knowledge with local growers. In the years that followed, Yang set up long-term partnerships with remaining growers, one plot at a time, who eventually stopped pulling their vines and instead joined him in rebuilding Taiwan’s grape-growing community.

Yang believed in developing the next generation of experts to carry on his work. To this end, he assembled a team of young Taiwanese agronomists and winemakers, supported by consultants from Napa Valley, all of whom were motivated by Yang’s vision. For the first year, the team searched for and found two local growers – Ms Chang in Houli and Mr Tu in Erlin – who had the courage to adopt new practices. At first, they were somewhat apprehensive, but knew they had to either embrace change or give up the business of grape growing, as the few remaining wineries that purchased their grapes were offering them less and less each year.

In pursuit of perfection
In both viticulture and winemaking, the approach to sustainability is to instil balance by respecting the soil and staying true to each grape. Every vineyard is unique, so the team carefully studied the soil, mesoclimate and individual vines at Weightstone estate. They pruned each vine to find a good growth-to-yield balance, and became focused on providing adequate sunlight and airflow so that each cluster could ripen to its fullest potential.

The team believes that vines are like people, and will live long, healthy lives if provided with balance, care and love. For example, in the sweltering heat of the summer season, picking is only carried out at night. Each cluster is picked and sorted by hand in the vineyard, and then transported in refrigerated trucks to the winery at sunrise. At this point, each cluster receives a final hand selection and goes through a gentle press.

For the first vintage in 2014, Weightstone produced three wines: Musann Blanc white wine, Blanc de Blancs sparkling wine and Gris de Noirs rosé sparkling wine. Musann Blanc is a dry, aromatic white wine made of 100 percent estate-grown Musann Blanc grapes. Around 2,000 bottles were produced in the still wine style, to allow purity in the expressive and layered tropical aromas. Following the same method, two sparkling wines were also born: Golden Muscat and Black Queen both have fruity aromas of pineapple, guava and plum, while retaining high acidity at harvest. A sparkling wine using the traditional method captures the purity of these characteristics, while obtaining quality and refined effervescence. Each product was fermented in the bottle, aged sur latte, riddled and disgorged by hand. Approximately 1,000 bottles were handcrafted for each wine.

Weightstone launched its first release in December 2016 in Taiwan, and was moved by the supportive feedback from wine critics, sommeliers, chefs and enthusiasts for local ingredients. Its wines are now offered at upscale restaurants, hotels and speciality wine shops in Taipei and other major cities in Taiwan.

Beyond the grapes and wine, Yang held dear the conscientious energy, human affection and collaborative process involved in winemaking. He believed that every sip carries the spirituality of a distinct place, time and the caring souls that created the wine. Perhaps, when all the wines have been made and drunk, these impalpable existences are what shall remain true to the land and people of Taiwan.

As his daughter, I now lead the team at Weightstone, helping make wines that transcend the physical and reach an inner place of gratitude for all that nature has given us to savour, experience and learn.

The economics of exclaves

Posted on by Max Tomlin

Deep in the European Union’s eastern fringe, intrepid travellers may find themselves greeted by an unfamiliar sight. Surrounded on all sides by the Schengen Area, a border crossing suddenly emerges and, on the other side, the words: “Welcome to the Russian Federation.” Given the Russian border – as it appears on most maps, anyway – is located some 300 miles further east, this may come as something of a surprise to most.

If there were economic opportunities presented by Kaliningrad’s unique geography, they have largely been opportunities missed

Russia’s westernmost territory, however, is not connected geographically to the rest of the country. Instead, the Kaliningrad Oblast is sandwiched between Lithuania, Poland and the Baltic Sea. At 15,100sq km, Kaliningrad is larger than Lebanon, Cyprus and the Bahamas, and is roughly equivalent to half the size of Belgium. Its capital city, also named Kaliningrad, is 525km from Berlin and 1,093km from Moscow.

It is just one of many exclaves – pockets of land geographically separated from the rest of their nation states by foreign territory – found throughout the world. Similarly, an enclave describes a territory enclosed by another country. Vatican City and Lesotho are the only completely enclaved sovereign states, but many regional enclaves and semi-enclaves can be found around the world. In fact, the scarcity of true enclaves means the terms are often used interchangeably.

Frequently, these national fragments provide difficulties for both their ‘mainland’ states and the countries that surround them. Disconnected from the national governments tasked with supporting them and often facing external trade barriers, exclaves face challenges that contiguous regions simply do not. Where an exclave is the focal point of geopolitical tension, its economic isolation can be particularly striking.

Unequal borders
Visiting an exclave can be a jarring experience: languages that are not widely spoken for hundreds of miles suddenly become commonplace, while state flags belonging to distant nations are hoisted high into the air. Most noticeably of all, the economic disparity between an exclave and its surrounding states can be pronounced.

Located on the North African coast, the Spanish exclaves of Melilla and Ceuta have some of the most unequal borders in the world, with Spain’s GDP per capita almost 10 times that of Morocco, the country that surrounds them (see Fig 1). The coastal exclave of Oecusse, meanwhile, is one of East Timor’s poorest areas, and Central Asia contains nine exclaves that remain at the heart of border disputes, making life difficult for their inhabitants.

If exclaves present headaches for mapmakers, they also cause serious problems for local economies. The Fergana Valley, which lies at the heart of Central Asia’s regional jigsaw, is poorer than the surrounding area despite its many natural resources. Disputed borders are costly to patrol and severely limit local development. What’s more, access between exclaves and their mainland territories is frequently blocked, particularly at times of regional tension. Consequently, national governments often attempt to reroute essential infrastructure in an effort to avoid conflict, but this is not always possible. The route between Vorukh and the rest of Tajikistan alone has been blocked at least 10 times since 2012, stunting economic growth in the exclave and the surrounding area. Blockades, it seems, are not great for business.

Trade is often cited as a way of reducing inequality, but it is here that exclaves face their most pronounced challenges. Whether separated by thousands of miles or just a few feet, the logistical challenge of transiting goods and services in and out of exclaves is significant. Evgeny Vinokurov, Director of the Centre for Integration Studies at the Eurasian Development Bank, believes closer integration could help address the inequality that exists between exclaves and the surrounding areas.

“[One] option is reaching such a level of integration between the mainland state and the surrounding state that the presence of the enclave is no longer problematic and so provides for a smooth passage of people and goods between the mainland and the enclave,” Vinokurov noted in his book A Theory of Enclaves. “Integration between the mainland and the surrounding state softens the issue of transit between the exclave and the mainland, or even removes it altogether.”

For some countries, allowing exclaves to integrate more fully into the surrounding state could be construed as geopolitical weakness

How likely it is for exclaves to achieve closer integration is difficult to say. Susanne Nies, Corporate Affairs Manager for the European Network of Transmission System Operators for Electricity and author of Enclaves in International Relations, believes that, for some countries, allowing exclaves to integrate more fully into the surrounding state could be construed as geopolitical weakness.

“When it comes to enclaves, everything is foreign policy,” Nies explained. “Enclaves are micro-entities with a political history distinct both from that of the heartland they belong to and the enclaving states surrounding them. They are often symbols of victory, and states will do everything to control their trophy.”

Unique circumstances
Exclaves are geographical oddities. Their incongruity with surrounding states presents certain challenges, but not insurmountable ones. In fact, the economic quirks thrown up by these nation-state offshoots can present opportunities, too. The Kaliningrad Oblast, for example, has experienced both highs and lows as a result of its isolation from Mother Russia.

Kaliningrad Oblast

947,873

Population

15,100sq km

Area

1,093km

Distance from Moscow

The early 1990s hit Kaliningrad particularly hard. Lithuanian independence, swiftly followed by the fall of the Soviet Union, caused a huge economic collapse in the region. Between 1991 and 1998, industrial decline in the Oblast was recorded at 70 percent. However, as Russia became increasingly integrated within the global economy at the end of the 1990s, Kaliningrad’s fortunes began to improve. Its location has also ensured that military spending has always been of great economic significance to the region, and today it is home to the headquarters of Russia’s Baltic Fleet, as well as some of the country’s most advanced weaponry.

“Enclaves can be grim and isolated or, on the contrary, paragons of international cooperation, taking advantage of their geographical location,” Nies said. “Kaliningrad can, of course, be used strategically for placing weapons in the immediate neighbourhood of the EU, but it does not need to create a feeling of mutual anxiety in the region. Russia, in the recent past, has also tried to use Kaliningrad as a bridge to the EU… exporting electricity and other assets.”

In fact, it wasn’t so long ago that Kaliningrad’s unique situation made it a poster child for Russia’s economic development. Between 1999 and 2004, growth hit 10.1 percent, outperforming Russia’s other regions (see Fig 2) and, indeed, some of Kaliningrad’s EU neighbours. Its development may have been swift, but it did require a helping hand.

Unwilling to see its westernmost region fall into a state of decay, the Russian Government granted Kaliningrad special economic zone (SEZ) status in 1996, providing a number of tax and customs duty benefits. The region rapidly became a manufacturing hub, attracting food processing factories, car-assembly plants and a host of other businesses. At one point in the mid-2000s, it was estimated that one in every three televisions bought in Russia was manufactured in the exclave.

In these more prosperous times, it seemed as though Moscow’s dream of creating a Baltic Hong Kong was coming to fruition. Then, on April 1, 2016, Kaliningrad’s SEZ status expired. Within a few months, prices on staple goods had increased by between 18 and 24 percent. Major employers, like the once-thriving agriculture firm BaltAgroKorm, were forced into bankruptcy. The harsh economic challenges of life in an exclave had been laid bare. The absence of interregional trade with other homeland states made for an unfavourable business climate, while promises of greater cooperation between Russia and the EU remained underutilised. If there were economic opportunities presented by Kaliningrad’s unique geography, they have largely been opportunities missed.

Out of sight
Nearly 2,000 miles away, the Spanish exclaves of Melilla and Ceuta present further examples of the economic problems created by these territorial anomalies. Every day, thousands of Moroccans make the journey from their villages, towns and cities to collect Spanish goods they can sell on once they’ve made their way back to Morocco. According to customs regulations in the North African country, any items that can be carried unaided are classified as personal luggage and, therefore, not subject to import tariffs. The practice, which is tolerated by both Spanish and Moroccan authorities, may offer some an economic lifeline, but more often results in exploitation.

Meilla and Ceuta’s Legal Smuggling Industry

15,000

Moroccans enter the cities per day for trade

$7.60

Approximate earnings per trip

$1.72bn

Annual value of goods smuggled

30%

Proportion of Spain’s exports to Morocco

45,000

People directly benefitting from the industry

400,000

Number of people benefitting indirectly

Septuagenarian women jostle with out-of-work men for the opportunity to haul packages weighing up to 100kg, each containing a mixture of household goods, food and clothing. In exchange they’ll earn around MAD 70 ($7.60) per trip, risking their lives to do so. Not only are the long-term effects of carrying such a heavy load detrimental to the porters’ health, the journey itself is fraught with danger. Competition for goods at the tight border crossing is intense and has even resulted in the deaths of eight women since 2009 – a result of asphyxiation and crushing.

Although the Spanish and Moroccan governments could work together to crack down on this legal form of smuggling, the cost of doing so would be great. Estimates indicate 45,000 people rely on the border trade for their livelihood, while a further 400,000 benefit from it indirectly. For Spain, this form of atypical trade represents 30 percent of the country’s exports to Morocco, adding up to over €1.4bn ($1.72bn) annually. In Melilla alone, the activity supports a third of the city’s economy. According to Vinokurov, this practice could be considerably more valuable when the trade of illegal goods is taken into account.

“Some 15,000 Moroccans enter Ceuta and Melilla every day, mainly for the purpose of small trade,” Vinokurov explained. “The shadow economy may have even greater value than the legal economy. Black market trade in the enclaves includes stolen luxury cars, gold, diamonds and currency, and the shadow economy includes, on the one hand, smuggling of certain goods and, on the other hand, money laundering. One network, which was uncovered in Ceuta in July 2000, had laundered drug money to the value of $153m in eight months.”

Cut off from the mainland, exclaves force governments to adopt economic policies they would not normally consider. In Kaliningrad, preferential treatment attempted to stimulate long-term prosperity – largely without success. At the same time, many analysts have claimed the financial support provided by Moscow came at the expense of Russia’s other regions. In Ceuta and Melilla, geographic isolation has resulted in an economic loophole being created. Closing it would certainly cause damage to both Morocco and Spain, but maintaining it allows the exploitation of the poor to continue. Tucked away in the midst of a foreign land, exclaves are easy to forget about, and this certainly seems to be the case regarding the terrible working conditions of these cross-border traders.

Tied down
While exclaves may appear to be geopolitical offshoots ploughing their own path, their development is often entwined with that of their mainland state. In the case of Ceuta and Melilla, their economies rely heavily on Spanish support. Although not part of the EU Customs Union, they enjoy preferential treatment as part of Spain. The EU also provided €117m ($143.9m) between 2000 and 2006 for regional development projects, a significant sum given the relatively small size of the exclaves’ populations (84,000 for Ceuta; 86,000 for Melilla). The Spanish Government is also responsible for creating many civil service jobs and financing thousands of military posts in the two cities.

Kaliningrad’s economic fortunes correlate closely with Moscow’s imposition of special economic benefits. While it suffers from economic stagnation as a result of Russia’s reticence to trade more openly with EU, its neighbours Poland and Lithuania are seeing continued growth. For Russia, however, the possibility of closer integration between Kaliningrad and its surrounding states is not likely to be explored, with anxieties over the re-Germanisation of this territory remaining. Although the city of Kaliningrad ceased being the East Prussian capital of Königsberg in 1946, the Russian Government clearly feels the exclave remains vulnerable to outside interference.

While exclaves may appear to be geopolitical offshoots ploughing their own path, their development is often entwined with that of their mainland state

“Enclaves are litmus tests, expressing a lot about international relations, the mainland state and the enclaving state,” Nies explained. “Despite its relative smallness, a country like Russia can’t accept losing Kaliningrad, which, from their perspective, remains a symbol of its victory in the Second World War.”

In India and Bangladesh, the benefit of putting aside historical land boundaries in order to solve present-day problems has been demonstrated recently. In November 2015, the two countries exchanged the many enclaves caught up in their complicated border arrangement. A total of 51 enclaves were transferred from Bangladesh to India, with a further 111 enclaves going in the opposite direction. Previously, the residents of the enclaves were unable to claim citizenship rights in either country, leaving them ineligible for state support. Today, there is hope that infrastructure projects will be launched in the formerly enclaved territories, helping lift the residents out of poverty.

Simply ceding territory to surrounding states, however, cannot solve the issues facing many other exclaves. More than 86 percent of the residents in the Kaliningrad Oblast today are ethnically Russian, while the territories of Ceuta and Melilla have been a part of Spain since the 15th century – before the modern state of Morocco even came into being. Exclaves may appear to be relics of a time when powerful nations made land grabs as they saw fit, but severing them from their mainland countries would not necessarily improve their fortunes. Protectionism, whether warranted or not, may prevent exclaves from achieving their economic potential, but it also protects the national identity of many of their residents.

For exclaves, therefore, the question arises of how to keep their distinctiveness intact without rejecting the economic opportunity that lies beyond their borders. In order to achieve this, political alignment to the mainland must be maintained, but not at the expense of economic openness with surrounding states. Open trading routes are vital for the development of both the exclave and its neighbouring regions, providing this doesn’t take the form of an exploitative relationship. Balancing the trade-off between autonomy and openness will not be easy to achieve, but it’s the only way to ensure an exclave’s distinction does not become synonymous with decline.

China’s transitioning economy

Posted on by Max Tomlin

The Year of the Rooster was pivotal in terms of China’s continued economic development. After a prolonged period of slowing growth, China’s vast economy expanded by an impressive 6.7 percent in 2017 – its first increase since 2010 (see Fig 1). The results, published in January, exceeded the expectations of most, including that of the IMF, which had forecast a more-than-respectable growth rate of 6.5 percent.

The success of the last year is a positive sign for China’s ability to shift its gargantuan manufacturing-driven economy to one that is services-led

Recovery of the global economic landscape played a crucial role, with export revenue rallying as international demand continued to climb. China’s real estate sector, meanwhile, rebounded, thus acting as another important driver for growth. But what makes the rate particularly impressive is its occurrence in spite of measures taken by Beijing – including necessary curbs on lending and manufacturing – which had threatened to stifle expansion prospects. As efforts for both continue, many again expect growth to be impacted in 2018.

That being said, what is most noteworthy about the success of last year is the positive sign it heralds for China’s ability to shift its gargantuan manufacturing-driven economy to one that is services and consumption-led; a feat that few nations have managed successfully. Beijing is all too aware of the importance of the transition. Now, after six years of slowed growth, the state is pushing forward with greater momentum, implementing essential reforms and promoting growth that is based upon quality, sustainability and efficiency – factors that now trump speed and size in their importance.

At full capacity
For decades, China had focused on the aggressive expansion of its manufacturing capabilities and output. The country subsequently became known as ‘the world’s factory’, exporting cheaply made goods and components across the planet at a fraction of the price buyers paid elsewhere. This strategy essentially enabled China to achieve double-digit GDP growth for close to three decades – a feat that is nothing short of spectacular for a nation of its size.

From the very beginning, however, the strategy was a double-edged sword, being simply unsustainable. “The world cannot continue to absorb more imports from China at the previous growth rates,” commented author and economics professor Ann Lee. And so today, one of the biggest problems facing the Chinese economy is overcapacity.

“China is structurally overinvested – in many cases acutely so: in manufacturing capacity in many sectors, and in both infrastructure and real estate capacity in some regions – bridges to nowhere, ghost cities, among others,” said David Hoffman, Senior Vice-President and Managing Director of the Conference Board China Centre. As Hoffman explained, such scenarios generate low, and sometimes even negative, productivity growth. “This is the fundamental problem,” he continued. “Overinvestment is dragging on productivity growth, and unproductive investment yields debt build-up. If the investments eventually prove to be unviable commercially, this then turns into bad debt.”

Consumption-driven growth, on the other hand, is more sustainable because capacity adjusts to demand from the bottom up, as opposed to dictating a false sense of output requirements from the top down. Through the former, the rate of investment and manufacturing capacity stays in tune with demand, thereby remaining steady, but appropriate. Following such a route is of paramount importance for China, now more so than ever before; after years of producing at overcapacity, an overreliance on government funding and ballooning debt have reached dire levels.

Treading a greener path
China’s strategy of heavy manufacturing is not only unsustainable economically speaking: it has also had a dramatic and unfortunate impact on the environment. For years, smog-filled skies have been the everyday norm for the citizens of metropolises such as Beijing, Shanghai and Guangdong. As stated by Lee: “China can’t take on more pollution from manufacturing.” It has taken a long time for the government to heed the warnings of environmental organisations, but 2017 was a significant shift in this respect.

Stringent anti-pollution policies were introduced to 28 cities last year, which included reining in production at heavy industry factories. Specifically, the urban areas across the north of the country had to reduce steel capacity by half and aluminium capacity by around a third over the most polluting period of the year (the months between November and March). The demand for steel also took a hit as places like Zhengzhou suspended the construction of roads, buildings and water facilities to fight pollution. Meanwhile, illegal or outdated steel mines, coal mines and aluminium smelters are in the process of being closed down.

China’s strategy of heavy manufacturing is not only unsustainable economically, it has also had a dramatic and unfortunate impact on the environment

Last year, consumers were also asked to switch from coal to natural gas for their electricity needs, though this had to be abandoned temporarily due to improper heating. Ultimately, however, the winter saw a sharp improvement in the quality of air in Beijing – undoubtedly a major milestone for the capital and the country as a whole, which can now set forth with a new outlook of optimism for the change that can be achieved through collective support.

Another way in which industrial overcapacity can be overcome is through China’s One Belt, One Road initiative, a state-led strategy to promote economic cooperation and connectivity with and between Eurasian nations. “All excess steel, cement, etc is being used to build infrastructure with countries such as Pakistan, Sri Lanka and Russia,” Lee told World Finance. This, however, could be another double-edged sword, according to Bart van Ark, Executive Vice-President, Chief Economist and Chief Strategy Officer at the Conference Board: “Yes, it’s a way to keep investing, but will that make China more productive, and therefore put it on a more solid growth path?”

The role of the state
The issue surrounding productivity is closely linked to China’s drawn-out overreliance on state-owned enterprises (SOEs). “SOEs are the primary agents of the government’s investment-led growth ‘addiction’,” Hoffman explained. These organisations are given credit by the state, with which they can make investments, regardless of whether they are risky or commercially viable. Hoffman continued: “After all, investment – even if it involves digging a hole and filling it up again – creates GDP growth. If the investment is unproductive, however, it only creates a one-off GDP boost. It is suspected that more and more of China’s ever-increasing investment is of this one-off nature. Because SOEs don’t have balance sheet accountability, in that they’re backed by the state and can’t go bankrupt, there is an intrinsic moral hazard in SOEs leading China’s investment drive. The only way for money-losing SOEs to survive is to continue borrowing, to continue investing, to continue building capacity. New borrowing then evergreens the old loans, and new loans are taken for more investing, and so forth.”

As hazardous as they can be to sustainable growth, SOEs do have a positive role to play in China’s transition, in that they enable the state to maintain a level of control. Indeed, the process of manoeuvring such a vast shift would be more difficult in a solely private-sector-driven environment. “SOEs are the most effective vehicle the Chinese Government has to impact on the economy,” van Ark noted. “There is a lot of awareness that SOEs are molochs [giants] that tend to be relatively inefficient. The government is trying to take significant measures in order to force mergers to make them more efficient going forward – so that is all really good stuff that is happening there.”

As van Ark explained, productivity is fundamentally born from free market processes; in such an environment, inefficient firms are simply unable to survive and so give way to more efficient firms that are able to grow, all the while becoming more productive. Although this is happening to an extent in China’s private sector, it has not yet transpired in the state-owned sector. Consequently, SOEs continue to crowd out opportunity for the private sector, which is where productivity growth is most likely to result. “Ultimately, the question is whether the state-led transition that the government is now undertaking will be the best way to make this transition – or whether it will be suboptimal and therefore keep China addicted to putting in more and more resources in order to keep the system going,” van Ark said.

The debt dragon
While the issues surrounding SOEs remain uncertain at present, one challenge that China seems to be tackling with fervour is its reduction in risky lending which, thanks to the introduction of more robust financial policies, was one of its biggest achievements of 2017. This pillar of Beijing’s economic strategy is crucial, as China’s debt has ballooned in recent years in not just one but multiple areas, ranging from local government loans to corporate and household debt to non-performing loans. Accumulatively, China’s debt is now equivalent to 234 percent of the country’s total output, according to the IMF. Growth, the organisation purports, must now take second place to improving the financial system.

Hoffman explained why this is so important: “Debt servicing costs drag on corporate performance, impacting the abilities of firms to invest in expansion, innovation and people. In parallel, non-performing debt constrains the amount of bank lending and government financing that can flow to maximally productive and beneficial purposes in the economy and society. Risky debt – where ultimate ownership of the debt and its liabilities are unknown – can have catastrophic consequences on healthy market players, hence wiping out positive economic activity.”

Despite the impact that a regulatory overhaul is expected to have on GDP growth, China is making arduous efforts to this end

Despite the impact that a regulatory overhaul is expected to have on GDP growth, China is making arduous efforts to this end. At the tail end of last year, for example, Beijing targeted the cheap capital that has flooded the market of late, thanks to the onslaught of online microlenders. Circumventing traditional lenders, borrowers could instead obtain funding for practically anything with just a few clicks – from a financial injection to their start-up to a personal loan for a new car. It perhaps comes as little surprise then that, according to the central bank, the business was responsible for a whopping RMB 1.49trn ($224.7bn) in outstanding short-term consumer loans within the first nine months of 2017, almost double the amount for the whole of 2016. News about aggressive loan collection agents also began to spread, as did the harmful nature of short-term, unsecured cash advances. And so last November, the People’s Bank of China (PBOC) issued its strictest restrictions yet. In effect, the central bank and its regional branches can no longer license new microlenders. Their offline counterparts, meanwhile, cannot operate outside their registered locations.

Tighter mortgage rules and a clampdown on speculation within the property market are other areas that are also being targeted. While China’s economy has experienced a boost thanks to the housing market’s two-year boom, fears of a bursting bubble have surfaced. Despite measures to curb speculative purchases, which began in late 2016, prices have continued to climb, albeit at a slower rate. Subsequently, in November, regulators announced further measures, including mechanisms to prevent funds from being channelled illegally into the market, as well as ensuring a more balanced capital allocation between real estate and other industries.
Through an announcement televised on state-owned China Central Television, the PBOC, the Ministry of Housing and Urban-Rural Development, and the Ministry of Land and Resources also instructed provinces to maintain their tightening measures, as lax regulation could lead to fluctuations in the market and financial risks. Another step due this year is the improvement of land market management, in a bid to prevent high prices pushing up property prices.

Transitioning to services
Alongside reforms to SOEs and the financial sector must come an overhaul of China’s services sector if its transition to a consumption-led economy is to be a success. At present, the development of traditional service sectors such as healthcare and public education has been slow given the entrenchment of the state, which has resulted in issues such as excessive red tape, bloated budgets and bureaucratic inefficiency. Focusing instead on newer, more nimble industries like e-commerce, technology and private education would give more space for growth generation.

This focus is already seeing results. In 2016, the services sector grew to be worth RMB 38.4trn ($5.6trn), which is equal to just over 50 percent of GDP, an increase from 42 percent around 12 years ago. Beijing’s goal is to increase the rate to between 70 and 80 percent of GDP – the average for advanced economies. The US, UK and France, for example, derive around 80 percent of their GDP from services, while Japan and Germany are at around 70 percent (see Fig 2).

To this end, in February 2017, Beijing revealed plans to set up a RMB 30bn ($4.7bn) fund to encourage high-value-added service exports. The state is contributing some 16.7 percent of the value of the fund, with non-government investors providing the rest. Such a boost is expected to have a dramatic impact on the sector, in addition to bolstering the number of jobs within. According to the Central Intelligence Agency, there are already more than 300 million people working in services, in areas ranging from hotels and restaurants to shops and real estate. But there is much more room for growth, and this is key for the population. Crucially, higher employment in the services sector correlates with higher wages, which will not only improve quality of life and reduce poverty levels but also lead to higher consumption, which in turn will further prop up the economy.

Van Ark explained: “When an economy gets more advanced and gets richer, it is normal for it to become more service-driven. You have a rising middle class, who are consuming far more services than they would have done previously, so you need to see that transition from a manufacturing and investment-led economy to a services-consumption driven economy. So in a way, what I would say is that this kind of transition is healthy – it is exactly what China needs.”

Pathway to the future
Certainly, there are numerous challenges yet to be overcome for China to push its economy to the next phase in its development. “We mustn’t forget that China is in the midst of a momentous economic transition; one that will require deep structural adjustments if it is to put the Chinese economy back on a sustainable path,” Hoffman told World Finance. “These adjustments lay before us, as they have largely been forestalled by elevated levels of credit expansion and fixed asset investment these last several years. Contrary to today’s prevailing thinking, a soft landing has not been achieved, even despite the stabilisation and slight uptick that occurred in 2017. Looking forward, it’s hard to see how many of these adjustments won’t be disruptive, if not painful, for markets.”

As described by Hoffman, it will indeed be painful at times, and the rest of the world will undoubtedly be impacted at some level or another, but given that China is now the world’s second-largest economy and an integral player in the global system, attaining sustainable growth is crucial for all. Furthermore, as economic development dictates, its transition to a consumption-led economy is the only way that quality growth in the long term can be achieved. Ultimately, this shift is absolutely necessary for China’s economy, as well as for its 1.4 billion-strong population. Yes, China’s transition is a monumental task – but given the capabilities of those in charge, together with their commitment to achieving quality growth across the long term, if any nation can make it happen, it’s the one in question.

Estonia pushes ahead in race to issue first state-backed cryptocurrency

Posted on by Max Tomlin

Kaspar Korjus, an Estonian tech entrepreneur turned top government official, agrees that his plan to make a government-backed crypto-coin is justly characterised as “a solution waiting for a problem”. He doesn’t, however, view this as a bad thing. If Venezuela doesn’t get there first, the tiny post-Soviet nation looks set to become the first country to issue a state-backed cryptocurrency.

Initially, the currency will be restricted to e-residents through a lock-up phase, but the aim is for them to reach both crypto and traditional exchanges

The topic first emerged in August 2017, when Korjus floated the possibility of Estonia becoming the first country to issue an initial coin offering (ICO) in a blog post. The aim would be to raise funds for Estonia’s e-residency project, a much-talked-about scheme that invites foreign entrepreneurs to become virtual residents of Estonia. The idea was to raise cash for the project while simultaneously creating incentives for investors and interested parties to support the growth of the e-residency community. It also hoped to put Estonia on the map as a haven for blockchain technology.

But the idea quickly ran into a stumbling block in the shape of Mario Draghi, President of the European Central Bank (ECB), who shot the idea down in September during a press conference. He stated: “No member state can introduce its own currency; the currency of the eurozone is the euro.”

The new digital nation
However, Draghi’s criticism has not stopped planning from going ahead, and has been largely dismissed by the assertion that an ‘Estcoin’ would definitely not be a currency. “Much of the criticism of Estcoin was based on the fact that Estonia simply can’t start its own cryptocurrency even if it wanted to… That’s why we have always referred to Estcoin as a proposed ‘crypto-token’,” said Korjus in a more recent statement. It is currently unclear what form the crypto-token will take. So far, Korjus has presented three proposals, all of which he insists can be introduced “without alarming [the ECB]”.

One thing all three proposals have in common is that they focus on providing some sort of crypto-enhancement for the country’s digital residency project. Under the project, anyone in the world (who isn’t a criminal) can become an e-resident and obtain an official Estonian digital ID for €100 ($123). The digital ID enables e-residents to identify themselves and sign documents online, making it possible to run a business through Estonia’s infrastructure or open a bank account from afar. They also provide a useful infrastructure for cryptocurrency projects. “Verified online identities give us a very good advantage for trading cryptocurrencies and it helps blockchain entrepreneurs with KYC [know your customer] requirements,” said Arnaud Castaignet, Head of Public Relations for the e-residency scheme.

Existing e-residents include Angela Merkel and Shinzo Abe, but the scheme has also provided a useful platform for entrepreneurs based everywhere from Bangalore to Turkey. In return for access to its hi-tech government infrastructure and ID cards, Estonia has been able to play host to, and receive corporation tax from, a growing number of flourishing small businesses. Korjus calls it the ‘new digital nation’.

The ambitious project is described as a way to break down barriers for entrepreneurs in less developed countries, while creating an online community of location-independent entrepreneurs. The official aim is to gain 10 million e-residents, a number that far outstrips Estonia’s actual population. This may seem ambitious, but the country’s e-resident population has soared to nearly 30,000 in just four years.

Community Estcoin
The goal of enhancing e-residency provides a common thread for the three Estcoin proposals that are currently on the table, but each one is wildly different in substance. The first proposal, which was laid out in a blog post at the end of last year, is to create a crypto-token that would act as a kind of loyalty token for the e-residency project. The concept – dubbed ‘community Estcoin’ – would provide a framework to reward actions that benefit the project, such as recommending a friend to become an e-resident, driving traffic to the website or providing advice to other e-residents. The coins would hold value within the e-resident community platform and could also be used to buy goods and services from other Estonian companies. Initially, the currency will be restricted to e-residents through a lock-up phase, but the aim is for it to eventually reach both crypto and traditional exchanges.

The kind of community effect that the proposal is targeting is popular among cryptocurrency heavyweights. Vitalik Buterin, the founder of Etherium, commented: “An ICO within the e-residency ecosystem would create a strong incentive alignment between e-residents and this fund and, beyond the economic aspect, [would make] the e-residents feel like more of a community since there are more things they can do together.”

The community Estcoin aims to be a useful tool for e-residents, but could also pave the way for the fulfillment of Korjus’ initial goal to make Estonia the first country to administer a national ICO. However, while Korjus’ vision of an Estonian ICO aims to “enable anyone to invest in a country for the first time”, many have described the idea as merely a variation of ordinary government bonds.

Identity Estcoin
The second proposal can be described as an ‘identity Estcoin’, and it holds the ultimate goal of improving the efficiency of the Estonian Government’s infrastructure. Under the proposed plan, identity Estcoins would not raise any funds for Estonia and would not be tradable. Instead, they would leverage blockchain technology to improve the infrastructure behind digital identities. Estcoins would become part of the process of signing digital documents, filing taxes and so on, improving the e-residency experience.

Under this set-up, the Estcoins themselves would be digital tokens that are used when e-residents carry out activities like digitally signing documents and logging into e-services. Each e-resident would be assigned a certain amount to start them off and may have to buy more as time goes on. Any funds would be used to uphold the network, but ultimately the project could be cheaper for everyone due to economies of scale. According to Korjus, they would enable the system to work on any device and without ever requiring updates. Castaignet told World Finance that the identity Estcoin is the “really radical” proposal of the three and is thus likely to be a more long-term project than the others.

Crypto-controversy
The second proposal may be radical, but the final proposal – the ‘euro-Estcoin’ – is the most controversial. It proposes a stable crypto-token that is pegged to the euro. Korjus explained in a blog post: “The way euro-Estcoins operate within the e-residency community would be similar to how other types of tokens operate within video games or simulated online worlds. E-residents could purchase euro-Estcoins within their new platform then trade them with other e-residents and cash out when required, while ensuring that all necessary banking and taxation rules are followed.” According to Korjus, the scheme would function through a government commitment to exchange any Estcoin back into a euro, and banks would be instructed to enable customers to switch between them freely. E-residents with euro-Estcoin balances would be able to make payments to one another without going through a bank. The idea is that transaction fees would be eliminated, creating a frictionless payments platform that could be used among members of the e-residency network.

Comparing the system to video game tokens makes it seem like a minor development, but a cryptocurrency that is protected from volatility while retaining the benefits of decentralisation has long been sought by crypto-enthusiasts. If widely adopted, however, it could run into unprecedented problems: one possibility is that people could skip the banking system altogether, holding most of their money in Estcoin wallets instead. This could strip banks of their deposits and provide a headache for the ECB.

Currency distinction
The claim that the Estcoin has always been referred to as a token is not strictly true. In a previous blog post, Korjus speculated about a future in which Estcoins might be “accepted as payment for both public and private services and eventually function as a viable currency used globally”. He stated: “By using our APIs [application programming interfaces], companies and even other countries could accept these same tokens as payment.”

There are technical distinctions between a token and a currency; a token is a piece of an existing blockchain, whereas a currency is an entire blockchain system in itself

Yet, there are broader technical distinctions between a token and a currency. For instance, a token is a piece of an existing blockchain, whereas a currency is an entire blockchain system in itself. The problem is that the official terminology has become blurred over time, and both crypto-tokens and blockchain currencies are now frequently labelled cryptocurrencies. Another distinction, which was underscored by Castaignet, is that a currency must be a means of exchange. This means that, as long as Estcoin proposals are restricted to those within the e-residency community, the coins won’t fulfil the full definition of a currency.

“Even the proposal that is seen as being the most controversial, euro-Estcoin, we still don’t see it as a cryptocurrency. It might be a new way of expressing a currency, but it can’t be a new currency in itself, at least in our definition,” Castaignet said. Instead, he described it as a ‘utility settlement coin’.

And yet, many maintain that the distinction remains fuzzy. For instance, Preston Byrne, a blockchain technologist and structured finance solicitor, responded to the proposals by tweeting: “Estonia’s Estcoin is going to stretch EU regulators’ tolerance for ICO garbage to breaking point. ‘It’s not a currency, Mario [Draghi], it’s a token’ likely to go down as well as a lead balloon with the ECB.”

Castaignet told World Finance: “Of course there are some legal discussions, and we are not going to launch anything that is in contradiction with our international obligations.”

The emerging university bonds market

Posted on by Max Tomlin

“Nothing short of greatness” – that is the motto of the University of Minnesota’s fundraising campaign to provide its sports programme with the state-of-the-art facilities it requires to dominate US athletics. For that purpose, the university has built the Athletes Village, a labyrinthine behemoth of concrete spanning 320,000sq ft at the university’s campus in Minneapolis. The complex, completed this January, already serves as a hub for the university’s athletes and sports teams.

The majority of US universities opt for municipal bonds, a financial vehicle traditionally preferred by US states or cities

The project cost $166m, a staggering sum even for an institution of the size of the University of Minnesota, with its more than 50,000 students and $3.2bn endowment. To bring it to life, the institution followed the example of other US higher education institutions and issued $425m of AA-rated bonds. Around a fourth of the proceeds will cover costs for the Athletes Village.

Issuing bonds is a way to finance infrastructure without taking too much risk, said Brian Burnett, Senior Vice President of Finance and Operations at the university: “The university can maintain its cash reserves for operations, while spreading the cost of a capital project over time.”

A market under construction
Higher education is the new frontier for the bond market, as an increasing number of universities issue bonds to finance debt or investment. Data held by Dealogic, a financial data provider, shows that the value of bonds issued by education providers worldwide nearly trebled from $2.2bn in 2007 to $6.4bn in 2017 (see Fig 1). Some of the biggest US universities, including Harvard, Yale, MIT, Stanford and Princeton, feature in the list of top borrowers.

In most cases, the money is spent on brick-and-mortar operations, from student residences to football stadiums and libraries: US universities spent a record $11.5bn on construction in the 2015-16 academic year. Many institutions hope to tap into the opportunities that come with globalisation; to lure international students, they invest in flashy dormitories or even campuses based abroad. Laureate Education, a multinational education provider and the top education bond issuer globally (see Fig 2), has campuses and online programmes in 23 countries and plans to expand its operations further.

The majority of US universities opt for municipal bonds, a financial vehicle traditionally preferred by US states or cities. The benefits are immense for institutions with an eye on the future rather than short-term profit, said Emily Wadhwani, an analyst at Fitch Ratings, a credit rating agency: “Municipal bonds have a lower cost of capital and wide market reach, as compared to other financing vehicles. They also allow the cost of a project to be spread over its useful life (30-40 years for most large capital projects), and also spread the resultant student fees more fairly over the life of the project. In addition, using long-term fixed-rate bonds removes the risk of increasing costs going forward.” As for investors, they pick municipal bonds for their low risk, a crucial asset in times of increasing volatility in US bond markets.

As with other institutional borrowers, universities have benefitted from an era of historically low interest rates. Most of them issue fixed-rate bonds that are immune to market volatility. “During the past 10 years or so, the interest rate environment has been relatively low, which allowed the university to lock in long-term debt at attractive rates,” said Burnett. However, some risks persist for issuers. A return to more normal interest rate levels could increase overall university borrowing costs and make it more difficult for financially strained bond issuers to service their debt. Taking a long view can save institutions from potential trouble, according to Karen Levear, Director of Treasury Operations at the University of Oregon, which issued bonds in its name for the first time in 2015 to invest in student housing: “Rising interest rates could impact the cost of future debt, but interest rates are still well below historic long-term averages, and since we issue debt for the long term, we keep a long-term view on our cost of capital.”

The double-edged debt sword
Debt can also be disastrous if a project takes a wrong turn. UC Berkeley offers a cautionary tale of what can go wrong: the Californian university borrowed $445m from the bond market in the aftermath of the financial crisis to rebuild its American football stadium. The plan overestimated the number of supporters the stadium could attract and the quality of football the university’s team could play, falling short $120m. Eventually the institution was forced to plug the financial gap with campus funds, including student fees.

$2.2bn

Value of bonds issued by education providers worldwide in 2007

$6.4bn

Value of bonds issued by education providers worldwide in 2017

Increasing levels of university debt can also have an impact on tuition fees, said Aman Banerji, Programme Manager of the Financialisation of Higher Education programme at the Roosevelt Institute, a US think-tank: “I worry about universities increasing the size of their debt portfolio simply to meet gaps in their operating expenses. The size of interest rate payments is another serious concern. While university administrators are likely to continue to deny that higher interest payments will drive up tuition costs, as the size of these expenses continues to grow, I worry that universities are likely to rely on students to fund the expense gap much in the way that student revenues have often helped fill revenue gaps with declining state support.”

One way to avoid such mishaps is to cast a wide net, said Levear: “We disconnect the cost of specific debt from specific projects by issuing debt for a capital pool. Then projects are funded from the pool at a blended rate. This means that all capital projects have to ‘pencil out’ at the same blended rate, [which] protects necessary projects from the risk of varying interest rates.”

The perils of extreme financialisation
Bond issuance has long been a common practice for US institutions but, according to many experts, the decline of public funding has turned it into an inevitable process for universities relying on grants to finance research. Data held by the Centre on Budget and Policy Priorities, a US think-tank, shows that public funding for the academic year 2016-17 was nearly $9bn lower than the figure in 2008, while tuition fees and student debt grew exponentially over the same period.

Leading universities are deemed credible borrowers with a global brand name, which is always an asset in bond markets

The drop in public funding has pushed universities to cosy up with the financial sector, said Banerji: “In the last couple of decades, we’ve seen a huge expansion in the nature and number of financial transactions between the financial sector and universities – interest rate swaps, letters of credit, bond agreements, hedge fund investments, and more – all of which handsomely benefit the financial sector.” The Roosevelt Institute’s report on university-linked interest rate swaps found that interest rate swaps cost 19 US institutions around $2.7bn.

Another reason why bonds have become more popular is the shifting nature of university leadership. More than one out of two members of university boards at research-intensive institutions have a background in finance, according to data from the Stanford Social Innovation Review report. Research by Charles Eaton, Assistant Professor of Sociology at UC Merced, shows that as more people with a financial background sit on university boards, financial solutions that would once seem unconventional to academics have become the norm.

Banerji told World Finance: “As universities shift to private and donor-funded sources of revenue and invest large amounts in the financial sector, they seek out experienced financiers who can guide their investments and supposedly ensure that they get the higher returns. Equally, as university boards become over-represented by those in the finance sector, they expand the type and amount of future engagement with the financial sector.”

Financialisation may also increase the gap between big and smaller institutions. Bond markets tend to favour universities that issue large chunks of bonds and penalise universities with more modest borrowing needs. Banerji said: “For small public schools, community colleges and others with lower credit ratings that must borrow at higher rates, this race is both unfair and dangerous. Smaller, less wealthy endowments appear to be investing in the types of hedge funds and alternative strategies that were once the sole purview of large public schools and wealthy private ones. The new entrants to these types of investments often generate far lower returns, along with pay management fees beyond their capacity, and put their financial model in danger through the process.”

UK universities playing along
For British universities, bonds have only recently become an option for raising funds, but demand is steadily growing. Dealogic data shows that the bond market for the UK education sector increased tenfold from £272m ($380m) in a single deal in 2007 to £2.4bn ($3.3bn) last year. As in the US, government funding for higher education has dropped by more than 30 percent since the financial crisis, pushing higher education institutions to consider alternative options.

Shifts in banking regulation have also restricted access to traditional finance options such as bank loans. Luke Reeve, a partner at EY, said: “UK universities, which have historically been relatively unleveraged and underinvested, had access to extremely cheap and long-duration bank credit prior to the financial crisis. Under Basel III rules, banks simply can’t offer long maturity debt anymore. So universities had to switch to the bond markets, where institutional investors such as pension funds and insurance companies are seeking long-dated liabilities.”

$380m

Value of UK education bond market in 2007

$3.3bn

Value of UK education bond market in 2017

Last November, the University of Oxford entered the fray, offering investors a bond with a record maturity of 100 years – the longest in the history of university bonds and longer than any publicly issued UK government bond. The current economic climate contributed to the decision, said a spokesperson for the university: “We did consider a number of options for financing our capital investment ambitions. We concluded that a bond represented a secure and predictable way to raise money over a long time and at low interest rates, particularly the historically low rates currently available.”

For their part, institutional investors opt for university bonds for their higher returns (compared with government debt) and their safety, since the UK higher education sector is highly regulated. Leading universities are deemed credible borrowers with a global brand name – always an asset in bond markets – and can therefore afford to offer long maturities. “We see the length of the bond, along with high demand from investors and the 2.54 percent rate achieved, as testament to external confidence in Oxford as an institution and in the high quality of its teaching and research,” said Oxford’s spokesperson.

For some universities, the obligations attached to bond issuance are too onerous to meet. Last May, the University of Bristol issued debt of £525m ($735m) to finance its plan to build infrastructure, including a new library and a hi-tech campus. Around £200m ($280m) was raised through private placement of unsecured notes in a bilateral deal with Pricoa Capital Group, part of the US group Prudential Financial. Robert Kerse, Chief Financial Officer at the university, told World Finance: “We principally selected a private placement over a publicly issued bond as we did not believe that the associated obligation of maintaining a credit rating for the next 30 to 40 years would leave the best possible legacy. Additionally, we felt that a private placement offered more flexibility with repayment profiles that could be selected to best manage future refinancing risk than a single bullet repayment, as is common with public bonds.”

Recent history has shown that caution about bonds is not unfounded. In 1995, Lancaster University issued a bond at a high interest rate. More than a decade later, the credit crunch pushed the university into financial strain because of the conditions attached to the bond. The University of Greenwich issued a bond in 1998, only to withdraw it four years later after its credit rating was downgraded.

Brexit also makes it harder for UK universities to access other finance channels in Europe. Kerse said: “The university considered taking borrowings from the European Investment Bank, but considered on balance that the political risk associated with new long-term borrowings from Europe was not something that it wished to accept.”

Australian universities tap into bond markets
Australian universities are becoming competitive internationally, poaching Asian students from US and UK competitors. To accommodate them, they have to invest in infrastructure, but traditional financial channels are less accessible. Last year, the Australian Government decided to wind up its Education Investment Fund, the public body funding teaching and research, forcing universities to consider alternative financing options, such as public debt. Bond issuance has increased from just $41m in 2008 to more than $1bn in 2016, according to data by Dealogic.

A case in point is the University of Melbourne, which issued $250m in bonds in 2014 to build student housing facilities and renovate existing ones. Katerina Kapobassis, acting Chief Financial Officer at the university, said the institution picked bonds over other financial routes for their combination of long maturity and low cost: “We are borrowing money to build long-life productive infrastructure assets to service our growth, so it is sensible to match asset and liability lives and issue debt with long maturities where possible. Banks and other credit markets donít currently offer such long maturities.”

The majority of investors are “insurance companies and other similar financial institutions”, according to Kapobassis. She added: “The average duration of certain insurance policies, such as life insurance, is very long. As these institutions are investing for a long period, they find the universityís strong reputation and robust AA+ credit rating attractive.”

Other Australian universities are exploring new territories in the bond market, such as up-and-coming green bonds that finance green projects. This summer, the Australian Catholic University became the first higher education institution worldwide to issue green bonds. Scott Jenkins, Director of Finance and Chief Financial Officer at the university, said: “Universities are large, complex organisations, [so] when it comes to financing expansion, many universities have seen that balance sheets are underutilised and have the capacity to borrow. In the current environment, the cost of funding is still low, although itís moving higher.”

As in other Anglophone countries, critics allege that bond issuance makes Australian universities vulnerable to the volatile forces of financial markets. But Jenkins thinks that universities can be more entrepreneurial, without compromising their educational purpose: “Over time, administrative areas of universities have become more businesslike, while the core mission and objectives remain unchanged.”

The holy grail of credit ratings
As universities become more active in the financial markets, their credit ratings become an important metric of their success. For critics, this is the last straw in the long way towards commercialisation of higher education, as universities are forced to take more wealthy international students, increase tuition fees and borrow to invest in flashy amenities, often with little educational value. Banerji said: “Credit rating agencies, especially through their credit upgrade and downgrade factors, can play a crucial role in determining a host of decisions on campus. On the student side, credit reports often suggest colleges maintain increasing out-of-state enrolment numbers to ensure the annual growth of net tuition revenue and maintain pricing flexibility. Equally, the agencies often highlight the importance of cost containment on the spending side that can have serious implications for faculty and staff on these campuses.”

The drop in public funding has pushed universities to cosy up with the financial sector

Many academics compare the increasing importance of credit ratings in higher education with university leaders’ obsession with league tables. But Wadhwani dismissed these fears as hyperbole: “Bond ratings are very different from academic rankings, the latter being an important marketing tool internationally, but less so historically in the US. Bond rating criteria do not require any particular level of academic standards; the focus is on financial sustainability within an institution’s unique educational niche.”

For some institutions, credit rating is not worth the trouble if issuing public debt is a one-off venture. That is the case of the University of Bristol, according to Kerse: “The university is unlikely to issue further long-term debt in the foreseeable future, and a credit rating would introduce another stakeholder to the institution. We would have considered a publicly issued bond if we were in an environment where we were issuing new debt more frequently.”

On the other side of the Atlantic, most US institutions view credit ratings and the scrutiny that comes with them as a necessary evil to further their institution’s mission. Levear noted: “We view our credit rating as an asset that can be used to help the university pursue its academic and public mission.” This is a view that is becoming increasingly prevalent in higher education circles globally, as financial stability and educational excellence can go hand in hand, according to Wadhwani: “Ratings tend to correlate favourably for universities with the financial capacity to support their mission and operating needs, rather than the reverse.”

Bridging Africa’s infrastructure gap

Posted on by Max Tomlin

More than any other continent, Africa is unfairly homogenised; talked about as if it has an unvarying history, is in possession of a uniform culture, and faces generalised problems. At times, it is even mistaken for a single country. Unsurprisingly for a landmass that is bigger than the US, China, India and much of Europe put together, Africa is incredibly diverse.

The African Development Bank will use this year’s Africa Investment Forum to bridge an infrastructure funding gap of $130-170bn a year

Unfortunately, one of the ways that this difference manifests itself is in terms of infrastructural development. According to the World Bank, it takes 12 days to export a container from Egypt, at a cost of $625, but transporting the same container from the Central African Republic takes four times as long and costs almost nine times as much. The infrastructure gap between Africa and Europe or the US may be significant, but national discrepancies remain a pressing issue too.

Hampered growth is one of the most disabling side effects of poor infrastructure. It’s easy to take roads, clean drinking water and electricity for granted, but without reliable access to these essentials, doing business becomes virtually impossible. This, in turn, makes it difficult to attract the investment required to fund new infrastructure projects.

In an effort to escape this vicious cycle, the African Development Bank (AfDB) will use this year’s Africa Investment Forum, due to begin on November 7 in Johannesburg, to bridge an infrastructure funding gap of $130-170bn a year. If the AfDB is successful, not only will it offer hope to its impoverished nations, but it will generate benefits for the developed world too. If it is not, Africa will remain a continent where some nations are on the road to prosperity, while others are in danger of being left behind.

A helping hand
Currently, Africa’s infrastructure is a mixed bag. While Angola has a road density of just 4km per square kilometre of land, South Africa’s figure is more than 15 times higher. Africa’s larger economies may be able to fund their own developments but for many others, this simply isn’t practical. Foreign investment, therefore, is set to play a major role in financing future infrastructure projects.

Professor Landry Signé, Distinguished Fellow at Stanford University’s Centre for African Studies and author of Innovating Development Strategies in Africa, believes that barriers to foreign investment must be eliminated, even though many of the struggles facing African countries today stem from their colonial past.

“In the 1980s, infrastructure for trucking, shipping and air transport was largely non-existent in Africa,” Signé said. “The infrastructure inherited from the colonial period (which was limited and generally served only to connect the administrative capital with sites where raw materials were mined) was either not kept or not maintained.”

Certainly, the growth rates being witnessed in many African countries will fill foreign investors with confidence that their funding will be generously repaid. Seven countries in sub-Saharan Africa (Côte d’Ivoire, Ethiopia, Kenya, Mali, Rwanda, Senegal and Tanzania) posted growth rates above 5.4 percent between 2015 and 2017, and – according to the World Bank – Africa is home to six of the world’s 10 fastest-growing economies this year (see Fig 1). That being said, high levels of risk can often accompany rapid growth, although that hasn’t seemed to deter everyone.

China-Africa relations are at an all-time high, with Beijing proving more than willing to extend its One Belt, One Road initiative across the continent. Last summer saw the completion of the Nairobi-Mombasa railway line in Kenya, with China agreeing to finance 80 percent of the $11.17bn cost. The new line will reduce travel times between the country’s two most important cities to 4.5 hours and help Kenya push its proportion of freight trade up towards its 40 percent target.

China-Africa relations are at an all-time high, with Beijing proving more than willing to extend its One Belt, One Road initiative across the continent

This is far from the only example. Across the continent, Chinese-backed railway, port and motorway projects can be found at various stages of completion. In Egypt alone, China has pledged $35bn to fund the creation of an entirely new capital city east of Cairo. Other nations are certainly helping with Africa’s infrastructure burden, including India and the US, but China is often considered the most noteworthy – and not always for the best reasons.

There is a growing concern, partly justified and partly inspired by western fears of a global power shift, that China’s infrastructural investments are not entirely altruistic. The cost of the Chinese-funded Addis Ababa-Djibouti Railway in Ethiopia totalled $4bn, almost a quarter of the Ethiopian Government’s expenditure over an entire year. It is possible that the economic benefits of the railway and other projects will help foster economic growth in the country and enable Ethiopia to repay this sum but, if not, China may seek repayment through political agreements or favoured access to natural resources.

Suspicions were certainly not eased in January, when reports indicated that China had been systematically hacking the African Union’s (AU) computer systems for five years. The AU’s $200m headquarters in Addis Ababa was financed by Beijing and built by China State Construction and Engineering, which allegedly allowed Beijing to conduct nightly data transfers and install hidden microphones in desks and walls. China has denied the accusation.

Of course, African countries are not naïve when it comes to international assistance. Having been subjected to colonial rule for a number of years, they are well aware that foreign investment is sometimes repaid with more than just interest. That being said, there is no reason why Chinese-backed projects can’t provide infrastructural and development gains in Africa in the here-and-now, while also providing long-term benefits for Beijing.

Looking closer to home 
Despite its size and abundance of natural resources, Africa is not a global player in terms of world trade. There is no doubt that challenges in the transportation and logistics industry have hampered the trading capabilities of many countries, not only intercontinentally but with their neighbours too. In 2011, for example, intra-African trade represented just 11 percent of African trade globally.

A train crossing the Kaaimans River, South Africa

Although South Africa sneaks into the global top 20 of the World Bank’s Logistics Performance Index, African countries also occupy five of the bottom seven places. Part of the blame for Africa’s infrastructural shortfall is geographic: the landscape varies hugely across the continent, with nations like Algeria and the Democratic Republic of Congo having to cope with vast deserts and extensive forests respectively. Human failings cannot be overlooked, however.

Past efforts to improve infrastructure on the continent have often come up short. Corruption, security concerns and the threat of political instability are, to varying degrees, issues that threaten to derail projects that get past the approval stage. While the Programme for Infrastructure Development in Africa has shown promise, only four of its 51 major projects have reached the advanced implementation stage so far. Whether the scheme can meet its ambitious funding goals remains to be seen.

If infrastructure can be improved, it would provide many African nations with a means of pulling themselves out of poverty. By improving logistic and trading networks, countries would be able to make better use of their natural resources. Mozambique, for example, is rich in aluminium, coal and natural gas, but poor in terms of its trade facilitation and logistics. Its current levels of coal production exceed its rail capacity, while the road network, which is largely unpaved or underdeveloped, causes further bottlenecks. Ensuring Mozambique can make the most of its resources will go a long way to improving citizens’ quality of life.

The growth rates being witnessed in many African countries will fill foreign investors with confidence that their funding will be generously repaid

Projects should look beyond road and rail networks too. “We all know that travelling in Africa remains inconvenient and costly,” said Pierre Guislan, the AfDB Vice-President for the Private Sector. “In the past 10 years, the AfDB has provided about $1bn to the African aviation sector. We have invested in airport construction or expansion in Morocco, Tunisia, Cape Verde, Ghana or Kenya, and in the improvement of air safety and navigation in the Democratic Republic of Congo… and West and Central Africa.”

Encouraging private transport and logistics (T&L) projects will also help stimulate domestic demand. T&L investors will have a keen eye on the retail, agricultural and manufacturing sectors, which are all performing strongly but have plenty of room to grow. In Tanzania, 20 percent of land is suitable for farming, but only five percent is currently cultivated. Energy exports to the US and China are growing rapidly, but further investment is needed to utilise untapped reserves. By investing in infrastructure, African countries are not just improving their business and trading capabilities, they are igniting a catalyst for future growth as well.

The road ahead
When news of the supposed AU hacking emerged, the biggest disappointment for AU Chairman Paul Kagame did not relate to Chinese surveillance. “I would only have wished that in Africa we had got our act together earlier on,” he said. “We should have been able to build our own building.” His remarks convey a sense of frustration that some African nations have not yet achieved the expected level of development, but the future still offers hope.

The 30th African Union Summit in Addis Ababa, Ethiopia

Signé believes that a number of infrastructure projects already in development, from the Trans-Sahara gas pipeline to the Kinshasa-Brazzaville Bridge road and rail development, could hold the key to closing Africa’s infrastructure gap. “Successful implementation of the already-funded projects is also one of the best indicators of the seriousness of African political leaders seeking infrastructure financing,” Signé noted. “They have no more excuses.”

Bringing these projects to completion would not only help improve the economic situation in the countries concerned – it would also provide a boon to investor confidence, giving them further reassurances that they will receive a return on any funding. This would encourage additional developments across land, air and sea that are much needed in a continent where the population is expected to double by 2050.

Africa’s wealthier countries also need to act now. Making greater use of municipal bonds would represent a good starting point, but this will require national governments to give major urban areas a greater degree of financial autonomy. Interference at the national level hampered Dakar’s efforts to sell municipal bonds to investors back in 2015, resulting in the loss of $40m of capital. Across the last two months of 2017, US cities raised more than $111bn of municipal bonds for infrastructure projects and other needs, but urban areas in sub-Saharan Africa have raised less than one percent of this amount since 2004. It is difficult to catch up with the West when countries are not taking advantage of all the investment opportunities available to them.

“Infrastructure projects are among the most profitable investments any society can make,” noted Akinwumi A Adesina, President of the AfDB, in the group’s recently published African Economic Outlook report. “When productive, they contribute to and sustain a country’s economic growth. They thus provide the financial resources to do everything else.”

Certainly, Africa has unique challenges to overcome if it is to develop its infrastructure further, but it also possesses countless opportunities. For national governments, identifying funding prospects, both domestic and international, must be made a priority. Strengthening financial regulations and political reputations will also encourage investors to back prospective developments. Each country, city and individual project must, of course, be assessed on its own merits, but if Africa’s infrastructural gap can be closed, then it could deliver great things for the entire continent.

Zenith Bank leading by example

Posted on by Max Tomlin

As with other oil-producing nations, Nigeria’s economy has been a mixed bag. In 2016, it experienced its first recession in a quarter of a century. It was an undeniably difficult year for the country as its finances bore the brunt of low oil prices. The situation was further exacerbated by a simultaneous reduction in output, caused by a series of militant attacks on crude pipelines in the Niger Delta.

In line with its socially conscious approach, Zenith Bank encourages gender equality and ensures that equal opportunities are offered to all

Last year, however, told a different story. After 15 months of recession, Nigeria’s economy finally rebounded in the second quarter of 2017, albeit at a GDP growth rate of just 0.6 percent. According to Nigeria’s National Bureau of Statistics, the economy achieved 0.83 percent growth overall for the year. Despite being slight, the figures are a positive sign of progress. In particular, they demonstrate the boost given to the oil sector thanks to a fall in the number of attacks on pipelines, which enabled production to increase by a third. Meanwhile, global oil prices also increased, helping to further bolster the economy.

Nigeria’s non-oil sector also played a significant role in the positive results of 2017. The adoption of a flexible exchange-rate policy, which aligned the naira with the black market rate, engineered a much-needed reduction in the shortage of dollars affecting importers. Accumulatively, a brighter economic and political outlook has been enticing investors back to Nigeria and the country’s stock market has rallied.

Against this bright backdrop, the financial sector continues to make significant moves, including the introduction of new technologies, which in turn have drastically improved the efficiency of financial transactions for customers. Various banks are also making a big push in terms of sustainability, creating better conditions for local communities and the environment alike. As an industry leader in Nigeria, Zenith Bank is a role model for both.

In light of the impact that the bank is having, both on the Nigerian financial sector and on local communities through an extensive set of corporate social responsibility (CSR) initiatives, World Finance spoke with the chairman of Zenith Bank, Jim Ovia, to find out more about the institution’s successes.

Laying the foundations for success
To understand how Zenith Bank is succeeding, it is important to go back to the very start. Established in May 1990, Zenith Bank began operating as a commercial bank in July of the same year. After 14 years of rapid growth and a highly successful initial public offering, the bank was listed on the Nigerian Stock Exchange in June 2004. The bank is also listed on the London Stock Exchange (LSE) and the Irish Stock Exchange (IRS). The bank’s listing of the second tranche of the $500m Global Medium Term Note programme broke ground with an overwhelming oversubscription of more than 300 percent. With its headquarters in the commercial capital of Nigeria, Zenith Bank now has more than 500 branches and business offices across the entire country – including, importantly, one in every state capital and major town in Nigeria. In 2007, it became the first Nigerian bank to be granted a licence by the UK’s Financial Services Authority, while it also operates in Gambia, Ghana, Sierra Leone, South Africa and China.

1990

Zenith Bank was established

2004

Bank floated on the Nigerian Stock Exchange for the first time

2007

The bank became the first Nigerian institution to be granted a licence by the UK’s Financial Services Authority

2013

Zenith Bank floated on the London Stock Exchange for the first time

In 2013, continuing along this path of expansion, the bank listed $850m shares on the London Stock Exchange, marking another major step in its status as a globally positioned financial institution. Today, Zenith Bank is the largest bank in Nigeria by Tier 1 capital and boasts a shareholder base of over one million.

“When Zenith Bank was founded, the intention was to meet the needs of Nigerians by providing excellent banking services,” Ovia explained. Given this steadfast focus on meeting the evolving demands and requirements of customers, the bank has placed cutting-edge technology at the core of its strategy. Consequently, by adopting the very latest innovations in fintech, Zenith Bank is able to provide platforms that are easy and intuitive to use, while also ensuring that transactions are carried out seamlessly, both online and in real time.

“From the beginning, the objective of the bank was to become and remain the leading brand in Nigeria,” Ovia continued. “That is why we have always strived to carve a global presence – and we have achieved this by offering a distinctive range of financial services. Since 1990, we have committed ourselves to building the Zenith brand into a reputable international financial institution that is recognised for innovation, superior performance and the creation of premium value for all stakeholders.”

In order to uphold this reputation, Zenith Bank maintains a continual state of evolution, constantly developing its services and adapting to shifting environments and customer taste. Ovia continued: “Over the years, business conditions have continued to change each year, bringing with them new prospects and challenges. That said, our objectives continue to be the provision of excellent financial solutions to our growing customer base across the world – and to do so in a way that creates value for all stakeholders.”

Thriving through technology
In order to stay at the top – and, in turn, provide the very best in financial services for its broad customer base – Zenith Bank is always on the look-out for new solutions that can improve the level of convenience and efficiency offered to its clients. Given the changing nature of financial services these days, it comes as little surprise that Zenith Bank has recruited Africa’s finest tech talent to work on new tools and platforms for the benefit of its customers far and wide. This is to complement its status as the company with the highest number of chartered accountants by any Nigerian institution.

“Zenith Bank is a trailblazer in the adoption of cutting-edge technology to provide banking solutions, which is why we are the bank of choice for millions of Nigerians,” said Ovia. “Our IT infrastructure is second to none in Nigeria, which is due to the fact that we have been able to adapt to the changing needs of the banking public by constantly coming up with new solutions. Our customer service is one of our pivotal attributes, upon which our institution has continued to thrive and won numerous endorsements and recognition for.”

As with any organisation worth its salt, Zenith Bank is all too aware of the importance of keeping clients happy. “We place the utmost emphasis on customer service, as we recognise that our customers are the primary reason of our business,” Ovia explained. In order to provide such excellent service, Zenith Bank places a lot of focus and resources into the development of its employees. He continued: “Our people are the greatest asset of our institution. We hire, train and retain the most diligent and highly motivated individuals that imbibe the vision of our institution.” It is to this approach that Ovia attributes the bank’s development. “Zenith Bank has grown organically,” he said. “Even when others have taken the M&A route, we have grown bigger and more sustainably due to the careful attention we have paid to retaining the best talent that Nigeria has to offer.”

Crafting a sustainable future
Over the past decade, sustainability has certainly become the buzzword of the corporate world. Much of this is based on a growing public awareness, which sees individuals opt for purchases and services that are less harmful to the world around them. As is the case with other spheres, this shared social consciousness has certainly made its way into the financial sector and transformed the way banks function.

The bank is involved in various community projects, including those dedicated to education advocacy, youth and sport empowerment and environmental sustainability

Given its size and leading position, CSR has become a core driver for Zenith Bank. According to Ovia: “It is necessary that banks operate with awareness and confidence – that their products and services do not have negative social and economic impacts on the environments in which they operate. This is crucial for the financial industry because every project they fund and every business banks invest in can affect the environment and local communities. This is why banks always conduct their business activities responsibly, without compromising the wellbeing of future generations.”

He continued: “For instance, in performing the crucial function of financial intermediation in the economy, sustainable banking requires financial institutions to deliberately channel funds away from investments and activities that harm the environment or cause social disorder. Instead, they should be channelled into areas that are environmentally friendly and enhance social development.”

As is the case with any nation working hard on its continued development, sustainable banking is crucial to the Nigerian economy. As stated by the Brundtland Report from the United Nations World Commission on Environment and Development: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Ovia said: “A safe and sustainable energy pathway is likewise crucial to sustainable development – this is something we have not yet found, but the rates of increasing energy use have been declining, at least.”

This point regarding clean energy is crucial for a country in the midst of large-scale industrialisation and agricultural development. When also combined with rapid population expansion, the energy required is enormous. “A safe, environmentally sound, and economically viable energy pathway that will sustain human progress into the distant future is clearly imperative,” Ovia told World Finance. “This, however, will require new dimensions of political will and institutional cooperation.”

With regards to urban areas, Ovia explained that good city management requires the decentralisation of funds, other resources and the will of local authorities, which are best placed to appreciate and manage local needs. “I agree that the sustainable development of cities will depend on closer work with the majorities of urban poor, who are the true city builders – namely, tapping the skills, energies and resources of neighbourhood groups and those in more informal sectors of work. Much can be achieved by the site and service schemes that provide households with basic services and help them to get on with building sounder houses.”

The benefits of sustainability
When asked how financial institutions can become more sustainable, Ovia replied that it involves carrying out banking operations and business activities with conscious consideration for the environmental and social impacts of those activities. “Sustainable banking integrates environmental and social criteria into traditional banking, and sets environmental and social benefits as a key objective,” said Ovia. “Financial institutions can become more sustainable by improving their activities to ensure that they create a very healthy environment, and they do the best they can in closing the social gap.”

There has been a major shift in sustainability when it comes to banking. This is in large part due to the kudos that comes with such actions. As indicated by survey findings, there are numerous reputational benefits that come with fulfilling regulatory requirements, which unsurprisingly act as the most common trigger for the adoption of sustainable banking practices. “Operational benefits – for example, increasing efficiencies and improving transparency – are the third most common trigger for banks adopting sustainable banking,” said Ovia. “The next most common trigger is the need for more employee engagement in terms of attracting and retaining talent. These top four triggers are in line with global trends, as demonstrated time and time again in recent years. But, as mentioned, the most common triggers for sustainable banking efforts remain the reputational benefits that come with meeting regulatory requirements.”

This shift is major news for Nigeria, to the extent that most banks in the country now compile annual sustainability reports that are submitted to the appropriate regulators. Zenith Bank has taken a lead in this direction, being the first company in Nigeria – and the first financial institution in the whole of Africa – to have adopted the GRI Standards in sustainability reporting.

“Zenith Bank promotes sustainability in terms of services and operations by making sure that sustainable business practices with reference to the environmental and social criteria of GRI Standards are embraced and executed. The bank adopted the green business option, which is committed to carrying out periodic reviews of our processes to identify areas of potential adverse environmental effects and mitigate them as efficiently as possible,” Ovia told World Finance.

He continued: “Zenith Bank is also conscious of the rising global concerns about environmental sustainability and has chosen to embrace ‘clean Earth’ principles. Our goal is to transform our banking operation into one that delivers low carbon emissions, energy efficiency, natural resource preservation, and protection of biodiversity and the Earth’s flora and fauna. We are fully dedicated to conducting our business activities in an environmentally friendly manner. The bank is mindful of the impact our business decisions could have on the career growth and overall wellbeing of our employees, and so these decisions are made with in-depth considerations.”

Zenith Bank also remains committed to adhering to all applicable labour laws and regulations in the different markets in which it operates. Consistent with international best practices, the bank establishes policies and guidelines covering grievance reporting and resolutions, disciplinary and reward procedures, paid maternity and paternity leave, employee training and performance management, and severance and separation benefits, among others.

Championing social initiatives
In line with its socially conscious approach, Zenith Bank strongly encourages gender equality and ensures that equal opportunities are offered to all personnel. “The bank strives to maintain a level playing field for all genders,” added Ovia. “As of December 31, 2016, we had a total of 5,970 staff in our employment, 2,859 of which are female and 3,111 male, representing 47.9 percent and 52.1 percent of our total employees respectively. There are 75 employees in the ranks of our top management group, which includes assistant general managers, deputy general managers and general managers. Of this number, 23 are female and 52 are male: the former represents a ratio of 31 percent.”

The bank is also involved in various community projects, including those dedicated to education advocacy, environmental sustainability, and youth and sport empowerment.
There is Zenith Bank’s multimillion-naira flagship Iga-Idunganran Lagos Island Community Healthcare Centre – a testament to its commitment to healthcare delivery in local communities. Not only did the bank fund the construction of the facility, but it also fully equipped it in order to meet the primary healthcare needs of Lagos Island residents. Along this vein, Zenith Bank donates equipment and facilities to hospitals across Nigeria, an example being its recent donation of incubators and other equipment for neonatal care to the University of Calabar Teaching Hospital in Cross River State in a bid to help reduce infant mortality.

Elsewhere, at institutions like the national hospital in Abuja, the bank has donated state-of-the-art ambulances, while it continues its work to help with the early detection of life-threatening diseases such as cancer and AIDS by providing free medical diagnosis kits to healthcare institutions. Other projects currently in the pipeline include a library project, which will see the bank fund more than 100 new libraries across the country, in addition to renovating existing ones in various different states.

Projects such as these are essential for Nigeria’s continued economic development and the improved welfare and wellbeing of its population of 186 million people. When asked about the bank’s role as part of this progression, Ovia answered: “The bank understands that the private sector is often seen as a driver of the economy and, in playing its part, the bank’s projects (which are collectively labelled CSR initiatives) have helped to improve the health and welfare of socially-excluded populations, thereby positively impacting their social status, earning potential and the access they have to services and resources.”

The necessity of ethical governance
Banks nowadays can’t escape from the necessity of corporate governance in their day-to-day operations, as well as their overall vision and direction. As such, Zenith Bank places corporate governance at the core of everything it does. “I believe corporate governance is the way a company polices itself,” Ovia told World Finance. “Corporate governance is intended to increase the accountability of companies and to avoid massive disasters before they occur.”

5 million

Number of free spectacles Zenith Bank has donated to women and children in the Maryland and Yaba communities

500,000

Number of wheelchairs the bank has donated to women and children in the Maryland and Yaba communities

Ovia gave failed energy giant Enron as a prime example of the importance of solid corporate governance in the long-term, sustainable success of any organisation – whether large or small. Through regular meetings with internal members, including shareholders and debtholders, as well as suppliers, customers and community leaders, companies can effectively address the requests and needs of affected parties.

He continued: “Corporate governance is of paramount importance to a bank and is almost as important as its primary business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. The bank’s image can also be enhanced in the public eye as a self-policing organisation that is responsible and worthy of holding shareholder and debtholder capital,” Ovia explained. “A bank without a system of corporate governance is often regarded as a body without a soul or conscience. If this shared philosophy breaks down, then corners will be cut, products and services will be defective and management will grow complacent and corrupt. The end result can be catastrophic.”

To avoid such disastrous circumstances, Zenith Bank goes to great lengths to ensure it complies with a solid corporate governance model. “Shareholder recognition is key to maintaining the bank’s stock price,” Ovia explained. “More often than not, however, small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Good corporate governance seeks to make sure that all shareholders get a voice at annual general meetings and are allowed to participate.”

According to Ovia, stakeholder interests should also be recognised by corporate governance. In particular, he explained, Zenith Bank takes the time to address non-shareholder stakeholders, which helps the company establish a positive relationship with both local communities and the media. To this end, board responsibilities are clearly outlined to shareholders in order to ensure that all board members are on the same page and share a similar vision for the future of the bank.

“Ethical behaviour violations in favour of higher profits can cause massive civil and legal problems down the road,” he added. “Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored.” To prevent this from happening, the bank established a code of conduct regarding ethical decisions for all members of the board. “This is crucial, because business transparency is the key to promoting shareholder trust,” said Ovia. “Financial records, earnings reports and forward guidance should all be clearly stated without exaggeration or ‘creative’ accounting.”

Zenith Bank’s corporate governance policies do not stop there, however, with new initiatives soon being rolled out. “The bank plans on reinforcing its corporate governance with a view to ensuring sustainable growth by launching proactive reforms to enhance transparency, as well as efficiency and manoeuvrability,” Ovia explained. “We will continue to introduce governance measures on an ongoing basis, as is appropriate to our aim of being a truly global company. Through such measures, we can maintain the trust of a wide range of stakeholders and continue to grow, while simultaneously responding to changes in the operating environment.”

Given the centrality of corporate governance to its operations, the bank now acts as a role model to others in the country, as well as the wider region. In recognition of its efforts, Zenith Bank was the first bank in Nigeria to win the award for Best Corporate Governance from World Finance magazine for three consecutive years (in 2014, 2015 and 2016). “This demonstrates that the bank is miles apart from its competition,” said Ovia.

In terms of its future plans, the bank will keep steady on its course of sustainability, community support, environmental awareness and solid corporate governance. “The bank plans on keeping a keen eye on the future and taking action to protect it,” Ovia noted. “A great way to do this is by focusing on our staff, the environment and achieving sustainable profits, which will help us achieve our medium to long-term goals.”

An oasis of fine wine excellence

Posted on by Max Tomlin

In 1990, a holiday to Argentina would change the lives of the Bousquet family forever. When Jean Bousquet laid his eyes on the Gualtallary Valley – a remote and arid terrain high in the Tupungato district of the Uco Valley in the country’s Mendoza region – he knew he’d found the location he’d been dreaming of. Here, where the condors circle above and the Andes Mountains stand imposingly in the distance, Jean had discovered his ideal terroir; a perfect place in which to nurture organically grown wines.

Although the location had a lot of potential, the only way to exploit it was through hard work and determination. Undeterred by such challenges, the family patriarch returned to France and, between visits to Argentina, set about divesting himself of virtually everything he owned, including the family winery and vineyards in Pennautier, near Carcassonne in the south-west of France. Industry experts in both France and Argentina questioned the decision, but almost 30 years after that fateful family trip, Jean’s risks have certainly paid off.

Consumers are changing and so too must the wine industry. Domaine Bousquet continues to focus on making high-quality wines that support the local community

Today, the future of the Domaine Bousquet winery rests with his son Guillaume, daughter Anne and her husband, Labid al Ameri. Following a 2001 trip to Argentina, Anne and Labid began investing in Domaine Bousquet, after a devaluation of the Argentine currency had rendered land prices cheap and Argentine exports very competitive. By 2008, both Labid and Anne had joined the winery full-time, eventually taking full leadership in 2011. In an interview with World Finance, Anne explained how Domaine Bousquet has managed to stand out in an incredibly crowded market.

“After two decades in business, Domaine Bousquet is a genuine success story,” Anne reflected. “Domaine Bousquet’s points of difference – certified organic fruit, high-altitude terroir and a French-Argentine profile – have proved to be a winning combination. Our major point of difference is much simpler, however: we just want to make high-quality wines that everyone can afford.”

Hitting the heights
With altitudes ranging up to 5,249ft, Gualtallary occupies the highest extremes of Mendoza’s viticultural limits. Today, wine cognoscenti recognise it as the source of some of Mendoza’s finest wines, but the same could not be said when the Bousquet family first set eyes on this cool-climate locale. Back then, it was virgin territory: tracts of semi-desert, nothing planted, no water above ground, no electricity and a single dirt track by way of access. Locals dismissed the area as too cold for growing grapes.

“My father believed that he had found the perfect blend between his French homeland – which has warm climate and potential low acidity wines – and the sunny New World, with its high thermal amplitude and naturally high acidity wines,” said Anne. “There was also another distinct financial plus: land prices at the time were approximately four percent of those for properties in more established districts of Mendoza.”

Anne’s father was not the first, nor the only wine producer to have his interest piqued by the Gualtallary Valley. But what set him apart is that he succeeded where several better financed, well-known names did not. What he seized upon, but others failed to grasp, was the singular importance of water. Water is hard to come by in Gualtallary; technically, the area is a desert. However, the family had done its homework and its first task in 1998 was to dig a well – all 495ft of it. Two years in the making, its completion was followed by the planting of vines. Other investors in the region, meanwhile, watched their hopes fade, chiefly due to an inability to extract water or secure water rights.

Working in harmony
Mastery of the natural landscape alone was not enough to turn an arid desert into an award-winning vineyard. Personal relationships have played just as important a role in the success of Domaine Bousquet, particularly in its early days. The complementary skill sets possessed by Anne and her husband, for example, helped take the vineyard’s success to another level.

“While we both consider ourselves brand ambassadors and focus on sharing our story, Labid is focused on the big picture and I’m the detail person,” Anne said. “We have structured our roles so that Labid is in charge of sales and marketing and I am in charge of administration, finance and operations. After living in Tupungato for seven years, we now alternate in spending one week each month at the winery there. We focus each trip on the quality of our wines. Passion and communication are the most valuable assets in our partnership.”

Broader community partnerships have also played a vital role in Domaine Bousquet’s success. Around 95 percent of employees come from the local town of Tupungato, 10km from the winery, and as a rural company, Domaine Bousquet’s partnerships with neighbouring vineyards have proven vital. Improvements to surrounding roads have bolstered access to markets, provided good local jobs and encouraged staff to achieve way beyond their expectations.

Domaine Bousquet also trains and promotes from within. Executive Chef Adrian Baggio, for example, was sent as an intern to New York, before rising through the ranks to take charge of the winery’s Gaia Restaurant. What’s more, all the harvest pickers are from Tupungato.

“We are aware that only by being successful can Domaine Bousquet provide much-needed jobs and opportunities for a poor, isolated community that has long been abandoned by the powers that be in Buenos Aires,” Anne explained. “That’s why we take a 360-degree sustainability approach that encompasses economic success, as well as environmental protection. At Domaine Bousquet, we believe that when our employees are empowered to achieve their potential, the wider community and the entire country also benefits.”

The story continues
The Bousquet family has been involved in winemaking for four generations, but this can only continue if they value sustainability over short-term success. With this in mind, Domaine Bousquet has made great efforts to pursue organic practices, a reduced carbon footprint and growth in the local community.

“When we set up home in Tupungato, the area was a rural backwater, abandoned by a failing central government,” Anne explained. “That meant building infrastructure from scratch. We joined an alliance of local wineries in funding construction of a new road to provide better access for employees, material deliveries and a growing number of tourists.”

Domaine Bousquet also made staff training a priority by creating development programmes that focus on a wide range of skills, from wine growing to office work. Every detail had to be considered, from transport for employees who don’t own a car, to microloans for continuing education. The wine industry as a whole has transformed the Tupungato economy, but Domaine Bousquet was there first.

Another major strand of the company’s sustainable ethos is its commitment to organic farming. Crops are grown in harmony with nature without using any chemicals, including pesticides, herbicides or synthetic fertilisers. Instead, natural fertilisers, such as Domaine Bousquet’s own compost, are used. Water shortages are averted through investment in water treatment facilities to limit waste. In addition, all vineyards use drip irrigation, and the winery is equipped with automatic cut-off cleaners to further reduce water consumption.

“Being organic was never a sales gimmick. Stewardship of the land is a necessity: the land was unspoiled when we arrived, and we weren’t about to spoil it,” Anne said. “Unlike many wineries whose organic wines are simply a small part of a larger portfolio, our fruit has been fully organic from the get-go, both estate and purchased. We have also played an instrumental role in converting fellow growers to organic principles.”

Anne and the other members of staff at Domaine Bousquet believe that the healthier the vineyard, the better the fruit and, of course, the wine. In other words, by nourishing the land and treating it with respect, the land will give back its best produce. But the company also likes to think more broadly in terms of sustainability. It has a capability programme for all its employees and subsequently decided to invest in achieving Fair for Life certification. In addition, by choosing to only use lightweight glass bottles across its entire wine portfolio, Domaine Bousquet has significantly reduced its carbon footprint.

“We continue investigating new techniques and methods to support our sustainability programme,” Anne explained. “Currently, we are looking forward to new fair trade projects to keep investing in our community and employee development. In order to take advantage of the great solar exposure at Mendoza province, which has more than 300 days of sunshine a year, we are working on installing solar panels to meet all of our electricity needs at the winery.”

Winemaking is a millenary industry that seemed as though it would never change. However, consumer needs are evolving rapidly, particularly with regard to what we eat and drink. Consumers today are increasingly conscious about how each product is made and respect brands that care about natural and sustainable processes.

Just as consumers are changing, so too must the wine industry. Domaine Bousquet is well aware of this and continues to focus on making high-quality wines that support the local community and bring pleasure to its global customer base. As long as the company continues on this path, it will surely achieve its goal of becoming the number one organic winery in the world.

Greece chasing a clean break

Posted on by Max Tomlin

The feel-good news of this summer is that Greece has entered the final throes of its economic nightmare. The country’s beleaguered economy is finally showing signs of a turnaround, and a sense of optimism has tentatively returned. In 2017, the country witnessed three consecutive quarters of growth for the first time since 2006, while growth has surpassed expectations for several quarters. But most significantly, the start of this year saw a landmark decision from international creditors that the Greek Government has completed almost all of the necessary reforms, and is close to unlocking the final slice of bailout funding.

Despite evidence of a turnaround, the Greek unemployment rate remains above 20 percent and the costs of the crisis will be present for years to come

The decision puts an exit date in sight for the country’s painful string of bailout programmes. As World Finance goes to press, there is just €1bn ($1.23bn) of bailout funds that have yet to be transferred, out of the €266bn ($328bn) total in emergency funding that had been allocated over the course of all three of its international bailouts. If all goes to plan, the transfer will constitute the last disbursement of the fourth and final tranche of Greece’s third and final bailout programme, with August 2018 earmarked as the date when Greece will be free to fend for itself.

All parties hope that this will foreshadow a smooth return to the markets, signifying a resolute end to a drawn-out crisis. Indeed, throughout this saga, this moment has always been touted as the overarching goal.

But as the bailout exit date – or ‘Grexit’, as it’s inevitably been dubbed – gets closer, the country will have to prepare for life without regular chunks of low cost finance from its ‘troika’ of lenders, and will have to rely instead on financial markets. For a successful transition into post-bailout life, it will need to persuade the markets that its bonds are a viable investment and its businesses are worthy of international capital.

Breaking the chains
Merriment at the prospect of a bailout exit will be subdued for Greeks, whose economic fortunes were the biggest casualty of the euro crisis (see Fig 1). Despite evidence of a turnaround, the unemployment rate remains above 20 percent (see Fig 2) and the costs of the crisis will be present for years to come. Under its bailout arrangements, the government has pledged to run a budget surplus of three percent for 20 years, and a further bout of cuts to public services are yet to kick in. “There is a sense of relief that the economy has moved to some recovery. But, in itself, this is hardly a cause for celebration,” George Pagoulatos, a senior advisor to former Greek Prime Minister Lucas Papademos, told World Finance.

What’s more, as the date for Grexit approaches, the exact form it will take is far from clear, and there remains the pivotal question of whether European creditors will totally relinquish their grip on reform efforts and let Greece govern itself. Both the IMF and EU creditors are reluctant to let this happen, fearing that the Greek Government will roll back measures, including pension cuts and other efforts to improve productivity.

However, the Greek Prime Minister Alex Tsipras has promised a “clean” exit from the bailout process, suggesting that the country will be able to break free entirely from any conditions attached to loans from international creditors, and determine its own economic policy. But such rhetoric may stray from reality in this case: the prospect of returning to markets will be far from simple, as will the question of breaking free from the dominance of international creditors on matters of economic policy.

Keeping it clean
When it comes to a return to the markets, the initial signs are good. Eurostat forecasts project growth of 2.5 percent for both this year and the next. Meanwhile, the country’s embattled banks have begun to return to bond markets, with the National Bank of Greece turning to international credit markets in October for the first time in three years.

Improved investor sentiment is reflected in the continued decline in government bond yields, with the yield on benchmark 10-year bonds dropping to an eight-year low at the end of 2017. Yields have since remained low – if not stable – during the first part of this year, sitting at 4.4 percent as World Finance goes to press. In January, S&P Global Ratings raised its sovereign credit grade, while Fitch lifted its rating in February.

As post-bailout life approaches, Greece has moved to test bond markets. In order to convince markets that it will survive without bailout funding, the government has set out to build up a cash buffer and has plans to raise as much as €19bn ($23bn) in total through three bond sales before the cut-off date in August. In July of last year, it successfully entered bond markets for the first time since 2014. In February, it tapped bond markets for €3bn ($3.7bn) in seven-year bonds in an issuance that ended up being oversubscribed and achieving a 3.75 percent yield.

The IMF, which has until recently been issuing dystopian visions of Greek’s economic future, published a 192-page report late last year that stated: “The Greek economy has remained more resilient than expected in a difficult environment: fiscal targets have been widely outperformed, and game-changing structural reforms – in areas such as tax administration, the business environment, energy, privatisation and public administration – have been launched.”

Adding shine to the numbers
But a closer look will show that the prospect of a completely clean exit remains quixotic. For one, there is also a notable political spin to the language used surrounding the crisis: at this point in time, it is in many people’s interest to paint Greece as a success story. Speaking to World Finance, Dimitri Vayanos, Professor of Finance at the London School of Economics and editor of a book on Greek reform, observed: “[The Greek Government wants] to give something to the voters. The European governance wants to sell Greece as a success story. They want to be able to say that they have effectively applied an adjustment programme and as a result Greece has returned to growth. Both the European Government and the Greek Government have the same incentive to paint it this way.”

The effort to add shine to the situation is also reflected in growth figures by Eurostat. “Based on the current projections, Greece is forecast to grow the slowest out of all eurozone countries in 2017 – save Italy, which is very close,” Vayanos explained. Growth figures for 2017 depict growth in Greece at 1.6 percent, while the eurozone as a whole has grown by an average of 2.2 percent. Projections for the following years remain below the eurozone average. Vayanos notes that this is discouraging because, with unemployment at 20 percent and significant amounts of idle capital, the economy is already running far below full capacity and should be capable of more rapid growth than its peers. “There is a lot of room for growth just by getting the economy back to full capacity,” he said.

Several key figures, including Bank of Greece Governor Yannis Stournaras, have argued that a return to the markets will be messy without a ‘precautionary credit line’

In addition, several key figures, including Bank of Greece Governor Yannis Stournaras, have argued that a return to the markets will be messy without a ‘precautionary credit line’ from European creditors, which would act as a halfway house between a fourth bailout and a clean exit. This would enable the government to access more funds from European creditors in the case of a negative shock, with the goal of creating a buffer that would quell any market fears over the
fragility of recovery.

However, this scenario is unpopular with the Greek Government owing to the fact that it is likely to come with certain conditions attached, and this would disrupt any realistic chance of a ‘clean’ exit. Greek Finance Minister Euclid Tsakalotos has railed against the idea, arguing that there will be no need for a credit line when the country already has a cash buffer for the same purpose. “It would be stupid to have two buffers… No serious person would suggest both,” he said in a recent statement. “There may be stronger monitoring, as was the case in Portugal and Cyprus, but we will have much more freedom and we need to let the society know how we intend to use it.”

As clean as possible
In order to exit safely, there must be some confidence that the current recovery can be sustained, but there is no guarantee that this will be the case. In addition to its vast sovereign debt levels, which are approaching 200 percent of GDP, the Greek economy remains dogged by structural issues, a weak banking system, a drought of investment and the hangover effects of a painful depression. Deep scars have been left behind by more than eight years of flagging domestic demand, and the slump has triggered a punishing brain drain that has seen many of the most skilled members of the workforce seeking employment abroad. The exodus has been worst among the young, who for some time endured a youth unemployment rate of over 50 percent, though this has since dropped to around 42 percent.

The good news is that the budget deficit has now been reversed, after reform efforts acted to cut spending and improve tax revenue collection, and the trade deficit has been eliminated thanks to reduced consumption and a rise in tourism. But at the same time, productivity-enhancing reforms are yet to fulfil their promise, which is causing potential foreign investors to hold back. Vayanos explained: “There has been some progress. But much more needs to be done, and the growth prospects still aren’t good.”

Scars have been left behind by more than eight years of flagging domestic demand. The slump has triggered a brain drain that has seen many skilled workers seeking employment abroad

Reforms of the labour market and product markets, as well as a large-scale privatisation scheme, are still in full swing. “On the labour market, there has been some progress. The labour market has become more flexible. Firing costs have decreased and disincentives for part-time work have gone down as well,” Vayanos said. However, labour costs remain far higher than those in neighbouring countries, which could be reducing the speed of recovery. “The other issue is that there are high barriers to entry. Privatisation is happening, but there is not massive interest from foreign investors. More needs to be done to open up product markets and oligopoly,” Vayanos continued.

The justice system is also another source for concern for investors, with years of crisis taking their toll on Greek institutions. “There have been some efforts to make it more effective, but progress has been slow,” said Vayanos.

The ever-distant promise
It would therefore seem that the prospects for Greece’s future hinge, to a large degree, on the prospect of debt relief, which has consistently been touted as the reward that would be granted upon the successful completion of bailout programmes. The worry is that, with sovereign debt so high, it may be impossible for Greece to attract enough foreign and capital investment to break out of its depressed state. Negotiations have now begun in the context of Eurogroup meetings, which in itself is a significant step given that discussions into the details of debt relief have remained purposely vague throughout the bailout process.

The boundaries of debt relief were laid out in ambiguous terms last June in a statement from the Eurogroup. Critically, it will consist of debt reprofiling rather than debt restructuring, meaning that while maturities may be changed, there will be no overall debt reduction. They are also likely to include the transfer profits built up by the European Central Bank from its holdings of Greek bonds. The agreement also states that gross financial needs should not exceed 15 percent of GDP in the medium-term, post-bailout phase, and subsequently should stay below 20 percent.

While there is broad agreement that the vast size of Greek debt is a dead weight that is holding back its economy, divergences in opinion emerge over the future prospects of the Greek economy. The debate centres on the topic of debt sustainability, and the extent to which the debt load can be sustained without stifling any hint of growth.

Out of the total €320bn ($394bn) in debt, HSBC estimates that 80 percent is owed to the eurozone, meaning any debt relief is predominantly a question for European creditors rather than private lenders. The IMF, which holds a much smaller proportion of Greek debt, has long held that the debt will be unsustainable without meaningful relief from eurozone lenders. In fact, last year the fund went as far as suggesting that Greek debt will become “explosive” after 2030.

European creditors, however, tend to disagree with the IMF as to how the future might pan out, predicting instead that Greece will be able to shoulder higher debt levels. This difference in opinion is derived in part from the fact that, from the point of view of European creditors, any outright cut in Greek debt would be politically unpalatable, despite being practically desirable. Ultimately, a compromise may be found in which debt relief is linked in some way to growth, so that debt payments would decrease if growth rates disappoint.

The Greek economy will remain under surveillance for many years – if not decades – to come

The question of whether there will be conditions attached will be a key part of discussions looking ahead. Crucial to this debate is European institutions’ distinct lack of trust in the Greek Government: many of them suspect that the government will roll back reform measures once conditionality is dropped. There have also been talks of a ‘no backtrack’ clause forming part of an agreement, which would make debt relief conditional on the basis of the government seeing out the reforms that have already begun. This would act to assuage fears from the EU’s side, such as the commitment to a further round of pension cuts in January 2019 and a reduction in the tax-free income threshold in 2020.

“The best thing that [Greece] can hope for is an upfront reprofiling of the debt that would clear the way for the next years and decades to remove the fear that they might not be able to service the debt,” said Pagoulatos. “The less optimal scenario is a gradual, step-by-step form of debt reprofiling that will maintain uncertainty.”

A long road ahead
In any case, the Greek economy will remain under surveillance, according to the framework of the European Stability Mechanism, for many years – if not decades – to come. Under EU rules, post-bailout countries such as Spain and Portugal are monitored on a biannual basis by the European Stability Mechanism until 75 percent of their loans are repaid. In Greece’s case, current projections suggest that it will remain under surveillance until 2060, with other more pessimistic commentators predicting this time period could stretch on till 2100. During this time, the European Stability Mechanism will continue to issue reviews and potential corrective actions.

Asked if a clean exit for Greece is a realistic prospect, Pagoulatos said: “Continuity is stronger than rupture in this case, in the sense that, whatever the form of the programme framework, Greece will continue to be an economy under very close surveillance.” Ultimately, Greece is exiting the bailout phase of its economic saga, but the moment will not spell the end of economic suffering, and is unlikely to mark a sudden cut-off point in its relationship with its creditors. The relationship will change with optimism in the air, but the prospect of a final exit from the crisis still lies far ahead.

The Brightline Initiative extracts the key lessons from Davos 2018

Posted on by Max Tomlin

Despite the incredible advances taking place in the world, a growing number of organisations will disappear in the next decade. The reality is that markets now shift in the blink of an eye, yet the underlying factors that cause them to change are often years in the making.

Consider blockchain, the underlying technology behind cryptocurrencies, which was one of the hot topics at the World Economic Forum (WEF) in Davos this year. Today, blockchain is everywhere, and a quick Google search for the words ‘blockchain technology’ returns over four million results. Blockchain is not new, however: it was conceptualised in approximately 2008, or around a decade ago. Its application opportunities are endless, yet it is only in the last two years or so that it really caught the attention of the mainstream media and organisations. How many firms started investigating blockchain technologies five or 10 years ago when they first appeared? Not many.

Leaders must be able to formulate solutions and implement them. The ability to turn ideas into results is the most important capability of any business

Disruptions and challenges
It is not the technologies themselves that scare business leaders, of course. It is their disruptive potential – how they will impact their businesses and society, and how that threatens the status quo. On top of that, business leaders face other, more profound, issues. Macroeconomic and social challenges are more prominent than ever, and require immediate action. Yet I believe that as leaders we must view these inherent uncertainties as an opportunity, rather than a threat.

This year, alongside the annual event hosted by the WEF in Davos, the Brightline Initiative, together with its founding members, the Project Management Institute and the Boston Consulting Group, supported an event hosted by The Economist. The main topic was the Business Case for Openness: Implementing Strategy in a Drawbridge-up World. The roundtable with global leaders covered the need to avoid protectionism and seclusion, and engage constructively with organisations, economies and societies to build strong alliances that can solve complex global issues.
The conclusion of this meeting forces us to rethink how we measure progress and growth, how organisations are structured, and how to deal with pressing new demands and challenges that are happening at a greater rate and speed than at any time in history.

Repairing fractures
Every annual WEF meeting has an overarching theme. For 2018, the theme was ‘creating a shared future in a fractured world’. It is an appropriate focus at a time when fault lines are emerging in many aspects of society; what leaders must now decide is how to respond to these challenges. I believe that the best response is to use the current uncertainty to develop talent for the future. After all, it is people that allow us to execute on strategy; it is people that get things done.

In 2018, we are at an exciting moment in terms of what technology can deliver – now and in the near future. Whether it is artificial intelligence, robots, self-driving cars, drones, augmented reality, virtual reality, the ubiquity of smartphones and apps, advances in biotechnology, the internet of things, or human machine interfaces – in every branch of science, it seems that progress is faster and discoveries are more astounding.

Spurring change
Klaus Schwab, founder and Executive President of the WEF, suggested that of the many trials in the world today, one of the most significant is dealing with the fourth industrial revolution, which is currently underway. Among the challenges this shift presents is ensuring that all of society benefits from this revolution. Business leaders must also ensure that their organisations do not become the 2018 equivalent of the buggy whip manufacturers that were put out of business by the automobile.

Technological change is now a constant. Combine this with the current unpredictability of our society and economies, and you have the perfect scenario for developing competencies among your people that will help your organisation become a change maker. And that is essential, because if your organisation is not a change maker, then it will inevitably become a change taker. As leaders, we must be able to formulate effective solutions and successfully implement them. The ability to turn ideas into concrete results is the most important capability of any business, governmental, or not-for-profit organisation today.

We need to develop adequate guidelines and practices for supporting leaders in leveraging their organisational delivery capabilities to overcome many of the strategy implementation challenges. So, I took away four insights from the session in Davos.

Principles to guide
The first is to observe and learn from the landscape. The Brightline Initiative offers a set of 10 guiding principles to help organisations bridge the gap between strategy design and delivery. One of those principles is: don’t forget to look outside, continue to monitor customer needs, collect competitor insight, and monitor the market landscape for major risks, unknowns and dependencies. This is more important than ever. As leaders, we need to be able to carefully observe the landscape and see what is challenging our basic assumptions and established views of the market, consumers and society.

Like the aforementioned disruptive blockchain technology example, we should place special attention on the emerging technologies that will challenge the way organisations operate in the next decade, and how we can use these technologies to help solve some of the most complex economic and social issues.

The second lesson is to continuously adapt your strategy. According to a 2017 Brightline survey conducted by the Economist Intelligence Unit (EIU), organisations that succeed in their fields “get insights from customers and the market to the people who matter and who can adjust the strategy and its implementation”. Strategy design and delivery are intertwined, and you need to continuously update both as new information emerges. Leaders need to balance a dynamic and flexible delivery capability with a long-term vision, the EIU concluded. It is critical to be able to actively address any issues discovered in this process and continuously assess your existing portfolio of projects and the organisation’s capacity to deliver. This brings me to the third insight: master implementation.

The EIU study highlighted that, if “all you are doing is developing documents”, it is a clear sign that your organisation lacks a set of core delivery capabilities, such as portfolio, programme and project management. More important than having a well-planned strategy is the ability to implement it. The EIU study also showed that only one in 10 organisations successfully reach all of their strategic goals. On average, organisations fail to deliver 20 percent of their strategic projects. Furthermore, almost two thirds of respondents admitted their organisations struggle to bridge the strategy-implementation gap.

Our 10 principles include a number of other practices, which are often ignored. These include: dedicating and mobilising the right resources; being bold, staying focused and keeping things as simple as possible; promoting team engagement and effective cross-business cooperation; and not forgetting to celebrate success and recognise those who have done good work. At the end of the day, we can all agree that strategy implementation is a team sport – it is not rocket science, but these simple axioms are too often ignored.

The final insight from the Davos session – to promote inclusiveness – was perhaps the most powerful. Every 20 seconds, one million dollars is wasted due to the gap between what an idea promises in terms of its potential and the actual results. This is an enormous amount of money and resources being wasted every day. As leaders, we need to find better ways to implement strategies and create prosperity for all. We must enable the right environment to share ideas and experiences, and combine profitability, prosperity, shareholder value and growth for society.

As Miki Tsusaka, Senior Partner, Managing Director and Chief Marketing Officer at the Boston Consulting Group, observed in Davos: “If you look at the notion of the corporate purpose and stewardship, this notion that we are doing something good for society is increasingly important.” Essentially, economic growth and doing good is not a trade-off.