2018 | World Finance

The spotlight has turned on Germany’s military spending as calls for investment intensify

Posted on October 22, 2018October 31, 2018 by Max Tomlin

Germany possesses the European Union’s biggest economy, has its largest population and runs the most substantial trade surplus. In one area in particular, however, it is not among the continent’s leading players: militarily, the country is lagging behind. Reports of under-equipped personnel and planes that are no longer airworthy are becoming increasingly commonplace. The primary problem is a lack of funding.

The chronic lack of funding that undermines the German military has deep roots

According to US President Donald Trump, Germany’s inadequate defence budget is more than just a domestic issue, having implications for the North Atlantic Treaty Organisation (NATO) and the security of the European continent. “If you look at NATO, where Germany pays one percent and we are paying 4.2 percent of a much bigger GDP – that’s not fair,” Trump said.

While the actual numbers are different – World Bank figures (see Fig 1) for 2017 put US military expenditure at around three percent of GDP and Germany’s at 1.2 percent – they aren’t enough so to discredit Trump’s original point. Germany could certainly do more to contribute to the West’s military alliance, and a country with its economic and political heft should not have to rely on others for its defence.

Simply committing to NATO’s two percent target will not be enough to overcome Germany’s military shortfalls: Minister of Defence Ursula von der Leyen will need to implement a strategic plan that overhauls a military enfeebled by years of underfunding. She will also need to convince members of the public that she is doing so in their best interests, not to satisfy the ranting of the US president. Furthermore, she will have to decide exactly what role an emboldened German military will play on the international stage.

Sleeper cells
Following a landmark summit in Wales back in 2014, it was agreed that each year a different NATO member would take control of the alliance’s Very High Readiness Joint Task Force (VJTF) – a 5,000-strong spearhead unit that can be deployed rapidly in response to a threat to a member’s sovereignty. Next year, it is Germany’s turn to take the reins and, in theory, this should not be a problem.

The German Armed Forces, or Bundeswehr, is made up of 179,753 active service personnel and an additional 27,900 reservists. It also boasts more than 200 main battle tanks, 565 infantry fighting vehicles and approximately 200 artillery units. Collectively, this constitutes the third-largest military in the European Union. The German Navy, meanwhile, has roughly 65 vessels spread across two flotillas, and its air force, the Luftwaffe, possesses 14 large transport planes and a number of fighter jets.

But if Germany’s military strength looks imposing on paper, the reality is somewhat different. Last year, just 95 of the country’s 255 Leopard II tanks were in service, almost the entire fleet of Eurofighter planes was grounded for technical reasons, and reports indicated that vests, tents and winter clothing were in short supply. The Luftwaffe even had to rent civilian helicopters to ensure that its pilots could achieve the flight hours required to ensure their licences were not revoked. The Bundeswehr may have plenty of planes, tanks and warships, but whether they are combat ready or not is another matter.

“The main impact of military underfunding has been in terms of readiness,” explained Tony Lawrence, a research fellow at the International Centre for Defence and Security. “Germany does not have the people or operational equipment it needs to fulfil its defence tasks. The annual reports of Germany’s Parliamentary Commissioner for the Armed Forces, Hans-Peter Bartels, contain some shocking statistics illustrating this lack of readiness in the Bundeswehr.”

The chronic lack of funding that undermines the German military has deep roots, but it hasn’t always been an issue. In 1960, Germany – or more accurately, West Germany – spent four percent of its GDP on defence, a figure that no NATO member is currently able to match. During the Cold War, the Bundeswehr’s 495,000 personnel made it the main player in NATO’s defence of Central Europe. If the decline is to be reversed, it will require a huge capital injection in order to do so. Nevertheless, throwing euros at the problem won’t be enough to make it go away by itself.

Target practice
Germany certainly needs to spend more if it is to catch up militarily with Europe’s best defence forces. As a whole, the country saves a lot but spends relatively little, and so bolstering its defence force represents one fairly obvious way for the country to invest its surplus. Although Europe is at peace now, if a country waits until it is under attack before increasing its military budget, then it is already too late.

179,753

Number of active Bundeswehr service personnel

27,900

Number of additional Bundeswehr reservists

200+

Number of Bundeswehr battle tanks

565 Number of Bundeswehr infantry fighting vehicles

65 Number of vessels in the German Navy

$6.7bn

Amount Bundeswehr was given for arms and equipment in 2017

$685m

Amount of Bundeswehr arms and equipment budget that went unspent in 2017

One of the most obvious areas to target is the amount Germany spends on military equipment. While Trump’s ire has focused on the two percent figure, there is another NATO objective that the country is failing to meet: namely, that all members should spend 20 percent of their defence budget on equipment. Currently, Germany is the only large European state that is not expected to achieve this in 2018.

If the German Ministry of Defence is to convince policymakers that it requires more funding, however, it will need to assure them that it knows how to best spend it. Last year, the German military was given €5.9bn ($6.7bn) to purchase arms and other equipment, and yet €600m ($685m) went unspent. If the Bundeswehr cannot make use of the budget it is already being allocated, there is little point in increasing it.

Lawrence agrees that there is a conversation to be had regarding the purpose of Germany’s armed forces. At the moment, Germany’s defence contributions include international operations in Kosovo, Lebanon and elsewhere, as well as participation in a number of NATO defence programmes, including the Baltic air-policing mission. With greater funding, however, the Bundeswehr could act more decisively in both domestic and international security issues.

“The immediate purpose of increasing defence spending would be to ensure that Germany is properly able to fulfil its defence commitments – about which there is currently some doubt,” Lawrence said. “But in the longer term, there is certainly a discussion to be had about the strategic role of a militarily stronger Germany, and how this fits with the roles of other key military powers such as France and the UK, and indeed the EU and NATO. This discussion is still very much in its infancy.”

For Germany to take more of a leading role will require something other than money. Buying updated equipment is relatively straightforward; training more personnel takes time. The Ministry of Defence is aiming to increase the size of the Bundeswehr by 20,000 personnel by 2024, yet it may find that this is a tough ask: the German economy is doing well, unemployment stands at less than four percent, and a career in the military remains unpopular.

A world in flux
Readers of the German weekend newspaper Welt am Sonntag were greeted by a headline on July 29, 2018 that would have been almost unthinkable just a few years ago. Above the picture of a nuclear warhead decorated in the colours of the German flag were the words: “Do we need the bomb?”

Under the 1968 Non-Proliferation Treaty, it is illegal for Germany to acquire its own nuclear weapons, meaning that recent discussions have focused on ways that the country could help finance the modernisation of French or UK capabilities. The fact that this is being considered at all says something about how currents within domestic politics are warming to the idea of a more militaristic Germany. It says even more about perceptions of the US and its future role in the geopolitical landscape.

The US was as important a player as any in the creation of the Europe we know today. It took a decisive role in the outcome of the Second World War and then delivered billions of dollars of aid through the Marshall Plan. In 1949, by forming NATO with other western powers, it helped create a safer world. Later that century, its ideological victory in the Cold War helped to unite a divided continent.

The German economy is doing well, unemployment stands at less than four percent, and a career in the military remains unpopular

With Donald Trump as president, however, the transatlantic alliance looks shakier than it has done for a very long time. US contributions currently represent 72 percent of NATO’s military expenditure, but just how much longer it will be willing to bankroll Europe’s defence remains to be seen. In light of Trump’s criticism, Germany has had to consider whether it must take on more responsibility.

While a ramping up of Europe’s nuclear defences would be one way for Germany to increase its defence spending, it would represent a sizeable commitment – and a divisive one among voters. Though the true cost of building a nuclear bomb is difficult to determine – nuclear programmes are often secretive affairs – it certainly is not cheap. The most comprehensive analysis of the US’ programme indicated that $5trn had been spent on maintaining and developing the country’s nuclear arsenal between 1940 and 1998. Whether Germany would be willing to commit the funds required without even gaining its own nuclear weapons is a question that may soon need an answer.

If the US is retreating from the world stage, it could further embolden an increasingly antagonistic Russia. Unfortunately, Lawrence believes that Trump’s abrasive personality means this growing threat from the East may not be enough to convince the German public that boosting military spending is the right thing to do.

“Donald Trump has certainly amplified long-standing US complaints about Europe’s defence spending, and has publicly taken credit for recent increases,” Lawrence told World Finance. “But Europe’s defence spending began to turn a corner after Russia’s annexation of Crimea and occupation of Donbas. President Putin was more of a factor than President Trump. Trump is very unpopular in Germany – his threats and bullying make it harder for German politicians to advocate increased defence spending.”

Years of military underfunding in the post-Cold-War era now appear to have been shortsighted. The optimism that greeted the fall of the Berlin Wall is a distant memory.

The battle between communism and capitalism may be over, but that does not mean future skirmishes between nation-states are impossible: Russia’s destabilisation of Ukraine continues, and the Baltic states are looking warily over their shoulders. Tensions in the South China Sea remain unresolved, and the conflict in Syria is yet to conclude. The US used to be the arbiter of disputes like these – now it looks as though it may not have the appetite to continue. As it stands, Germany is not ready to take up the mantle.

History’s long shadow
The reason for the Bundeswehr’s lack of readiness partly stems from the fact that large sections of the German population remain suspicious of militarism. Angela Merkel’s coalition partners, the Social Democrats, are largely opposed to increasing defence spending, and a significant proportion of the public feel the same way. In fact, a survey conducted by the Pew Research Centre last year found that just 40 percent of Germans supported defending a NATO ally if it got into a military conflict with Russia.

Large sections of the German population remain suspicious of militarism

It is reasonable that a country that still bears the emotional scars of two world wars does not want to become a leading military power again. It is even more understandable that it does not have much inclination to prop up NATO financially – after all, the transatlantic alliance’s first secretary general, Lord Ismay, famously declared that NATO was created to “keep the Soviet Union out, the Americans in, and the Germans down”.

After the Second World War, stringent restrictions were put in place to limit Germany’s military capabilities. It was only in 2012 that the country’s Federal Constitutional Court agreed that its armed forces could be deployed on German soil, and even then only if Germany faced an assault of “catastrophic proportions”. And it wasn’t until 2014 that Germany began arming irregular forces in a war zone. Following both these developments, there were noises of disapproval: it seems that the people who fear German military expansion most of all are the Germans themselves.

Germany’s overly cautious approach to military expenditure is also the result of bureaucratic hurdles. The country’s defence budget is the only aspect of government spending where every proposed expenditure above €25m ($28m) has to be approved by the budget committee. According to Der Spiegel, this threshold has not changed since it was introduced in 1981; at the very least, it should be increased to take account of inflation.

“The anti-militaristic strategic culture that grew as a response to Germany’s military past is an obstacle to doing more in defence,” Lawrence said. “However, Germany is now so locked into cooperative multilateral defence structures – bilaterally, in NATO and in the EU – that the fears of reawakening its militaristic past are almost certainly overplayed.”

The German people may remain reluctant to embrace a strong military, but the current geopolitical situation means that, realistically, the country’s politicians can no longer follow suit. In August, Annegret Kramp-Karrenbauer, Secretary General of the Christian Democratic Union and tipped by some to be Merkel’s successor, even raised the issue of conscription – something that was abolished in 2001 – during an interview with the Frankfurter Allgemeine newspaper.

It is reasonable that a country that still bears the emotional scars of two world wars does not want to become a leading military power again

Depending on the proposal’s scope, reintroducing conscription would be logistically difficult and could cost millions of euros. Still, the fact that the idea is being mooted is a step in the right direction. Remarks by Merkel, von der Leyen and other leaders in support of increasing defence spending are also reassuring.

These developments indicate that the relationship between Germany and its armed forces is finally moving towards a state of normalisation. Following the end of the Cold War it may have been acceptable, and indeed politically expedient, to reduce Germany’s military spending, but today the country has responsibilities to its fellow NATO members that cannot be met on the cheap.

Taking command
Although it is right that Germany should spend more on its defence, Donald Trump’s threats and finger-pointing are unlikely to persuade politicians. They are also somewhat misleading: while it may be true that Berlin is failing to meet NATO’s two percent target, it does contribute heavily in other ways.

Many defenders of Germany’s military expenditure argue that the country’s support for UN missions and the fight against ISIS contribute to the West’s safety, even if they do not show up on NATO balance sheets (see Fig 2). In addition, Germany supplies more funding in terms of official development assistance, which plays a significant role in crisis prevention, than any other major European nation.

It is also worth bearing in mind that Germany is not the only NATO country failing to meet its two percent obligation: according to the latest estimates, only the US, Greece, Estonia, the UK and Latvia are on course to meet the target in 2018. According to Lawrence, however, Germany’s economic strength means it should shoulder more of Europe’s defence burden.

“Germany’s defence contribution falls some way short of that of France and the UK, Europe’s other leading powers,” Lawrence states. “But Donald Trump seems to have a particular bee in his bonnet when it comes to Germany – perhaps because he lays at Germany’s door what he claims is the EU’s unfairness in its trade relations with the US.”

Even pushing Trump’s trade concerns to one side, it is not right for Germany to allow its military to decline while expecting the US to pick up the slack. Although the German Government has committed to raising its military budget to 1.5 percent of GDP by 2025, this remains below the levels of other major western powers. In order to catch up, defence ministers will need to produce a strategic long-term plan for the Bundeswehr’s future and reduce the bureaucracy surrounding defence procurement.

Germany’s military past should not be forgotten, but neither should it be allowed to weigh so heavily on the present. A strong Bundeswehr could not only help defend the country against an increasingly belligerent Russia, it will also shore up NATO should the US decide to act on Trump’s isolationist rhetoric. In order to bolster the strength of its armed forces, Germany must increase its defence spending to a level that befits a country of its size and standing. That may be the only way to guarantee the safety of its own people and the security of Europe as a whole.

The precarious balancing act facing Jamaica

Posted on October 22, 2018October 30, 2018 by Max Tomlin

Think of Jamaica and certain things come to mind – one, a flourishing tourism sector, with luxury accommodation and world-class hospitality. With that, our mind wanders to azure blue seas, palm trees swaying in a light breeze, the scorching sun overhead and an abundance of colourful marine life. This scene, however, is problematic for various reasons.

The all-inclusive business model has come to define Jamaica’s tourism sector

First, Jamaica’s tourism sector is a double-edged sword of sorts. This has to do with the primary business model it has in place, among other factors. Second, the island’s environment has been under significant pressure for some time now; this is particularly the case for the country’s marine life. Once abundant and the foundation of a thriving fisheries sector, it has been in such decline for decades that Jamaica has one of the most depleted fish stocks of any country. Sustainability is crucial for any country, but in Jamaica the matter takes on an even more urgent tone, particularly as the economy relies so heavily on its natural beauty.

The all-inclusive pioneer
The story of Jamaica’s world-renowned tourism industry starts with one individual: Abraham ‘Abe’ Elias Issa. Considered the ‘father of Jamaican tourism’, in 1949, Issa opened the Tower Isle Hotel – the country’s first all-season resort. Located just outside Ocho Rio – back then, a small fishing town – the hotel swiftly rose to fame, luring Hollywood stars, sporting legends and even British royalty.

The hotel’s success sparked the proliferation of hotels in the area. “It was the beginning of modern tourism,” Issa’s son Paul told The New York Times in 2008. “Jamaica became a very ‘in’ place… Everyone follows the rich and famous.”

Thanks to this success, in 1955, Issa was appointed president of the newly created Jamaica Tourist Board. He set forth an aggressive marketing campaign, both locally and internationally. The advertising and publicity Issa drummed up was hugely successful; under his leadership, the number of tourists arriving on the island almost tripled between 1955 and 1962.

Issa made history again in 1978 when he turned Tower Isle into Jamaica’s first inclusive, couples-only resort, appropriately renaming it Couples Ocho Rios. The Couples brand – which was to spread across the Caribbean, with four hotels in Jamaica alone – was another major success for Issa, and indeed the market itself. Today, the all-inclusive business model has come to define Jamaica’s tourism sector.

“Tourism is a major contributor to Jamaica’s economy,” said Dr Robert Mullings, a lecturer in the economics of international growth and development at Nottingham Trent University. “In a $14bn-to-$15bn economy like Jamaica, tourism revenues contribute over $3bn to the economy and employs approximately… nine percent of the labour force. Recently, the tourism sector has been growing in excess of 12 percent per year, which has significant implications on local demand and government revenues.”

The full picture
Despite the undeniable impact that tourism has had on Jamaica’s economy, the reality of this success is far more complex. As explained by Dr Damien King, Executive Director at the Caribbean Policy Research Institute: “The economic value added [by] the industry is actually quite thin, despite its large physical presence.”

$3bn+

Revenue of Jamaica’s tourism industry

9%

of Jamaica’s labour force is employed by the tourism industry

5.4%

Growth in Jamaica’s tourist industry in first half of 2018

16,662

people are employed by the island’s tourism industry

1,800%

Increase in fish biomass in the Oracabessa Bay Fish Sanctuary in the past seven years

150%

Increase in coral coverage in the Oracabessa Bay Fish Sanctuary in the past seven years

The all-inclusive-resort model, while extremely successful in attracting visitors to Jamaica, has an unfortunately limited impact on the local economy. With all food and drink included in a holiday package, an array of restaurants to pick from and a variety of in-house activities to sample, most tourists simply don’t venture outside of their resort throughout their entire stay.
The island’s location and economic structure also limit the potential of its tourism industry. “It’s really in the nature of having a world-class tourism industry in a small island, where many other industries are not world class, that a lot of the inputs have to be imported,” King explained.

Then there is the fact that most hotels on the island are mere links in large multinational chains. This again limits the economic value of their presence. As King told World Finance: “The financial structure of many of the large resorts is such that the tourist buys a product from a subsidiary outside of Jamaica, and then that subsidiary contracts the services of the hotel – and that too limits the financial flow.”

There is also a fear factor at play. Well-publicised stories of violent crime in Jamaica and warnings of potential dangers for tourists have further embedded a disinclination for visitors to explore the country. “Much of the industry has developed an all-inclusive model, reflecting issues with crime and tourist harassment outside of the resorts,” King explained. “And that therefore limits the ability of the tourists to buy services from other parts of the economy.”

Expanding on the impact crime has had on the sector, Mullings said: “This is a serious issue, which the government is trying to address on many levels. The government has attempted to address this complex problem through increased policing activities and occasional curfews, investing in the investigative capacity of the security forces and some reform of the judicial system, the occasional provisions of new resources to the police and security forces, and setting up an intended independent body to investigate questionable policies by the security forces called… the Independent Commission of Investigations.”

But while the fears of tourists have magnified over the years, King believes that perceptions are worse than the reality: “The reputation of crime in Jamaica is not as bad as crime in Jamaica,” he said. “Jamaica actually has astonishingly low rates of crimes against tourists… to the extent that [if] Jamaica makes progress in improving security on the island, then very quickly thereafter, visitors are going to want to take advantage of the tremendous culture, amenities and facilities outside the resorts, so the benefit and the impact is going to spread.”

This sentiment was echoed in January after the government declared a state of emergency in the St James parish, which includes the popular tourist area Montego Bay, following a number of ‘shooting incidents’. Foreign offices urged tourists to stay in their resorts and to not walk along beaches alone – even during the day. But Sean Tipton, from the Association of British Travel Agents, told the BBC: “If you look at the incidents that have occurred, they have been directed at local people. It’s obviously terrible for them, but in terms of instances affecting tourists, I haven’t actually come across one in Jamaica for quite some time.”

Despite the scare, tourism continued to increase this year, with Jamaica recording overall market growth of 5.4 percent for the first half of 2018. This equates to 100,000 more tourists than the same period last year, with a significant 7.3 percent increase in foreign exchange earnings, reaching $1.5bn.

In spite of these strong figures and the upward trend in tourists visiting the country over the past decade (see Fig 1), more must be done to make tourists feel safe and want to experience the real Jamaica. If this can be achieved, local economic activity should increase and the country can really capitalise on the vast potential of the tourism industry. Naturally, changing perceptions will take time, but it should follow when crime in the country falls as a result of more effective security measures.

Environmental neglect
The island’s beautiful setting is what attracts many tourists, but as more coastlines and wetlands are cleared to make way for hotel developments, the industry continues to damage its appeal. Such works are also aggravating the issues surrounding another sector.

In the mid-20th century, fishing was one of Jamaica’s key economic drivers. In a bid to expand the market, during the 1950s and 1960s, the government sponsored a boat mechanisation scheme to subsidise outboard engines and fuel, while also developing training programmes for fishermen in the use of improved equipment. These initiatives increased landings by some 50 percent. By the 1960s, Jamaica’s fisheries sector was thriving, but with this came the inevitable adverse effects.

According to the report Forgotten fish: Jamaica’s reef history, by 1969 grunts and large snappers were rare around shallow reefs, meaning that fishermen had to travel numerous miles to secure a profitable catch. After years of overfishing – together with other unsustainable practices, such as dynamite and longline fishing – Jamaica’s fish stocks had declined massively. Additional government subsidies in the 1970s enabled fishermen to continue their activities; however, in spite of this, their catches continued to become smaller with each passing year.

Coastal developments have contributed to the country’s rapid destruction of coral reefs and mangrove forests

The construction and subsequent presence of large-scale hotel resorts has further exacerbated the problem. Coastal developments have contributed to the country’s rapid destruction of coral reefs and mangrove forests, while also causing other negative effects, such as increased sedimentation. Poor water quality, thanks to solid waste, chemical spills, nitrification and thermal discharges, has also disturbed marine life. Add in other factors, including public disregard and physical damage from marine users, as cited in a 2017 World Bank report, and the situation has reached dire straits.

King told World Finance: “Jamaica has not done a particularly splendid job at managing the physical imposition of tourism in a way that has been sustainable. We have allowed many developers to destroy wetlands, take out sea grass and denude nearby hillsides, all of which has led to denuding of the corals and erosion.”

He further explained that enforcement of environmental policies is a big part of the problem: “Jamaica has an impressive legislative, regulatory and institutional framework for environmental management… The problem is that there has not been even a modest attempt to enforce those regulations and legislations – one, because of administrative capacity, [and] two, because many of our recent governments have displayed a sort of desperation of investment, and are therefore devaluing restrictions on such developments.”

Rays of hope
Given the severity of the situation, a number of non-governmental organisations have emerged in a bid to help preserve and revitalise Jamaica’s marine life. Standing out for its success thus far is the Oracabessa Foundation, which was created in 1997 to support the sustainable development of the small coastal town that shares its name. The area is famous for being the inspiration and former home of James Bond author Ian Fleming. The organisation’s second claim to fame belongs with its founder, Chris Blackwell, the man responsible for introducing Bob Marley to the world through his label, Island Records. Blackwell is also the founder of Island Outpost, a collection of hotels and villas, which includes the Goldeneye Hotel and the Fleming Villa.

In 2008, the Oracabessa Foundation teamed up with the St Mary Fishermen’s Cooperative to create the Oracabessa Bay Fish Sanctuary, a no-fishing zone that stretches along the length of the town that was legally recognised in 2010. Being a prominent hotelier in the area, and thanks also to his celebrity links, Blackwell has provided considerable assistance to Oracabessa, raising funds and awareness while also revitalising the marine area in the protected zone. But thanks to the involvement of local fishermen in particular, the sanctuary has shown impressive results: a 1,800 percent increase in fish biomass in the past seven years, along with a 150 percent increase in coral coverage.

Oracabessa has inspired the fishermen of other areas to partner up with local hotels and conservationists to follow suit. Today, Jamaica has 17 Special Fishery Conservation Areas in total, and while their management and effectiveness varies, they are all showing promising results.

Mother Nature
Though seemingly separate industries, tourism and fishing are invariably linked. The two depend heavily on the environment, but Jamaica’s environment now depends on them. While the government, as well as numerous organisations and stakeholders, are all too aware of the importance of conservation to Jamaica’s economy, the demands of its development remain – and with that, continued challenges for the environment.

The health of coastal areas and coral reefs is imperative to the sustainability of its fisheries sector

The impending expansion of the tourism industry is a fine example of this predicament. The government’s 5x5x5 agenda involves a target of five million visitors generating $4bn by 2021, which is tied with the goal of creating 15,000 new hotel rooms and 125,000 direct jobs. But with greater volumes come greater risks to the environment.

“Environmental sustainability is of utmost importance to Jamaica’s economy and people,” said Mullings. “Since one of Jamaica’s major services, which it provides to the world, is its tourism product, the beauty of the island needs to be preserved to sustain its touristic appeal. Sustainable development is therefore inherently important to this sector.”

The health of coastal areas and coral reefs is imperative to the sustainability of its fisheries sector as well; this is a market that the government is also hoping to expand. Add in the dangers of climate change, which the island is especially vulnerable to, and the case for more effective sustainability practices in both fishing and tourism becomes all the more urgent for the long-term viability of Jamaica’s economy.

Jamaica faces a difficult balancing act at present – that of growing its economy, and that of protecting its environment. But as the two are so closely intertwined, placing too much focus on the short-to-medium-term goals will only worsen its long-term prospects. The price to pay is far too great.

Digital transformation demands faster, more adaptable business banking

Posted on October 19, 2018October 19, 2018 by World Finance

Technology has had such a huge impact on the economy – and it’s also changing the way commercial banks are serving their clients. Businesses need to get to market faster, which means they need a banking partner that can keep pace, says Dev Srinivasan, Head of Canadian Business Banking for BMO Financial Group. He explains how BMO Business is adapting – including the launch of business express, which can auto-adjudicate loans of up to $1m.

In the second part of this interview Dev discusses the customised approach that BMO Business takes to serving clients in the agriculture, healthcare, and technology sectors; then in part three he explains BMO’s five business beliefs and how they’ve improved client relationships.

Dev Srinivasan: Technology has had such a huge impact on not only our overall economy, but the businesses that we’re serving in the commercial bank right now. So, if you think about the speed with which our clients are getting to market right now, how there’s a shift from people doing labour towards machines, and that sort of thing. It’s a massive impact, change in cost. You can be global no matter where you’re located now. It is really changing the industry.

The technological advancements that have occurred in the industry are really changing the dynamic in terms of what banks need to bring to the market right now, in that… if you think about the speed with which we need to respond to our clients, if you think about the type of structures that are needed to support this new industry, and the new way of doing things. Clients really need more adaptability now from their banks. And we believe that we’re bringing leadership on that front.

One of the bigger advancements that we feel is leapfrogging us in the market right now is the launch of business express. So to give you an idea of what this is, for small business clients – so, clients borrowing less than $1m – we now have the ability to auto-adjudicate. So using technology to essentially determine the risk and grant the loan in under 30 minutes.

So if you think about the impact that has on a business, that is perhaps maybe cashflow tight. The ability to go talk to suppliers and say, we have a loan committed to us, in that short a period of time, is a huge value-add.

I think the biggest thing that the bank can do to support clients in this environment is to really understand. Understand the differences in the economy today, in business today – versus even 10 years ago. If you think about banking as an old industry – many hundreds of years old – and the changes that have happened in the last 10 years are significant.

So, making sure that we’re understanding the pressures that our clients are facing, and also what the industry is doing, is hugely important.

‘Being a pure banker doesn’t work’ to service ag, tech and health sectors

Posted on October 19, 2018October 19, 2018 by World Finance

The Bank of Montreal takes a customised approach in industries such as agriculture, healthcare, technology and innovation, explains Dev Srinivasan, BMO Financial Group’s Head of Canadian Business Banking. These are industries where clients value – and demand – a high degree of specialisation. He explains what makes these sectors unique, and how BMO Business has adapted its service model to meet and exceed client expectations.

This is the second part of a three part interview: in part one Dev explains how BMO Business is accelerating its services to match pace with a digitally transformed environment; then in part three he talks about BMO’s five business beliefs, and how they’ve improved client relationships.

Dev Srinivasan: BMO Business banking really takes a customised approach in industries where our clients value and demand that type of specialisation.

So in areas such as agriculture, healthcare, technology and innovation – we take a specialised approach where we have bankers and credit officers who are very deep in the space, to ensure that one: we’re serving clients in the way they want to, giving them the type of service they need; and also structuring deals in a way that is relevant in their market.

So in terms of how we’re servicing these clients in each of those sectors, there’s many commonalities. I’ll start with agriculture though. Just being a pure banker doesn’t work in that industry. So our clients in the ag sector really want someone who is one, knowledgeable about the industry, for sure; but also two, is local in the community. We’re fiercely local. We give back to the communities, which our clients value. We also understand the dynamic in the local industry. It’s not about the macro in a lot of cases, it’s about understanding the local market. That’s a huge differentiator for us, and a reason why we are the number one agriculture bank in Canada.

In areas like healthcare and technology and innovation, which are less asset-rich, it’s all about: okay, what are the structures that are appropriate for these industries? And what is the risk associated with it? Because certain areas are higher risk, so you need to structure differently; others are lower risk.

So, really understanding the nuances, and getting that structure right, to ensure that you’re pushing up to our risk appetite, in terms of how we’re dealing with these clients is incredibly important and a differentiator in the market.

BMO Business banking absolutely sees its clients as partners. We have a mantra within the bank, that the Bank of Montreal is an incredibly strong partner for our clients. And we really view it as, we’re jointly looking to make sure our clients succeed.

Another thing that we really stick true on is, we’re great in good times; but we’re even better when challenging times arise.

We’re not the bank that goes away when cashflow is tight. We’re the bank that leans further into that, and really supports our clients. Once we’re committed to you, we’re definitely committed to you.

‘Owning a business is an act of courage’ – BMO’s beliefs drive its service

Posted on October 19, 2018October 19, 2018 by World Finance

BMO Business banking sees its clients as partners, says Dev Srinivasan – and to deliver best service, the bank’s relationship managers need to consistently put themselves in their clients’ shoes. To help connect with clients and reinforce relationships, BMO developed five business beliefs – Dev explains what these are, and how they’ve helped build stronger partnerships.

This is the final part of a three part interview: in part one Dev explains how BMO Business is accelerating its services to match pace with a digitally transformed environment; then in part two he discusses the customised approach that BMO takes to serving business clients in the agriculture, healthcare, and technology sectors.

Dev Srinivasan: The Bank of Montreal has five business beliefs that we adhere to. And the five business beliefs are:

One – owning a business is an act of courage. We understand that it’s a lonely process, and taking that leap, to go out and do something on your own, is a huge step that we admire, and we look to support.

The second is that the choice of bank can be one of the most consequential a business owner can make.

If you think about it, a strong bank, a strong relationship manager, can be the difference between outsize growth or stagnant growth. The difference between bankruptcy and continuing on and passing the business on to your children.

The third is – a relationship manager that acts as an order taker is short-changing their clients.

We want our relationship managers to add value in every situation. It’s not about just taking orders, running back and processing the deal. This is all about challenging – in a constructive way – our clients, and ensuring that we’re bringing the best solution forward for them.

The fourth business belief that we have is – that clients hate surprises and silence. One of the things that I live by, and I know a lot of people in the business bank do, is: if a client is asking you, ‘Hey, just checking in on where this is at?’ you have failed as a banker.

This is all about ensuring that you’re proactively communicating with our clients, ensuring that they’re up to speed, and that they’re comfortable with where we’re going.

Finally, the fifth belief that we have, is that – earlier conversations lead to better options and outcomes.

So great for instance in this is that we have brilliant clients, who have driven huge success in their business. But typically, we often see that they haven’t thought about business succession. So, what do they do when they want to step back from the business? Do you pass it on to your family, are you looking to sell it?

Having that sort of discussion in terms of succession, passing the business on, is something you need to have five or 10 years in advance to truly prepare well for it. It’s actually a gap that we’ve seen, so we really encourage our relationship managers and our clients to have those conversations early, making sure that they’re best prepared to maximise value, ensure their family is well taken care of, and ensure the business remains as an ongoing concern.

These beliefs have really changed the way we work with our clients in a number of ways. One, it ups the bar. It sets the bar in terms of what the standard is for a great client experience. What is the BMO standard for a great client experience – and we’re able to deliver that consistently throughout the country.

In terms of our clients, it really explains to them why banking is not a commodity. It’s easy to look at products and services and say they’re all the same. The way we deliver it, the way we’re able to articulate our value proposition is a true differentiator for us, and our clients have really responded to that.

BCI Asset Management continues to go from strength to strength in Latin America

Posted on October 19, 2018October 26, 2018 by Max Tomlin

Managing assets worth in excess of $10bn, Bci Asset Management (Bci AM) is among Chile’s three largest money managers and is aiming to become one of the largest and best asset managers in the region by focusing on locally relevant strategies. Forming key partnerships with world-class players will also help develop its product portfolio.

The political cycle has added volatility to financial markets in a year that has already been rocked by trade war uncertainty

Being part of the Bci Group – as well as being the only Chilean-owned bank in Chile, controlled by the Yarur family since the bank’s foundation in 1937 – Bci AM is following the group’s regional expansion strategy. So far, this has focused on Florida, with the acquisitions of Miami-based TotalBank from Santander in 2017 and City National Bank of Florida from Bankia in 2013.

Apart from serving the Chilean and wider Latin American institutional markets, Bci AM is offering its Latin American funds to Europe and North America via SICAV and UCITS platforms. Although our home region will always be a key area of focus for us, we recognise that asset management is a global industry.

Moving forward
On the internal front, Bci AM’s ongoing efforts to strengthen its investment team, processes and support areas have already been recognised by Fitch Ratings, one of the world’s biggest credit rating agencies. The ‘excellent’ asset manager qualification that has been assigned to the company, and that was ratified once again in 2018, demonstrates our commitment to the highest possible standards.

Our efforts have mostly borne fruit in terms of the quality and size of our investment team, which is dedicated to Latin American strategies, as well as equity and fixed-income funds. This team has grown from eight to 17 investment professionals in the last three years alone. The investment approach pursued by our team is fundamentally a bottom-up methodology, which means analysts are split by economic sectors covering around 20 and 30 issuers. They, therefore, quickly become experts able to recommend investment ideas for each company’s publicly traded debt and equity issues.

Moreover, each strategy adheres to a disciplined process consisting of weekly meetings for detecting new investment ideas, followed by an in-depth review process. This allows the investment committee to finally arrive at a decision where the investment thesis is developed by each analyst and discussed with the rest of the team.

We aim to offer our clients a wide range of investment funds, including thematic, real estate and private capital funds. Within these categories, we also provide a variety of financial documents and informative brochures that help explain the complexities of the financial markets as clearly as possible. Nowhere is this complexity more prominent than in the Latin America region.

Currently, Bci AM is of the view that the region is still developing from an economic standpoint, following the path of a world economy that is set to post a fifth year of growth above its previous five-year mean. The consumption cycle along with relatively high levels in the commodities market are the main drivers for this rebound. This, of course, provides a wealth of opportunities to investors, but they should still tread carefully. Although there are many reasons to be optimistic, the Latin American market can only be navigated successfully through knowledge and careful analysis.

Playing politics
Alongside a benign economic environment, the political cycle has also played a critical role this year in Latin America, with three presidential elections carried out in the past 10 months. This has added volatility to financial markets in a year that has already been rocked by trade war uncertainty. In November last year, Chile held a presidential election in which Sebastián Piñera ended up prevailing – a fact that bodes well for the country’s business environment and offers hope of revitalising the Chilean economy after four previous years of low growth and plenty of pessimism within the country.

In May this year, Colombia also elected a new president. Although left-wing politician Gustavo Petro was an option for voters, eventually former president Álvaro Uribe’s endorsed candidate, Ivan Duque Márquez, beat Petro at the ballot box. With the Colombian presidential elections settled, the region was left with a set of market-friendly leaders at the head of most of the Andean nations: Argentina, Chile, Peru and Colombia.

But not every development has provided good news for Latin America from a political standpoint. Mexico has recently elected Andrés Manuel López Obrador (also known as AMLO) – a political leader who was initially received very negatively by financial markets. His recent moves towards a more practical approach regarding markets and the private sector in general is sure to be welcomed. After leading the polls since the first day of his campaign, AMLO confirmed his superiority by winning the presidential election on July 1 – however, although he secured a clear majority, it was not enough to enable him to immediately to pass critical legislation in the Senate.

At the end of this intense political road, we arrive at the Brazilian presidential election, which comes at a critical moment for the country. After last year’s impeachment of former president Dilma Rousseff, President Michel Temer has been incapable of passing much-needed legislative changes. If he remains unable to overhaul the country’s social security system, there is little chance of reducing the yearly fiscal deficit (currently amounting to around six percent of GDP) and preventing government debt from increasing each year.

The current political situation has former president Luiz Inácio Lula da Silva leading the polls despite currently being in prison for his involvement in the so-called ‘Operation Car Wash’, which centres on allegations of money laundering and corruption at the state oil company Petrobras. Elections are being held in October this year and to date there more than 10 active candidates, highlighting how fragmented the political arena and party system in Brazil currently is.

Weathering the storm
With regard to equity markets, and from a dollar-based investor point of view, Bci AM finds three distinctive sources of potential returns: company cash flows, currency appreciation and multiple expansions. We have a positive and optimistic view across all three fronts. From a macroeconomic view, after three years of GDP contraction, Latin America has entered a period of economic expansion, combined with low rates and expansive monetary policies in most countries. In addition, we have seen region multiples traded at premiums of 10 percent when compared with their historical averages in period of expansion, and we think that this pattern should repeat in the following years once political uncertainty is finished.. The MSCI Emerging Markets Latin America (MSCI Latam) index is trading at 11.6 times it price-earnings (P/E) ratio, slightly below its historical 10-year P/E average of 12.1.

Regarding company fundamentals, during the past couple of years many have spent all their efforts working on improving operational efficiencies. Now they have started to harvest the rewards of these efforts. Operational margins of companies represented by MSCI Latam went from 17 percent in 2013 to 11 percent in 2015, pulling the return on equity of the index from above 10 percent to 3.5 percent. As the economies recover, these companies have raised their margins to 16.4 percent and are boasting a return on equity of 10.7 percent. This is a margin expansion that should be set to continue further for the next two years, with earnings expected to increase by 68 percent and 10 percent for 2018 and 2019 respectively.

In relation to dollar-denominated corporate bonds in the region, Bci AM sees the recent bounce in terms of returns and spreads as a very positive dynamic given the volatile global market backdrop we have experienced throughout the year and the demanding presidential election cycle of the last 10 months in Latin America.

According to the JPMorgan CEMBI Broad Index, an average corporate bond in Latin America currently offers a spread of 340 basis points (bps), which is around 30bps above the levels seen at the beginning of the year and roughly the same level as the ones we had one year ago. This was at a time when we still had several political events, including many important elections, ahead of us. In Bci AM’s view, the current situation offers a fair entry point to this asset class, because valuations sit around the long-term mean and fundamentals should continue to improve.

Even though the current global economic cycle seems to be at a late growth stage, Bci AM is taking a constructive view of Latin America, which is a region that has been able to withstand not only the recent global trade war tensions, but also its own political obstacles. What’s more, both the general macroeconomic and political situations have enabled companies to benefit from a healthy rebound in local demand dynamics, as well as relatively high commodity prices.

Despite Brazil’s still-unsolved political situation, fundamentals in the region are sound from a macro perspective and also from the point of view of individual companies. In spite of the trade war threats we have witnessed throughout this year, we believe assets in the region should benefit from a calmer global scenario next year.

Defusing the US-China trade conflict

Posted on October 18, 2018September 11, 2019 by Max Tomlin

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Pro-market president is set to lead Colombia into an exciting new investment era

Posted on October 17, 2018October 25, 2018 by Max Tomlin

Colombia is a country with many opportunities for the future. This sentiment came to the fore in mid-June this year, when Iván Duque was elected as the country’s new president. Duque, the youngest elected leader in Colombia’s history, has vowed to reduce corporate tax, cut red tape and lessen legal uncertainty for foreign investors seeking to enter key sectors such as oil and mining.

International and local investors reignited their interest in Colombia after verifying that the economy is decidedly pro-market

With a market-friendly president in place, trust is returning to the country. Subsequently, investors now see a democratic country with a current account and fiscal balance in check, as well as controlled inflation. They also recognise the high level of investment into infrastructure that is being carried out and must be completed by this current government, which in turn will make the country even more competitive.

Of course, challenges remain. After signing the peace process, the fight against corruption is now a top priority for the country, as reaffirmed by Colombian citizens in recent surveys. Social infrastructure investment is also a key matter for the new administration’s upcoming four years, particularly as the previous government prioritised the development of roads, ports and airports. It will also be a challenge to keep the economy healthy amid the major difficulties that Latin American countries are experiencing at present – Venezuela, for instance, once one of Colombia’s closest commercial partners, is the most critical case.

The investment machine
During the previous government’s tenure, significant efforts were made in the development of the country’s competitive infrastructure. Although road construction was the state’s primary focus, important investments into ports, airports and navigability were also made.

Against this backdrop, project finance in Colombia has advanced considerably: banks are more cautious, as are sponsors. Consequently, they analyse and distribute risk within different parties. This has been a huge learning process – one that was achieved in a short period of time, but was necessary in order to improve confidence in the financing of future projects.

48 million

Population of Colombia

16%

of the Colombian population belonged to the middle class in 2002

31%

of the Colombian population belonged to the middle class in 2015

46%

of the Colombian population is predicted to belong to the middle class in 2025

That said, a key point for the new government must be social infrastructure. However, in order to attract investors of this type, it is necessary to have more robust regulations in place. Private investment in hospitals, schools and universities, as well as in better prison establishments, must be promoted in a determined way. In terms of the state’s fourth generation (4G) projects, we need to execute ambitious plans on those fronts, particularly in the health sector.

BTG Pactual has been active in Colombia for the last five or six years. When it first arrived on the scene, one of its primary focuses was to support the country’s development activities – not only in the private sector, but also in government initiatives that would benefit the country. For example, BTG Pactual has worked with Construcciones el Cóndor, Aleática (previously called OHL), Mota-Engil, Sacyr and Odinsa, among other infrastructure companies. We structured the highway project Ruta al Mar, which cost $490m in project financing. Thanks to the structure implemented by BTG Pactual, Ruta al Mar achieved international investment-grade ratings, despite having commercial risk. This project was awarded Infrastructure and Project Finance deal of the year Americas 2018 by The Banker and Latin America Transport deal of the year 2017 by IJ Global. In addition, we are currently supporting two 4G roads, which we expect to have closed between Q4 2018 and Q1 2019. In one of these projects, BTG Pactual also participated in a bridge loan facility.

Arousing global interest
Colombia’s M&A activity is in constant motion at present. It was somewhat cautious during the first half of this year, mainly because of political activity and the change in the country’s incumbent government. Fortunately, both international and local investors reignited their interest in Colombia after verifying that the economy is decidedly pro-market.

Colombia is a country of 48 million inhabitants, with a growing middle class that has expanded from 16 percent of the population in 2002 to 31 percent in 2015, and is expected to reach 46 percent by 2025. This growth makes sectors such as consumption and healthcare very attractive. Likewise, assets in regulated markets such as energy remain especially appealing to investors.

Simply put, Colombia is an attractive market for foreign investors. First and foremost, its economy is stable, as indicated by an average GDP growth of 3.89 percent between 2007 and 2017, in comparison to the Latin American average of 3.12 percent. Second, Colombia has 62 free trade agreements either in force or currently under negotiation. And finally, the previous government managed to finalise a long peace process with the FARC guerrillas, which has given a further boost to investor confidence.

The current government now seeks to maintain this economic stability. The country’s regulatory framework is encouraging, but perhaps the biggest drawback is the tax burden that companies face, which is one of the highest in the world. Fortunately, this is something that the new government has pledged to reduce. This will prove key to promoting Colombia’s reputation for business; it is already ranked as the second-most attractive country in Latin America in which to conduct business.

Equity capital market
The equity capital market (ECM) in Colombia has been quiet of late. There have been no recent ECM issues offered to the general public except for the Grupo Energía Bogotá (GEB) share offers in December 2017 and July 2018. Previous ones, such as Grupo Argos in December 2016, paid $672m to shareholders in a two-part acquisition to acquire Odinsa, a local construction company, of which $225m were in shares, while Colombian electricity company Celsia sold 97 percent of its shares to existing shareholders in February 2018.

Generally speaking, the main reason for this reduced level of activity is the relatively small size of Colombian companies. This makes it more difficult to access the capital market: issues should be around $300m or more in order to have some liquidity, but there are not many companies that are big enough to issue this amount and offer the market a minority position.

For this reason, the GEB offering was a landmark process in Colombia. BTG Pactual acted as the lead left bookrunner on the $669m re-IPO of GEB, a leading owner, developer and operator of electricity and natural gas infrastructure assets across Latin America. This re-IPO represented 10.4 percent of post-money market capitalisation.

This was the first international equity offering from a Colombian issuer since 2014, the largest 144A offering from the Andean region since 2013, and the first 144A equity offering from a Latin American issuer since April 2018. BTG Pactual generated 62.2 percent of the demand for the transaction in which shares were priced at COP 2,018 ($0.67), which represented a minimal (1.1 percent) discount versus the launch price.

The transaction was part of a two-phase democratisation process as laid out in Colombian Law 226, which applies to the sale of state-owned shares and convertible bonds in Colombia. BTG Pactual coordinated a comprehensive pre-marketing effort for the re-IPO given the transaction size and investor’s lack of familiarity with the name: this consisted of two non-deal roadshows, both a local and international anchoring process, and a global investor education effort.

Home-grown services
BTG Pactual’s story in Colombia started in 2012, when it bought Bolsa y Renta, then the second-biggest equity brokerage in the country. Since then, BTG Pactual has achieved a considerable presence in Colombia, with more than 260 people on the ground. It also received a critical boost when it was named Colombia’s best investment bank in 2017 and 2018 by World Finance magazine. We have also won prizes for the best M&A bank and best project finance company in Colombia from other specialised entities. At the same time, we have consolidated our leadership in the fixed income and stock trading markets, as we offer credit to our corporate clients and have structured several kinds of funds for them to invest their resources in, from typical stock funds or fixed income funds to more structured ones, such as payroll funds, cocoa or real estate.

BTG Pactual decided to enter Colombia in order to become the leading player and offer all the knowledge of its global platform to the benefit of the market. As such, we bring a wealth of experience in ECM, debt capital markets, M&A and project finance in other economies to our clients in Colombia.

It is our goal to offer all the activities in the Colombian market that we offer to other countries. For instance, credit and insurance are two of our development objectives in Colombia this year and next. As a firm, we are not known for doing many transactions, but we are known for making those that we do different from others.

In terms of the future of the Colombian economy, we are positive. We expect that stability will continue, as will low inflation, a growing GDP, better infrastructure and a more competitive environment, thereby making Colombia an even more attractive country in which to invest. Even though there will be challenges, we do not foresee difficulties within the near future.

Top 5 tax scandals

Posted on October 16, 2018October 17, 2018 by Helen

IRS, HMRC, FTS or CRA: whatever you like to call him, there’s no hiding from the taxman. No individual or institution is immune from the annual tax deadline, although many aim to reduce what they pay as much as possible through loopholes and profit redistribution schemes.

When that tips over into illegal territory, though, it becomes a major problem. The IMF estimates that over $600bn is lost every year due to tax avoidance, with the US, China and Japan named as the greatest culprits. World Finance investigates the top tax scandals across the globe in recent years, and who was behind them.

1 – Panama Papers
The leak of 11.5 million compromising documents sent shockwaves across the globe in 2016. Taken from the archives of Panamanian law firm and corporate service provider Mossack Fonseca, the documents detailed the financial information of nearly 215,000 offshore entities, implicating more than 40,000 private and corporate clients.

Although it’s not illegal to run an offshore business entity, the Panama Papers revealed that many shell corporations set up by Mossack Fonseca were used for illegal activities such as tax evasion and bypassing international sanctions.

The IMF estimates that over $600bn is lost every year due to tax avoidance, with the US, China and Japan named as the greatest culprits

All in all, 12 current or former world leaders, 128 public officials and politicians and thousands of other celebrities and business people were implicated in the leak. These include former British Prime Minister David Cameron, former Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson, French banker Éric de Rothschild, and former CEO of Citigroup Sanford I Weill. As of June 2018, more than $700m of fines and back taxes have been reclaimed.

2 – Ex/cum trades
It was revealed in 2017 that the German state had lost at least €31.8bn ($36.8bn) since 2001 as a result of ‘cum/cum’ and ‘ex/cum’ banking and broker practices. Cum/cum trades work by exploiting a loophole in German law that allows domestic investors to claim tax credit on dividends from private companies. Under this scheme, German banks would ‘borrow’ the shares belonging to a foreign investor just before a dividend payment, allowing that investor to escape paying tax.

Cum/ex trades allow institutions to apply for multiple refunds on capital gains taxes that were only paid once to tax authorities.

Both practices were outlawed in 2012 and 2016 respectively, but continue to be exploited by a criminal network based in London. Frankfurt prosecutors charged six investment bankers and lawyers in May 2018for their role in the scheme. Professor Christoph Spengel at Mannheim University initially revealed the scheme, calling it “the biggest tax scandal in the history of the Federal Republic of Germany”.

3 – Big tech
Multinational technology companies including Google, Apple and Amazon have been slapped with multiple allegations in recent years regarding non-payment of taxes in Europe. In 2016, Google was accused of using two regulatory loopholes, nicknamed the ‘double Irish’ and ‘Dutch sandwich’, allowing it to pay just six percent corporation tax rather than the required 19.3 percent. The same year, Apple was ordered to pay $15.4bn in back taxes to Ireland after it was revealed that the company paid just one percent tax on its European profits in 2003, down to 0.005 percent in 2014.

UK politicians also called for a boycott of Amazon in 2014 when it was revealed the company had paid just £4.2m ($5.6m) in tax on sales of £4.3bn ($5.7bn). It was able to do this by funnelling payments made in the EU through a subsidiary based in Luxembourg.

The e-commerce giant claims it has since cleaned up its act, but in 2018 it paid just £4.6m ($6.1m) in tax, despite profits hitting a £72.3m ($95.5m) high.

4 – South Africa
The “biggest political scandal since the Apartheid era” raged in South Africa during Jacob Zuma’s rule between 2009 and February 2018, engulfing the president himself, the billionaire Gupta family and a number of corporations including McKinsey and KPMG. Allegations of corruption and cronyism were rampant during Zuma’s reign due to his relationship with the Guptas, who were accused of having undue influence over the president. Both parties have repeatedly denied any wrongdoing.

In 2017, eight senior KPMG officials were dismissed after it was revealed that the company had missed a number of red flags when auditing the Guptas’ financial records. These included the relabeling of payments worth millions of South African rand so that they could be tax deductible, and an understatement of tax payable. This allowed the family to avoid paying ZAR 2.05m ($145,000) of tax on a singular transaction.

5 – Trump family
The incumbent US president and his family have been embroiled in a number of tax scandals in recent months. On October 2 this year, The New York Times revealed the results of an 18-month-long investigation into Trump’s tax records, and his father’s before him, alleging that both men had engaged in a number of “dubious tax schemes” and “outright fraud”. Such incidents included the establishment of a sham corporation for the president and his siblings to avoid the 55 percent tax rate on gifts from their parents, and undervaluing family properties to reduce the tax bill by hundreds of millions of dollars.

On October 13, The New York Times also alleged that Jared Kushner, Trump’s son-in-law and senior advisor, paid little to no federal income tax between 2009 and 2016. He achieved this by utilising a tax benefit known as ‘depreciation’, which allows property investors deduct a portion of the cost of their buildings from their taxable income every year. Although this practice is not technically illegal, it raises ethical concerns, especially as Kushner has profiteered to the tune of $324m. When asked for comment by The New York Times, a spokesperson for Kushner’s attorney said Kushner “properly filed and paid all taxes due under the law”.

Battery metals appear to be losing their spark as prices start to fall

Posted on October 16, 2018October 23, 2018 by Max Tomlin

The automotive industry is on the verge of an electric revolution. The International Energy Agency has predicted the number of electric vehicles on the world’s roads will triple to hit 13 million by the end of the decade – and by 2030 that number could soar to 125 million.

New industries are powering demand for batteries, which has thrust a number of little-known metals into the spotlight

Meanwhile, the rise of renewable energy generation has boosted demand for battery storage, which can balance intermittent power from green energy sources. The global energy storage market is expected to grow to more than 300GWh between 2016 and 2030, according to Bloomberg New Energy Finance (BNEF).

These new industries are powering demand for batteries, which has thrust a number of little-known metals into the spotlight. This has led to the price of lithium – a key component in lithium-ion batteries – doubling between 2016 and 2018. Meanwhile, the price of cobalt – a by-product of copper or nickel mining that is used in battery cathodes – has more than tripled since January 2016 (see Fig 1).

The surge in the value of these crucial components could be reaching its limit, however. In fact, as cobalt prices already start to drift lower and lithium stabilises, some analysts have suggested that the metals are on the brink of a crash.

Supply and demand
The market for lithium-ion batteries is growing rapidly. Used in everything from iPhones to electric vehicles, the power units are made up of a mix of metals, such as lithium, cobalt, nickel, manganese and graphite. The lithium industry is projected to grow from 100GWh of annual production in 2017 to nearly 800GWh in 2027, according to Cairn Energy Research Advisors.

As the chatter around electric vehicles evolved from speculations to tangible predictions, it has become clear that global lithium supplies are lacking. Lithium can generally be produced from one of two sources: spodumene hard rock, or brine. Producing lithium through brine in Central and South America is a “very, very simple operation”, and it is also relatively cheap, according to James Mills, a mining analyst at SP Angel. The process is time-consuming, however, taking between 12 and 18 months.

While the market waits for those supplies to come online, the gap is being filled with spodumene production in Australia. The country has seen a rapid move to extract these hard rocks, so much so that this year it overtook the ‘lithium triangle’ – Chile, Argentina and Bolivia – as the largest producer. This process is more expensive, however, and produces lower-grade lithium that must be shipped away, typically to China, to be upgraded into a battery-ready product. As a consequence of this, Mills said future supply is not expected to come from Australia, but from the large brine producers, like Chile-based SQM.

The deluge of investment into new projects is expected to meet demand forecasts for at least the next five to seven years, according to BNEF. However, in a recent report by Bank of America Merrill Lynch (BAML), analysts led by Head of Metals Research Michael Widmer predicted a glut of lithium on the market could cause the price of lithium to plunge by more than half to $10,000 a tonne by 2025. Producers are expected to add 815,000 tonnes of lithium to the market, surpassing a 460,000-tonne increase in demand.

Widmer told World Finance that, because supplies are ramping up gradually, prices will not fall every quarter – instead, over the next year or two they will start to “normalise and come a bit lower”. But to balance the market beyond 2020, Widmer opined that 50 percent of mines would need to be idle.

Panellists at a recent mining conference hosted by S&P Global Market Intelligence added that a major correction could happen as soon as 2021, due to lower-than-expected demand for lithium. Arnab Sen, Chief Investment Officer at investment firm Harbour Capital Management, said in the next three years, demand would “surprise the market to the downside” compared with current expectations. Paired with the pipeline of new lithium supply coming online, he said a price “reset” was on the horizon.

However, analysts at Goldman Sachs said the fears – and the resulting sell-off in lithium producers’ share prices – have been “overdone”. Analysts at the bank said it will be more difficult to develop new lithium mines than many people think, and at the same time demand will rise fourfold by 2025.

Despite the increase in new projects around the world, Goldman Sachs wrote: “We expect lithium markets to remain sufficiently tight to handsomely reward incumbent producers.” The share prices of US producers Albemarle and FMC in particular could rise by a further 34 percent and 30 percent respectively, the analysts added.

New battery chemistry
There are two big uncertainties for the future of battery metals, according to Widmer. The first is how quickly electric vehicles will penetrate the automobile market. This relies on improving consumer appeal by creating convenient re-charging infrastructure and advancing battery technology to boost vehicle range. But Widmer implied the eventual uptake in electric vehicles is inevitable: “In the end, it’s still a market where [electric vehicles] will ultimately become more important.”

Lithium and cobalt have been the stars of the battery metals market because of their stunning price movements

The remaining uncertainty is the chemical make-up of electric vehicle batteries. Cobalt is an important element in a lithium-ion battery, as it essentially extends the cell’s life cycle. Although it can be replaced by nickel – which is more widely available and cheaper – this could lead to a fire hazard as cobalt keeps the cell from overheating and combusting.

Despite this, battery makers are increasingly looking to distance themselves from the costly metal after prices surged based on fears that a supply shortage would come as soon as the early 2020s.

Elon Musk, the founder of Tesla, famously claimed he would reduce the amount of cobalt in his electric vehicles to “almost nothing” by increasing the amount of nickel. Although Tesla does not publicise the composition of its batteries, it reportedly uses a lithium-ion battery with a cathode primarily composed of nickel, cobalt and aluminium. According to S&P, these batteries are typically made of 85 percent nickel, 10 percent cobalt and five percent aluminium.

Panasonic, which makes the batteries used by Tesla, added in May that it plans to begin developing electric vehicle batteries that use no cobalt. Kenji Tamura, who is in charge of Panasonic’s automotive battery business, told analysts: “We are aiming to achieve zero usage in the near future, and development is underway.”

It is expected that cobalt-free batteries will take years to develop, but Tesla and Panasonic have already reduced their cobalt usage by about 60 percent. Some analysts fear that reducing it further could create engineering problems.

But the threat could still impact long-term cobalt prices, Widmer said: “If you take a little bit of supply growth coming through together with engineering cobalt out of the market, you end up in an environment where cobalt looks to be oversupplied [in] the coming years.”

Cobalt prices have already started to fall in the last few months, and according to Wood Mackenzie, supply will exceed demand by 652 tons this year. Next year, that gap will widen to 20,842 tons, which could cause prices to drop 23 percent from this year’s forecast to an average of $62,502 a ton. By 2022, the energy consultancy expects the price of cobalt to average just $44,585 a ton.

Ethical dilemma
A high price is not the only factor pushing battery producers and car manufacturers away from cobalt – geographical and ethical issues are also on the table. Global cobalt reserves are largely concentrated in the Democratic Republic of the Congo (DRC). The central African nation accounts for more than 60 percent of the world’s mined output of cobalt, which, according to Widmer, brings “a whole load of problems with it”.

13m

Predicted number of electric vehicles on the world’s roads by 2020

125m

Predicted number of electric vehicles on the world’s roads by 2030

The DRC has a turbulent relationship with the mining industry, having increased taxes and royalties on cobalt in January. The government then declared cobalt a “strategic mineral” just a few months later, meaning it can raise royalties paid to the government from cobalt mining up to 10 percent from a previous cap of two percent.

Those looking to source their cobalt from outside the DRC will struggle. The world’s reserves and resources outside the country are geographically diverse, with no region in a position to replace production if supply in the DRC is disrupted.

What’s more, the DRC has also faced criticism for using child labour in its mines. Approximately 20 percent of cobalt in the DRC is mined by hand, and Amnesty International has said children as young as seven are among those working in the narrow, man-made tunnels of these small mines. Last year, Amnesty accused major electronics and electric vehicle firms such as Apple, BMW and Tesla of not doing enough to stop human rights abuses entering their supply chains.

In addition, the London Metal Exchange (LME), the world’s largest metal bourse, is said to be strengthening its scrutiny of companies that source their cobalt from the DRC. According to the SP Angel 2017 Commodity Research Book: “The LME, Amnesty International and consumers of DRC exports are probing into responsible mining practices, and demanding increased transparency toward ethical supply.

“Restricted tolerances on the supply chain are aimed at reducing the demand on the 20 percent supply from artisanal mines, which are employing an estimated 40,000 child labourers.”

There are also some efforts to use blockchain technology to securely track cobalt from mine to manufacturer to give firms a guarantee that children did not mine the cobalt they use.

But with cobalt already down 20 percent from its all-time high and battery producers scrambling to find replacements, the metal may have a tough few years ahead. In the coming quarters, Widmer expects cobalt to fall back to the level where it started before the electric-vehicle-induced rally.

The forgotten metals
Lithium (see Fig 2) and cobalt have been the stars of the battery metals market because of their stunning price movements, but there are a number of other metals in the mix that are potentially more interesting.

“They’re called lithium-ion [batteries], and everyone just assumes they’re mainly lithium. They’re actually not,” Mills said. “There’s other metals in there which are very much undervalued, and their time is going to come.”

Graphite, for instance, makes up almost 50 percent of the mass of lithium-ion batteries, but Mills said this goes unappreciated: “The price is just starting to come up, and you’re going to be in a position where the growth in terms of demand is going to be huge and you don’t have enough graphite to support the market.” Research by market research firm MarketsandMarkets said the graphite industry is expected to be worth $29.05bn by 2022.

Nickel is another underrated battery metal, Widmer said, because for every gram of cobalt removed, the nickel content of the cathode must be increased. “And that’s exactly what has been happening,” he said, referring to moves by the likes of Tesla and Panasonic to eradicate cobalt.

However, over the past few years on the nickel market, a number of big mines run by giants like Norilsk Nickel, BHP Billiton, Glencore and Anglo American have burned through a lot of cash. Widmer explained: “They didn’t close their mines down, but they had to cross-subsidise a lot of those operations, and because of that we have seen virtually no growth [capital expenditure] going into the industry.

“So you’re now in an environment where the mining industry has stopped spending on operations at the same time as you’re actually seeing the demand increase coming through.”

Currently, nickel looks set to be one of the strongest metals fundamentally. According to Widmer, it is the raw material that BAML says gives the best exposure to the rising popularity of electric vehicles. “It looks very, very bullish,” he told World Finance. Prices have risen steadily, and as of July they were up about 40 percent over the previous year, even taking into account a sell-off due to various global trade disputes.

The case for many battery metals continues to look strong. Although there will be some oversupplies in the lithium market, its position as a key component of lithium-ion batteries means long-term demand will stay strong so long as demand for electric vehicles rises. Cobalt’s future, however, looks bleak.

Due to its concentration in a politically volatile country and the proliferation of child labour in the supply chain, many manufacturers have decided to engineer the metal out of their batteries. But until a transformational next-generation battery is developed, metals like graphite and nickel, which have yet to gain the same level of attention from investors, may be the ones to provide the most noteworthy price spikes in the months and years ahead.

Invest Turks and Caicos has created an investment vehicle that works for everyone

Posted on October 15, 2018October 22, 2018 by Max Tomlin

With fewer than 40,000 inhabitants, the Turks and Caicos Islands (TCI) may be one of the Caribbean’s smallest territories, but it certainly punches above its weight. Boasting spectacular coral reefs, luxurious hotels and exotic wildlife, the archipelago has gained a well-deserved reputation among travellers as something of a hidden gem.

Boasting spectacular coral reefs, luxurious hotels and exotic wildlife, the TCI has gained a reputation among travellers as a hidden gem

However, there is much more to the TCI than just tourism. The financial sector is regaining much of the traction it lost during the 2008 financial crash, and other lucrative industries are also on the rise. The TCI has played a crucial role in promoting investment opportunities in the region.

Like many other parts of the world, the TCI was badly damaged by the 2008 global financial crisis. Along with Hurricanes Irma and Maria in 2017, these external factors exposed the islands’ ‘open arms’ investment policy and were a major setback for the TCI economy. In response, the TCI Government has revised its investment policy statement (IPS).

A fresh approach
The revised IPS aims to create a new investment model that will maintain a dynamic, growing economy – one that is better equipped to tackle economic and social challenges, and is more resilient to external shocks. Invest Turks and Caicos Agency (Invest TCI) plays an essential role in this new investment landscape, promoting the islands, generating leads, servicing investors and advocating the government.

To be effective in attracting new investment, the TCI Government is identifying and targeting companies in priority sectors and using relationship management strategies to attract these firms to the islands. The TCI Government is committed to proactively seeking out high-quality corporate investors who otherwise would not have considered the location, and also aims to secure a greater quantity and quality of inward investment projects through relationship building and effective facilitation.

Priority areas
In order for this new investment policy to have the greatest possible impact, the TCI Government has identified several development priorities for the next five years. Strengthening the tourism sector is a major focus area, and investment will be needed if the islands are to provide visitors with the range of experiences they demand. A 2016 study by KPMG found that tourists to the TCI were looking for activities that went beyond sun and sea. The islands’ unique relationship with marine life – its ‘mariculture’ – should be emphasised to prospective visitors, who could be enticed to visit the world’s only conch farm. More could also be made of TCI’s history, such as its once-thriving salt industry, its ‘agri-food’ scene and its horticulture.

Attempts to diversify the tourism sector will also benefit from the development of the islands’ cruise industry. This would help the TCI make the most of its natural gifts, including Grace Bay Beach on the island of Providenciales, which is widely considered to be one of the best beaches in the world. Encouraging public-private partnerships could help with the development of ports and other transport infrastructure, which would provide a much-needed boost to
the cruise industry.

Outside of tourism, the financial services sector is gaining traction and there is renewed focus on establishing a strong regulatory framework for the industry. The growth of the manufacturing, fishing and agriculture sectors is a top priority, along with the development of renewable energy technology and the growth of the information technology sector.

Incentivising investment
If the IPS is to support a dynamic economy, then it will need to offer a helping hand to local and foreign businesses. In order to do so, the IPS supports firms in their initial start-up activities, helping them to maintain their products and services at a five-star level. This is in keeping with the islands’ desire to remain as one of the world’s top high-end destinations.

Under the IPS, projects in Providenciales will be eligible for a 50 percent concession on import duties, with this figure rising to 75 percent for all business projects located on the Family Islands. Furthermore, in exceptional circumstances where proposals are deemed to be in the national interest but private land on which to develop them is not available, land owned by the monarchy will be made available.

Invest TCI is responsible for monitoring performance once a development agreement has been signed between an investor and the government. Invest TCI oversees business eligibility for investment incentives, working alongside the TCI Government to ensure that approved projects are marketed globally to qualified investors and have considered the interests of local community groups. That way, the TCI can create an open, outward-looking investment sector that still looks after its citizens.

Nuclear power continues its decline as renewable alternatives steam ahead

Posted on October 15, 2018October 22, 2018 by Max Tomlin

Last year, the largest nuclear power builder in history went bankrupt. Japanese conglomerate Toshiba’s prolific subsidiary Westinghouse filed for bankruptcy after revealing billions of dollars of cost overruns on its US construction projects. At the start of 2018, Toshiba agreed to sell the business for $4.6bn.

Despite technological advances, the cost of nuclear power tends to increase due to the high price of taking care of ageing reactors

The high-profile sale followed the French Government’s €5.3bn ($6.2bn) bailout of state-owned nuclear company Areva, which went technically bankrupt after a cumulative six-year
loss of $12.3bn.

These distress signals were noted in the 2017 World Nuclear Industry Status Report, which claimed the debate on nuclear power is over. “Nuclear power has been eclipsed by the sun and the wind,” the report’s forward read. “These renewable, free-fuel sources are no longer a dream or a projection – they are a reality [and] are replacing nuclear as the preferred choice for new power plants worldwide.”

But even while confidence in the industry erodes, strident nuclear advocates still insist the technology is a fundamental ingredient in the global energy mix, providing vital zero-emission, base-load power.

Powering down
The nuclear industry has been shaped in many ways by its biggest disasters: the catastrophic Chernobyl tragedy in Ukraine is considered to be the worst nuclear accident in history, in terms of both cost and casualties. In 1986, one of the four nuclear reactors at the power station exploded, spewing radioactive material into the atmosphere. Decades later, there is still no accurate measure of how many people have indirectly died from the exposure.

$200bn

Estimated cost to date of the Fukushima nuclear plant disaster

$630bn

Estimated eventual cost of the Fukushima nuclear plant disaster

90%

Drop in real price of solar photovoltaic power from 2009-2016

50%

Drop in real price of wind power from 2009-2016

9GW

Increase in global nuclear capacity in 2016

55GW

Increase in global wind capacity in 2016

75GW

Increase in global solar capacity in 2016

126 Number of nuclear reactors operating in EU member states

25%

Proportion of electricity generated by nuclear power in the EU

Then, in 2011, a 9.0-magnitude earthquake off the coast of Japan triggered a 46-foot tsunami that hit the Fukushima nuclear plant. The event led to the leakage of radioactive materials, and the plant was shut down. Six years later, the total official cost estimate for the catastrophe has reached $200bn, though it could rise to as much as $630bn according to independent estimates.

These incidents have cast a shadow over the sector. In the years since, new nuclear designs have aimed to improve safety features while maintaining low costs. But despite this, the frequency with which cost overruns and delays occur means nuclear projects are still often deemed too risky for private investors.

Construction delays are a big factor behind rising costs. According to the 2017 World Nuclear Industry Status Report, 37 of the 53 reactors under construction in mid-2017 were behind schedule. Eight of those projects have been in progress for a decade or more, and three of those have been under construction for more than 30 years.

As recently as July, Électricité de France’s (EDF’s) flagship nuclear project in Flamanville, which is already seven years behind schedule, was set back by another year over piping weld issues. The ‘quality deviations’ found in 33 welds at the European Pressurised Reactor (EPR) would also cause costs to swell by a further €400m ($465m). The cost of the project now sits at a grand total of €10.9bn ($12.7bn), more than three times the original budget.

Flamanville is one of three new EPRs currently being built in Western Europe. The region’s first new nuclear power station in 15 years, Finland’s Olkiluoto 3, was supposed to be completed in 2009. After numerous delays, it is now expected to be finished in May 2019. Meanwhile, the 3.2GW Hinkley Point C reactor in Somerset is expected to become the UK’s first new nuclear power plant in more than 20 years. It is already expected to be around £1.5bn ($2bn) over budget and more than a year behind schedule.

Yves Desbazeille, Director General of FORATOM, the trade organisation for Europe’s nuclear power producers, told World Finance that delays in major construction projects “are relatively common and difficult to predict”, whether in the nuclear sector or elsewhere.

“Nevertheless, we believe that lessons learned from the projects which are currently being developed in Europe will allow us to avoid these risks in the future,” Desbazeille added.

Likening nuclear power to that of a living organism, however, Mycle Schneider, the lead author of the World Nuclear Industry Status Report, told World Finance the industry was like a “dying species” due to the obvious reduction in new nuclear project launches in recent years.

This is seen clearly in the International Energy Agency’s (IEA) annual World Energy Investment report, updated in July, which found that nuclear investment is falling fast. The amount of money funnelled into nuclear power nearly halved in 2017, dropping by 45 percent as fewer new plants came online. New nuclear capacity was hit particularly hard, falling by around 70 percent to the lowest in five years as a growing slice of investment was put towards upgrades for existing reactors. Moreover, the growing popularity of renewable energy must be considered, according to Schneider: “To nuclear power, it’s like an invading species to the living organism.”

Renewables charge ahead
The economics of renewable power generation has transformed in the past five years, with costs plummeting to record lows due to the technology’s exceptional ‘learning rate’. A learning rate is the drop in the initial cost of construction as technology improves over time. The quick decline in the cost of renewables took the industry by “total surprise”, Schneider said.

For power generated by a solar photovoltaic (PV) system, that means real prices have plunged by 90 percent between 2009 and 2016. The real price of wind power, meanwhile, fell by 50 percent.

At the same time, nuclear power has presented a negative learning rate: despite technological advances and years of study, the cost of nuclear power tends to increase due to the high price of taking care of ageing reactors.

Nuclear power emits 30 times less carbon dioxide than natural gas, 65 times less than coal and three times less than solar energy

Politicians can’t pretend new nuclear projects are a viable economic option, Schneider said: “There is no market anymore in the world where new-build [nuclear reactors are] economic under market economy terms.”

Renewable energy is not only threatening new nuclear projects; even existing nuclear power, which costs an average of $35.50 per MWh, was higher than recent renewable energy auctions in a number of countries, where prices have fallen to all-time lows of below $30 per MWh.

But Desbazeille said the issue of comparing costs was more complex. Citing a recent report by the OECD’s Nuclear Energy Agency titled The Full Costs of Electricity Provision, he said the price of electricity in today’s market does not include all the costs that must be taken into account when comparing different energy sources, such as grid-level costs, land-use charges, security of energy and electricity supply, or employment generated in the electricity sector.

Whatever the cost comparison, it appears adding solar and wind power to the grid is more common at the moment. In 2016, global nuclear capacity increased by just 9GW, while solar capacity jumped by 75GW and wind notched a 55GW increase.

Comparing the data since 2000 presents an even starker image. In the 16 years measured by the World Nuclear Industry Status Report, countries around the world added 451GW of wind energy and 301GW of solar energy to power grids, dwarfing an increase of just 36GW for nuclear.

The emissions race
Although the 126 nuclear reactors operating in 14 EU member states generate more than a quarter of all electricity in the EU, and nuclear sources still accounted for close to 30 percent of all electricity production in the eurozone as recently as 2015 (see Fig 1), many governments are beginning to turn their backs on nuclear power.

In March, Belgium agreed to shut down the country’s seven nuclear reactors by 2025, and Germany has been working since 2011 to phase out its nuclear reactors by 2022. In a referendum in 2017, Switzerland also voted to gradually eliminate its nuclear reactors.

The change is even occurring in France, which is the second-biggest user of nuclear power after the US. President Emmanuel Macron’s election campaign in 2017 included a promise to cut nuclear power generation from more than 70 percent of the country’s energy mix to 50 percent.

But nuclear power accounts for almost half of the EU’s low-carbon electricity generation, and in some cases retiring nuclear power stations has undone some of the bloc’s work to reduce carbon emissions. According to FORATOM, nuclear power emits 30 times less carbon dioxide than natural gas, 65 times less than coal and even three times less than solar energy. The IEA found that the decline in Europe’s nuclear generation since 2010 has offset over 40 percent of the growth in solar PV and wind output across the continent. Desbazeille told World Finance the objectives of the Paris climate accord – the 2016 agreement signed by nearly 200 countries to reduce carbon emissions – “cannot be achieved without nuclear power”.

Due to the complexity of the situation, the UK has been urged to take a measured approach. The UK has sought to build as many as six new nuclear plants in the coming years to replace ageing coal and nuclear reactors. However, in July, an independent advisory body warned the government not to rush into any further support for new nuclear power stations due to the falling cost of wind and solar power. After Hinkley Point C, the National Infrastructure Commission (NIC) suggested the government should agree on support for only one more nuclear plant before 2025.

The NIC said an electricity system mainly powered by renewable sources of energy would be the “safest bet” in the long term, as wind and solar power have a much lower risk profile.
Sir John Armitt, the NIC’s chairman, told World Finance the problem with nuclear is that it is a “very, very complex system”. While renewable costs can be reduced through technological simplifications, nuclear projects have a “tendency to constantly be concerned about safety”, Armitt said. That means a long, uphill struggle for design and licensing approvals and little opportunity for cost reductions along the way.

Armitt worked with the contractor on the UK’s Sizewell B nuclear power station, and he remembers standing in the midst of construction a couple of years before commissioning and thinking: “There must be a cheaper way to generate electricity than this.”

While the NIC’s prediction might not be absolutely certain, Armitt said: “We’ve got time in the 2020s to pause and have a low-regret solution, which is to not rush ahead with nuclear while we see what continued developments take place that could potentially give us a renewable future, rather than a nuclear future.”

According to Schneider, a government that continues to invest in new nuclear power after looking at the hard data is not focused on the economics of energy anymore: “We’re talking about investments that are done for different reasons.”

He explained: “A third of the investment for Hinkley Point C comes from China… It’s geopolitics. It’s to get a foothold in a strategic sector in a country like the UK and take it as a platform.” Plus, in a country like Iran, nuclear science still has “this perfume of exquisite, exclusive
top science”.

China’s waning nuclear interest
By a wide margin, China is currently the global leader in the construction of new nuclear plants. In fact, for three years in a row, global electricity generation from nuclear power would have decreased if China were removed from the picture. By 2030, the IEA expects the country to overtake the US as the world’s top generator of nuclear power.

Much of the nuclear debate is powered by opinions, but looking at the hard data, it’s clear that the industry is in a slow and inevitable decline

Of the 10 reactors that started up globally in 2016, half were located in China. Meanwhile, nearly 40 percent of the total reactors currently in construction are Chinese. However, China has not launched a new construction of a commercial reactor since December 2016.

The country had planned for 58GW of total nuclear capacity to be in place by 2020, but having failed to get 30GW of new plants under construction by 2018, China’s lead in the field of nuclear power may be slipping.

What’s more, even in this hub of nuclear activity, renewable generation is moving even faster. As of July 2017, China had 37 operating nuclear reactors with a total net capacity of around 32GW. In 2017, however, the country added a whopping 53GW of solar power.

“To illustrate the speed with which things change, and [which] the invading species is taking over, if you only go back five years in 2012, Germany was the world record holder in the addition of [solar PV] with 7.5GW,” Schneider said. “Now it’s China with [53GW] five years later. The speed is just unbelievable.”

The return of small reactors
One often-cited glimmer of hope for the nuclear industry is in small modular reactors (SMRs). These shrunken-down nuclear reactors generate electrical output of between 50MW and 300MW on average, compared with the generation of 1,000MW or more from a conventional reactor, but it is unlikely they will be commercially available before 2030.

Proponents say SMRs will be cheaper and safer than conventional nuclear plants, and will be capable of competing with solar and wind power. Desbazeille said SMRs were a “game changer” that could put Europe back at the forefront of nuclear technology.

“We often hear about the ‘Airbus of this or that’, but an ‘Airbus of SMRs’ at EU level would make sense as it would fit perfectly into what Europe can be strong on: integration of complex systems, manufacturing and industrial optimisation. This is exactly what the Airbus success story is built on,” Desbazeille said.

Much of the nuclear debate is powered by opinions and estimates, but looking at the hard data, it’s strikingly clear that the industry is in a slow and inevitable decline

But while SMRs are purported to be the key to transforming the nuclear sector, history has painted a troubling picture: SMR designs have been in the works for decades, but none have reached commercial success. In fact, Westinghouse worked on an SMR design for about a decade, but the project was abandoned in 2014. At the time, then-CEO Danny Roderick said: “The problem I have with SMRs is not the technology, it’s not the deployment – it’s that there’s no customers.”

A number of companies continue to work on new designs, however. US firm NuScale Power plans to develop an SMR to re-establish the country’s leadership in nuclear technology. The design is currently under review for approval by US regulators. While NuScale is seen as one of the firms closest to commercialisation, it may be too late by the time the arduous process of securing approvals is completed.

Therefore, by the time SMRs are ready for mass deployment, the energy debate may already be over. “Look at what happened over the past five years,” Schneider said. “But can you imagine what will happen in the next 10 years? This is going to be a completely different world.”

“It’s a very seductive idea,” Armitt added, but he feared the modularisation idea might not be as easy to deliver as it sounds.

Although SMRs have been talked about for decades, the progress made so far has been tiny. New technologies in the nuclear sector take a huge amount of time to develop – just look at the struggle to build EPRs in Europe. Plus, opting for a small design cuts out the economies of scale, or the cost advantages that come about due to increasing the size of a project. This is something nuclear projects often rely on.

A report by researchers at Harvard University, Carnegie Mellon University and the University of California, San Diego concluded that in the absence of a “dramatic change in the [US] policy environment”, a convincing case for a domestic market for SMRs is difficult to make.

Much of the nuclear debate is powered by opinions and estimates, but looking at the hard data, it’s strikingly clear that the industry is in a slow and inevitable decline. China’s plans to become a nuclear powerhouse have been overshadowed by its huge investments in renewable energy – in fact, the number of new construction starts (see Fig 2) has fallen around the world as stubbornly high costs and complex designs make new nuclear a hard sell.

Even in spite of nuclear power’s role in reducing carbon emissions, the potential safety issues and environmental impact of a meltdown are too big to ignore. With the cost of renewable and battery technologies expected to continue falling, wind and solar power appear to be the next golden opportunity.

Branson halts $1bn deal with Saudi Arabia

Posted on October 12, 2018October 22, 2018 by Max Tomlin

Sir Richard Branson has halted talks with Saudi Arabia’s sovereign wealth fund over a possible investment into Virgin’s space ventures amid concerns surrounding the disappearance of journalist Jamal Khashoggi.

Mr Branson announced in October last year that he had secured around $1bn of capital from the Gulf state’s Public Investment Fund for his US-based space firms Virgin Galactic and Virgin Orbit. This cash injection, he said, has now been halted as a result of the Khashoggi case.

Governments and corporations across the globe are now pressurising the Gulf state for answers regarding Mr Khashoggi’s disappearance

Mr Khashoggi, a prominent journalist, entered the Saudi Arabian consulate in Istanbul on October 2 to obtain the necessary paperwork to marry his Turkish fiancé. He has not been seen since, and is now presumed dead, a claim corroborated by the Turkish government.

Saudi Arabia has denied all wrongdoing in the Khashoggi case and has claimed that the journalist left the consulate alive and well on October 2. Turkey is alleging that the Gulf state sent a 15-member team to carry out a ‘preplanned murder’.

Governments and corporations across the globe are now pressurising the Gulf state for answers regarding Mr Khashoggi’s disappearance. In a statement to the Financial Times, Mr Branson said that the accusations levelled against Saudi Arabia “if proved true, would clearly change the ability of any of us in the West to do business with the Saudi government.” He added that Virgin had requested information from authorities in Riyadh.

A number of other renowned business leaders have also pulled out of their financial commitments with Saudi Arabia pending more information. Ernest Moniz, an energy secretary who served under Obama, and Sam Altman, president of startup incubator Y Combinator, have suspended their roles on the advisory board of a $500bn megacity project.

CEO of Uber Dara Khosrowshahi, Viacom’s Robert Bakish and editor of the Economist Zanny Minton Beddoes have also pulled out of a high-profile tech conference scheduled to take place in Riyadh at the end of October. The Future Investment Initiative, which has been pegged as ‘Davos-in-the-desert’, was designed to inspire investment in Saudi Arabia’s economic sector, but attendees are quickly dwindling in the face of the Khashoggi case. The New York Times has also announced that it will no longer be a media partner of the event.

Mr Khashoggi was an eminent critic of the Saudi Arabian regime, having written a number of columns for the Washington Post newspaper criticising the Gulf state’s policies towards Qatar and Canada, and its involvement in the Yemeni war.

This termination of economic ties is sure to continue until Saudi Arabia answers the questions that the West are asking.

CIBC FirstCaribbean is harnessing technology for the benefit of its customers

Posted on October 12, 2018October 17, 2018 by Max Tomlin

FirstCaribbean was formed in 2002 following the merger of CIBC West Indies and Barclays’ Caribbean operations. In December 2006, CIBC acquired Barclays’ stake and became the majority shareholder in FirstCaribbean. On June 20, 2011, we proudly announced that we would be co-branded under the CIBC banner, adopting the name CIBC FirstCaribbean.

Technology is driving the future of CIBC Firstcaribbean by helping us to create solutions that allow our clients to bank when, where and how they want

The addition of CIBC to the FirstCaribbean brand emphasises CIBC’s support of our bank, as well as its commitment to delivering top-class services to our clients and a first-rate working environment for our employees. Our clients and our employees across the Caribbean will continue to benefit from the long-term investment that CIBC FirstCaribbean is making.

Today, CIBC FirstCaribbean is a bank that builds relationships and offers a full range of market-leading financial services, including our corporate, investment, retail, business and international banking departments, as well as wealth management services. We have 80 branches and offices in 17 countries throughout the Caribbean. We are one of the largest regionally listed financial institutions in the English and Dutch-speaking Caribbean, with over $11bn in assets and a market capitalisation of $1.8bn. We also have an office in Hong Kong.

The face of banking is changing throughout the world, and CIBC FirstCaribbean intends to lead these changes with the expertise, integrity and knowledge gained from almost 200 years of banking in the Caribbean. We are confident we will continue to be a regional leader by putting our clients at the centre of everything we do.

The personal touch
At FirstCaribbean, we ensure we have a range of products and services that suit all of our clients’ needs and, as such, we are extremely proud of the suite of cards we are able to provide. We carry a card for every business and personal user, and are the only regional institution that provides clients with the convenience of contactless debit and credit cards.

All of our cards have world-class security features and high levels of flexibility and reliability. Our clients use our cards with confidence due to the anti-fraud integration that comes with our mobile and online banking offerings. Cardholders are increasingly using their cards for all of their spending needs – at the cash register, for shopping online and when travelling overseas.

Our Visa Infinite and Visa Platinum cards are our most prestigious: holders of these distinctive cards enjoy unparalleled purchasing power and have access to a world of special privileges, benefits and rewards designed exclusively for Infinite customers. The CIBC FirstCaribbean Visa Rewards Gold card gives our customers more options to earn rewards on travel and merchandise.

Our new Cash Back Visa credit card, meanwhile, is the smart choice for today’s value-conscious shoppers. Cardholders can enjoy both its cutting-edge look, with its easy-to-read vertical design, and the functionality provided by its automatic cashback feature on every dollar spent. Our Cash Back Visa credit card is ideal if you are a first-time cardholder, just starting out in your career, or simply need a credit card that actually helps save you money.

The CIBC FirstCaribbean British Airways Visa Platinum credit card provides automatic enrolment in the exclusive British Airways Executive Club. This is a very popular card for clients who are frequent travellers to Europe. Our full suite of cards includes both chip-and-PIN and contactless offerings for security and convenience. The use of credit cards by our clients continues to grow rapidly because they are rewarding, secure and easy to use.

Going the extra mile
As well as investing in our clients, CIBC FirstCaribbean supports growth and development in the wider Caribbean region. In 2015, for instance, we opened our first branch in Aruba and, over the past three years, we have opened new banking centres in other markets, such as St Maarten, Trinidad and Tobago, and the Cayman Islands. We have also launched a home insurance coverage plan so clients can protect their future.

We continue to give back to our communities via our ComTrust Foundation. Through the foundation, we set aside at least $1m of the bank’s profits each year to donate to important causes in the region that focus on health, education and the environment. Over the past 16 years, this has amounted to more than $20m. Our employees actively choose and participate in the charities we support. These efforts contribute substantially to the social betterment of the communities we serve.

One of the ComTrust Foundation’s flagship events is Walk for the Cure. Our walk has become one of the Caribbean’s largest cancer fundraising and educational initiatives, raising over $2m for cancer detection, treatment and care in the region over the past six years. We are proud to continue attracting thousands of walkers, sponsors and supporters, from the Bahamas in the north to Trinidad and Tobago in the south. Our last walk attracted more than 20,000 participants, and numbers continue to grow every year.

Digital transformation
Technology is one of our top priorities and has allowed us to deliver on our promise of “banking that fits your life”. Technology is driving the future of the bank by helping us to create solutions that allow our clients to bank when, where and how they want.

We have upgraded several of our internal systems and released a new mobile app and an upgraded online banking platform, which have unlocked a wave of new opportunities for us. Recently, we have put fraud protection in the hands of our clients with features such as Freeze My Card, mobile location confirmation and other transaction controls. These enhancements have earned us a lot of praise from our clients and allowed us to remain an industry leader in the Caribbean region.

Even more pleasing is the fact that we have seen a dramatic increase in the use of our alternative banking channels. Our best-in-class technological advancements are resonating with our clients and changing the way they do business with us. Our goal is to put banking in the hands of our clients and provide them with multiple ways to interact with us.

We are focused on providing modern, digital banking solutions to our clients by listening carefully to their needs. We have made innovation a focal point in our banking strategy so that we will always remain ahead of our industry peers. We have embraced an agile approach to technology development, as we believe it is critical to take our products and services to market quickly and seamlessly. This is evidenced by the multiple releases of our mobile banking solution each year.

Our success is only possible because of the excellent work of our agile business and technology teams, as well as our close partnerships with a number of technology providers. Our customer service teams actively engage with our clients through focus groups, discovery sessions and a number of other feedback channels. This helps us determine what features would really improve the banking experience of the people we serve.

We acted on the feedback we have received from clients and have continually revamped some of our services since our mobile launch in 2016. Some of our most recent developments are built on Visa technology and have enhanced customer security. These anti-fraud solutions were the first of their kind to be introduced in the Caribbean; through our mobile app, clients can conveniently check their account balances, transfer their funds between accounts, pay their bills, receive in-app transaction alerts, track their reward points, apply for products and much more.

We are continuously enhancing the features of our mobile app and adding new ones to ensure that it fits the lives of our clients. Our clients are at the heart of everything we do. The company continues to listen to them, while they continue to give us feedback on how we can better serve them. We take comfort that we are achieving this goal from the industry-leading ratings we receive in various app stores, and have been able to better connect with our clients simply by listening to them and responding to their needs. This has helped us tremendously as we have seen a shift in the way our clients do business with us.

Our parent company, CIBC, continues to support our bank and region through significant investment. CIBC is a leader in technology and we maintain a close relationship in order to capitalise on its knowledge, insights and success. With its help, our commitment to creating transformative solutions that connect with our clients continues to go from strength to strength.

The key to this is always putting our clients at the heart of our operations. We are working on rolling out a few first-to-market services in the region over the coming months, and we know these developments will not only keep our existing clients happy, but also help us to attract new ones.

Wall Street equities sell-off sparks dramatic fall in global markets

Posted on October 11, 2018October 16, 2018 by Max Tomlin

A mass Wall Street sell-off of equity stocks on October 10 has sparked a slump across Asian and European markets.

The sell-off was triggered by concerns over the end of cheap money as the Federal Reserve hiked rates last week for the third time this year

The S&P 500 closed 3.3 percent down last night, its lowest level in eight months, and the Nasdaq Composite fell more than four percent, its biggest one-day decline since June 2016.

Tech stocks were hit particularly hard, with the ‘big five’ tech firms (Apple, Facebook, Amazon, Netflix and Google) losing a collective $172bn in value, equivalent to the entire GDP of Algeria.

The sell-off was triggered by concerns over the end of cheap money as the Federal Reserve hiked rates last week for the third time this year. A volte-face in US Treasury yields also threatens to make borrowing more expensive for corporate companies, with the 10-year yield racing to a seven-year high of 3.25 percent.

In an interview with Fox News on October 10, President Donald Trump sharply criticised the Federal Reserve for causing the drop in equities. “The Fed is making a mistake. They’re so tight. I think the Fed has gone crazy,” he said.

Escalating trade tensions between China and the US, and the application of billions of dollars of tariffs, has had a detrimental effect on markets in both countries. Chinese tech powerhouse Tencent lost almost seven percent on the Hong Kong Stock Exchange. Elsewhere in Asia, Taiwan’s bourse, which is dominated by electronics stocks, closed 6.3 percent down on October 10, and Japan’s Nikkei 225 index lost 3.9 percent.

European markets also felt the pinch, particularly within tech stocks, as the Europe-wide Stoxx tech index was down 1.7 percent on October 10, its lowest level since February 2017. London’s FTSE 100 hit a new six-month low at the start of trading on October 11, sinking by 1.7 percent.

The slump, which had previously been limited to equities markets, is expected to spread to more markets today. Bloomberg is reporting that credit markets have moved in line with stocks this morning, with insurers particularly badly hit, and Dutch vehicle-fleet lessor LeasePlan has even cancelled its IPO due to the market volatility. An analysis of S&P futures indicates that there may be further selling to come in US markets. Currency markets appear to be unaffected as of yet.

179,753

Number of active Bundeswehr service personnel

27,900

Number of additional Bundeswehr reservists

200+

Number of Bundeswehr battle tanks

565

Number of Bundeswehr infantry fighting vehicles

65

Number of vessels in the German Navy

$6.7bn

Amount Bundeswehr was given for arms and equipment in 2017

$685m

Amount of Bundeswehr arms and equipment budget that went unspent in 2017

$3bn+

Revenue of Jamaica’s tourism industry

9%

of Jamaica’s labour force is employed by the tourism industry

5.4%

Growth in Jamaica’s tourist industry in first half of 2018

16,662

people are employed by the island’s tourism industry

1,800%

Increase in fish biomass in the Oracabessa Bay Fish Sanctuary in the past seven years

150%

Increase in coral coverage in the Oracabessa Bay Fish Sanctuary in the past seven years

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48 million

Population of Colombia

16%

of the Colombian population belonged to the middle class in 2002

31%

of the Colombian population belonged to the middle class in 2015

46%

of the Colombian population is predicted to belong to the middle class in 2025

13m

Predicted number of electric vehicles on the world’s roads by 2020

125m

Predicted number of electric vehicles on the world’s roads by 2030

$200bn

Estimated cost to date of the Fukushima nuclear plant disaster

$630bn

Estimated eventual cost of the Fukushima nuclear plant disaster

90%

Drop in real price of solar photovoltaic power from 2009-2016

50%

Drop in real price of wind power from 2009-2016

9GW

Increase in global nuclear capacity in 2016

55GW

Increase in global wind capacity in 2016

75GW

Increase in global solar capacity in 2016

126

Number of nuclear reactors operating in EU member states

25%

Proportion of electricity generated by nuclear power in the EU

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