2018 | World Finance

Sovcombank overcomes adversity to deliver sustained success in Russia

Posted on September 28, 2018October 3, 2018 by Max Tomlin

Though today it is one of the biggest banks in Russia, Sovcombank started out from humble beginnings. Under the name Buoykombank, the bank was incorporated in November 1990 in the small town of Buoy, which can be found in the northern region of Kostroma. For over a decade, it performed well as a local bank, servicing the financial needs of the people of Buoy. But this institution was soon to extend much further than the borders of Kostroma: a new chapter in the bank’s history began when two brothers, Sergey and Dmitry Khotimskiy, together with their business partner Mikhail Klyukin, bought Buoykombank outright.

During Sovcombank’s early years, it operated under a traditional banking model, with a particular focus on retail banking for pensioners

“We bought Buoykombank in 2001 and every one of us thought that it was a temporary project,” said Sergey Khotimskiy, co-founder and First Deputy CEO of the bank. “We wanted to buy a small regional bank for $300,000, get a foreign exchange licence, transfer it to Moscow, and then sell the bank for $1m – that was the business plan. But for some reason, we still haven’t sold it. We really like banking and don’t want to do anything else.” Instead, with 100 percent of the bank’s shares in tow, the trio embarked on a complete transformation. This began with a new name – Sovcombank – in 2003.

During Sovcombank’s early years, it operated under a traditional banking model, with a particular focus on retail banking for pensioners – a niche area in Russia’s financial services sector that most banks shied away from at the time. Banks shared a reluctance to lend to pensioners because of their generally low incomes, as well as their shorter life expectancy compared with those of their counterparts in developed economies. In Russia, the average life expectancy is 71.9 years – below the global average of 72 and a far cry from those of developed economies, with the US, Germany and the UK boasting expectancies of 78.5, 81 and 81.4 years respectively, according to the World Health Organisation. This fact, together with the specific staff training and expertise needed to serve pension clients, held most traditional banks back.

Sovcombank, however, embraced the challenge. Thanks in large part to its prudent financial behaviour, the bank was able to turn this niche sub-sector into an opportunity for growth – one that few others in the market had recognised. Though the loans were small and often made on a short-term basis, the cost of risk was among the lowest the market had to offer (see Fig 1). This was key, particularly as interest rates were at the same level as in other, riskier areas.

With Sovcombank’s cost of risk being among the lowest in the country, its expansion soon took place: starting life as a single office in Buoy, today the bank’s retail segment has over 2,000 offices in more than 1,000 towns across Russia, serving some 3.2 million customers.

This widespread presence was helped by a series of strategic acquisitions over the past 10 years, which have seen the bank become one of the most successful in the market. Between 2014 and 2017, Sovcombank achieved an average reported ROE of 50 percent (see Fig 2), making it the most profitable banking group in Central and Eastern Europe in both 2016 and 2017.

Foundations for success
Dmitry Gusev, CEO of Sovcombank, puts the bank’s success down to a number of factors, starting with the context in which it was established. He told World Finance: “We were quite lucky starting our banking business in the period when the national banking system was only just being formed, so there were lots of opportunities out there.”

He continued: “If we look into the current champions – those privately owned banks that have managed to get into the group of Russia’s competitive banks – we see that many of them started at exactly the same time. Because the growth of the national banking system was so huge, we saw that not only our bank, but also many others, grew significantly.”

However, as Gusev explained, many banks were not completely capitalised during that period, meaning they did not have a capital base in place to fully support growth. Sovcombank, on the other hand, maintained a prudent approach and expanded with the pace of its new profit generating capacity. It is through this strategy that Sovcombank has since established itself as one of the biggest privately owned banks in Russia.

While the bank has evolved in numerous ways since 2003, one core aspect of its operations continues: pensioners and pre-pensioners remain one of Sovcombank’s main clientele. That said, the bank is also in the process of diversifying its clients significantly with a new line of products, which includes installment cards, home equity loans, mortgages and automobile loans that are aimed at younger customers.

Meanwhile, Sovcombank’s corporate and investment banking (CIB) arm continues to grow. Today, it provides financial services to the biggest private and state-owned corporations in Russia, as well as to regional governments and municipalities. In 2017, Sovcombank was ranked as the number one privately owned arranger of domestic bonds in Russia by Bloomberg. Further, Sovcombank’s CIB arm enables some 350,000 micro, small and medium-sized businesses to engage in public procurement, issuing around 26 percent of all bank guarantees needed for state and municipal procurements in the country

A winning formula
Over the past five years, Sovcombank has led 10 successful M&A deals, which in turn has enabled it to increase its capital base considerably. What makes this achievement all the more noteworthy is that most M&A transactions in Russia during this time have been unsuccessful. Indeed, this is a trend that can be seen all around the world – simply, M&A successes have not been favourable to acquirers for some time now.

“Despite global trends, we have been successful in each and every one of our M&A transactions,” said Gusev. He puts this success rate down to three key pillars: “First of all, who you are buying from is very important. Every seller that we deal with is a very reputable organisation – either foreign, such as a big foreign bank, or a very successful privately owned Russian group. Dealing with the purest, cleanest banks gives us valuable expertise in the most attractive niches.

“Second, we have never tried to just buy whatever is being sold – we always wait for really good transactions that, while increasing our competitive advantage, also boast good financial terms and offer a favourable price for the institution in question. And the third pillar is that we are always very quick to complete the integration process.”

The bank’s record reflects this: its longest M&A integration process took nine months, while the fastest was concluded in just four. Gusev said: “This short period of time ensures that the transaction does not lead to what I call the ‘disorganisation of the acquirer and the target’. I believe that if you spend too much time walking in parallel structures, then most of the competitive advantages that you plan to utilise after the acquisition end up being wiped out.” This strategy has worked superbly well for Sovcombank, not only at a time in which M&A activity has been low, but also during a period of relative economic hardship for Russia.

Overcoming impediments
The 2008 financial crisis rocked the world and had a huge impact on the Russian economy. The effect of this external shock was exacerbated further by the bursting of Russia’s asset bubble and a collapse in oil prices, which led to considerable capital withdrawals from the country.

It is remarkable that while countless entities in Russia have struggled during tumultuous times, Sovcombank thrived

Describing the atmosphere at the time, Sergey Khotimskiy said: “Initially – in the segment of private banks, and to a lesser extent the state-owned banks – bankers didn’t really value a bank’s capital. When a bank invests in assets that can’t be sold today, it automatically means that for some reason the bank either does not protect its capital or does not plan to give the money back quickly. And it was with this ‘birth trauma’ that many Russian private banks began their journey.

“When the banking system started to develop, the bankers thought: ‘OK, we collected the customers’ money, so now we invest it in real estate projects.’ With this approach during the time of hyperinflation in the 1990s, banks normally had time to wrap a project in money, but when they tried to repeat this process in the 2000s, the crisis of 2008 hit them and those models very hard. A huge number of banks received ‘holes’ in their balance sheets due to the reduction of liquidity and the value of such assets. As a result, lots of them did not survive.”

This scenario marked the first significant purge of Russia’s banking system. But while the external shock of the 2008 crisis had an irrefutable effect, the country was better positioned fiscally than it had been in the past, taking lessons learnt from the 1998 Asian financial crisis, which had dire consequences – including a default on domestic debt.
But just as economic recovery began to sink in, Russia was hit with another crisis in 2014. It started with an enormous – almost 50 percent – plunge in the price of oil. Being heavily dependent on the oil sector, the government was forced to make swift and significant budget cuts. It did so primarily through public sector salaries, all the while providing support to the companies affected by taking assets from the National Welfare Fund.

2000+

Number of Sovcombank retail segment offices

1000+

Number of Russian towns in which Sovcombank has a retail segment office

3.2m

Approximate number of Sovcombank retail customers across Russia

50%

Average ROE Sovcombank achieved between 2014 and 2017

No.1

ranked privately owned arranger of domestic bonds in Russia in 2017

350,000

Micro, small and medium-sized businesses assisted by Sovcombank’s CIB in public procurement

Then came another blow: economic sanctions were imposed by the US and Europe in a bid to curb Russia’s energy future. By curtailing access to western technology at a time when Russia was planning to tap new deep-sea, shale and Arctic reserves, the US and Europe took aim at the very foundation of Russia’s economy. Unsurprisingly, sanctions were followed by a collapse of the ruble, which had a sudden and devastating effect on the economy.

The culmination of the crisis came on December 17, 2014 – a date that is now known as Black Wednesday in the history of Russia’s financial system. Khotimskiy described the situation: “The Central Bank of Russia [CBR] sharply increased its key interest rate by 6.5 percentage points to 17 percent. The exchange rate went off the scale and the market began to panic. Regulators introduced unprecedented measures to support the banks, which were engaged in patching holes for a week; trying desperately to stop the outflow of deposits and maintain their balance sheet. At the same time, Moody’s was the first of the three international ratings agencies to announce an increase in the likelihood of the Russian Government imposing a moratorium on the repayment of foreign debts. Furthermore, Moody’s did not rule out a default of the government on its own obligations. Meanwhile, S&P began revising the sovereign rating of Russia with a negative outlook, in the direction of the ‘garbage’ zone.”

Khotimskiy continued: “The foreign investors came back from the Christmas vacation and immediately began a massive sell-off of Russian securities. On both sides of the ocean, investors threw off the paper at any price. The discount was 10 percent.”

Amid the crisis, Sovcombank had to work quickly and decisively. “The supervisory board of Sovcombank met on December 29 and reviewed the 30 largest issuers in order to set limits on them. From January 2, 2015, the entire team in Sovcombank’s treasury unit worked from morning until late in the night, buying paper at the bottom. Between January 2 and 10, Sovcombank bought bonds for $500m; by the end of January, due to the growth of securities in the price of this strategy, the bank achieved a profit of $50m. We were not the only ones who worked on those days, but there were almost no banks that managed to raise their limits and ensure the work of the treasury unit 24/7,” said Khotimskiy.

Chances from challenges
Far from showing signs of retracting, the US introduced new sanctions against Russia in both 2017 and 2018. “In general, sanctions are not very good for the Russian economy, and the economy is struggling to adjust. But at the same time, I think they provide an opportunity for healthy organisations,” Khotimskiy explained. “Due to the sanctions, many foreign entities have left Russia, which has created a window of opportunity for privately owned banks to compete for the best clients, both retail and corporate.”

It is remarkable that while countless entities in Russia have struggled during these tumultuous times, Sovcombank did more than just survive: it thrived. This success is rooted in the bank’s far-sighted approach to banking. “We always try to manage the business in a countercyclical way, which means that during good times, we keep our capital base and liquidity in a safer mode than most of our privately owned competitors,” Khotimskiy told World Finance. “This means that when bad times come, we always have a cushion in place.”

In fact, the bank was able to utilise a variety of opportunities that it recognised during both the 2008 crash and the Russian economic crisis of 2014. “During these periods of time, we managed to buy very attractive assets and secure very attractive clients. So we actually made more money and were more successful after those crises than ever before,” Khotimskiy noted.

“This strategy works very well in Russia and we think it will continue working in the future because the economy is very volatile, and whenever people are scared about what’s going on in Russia’s economy, there are amazing opportunities to be found,” he continued. “Russia has proved again and again that it can survive external shocks, and in every shock there is an opportunity.”

A foreign exodus
Given the precarious economic landscape after 2008, a number of foreign banks have gradually reduced their investments in Russia. According to outlets in the Russian media, the total loss amounts to around $2bn.

Khotimskiy explained the reasons behind this shift: “I think it’s very challenging for a foreign institution to be successful in Russia right now. I think those institutions that are still here are very successful and Russia plays quite a significant role in their global balance sheets. They are Italian, Austrian and French banks; even Citibank is very successful in Russia. But I think for newcomers right now, the political situation is not very favourable. I also think the fact that we saw a significant exodus of different foreign banks proves that even though some champions remain, in general, the environment is very tricky.”

While this environment has closed off various opportunities for foreign banks, it has opened many new doors for domestic institutions. That said, Russia’s prospects for foreign portfolio investment remain very attractive. Khotimskiy told World Finance: “I think Russia is a darling for portfolio investors because of its volatility. For those professionals that understand Russia well enough, I think Russia always proves to be a land of opportunities. Because when everyone becomes scared and a huge sell-off is on the way, you can always make great use of that.”

Clean-up time
Against this complex backdrop, another momentous shift has been underway. Indeed, the past five years have been nothing short of decisive for Russia’s financial sector. Under the leadership of Elvira Nabiullina, who was appointed as the new head of the CBR midway through 2013, a large-scale and unprecedented clean-up of the industry has taken place.

For those professionals that understand Russia, I think it always proves to be a land of opportunities

When Nabiullina took to the helm of the CBR, she was faced with an ailing and bloated banking sector. In the 2000s, a booming oil sector helped mask the problems facing Russia’s banks, but the 2008 crisis swiftly brought them to the surface. Of greatest concern were deficient regulations, the prevalence of bad loans and a lack of capital. Fortunately, under Nabiullina, the CBR has deepened oversight in the sector by enforcing more robust liquidity and capital adequacy requirements.

In the early stages of the initiative, the CBR focused on curtailing suspicious capital outflows, under the belief that billions upon billions have left the country, and purging so-called ‘pocket banks’. The post-soviet term refers to institutions created by industrial groups to service their businesses’ financial needs; in some cases they also acted as fronts for money laundering. The CBR took on banks that were previously considered untouchable, gradually tightening rules along the way, including those related to lending to the banks’ owners.

Five years later, Russia’s clean-up of its banks is more than half complete: from more than 900 banks in 2013, around 500 are left today. While some have collapsed, others were bailed out by the state. The biggest among these were B&N Bank, Otkritie, and Promsvyazbank, which were all seized by the CBR in 2017.

Meanwhile, since mid-2017, only financial institutions with strong ratings from Russian ratings agencies ACRA and Expert RA have been entitled to state funds and instruments. Another new rule – though only for the interim – involves meeting capital requirements and having balance sheets of a certain size in order to access state funds.

The CBR’s robust work is lauded for having prevented another financial crisis, while helping to strengthen healthy banks in its wake. “Sovcombank is one of the beneficiaries of this process, because we were always suffering from the competition of organisations that never really bothered to stick to the rules, as well as those that were under-capitalised and managed to grow without a real capital base,” said Khotimskiy.

“From this point of view, the clean-up is very important: it’s clear that there are no significantly big privately owned banks that can work the way they used to before. So we think that the job done by the central bank is really a base for both significant economic growth and the healthy growth of the banking system in the future.”

Consequently, in recent years, the Russian banking sector has been showing impressive figures in terms of returns on capital and assets. “Obviously, because inflation rates are low, the returns that we used to see are no longer on the table,” Sergey Khotimskiy explained. “However, at the same time, Russia still has one of the highest equity returns on assets in the world, so I think that we’ll be seeing double-digit returns in most banks. As far as Sovcombank is concerned, for the last 10 years, our average ROE was more than 30 percent, and we expect it to stay above 20 percent for the next three to five years.”

The march of technology
The future for Russia’s banking sector looks promising – an outlook that is strengthened further by its impressive adoption of cutting-edge financial technology. Unlike other markets, however, this drive is not led by fintech players: according to Gusev, it actually comes from the banks themselves.

The past five years have been nothing short of decisive for Russia’s financial sector

“The Russian banking system is a unique financial system in this sense. The general state of Russian banking is very developed in terms of technology, and I think some champions – both state and privately owned – really are the key drivers of the digitalisation of financial
systems,” Gusev noted.

Over the past year or so, many successful fintech start-ups in Russia have been acquired and integrated into domestic financial institutions. Gusev said: “We think that’s because very strong banks are paying huge attention to digitalisation; I think this trend is probably going to stay the same for some time. While many fintech companies will be at various stages, the most advanced ones will continue to be bought out by the banks themselves.”

Speaking about some of the most exciting technology the market has to offer, Gusev was clear about what stands out for him at present: remote biometric identification (RBI) and Russia’s Unified Biometric System (UBS).

“We live in the digital age, and we can hardly imagine our everyday lives without mobile devices,” Gusev said. “We are regular users of mobile communication, and at the same time we still can’t fully function without offline visits to a bank office; without physical identification on the spot. In my opinion, this is a relic that should be addressed as soon as possible.”

This is where RBI and UBS come in, as they allow banks to identify clients remotely, thereby eliminating the need for their physical presence in brick-and-mortar bank branches. “I think this is a game-changer for the industry, and in several years, we will see more and more bank branches shut down,” Gusev told World Finance. “Only those banks that manage to turn their outlets into centres for consulting and for sales without any operational work will be really successful in reaching out to their clients in remote locations, and even in big cities.”

Sovcombank was one of the first credit institutions in Russia that began to gather the biometric data of its customers and transfer them to the UBS. “Of course, we can’t say that the system is working flawlessly at present, or that there are no problems with data transmission, but this can be expected because the process is still in its very early stages,” said Gusev.

He continued: “As for the advantages, it should be understood that this issue can’t be considered only in the banking context – in the future, we are thinking about creating a universal digital profile of the client, which they can use to obtain services in the bank and to solve a much wider range of problems and tasks. This point, in my opinion, should be explained to our customers, as the question of the speed of filling the UBS is not only a question of the activity of banking organisations, but also a question of the financial literacy of users.”

Aside from RBI, Gusev notes that the other technologies set to transform the industry include the introduction of a system of fast payments, application programming interfaces and technology based on a distributed registry system. Gusev said: “The fifth is, of course, end-to-end protocol, which allows you to combine different databases, and on this basis, to create a universal digital client profile. All of these technologies are interconnected in one way or another, and complement each other. They have all arisen due to the fact that the very philosophy of human life has changed. Indeed, we are increasingly entering the age of the digital economy, and this is changing our perception of the most mundane things, including banking and financial services.”

As the industry hangs on the cusp of this new future, some retrospection is important. Undoubtedly, a great deal has happened in Russia’s financial sector over the past decade – the last five years, especially so. This transformation can be attributed to a variety of factors, from a series of drastic external shocks to a dramatic clean-up of the industry. As the CBR’s initiative continues, more robust regulations will be implemented, while the unhealthiest banks will be removed from the landscape. Interestingly, this is not the only ongoing factor at play: the industry is being shaped further by new technology and the new opportunities that it presents.

Sovcombank is well positioned to capture both. As demonstrated by its track record, the bank rarely fails to notice the opportunities that can be found, even in the most difficult of circumstances. All the while, it stays ahead of the curve, never resting on its laurels, working countercyclically and adopting the latest innovations in the industry to stay profitable, while remaining a key partner to its clients, both big and small. Russia’s financial industry has faced an incredible onslaught of challenges in recent years, but out of the clouds of doubt, the likes of Sovcombank continue to shine through.

The price of the US opioid crisis

Posted on September 27, 2018November 15, 2018 by Max Tomlin

“It’s entwined in every aspect of American life,” Michael Moore sighed. “It’s like a cancer that is spreading and you can see the tentacles of the disease go out into society.”

The ex-US Attorney for the Middle District of Georgia is referring to a dangerous epidemic that has swept across the world’s largest economy in recent years. Its impact is estimated to have cost over $1trn, and that figure continues to grow year on year. But this epidemic isn’t just being felt in people’s bank accounts, but in their communities and their families, too.

Between 1996 and 2001, Purdue Pharma conducted a highly aggressive marketing campaign to push doctors across the US to adopt OxyContin

The opioid crisis has financially and socially devastated the United States since its inception 22 years ago. It costs the country over 150 lives every week, and an estimated $500bn annually in medical and legal aid. It has become one of the US’ most pressing crises to solve, with candidates across 25 states putting it at the forefront of their respective campaigns for the upcoming 2018 midterm elections.

Origins of the epidemic
Opioids were brought into the mainstream in 1995 by pharmaceutical manufacturer Purdue Pharma and its product OxyContin. The drug’s sole active ingredient is an opium-based compound called oxycodone that was developed by German scientists in 1916. Until that point, oxycodone had been primarily used in its immediate-release form to treat pain in cancer patients. Purdue Pharma, however, developed a capsule with a controlled-release coating, which allowed the active ingredient to be discharged over 12 hours, making it suitable for treating all types of chronic pain.

Between 1996 and 2001, Purdue Pharma conducted a highly aggressive marketing campaign to push doctors across the US to adopt OxyContin. The company held 40 ‘pain management symposia’ in traditional holiday destinations such as Florida for over 5,000 doctors, nurses and other prescribing physicians to extol the virtues of its new superstar drug. At these all-expenses-paid events, Purdue Pharma compellingly sold OxyContin on the basis that it had a ‘less than one percent’ addiction rate and would solve America’s pain problems.

During the same period, the company doubled its sales force and initiated a free 30-day trial programme for the drug, which by 2002 had been redeemed by over 34,000 patients. Sales representatives were wildly incentivised to push OxyContin with promises of $10,000 cash bonuses and lavish trips. The average salary for a Purdue Pharma sales rep in 2001 was $55,000, but the average bonus was considerably higher at $71,500. In that year alone, the company paid out over $40m in bonuses.

As one might expect, the majority of former Purdue Pharma sales representatives aren’t keen to talk about their experiences today. Those that are willing to talk toe the official line of ‘we didn’t do anything wrong’. They claim that Purdue was like any other big pharmaceutical firm in the way that it handed out bonuses to representatives who exceeded their sales targets. World Finance spoke to one anonymous Purdue employee who sold OxyContin between 2002 and 2004, he said: “the more you sell, the more money you make. That’s the way it works.”

It may be true that all pharmaceutical sales companies have a budget for marketing a new drug, which does include sales bonuses. However, Purdue Pharma took it to a level beyond anything seen before in the sector, spending between six and 12 times more than their closest competitor did on an equivalent drug. By 2000, Purdue had spent $4.04bn promoting OxyContin – the following year, in 12 months alone, it spent $200m. But these outgoings paled into insignificance in comparison with the revenue it was raking in. Sales of the drug in 1996 were worth $4.8m; just four years later, that figure had skyrocketed to $1.1bn.

Through its forceful promotion of OxyContin, Purdue Pharma created an unprecedented national appetite for opioids. In 2001, physicians across the US wrote over six million prescriptions for the drug. The country had become reliant on pain pills, and behind the scenes, there was an incredibly rich family profiteering from the demand.

Keeping it in the family
Purdue Pharma began as a subsidiary branch of the Purdue Frederick Company, owned by brothers Raymond, Mortimer and Arthur Sackler. Arthur and his descendants took a step back from the firm many years ago and no longer have any involvement with its activities, but seven of Raymond and Mortimer’s children remain active board members of Purdue Pharma, while Raymond’s son Richard Sackler was the president of the company from 1999 to 2003.

While the Sacklers continued to amass their vast fortune, the opioid crisis escalated across the country

The family has remained remarkably untouched by any legal challenges posed to the firm, and has barely spoken in public about their involvement in Purdue Pharma, preferring to direct attention to their philanthropic activities. But there’s no hiding the source of their tremendous wealth. In 2015, the family burst onto Forbes’ list of America’s Top 20 Wealthiest Families with an astonishing estimated net worth of $14bn. At the time, that figure equated to the 16th largest family fortune in the country.

The crisis deepens
While the Sacklers continued to amass their vast fortune, the opioid crisis escalated across the country. ‘Pill mills’ began to spring up, run by physicians of dubious morals who gave patients a rough once-over then handed over an OxyContin prescription in exchange for cold hard cash. Doctors working in these establishments charged between $200 and $300 for a prescription, and could see up to 60 patients a day.

Meanwhile, the fatality rate of opioid addiction rose year on year. In 2002, prescription opioids were killing 5,000 people annually, but 10 years later, that number had risen to 15,000. Preliminary figures from the Centers for Disease Control and Prevention (CDC) estimate that 72,287 Americans died in 2017 as a result of drug overdoses, and of those deaths, 49,000 were directly caused by prescription opioids.

The crisis had other, far darker implications too. It was discovered by some users that the controlled-release coating of OxyContin could be dissolved away, leaving a fine powder of pure oxycodone which could then be snorted or melted and injected, giving a much more intense high. Those who took OxyContin via this method soon fell into the grip of addiction, and as the cost of the drug rose and Purdue Pharma made it harder to extract the oxycodone, many turned to black-market opioids such as heroin to get their fix.

Richard Blondell is the Vice Chair for Addiction Medicine at Buffalo University and an expert on the opioid crisis. “Prescription drugs are gateway drugs to heroin,” he told World Finance. “Doctors and other physicians inadvertently prescribe their patients into addiction, but when they stop the prescriptions, patients turn to the illicit market for their drugs. As such, these prescribers make things worse by converting a licit drug problem into an illicit problem.”

A global market
Heroin consumption in the US skyrocketed from 374,000 users in 2002 to 948,000 in 2016, a spike that can be directly linked to the opioid crisis. Addicts subsequently went in search of bigger and better highs, and landed on fentanyl, a new synthetic opioid estimated to be 30 to 50 times more potent than heroin. The drug is typically manufactured in China and then shipped to the US. In January, the Senate released a report highlighting that $800m worth of fentanyl pills had been sold to US consumers by Chinese distributors over a two-year period. As such, what began as a national prescription pill problem has spilled over into an illicit global drugs market.

Michael Moore began his career as a state drug prosecutor before being sworn in as Obama’s Attorney General for the Middle District of Georgia in 2010. Over the course of his extensive legal career, he has dealt with a range of drug epidemics, including the opioid crisis.

He described anecdotal stories that he would hear, about people desperate to get their hands on pills: “We would even see things like people asking to see a house that was for sale, and a couple would go, and one would go with the realtor to look around the bedrooms, and the other would go and raid the medicine cabinet.”

Moore believes that this type of criminal behaviour is just one of the knock-on effects of the opioid crisis. “It’s a crisis that has taken an untold number of young people, a crisis that has broken up a number of families, that has caused a skyrocketing increase in healthcare costs, that causes our jails to be overcrowded, and our hospitals to be overcrowded, and much of it is because of the effects of addiction and all the things that go along with it.”

Legal challenges
As a result of its role in exacerbating the opioid crisis, Purdue Pharma has faced an increasing number of legal challenges in recent years. In May 2007, a Purdue Pharma affiliate and three executives pled guilty to misrepresenting the addictive capacity of OxyContin, and were collectively fined $634m. There has also been a number of lower-value criminal cases brought against the company, but Purdue has always opted to settle out of court, allowing it to remain shielded from the spotlight.

As a result of its role in exacerbating the opioid crisis, Purdue Pharma has faced an increasing number of legal challenges in recent years

That could be about to change, though. The legal pressure is mounting against big pharmaceutical companies, and Purdue Pharma specifically, as more and more states team up in a collective case aiming to hold industry titans responsible for their part in orchestrating the epidemic. So far, 23 state attorney generals have expressed their intention to participate.

Many are hoping that the case will wipe out a significant proportion of Purdue Pharma’s profits from selling OxyContin. The drug is estimated to have generated some $35bn in revenue for the company; with the drug still on the market, that number continues to rise.

“To add insult to injury, Purdue recently won approval to market its own brand of buprenorphine that is used to treat addiction. In effect, they hope to earn a handsome profit from [solving] the epidemic they helped to create,” Blondell explained.

The cost of profit
Profit for Purdue comes at a hefty price for the nation. In November 2017, the White House released a report by the Council for Economic Advisers that estimates the economic burden of the opioid crisis in 2015 alone to be an astounding $504bn. That equates to almost three percent of the nation’s GDP – nearly as much the entire federal defence budget. This figure encompasses the cost of healthcare for treating those addicted and secondary consequences of addiction, as well as lost productivity in the workforce and the involvement of criminal justice authorities for crimes relating to addiction.

This figure does not, however, account for the lives of thousands of Americans that have died as a result of overdoses. Putting a price on a single human life is a near-impossible and problematic exercise, but certain bodies in the US are required to do so for scientific or economic purposes. In 2016, the US Department of Transportation valued the average American life at $9.6m. Applying that value to the CDC’s estimate of 180,000 people who died of opioid overdoses between 1999 and 2015 equates to a literal death toll of $1.73trn.

That doesn’t even begin to cover the additional human costs of the crisis, either. Not the millions in foster care costs for children whose parents’ lives were claimed by opioid overdoses. Not the recovery costs for thousands of small communities left derelict and ruined by addiction. Not the psychological cost for the years it will take the US to come to terms with the profound scars of such a destructive epidemic.

Cuba’s economic liberalisation remains a distant prospect

Posted on September 27, 2018October 2, 2018 by Max Tomlin

For the first time since New Year’s Day 1959, the head of state of the Caribbean island nation of Cuba is someone outside the Castro family. The appointment of Miguel Díaz-Canel to the presidency has fuelled speculation about the future of the country and its economy. The past 10 years have already shown a degree of willingness within the Cuban establishment to implement some much-needed economic reforms, and new leadership provokes questions about a possible acceleration of the reform process.

Even if Díaz-Canel had lofty reform ambitions, it would be difficult for him to single-handedly change the country’s course

Much will depend on which Castro brother Díaz-Canel wishes to emulate most. Fidel was staunchly communist, scornful of anything resembling capitalism and rabidly anti-American. Raúl, on the other hand, while also sharing his brother’s sentiments, has not been as strident in their practical implementation and has been more open to market-oriented reforms.

Raúl’s reforms
Over the past decade, Raúl Castro’s government has made modest, but significant, reforms to the economy. The measures – enacted in 2011 and formally known as the Guidelines of the Economic and Social Policy of the Party and the Revolution – state that the socialist planning system will remain the principal management tool of the economy, but that its methodology needs adjustment. Despite the attempts to reconcile them with a socialist system, the measures created a crack in the system, through which hundreds of thousands of people saw the light.

In a bold move, the government began reorganising state-owned companies and moving them out of direct state control, opting to tax and regulate them instead of managing them directly. This gave more autonomy to the state-owned businesses that make up around 70 percent of the country’s economic activity.

Additionally, private residential real estate markets were opened up when the ban on the private sale of houses and cars, which had been in place since shortly after the revolution, was pulled back. People were suddenly allowed to sell their houses, as well as rent space on their premises.

147,000

Number of Cubans registered as self-employed in 2010

392,000

Number of Cubans registered as self-employed in 2011

580,000

Number of Cubans registered as self-employed in 2018

70%

The proportion of economic activity driven by state-owned businesses

18%

Estimated contribution of the private sector to Cuba’s GDP

439 Number of private cooperatives operating in Cuba

Further, in order to alleviate state payrolls, a number of regulations on small businesses were relaxed. People were once again allowed to hire staff from outside their family – something that was banned in 1968. As a result, the number of cuentapropistas – people registered as self-employed – exploded after the reform package took effect. In 2010, there were 147,000 people registered as self-employed, whereas in 2011 that number shot up to 392,000, signalling a huge entrepreneurial appetite within Cuba. There are currently around 580,000 licensed cuentapropistas, as well as 439 private cooperatives, in the country.

Despite the advances made, some of the measures in the reform package – notably the granting of new business licences – have been stalled or suspended. This is due to what the government has said was excessive accumulation of wealth, as well as tax evasion and other factors. This does not necessarily mean, however, that the country is rolling back the progress it has made, but rather that it may need more time to establish the environment these small businesses will be operating in.

“If you start a new private sector from scratch, you’ve got to develop all the rules about taxation and regulation. In any capitalist economy, the whole thing is constrained and taxed and regulated by a whole apparatus, so they’re trying to build that,” Emily Morris, an honorary research associate at the Institute of the Americas at University College London, told World Finance.

She added: “The fact that they’ve suspended [business licences] longer than they thought at the beginning is a huge disappointment, particularly to people who just invested in their business and were just about to get their licences, but I don’t think it actually changes the trajectory of reform.”

Given the lack of transparency in the Cuban Government regarding state finances, it is difficult to gauge economic activity, but some estimates suggest that as much as 18 percent of GDP comes from the private sector. The nascent private sector has grown not only in terms of size, but also qualitatively. This is evident across the many taxis, restaurants, barbershops and other small businesses across the narrow band of government-approved enterprise activities that are no longer just informal establishments, but increasingly sophisticated professional services servicing Cuba’s growing population (see Fig 1).

In the Castro image
The question, given new leadership, becomes one of continuity. Despite an ostensible changing of the guard, Díaz-Canel seems to have taken every opportunity to signal that he does not intend to deviate in any substantial way from the path the Castros have set the country on. In fact, it seems one of the principal reasons Díaz-Canel was tapped in the first place was his loyalty to the revolutionary project and the socialist hierarchy.

It is entirely possible that Díaz-Canel will zealously defend the status quo against a public that may increasingly see this transition period as an opportunity for change. The recent history of handpicked successors in Latin America – notably in Venezuela – also suggests that a protégé can even bring about more economic harm than their predecessor.

It is not unprecedented, however, that a loyal party apparatchik that rose through the ranks of a deeply entrenched ruling system would take bold steps to change their country’s course. Mikhail Gorbachev is perhaps the most obvious example of this. That said, even if Díaz-Canel had lofty reform ambitions, it would be difficult for him to single-handedly change the country’s course. The role of the president in Cuba is not the same as is traditionally understood in most other countries: unlike in a democratic system, where the president is elected and has authority stemming from popular mandate, in Cuba the president is actually the President of the Council of State, and is just another member – albeit an important one – of a bureaucratic system wherein major decisions must be approved at multiple levels. Additionally, though he is no longer president, Raúl Castro remains First Secretary of the Cuban Communist Party, the most powerful political organ in the government.

“There are indications that [Díaz-Canel] may be more liberal socially, but in terms of his economic policies, in terms of national security, I think it will very much be continuing this very carefully planned [reform] process that keeps disappointing international business media because they want to see some dramatic Eastern-European-style transition, and I don’t think that’s on the cards,” Helen Yaffe, a lecturer in economic and social history at the University of Glasgow, told World Finance.

A currency unification?
One of the most important hurdles facing Díaz-Canel’s economy is the integration of its dual-currency system. At present, the island has two operating currencies: the Cuban peso (CUP) and the Cuban convertible peso (CUC). The CUP is the main legal tender used domestically, whereas the CUC is primarily used for state functions and foreign dealings. The dual system was introduced in the aftermath of the collapse of the Soviet Union, as Cuba was dealing with the catastrophic economic fallout (see Fig 2) of losing its principal supporter.

In order for market forces to be introduced effectively, there needs to be a reliable form of market pricing, which is extremely difficult to establish when there are multiple exchange rates operating in the same space.

According to Morris: “[Diáz-Canel] has got an incredibly distorted economy because of the price exchange rate system, I think that’s the number-one urgent thing that needs to be tackled – I think it’s more important than further liberalisation at this moment.” She added that in the absence of a solution to the messy exchange rate system, liberalisation would lead to people making money from intermediating between the two markets, which doesn’t increase production for the economy.

Additionally, it is probable that Cuba would get sucked into an inflationary situation if the transition were not handled correctly. If the value of the unified currency was set somewhere between the existing ones, then demand for goods would rise as the CUP gained purchasing power. Supply, however, would not see the same kind of rise, leading to a potentially sharp hike in prices.

Unifying the currency is a crucial stepping stone if any kind of private sector is going to be established on the island. Having such a distorted economy makes it impossible for companies to be valued accurately. This acts as a disincentive for foreign investors to put their money in Cuba, as they have no reliable way of determining the value of their investments.

The US problem
Perhaps the biggest external factor casting a shadow on Cuba’s economic development is the half-century-long economic embargo that the US has had in place on the island. Apart from preventing trade with the biggest market in the Western Hemisphere, US sanctions also cut Cuba off from international funding from entities like the World Bank and the Inter-American Development Bank, severely curtailing its ability to develop its economy and infrastructure.

Remarkably, Cuba has managed to stay afloat despite sanctions that would cripple most other small economies. “I actually interviewed the [former] president of Ecuador, [Rafael] Correa, and he said to me: ‘Ecuador wouldn’t last 50 days with a blockade like that, and Cuba’s lasted 50 years’,” said Yaffe. However, the embargo nonetheless acts as a major disincentive for foreign direct investment, as companies tend to be risk-averse and do not want to end up on the wrong side of the US Treasury, despite international law deeming the embargo to be unlawful.

Cuba’s troubles with its neighbours extend beyond the US; the island nation is increasingly finding itself without sympathetic allies

In 2013, world leaders congregated in South Africa to bid farewell to Nelson Mandela. At his funeral, President Barack Obama made a historic gesture when he extended his hand to shake Raúl Castro’s – an act theretofore unimaginable against the backdrop of post-revolutionary US-Cuba relations. The handshake marked the beginning of a rapprochement process that would culminate in the opening of a US embassy in Havana.

All of a sudden, a whole host of possibilities opened. Observers wondered if this meant there was a chance for the decades-old economic embargo to be lifted and, if so, whether that would result in the liberalisation of Cuba’s economy.

The prospect of thawing over that most stubborn remnant of the Cold War has become increasingly small, however, given the attitudes of the new US administration. Travel restrictions to the island, which had been relaxed under Obama, have been tightened once more by Trump. This led to a sharp drop in the number of American visitors going to Cuba in the first few months of 2018 compared to the previous year.

“The logic of the new administration is questionable if the intention is to try and induce Cuba along the path of economic reform that would be gradual and peaceful,” explained Stephen Wilkinson, a lecturer in politics and international relations at the University of Buckingham. “It makes more sense if the intention is to try and bring about some kind of radical sudden change; some kind of overthrow of the present political system, which is very unlikely,”

He added: “The Trump administration seems to be enthralled to these extremely anti-communist Cuban-American politicians, and they are listening to them rather than listening to the more sensible people in the foreign-policy-making establishment that would see the Obama policy continued. The Trump administration seems to have stalled, and in some ways retracted, some of the Obama changes, which is having an impact on the Cuban economy.”

Fall of the pink tide
Cuba’s troubles with its neighbours extend beyond just the US; the island nation is increasingly finding itself without sympathetic allies in the region. The ‘pink tide’ of left-leaning countries in Latin America, which began forming in the 2000s and peaked in the early 2010s, has mostly subsided. The Bolivarian Alliance of the Americas (ALBA), started by Cuba and Venezuela under then-president Hugo Chávez, is a shell of its former self and doesn’t have the regional support it once enjoyed. Having the support of ALBA meant Cuba was able to monetise its core competencies, primarily through exporting medical professionals, without having to compete in regional free markets.

Perhaps the most worrying regional development for Cuba in the past few years has been the implosion of the Venezuelan economy under Nicolás Maduro

The impeachment of President Dilma Rousseff in Brazil, as well as the subsequent imprisonment of former president Luiz Inácio Lula da Silva, has not boded well for Cuban-Brazilian relations. Further, the election of Lenín Moreno in Ecuador removed another ally, Rafael Correa, from office. The trend is only compounded by the ongoing political turmoil in Nicaragua that is threatening the presidency of Daniel Ortega.

Perhaps the most worrying regional development for Cuba in the past few years, however, has been the implosion of the Venezuelan economy under Nicolás Maduro. Venezuela has, for most of the 21st century, been Cuba’s biggest supporter in the region. The Cuban economy has been kept afloat, particularly during times of high oil prices, by cheap oil imports from Venezuela. Oil imports have since decreased, although the impact has been blunted by the currently low global oil prices. However, when prices begin to rise again, Venezuela’s reduced capacity is going to be strongly reflected in Cuba’s economy due to its dependence on imported oil.

“To some extent, Cuba became somewhat dependent on its relationship with Venezuela and Brazil in particular, and neither of these [are now] in the same position they were in the past,” said Wilkinson. “It’s not wholly disastrous yet, but it’s certainly a restraint, which makes life very difficult. It means that Cuba’s allies now are countries that are very distant. You’re talking about China and Vietnam, and they are a long way away. Supply lines, the cost of imports and all of those kinds of things become quite problematic again.”

Economic vs political change
Cuba’s economic model and its political system are so deeply interlinked that it is difficult to see how any major introduction of market forces can be reconciled with a political apparatus that, for 60 years, has been predicated on preventing exactly that. The bigger the private sector, the less centralised the economy, and this poses a potentially existential threat to Cuba’s Marxist revolutionary project, making the prospect of liberalisation scant.

It is difficult to see how any introduction of market forces can be reconciled with a political apparatus that has been predicated on preventing exactly that

According to Yaffe: “Unless there is a political crisis or political takeover, you’re not going to see liberalisation. You’re going to see this slow, very controlled process. There is a market opening, but they’re not going to allow foreign investors to buy up natural resources in Cuba, nor to buy up land.”

This creates a catch-22: a significant economic shift would need a change in the political structure, but a significant change in the political structure will be difficult to come by without a change in the way the economy is run. The modest changes that have already been enacted have created momentum, however, and as entrepreneurial sentiments rise, so will the demand for a more market-oriented environment.

“The economic change is having political implications, clearly. Once you have a large portion of the population no longer dependent on state employment, you have a political change already,” said Morris.

Change may not come quickly, but there is reason to be hopeful. Momentum has undoubtedly been building, with an increasing number of people now registered as self-employed. Further, the number of people using the internet more than doubled between 2010 and 2016, softening what has been a historical stranglehold on the Cuban citizenry’s access to information.

It is not yet clear what the post-Castro era will have in store for Cuba, but the prospects of a dramatic change in the economy are – at least in the short term – less than stellar. Short of major political upheaval, economic progress in Cuba is likely to be frustratingly slow, but there is good reason to believe it will be increasingly influenced by the Cubans who want change.

Michael Kors buys Versace for $2.1bn

Posted on September 26, 2018October 1, 2018 by Ashton Wenborn

Famed Italian fashion house Versace has been sold to US clothing and handbags group Michael Kors in a $2.1bn deal confirmed on September 25.

The Versace and Michael Kors brands, along with Jimmy Choo, which Kors purchased last year for $1.2bn, are to be folded into a new company called Capri Holdings.

Versace was founded 40 years ago by Gianni Versace and was transferred into family ownership after the label’s founder was shot dead outside his Miami mansion in 1997. Today, the family controls an 80 percent stake in the business. Gianni’s siblings, Donatella and Santo, own respective stakes of 16 percent and 24 percent; his niece, Allegra, holds a further 40 percent.

Michael Kors has closed 100 stores this year and streamlined its product offering in an effort to shake off its current all-American, mass appeal image

Blackstone Capital, a US private equity firm that currently owns 20 percent of Versace, will sell all of its stock to Kors in the merger. The Versace family will maintain a €150m ($176m) stake in the new company Capri Holdings. Donatella, who is currently the brand’s vice-president and artistic director, will stay on to “lead the company’s creative vision”.

In her statement, Donatella pronounced that Versace had to be sold for the brand to realise its full potential. “We believe that being part of this group is essential to Versace’s long-term success,” she said. “My passion has never been stronger. This is the perfect time for our company, which puts creativity and innovation at the core of all of its actions, to grow.”

The purchase of Versace is part of a larger plan by Michael Kors to reposition itself as an uber-luxury brand. The company has closed 100 stores this year and streamlined its product offering in an effort to shake off its current all-American, mass appeal image.

In a press release, John Idol, Chairman and CEO of Michael Kors, paid tribute to the label’s prestigious reputation: “For over 40 years, Versace has represented the epitome of Italian fashion luxury, a testament to the brand’s timeless heritage.” However, he also told Bloomberg that Versace is “terribly underdeveloped” in terms of revenue compared with other Italian luxury brands that are “doing in the billions of euros today”.

With the aim of enhancing earnings growth, Idol revealed plans to increase the number of Versace stores from 200 to 300, as well as boosting the brand’s e-commerce sales and expanding into Asia.

Versace is the latest in a string of family-owned European brands to be taken over by global fashion conglomerates. In 2017, French group LVMH, which also owns Louis Vuitton and Balenciaga, bought Dior for $13bn, and in June, the Missoni family sold a 41 percent stake in their eponymous brand to an Italian private equity venture for €70m ($82m).

Incorporation into a larger luxury group provides clear benefits for brands, such as priority access to sought-after storefront space and advertising slots. It does, however, pose a risk to a brand’s creative soul, as artistic freedom is likely to be limited by corporate owners to economise on production costs.

The luxury fashion sector has seen a significant number of consolidations in the past 12 months, with new partnerships being formed between brands that occupy very different corners of the fashion landscape. Only time, consumer reactions and future revenue will tell whether those partnerships are successful.

Allegro Development continues to revolutionise commodity management

Posted on September 26, 2018October 1, 2018 by Max Tomlin

The world is changing, and commodity markets are experiencing more volatility, risk and complexity as a result. Thanks to recent trends in digitalisation, such as Industry 4.0 and the Internet of Things (IoT), the way market participants respond to this uncertainty is changing as well. These trends have introduced many exciting digital solutions, from business process automation to enhanced connectivity in manufacturing technologies.

Market volatility and uncertainty can put companies at great risk, but it can also present opportunities to businesses with next-generation commodity management systems

But what does all of this mean for commodity businesses? As John Chambers, then-Executive Chairman at Cisco Systems, said in 2015: “At least 40 percent of all businesses will die in the next 10 years if they don’t figure out how to change their entire company to accommodate new technologies.”

World Finance interviewed Frank Brienzi, CEO of Allegro Development, to get his perspective on how this increase in market volatility, complexity and risk is affecting commodity markets, as well as learn about the latest innovations in commodity trading and risk management.

What major challenges are commodity businesses experiencing today?
I think what Chambers said was spot on. Market volatility, risk and complexity are challenging commodity businesses now more than ever, and if they don’t figure out how to accommodate new technologies in response to these challenges, they won’t survive. There is a great deal of uncertainty in the market – in fact, the only certainty seems to be uncertainty. Many causes are driving this current environment, including geopolitical events, such as Brexit, conflict in the Middle East and the threat of trade wars between the largest economic powers.

280+

Number of Allegro customers

6 Number of continents Allegro is active in

30+

Years of experience Allegro has in commodity management

The world is also experiencing more extreme weather events than before, placing greater pressure on energy supply and demand patterns. Liquefied natural gas (LNG) and renewables are affecting supply sources, while the US’ shift from being an importer to a leading global exporter has further complicated commodity management. With these challenges, industry participants must find ways to manage price volatility and changes in logistics, as well as balance supply and demand.

In addition, commodity companies must ensure they have systems in place to capture, manage and leverage the latest explosion in data. A perfect example is the power market moving from 30-minute to 15-minute settlements. Soon, the market will move to five-minute settlements, creating much more data to manage. Another trend to watch is the surge in sensors being placed on assets thanks to IoT. Such colossal amounts of data can be used to enhance supply chain management and asset optimisation, while improving trading decisions.

Market volatility and uncertainty – coupled with big data – can put companies at great risk, but it can also present tremendous opportunities to businesses with next-generation commodity management systems that incorporate advanced analytics.

How do businesses manage in this type of environment?
We’ve found that many commodity businesses are still using spreadsheets or other off-system solutions in conjunction with their current commodity management systems to monitor their portfolios, rather than using one platform to manage all of their operations.

By relying on spreadsheets, outdated commodity trading and risk management software (also known as CTRM software or ETRM software), and other off-system solutions, businesses are exposing themselves to greater risk. Without real-time portfolio visibility, robust risk management and tight controls, businesses put themselves at the mercy of the market, missing opportunities and adding considerable costs. We’ve heard many stories where commodity businesses have had big losses due to bad data or a trade capture error that made its way to the back office and was used in a settlement. Spending time and resources to unwind those transactions and identify where the data went awry is an almost impossible task when done in spreadsheets and other off-system solutions, dealing a hard blow to a business’ bottom line in the process.

The answer to all these challenges is Allegro’s CTRM software and advanced analytics solutions. Our system provides multi-commodity and multi-region portfolio management that gives customers real-time position visibility, greater controls, regulatory compliance and enhanced risk-management capabilities.

There’s been a tremendous consolidation in the ETRM software space, with ION now owning a number of major ETRM vendors. What does that mean for Allegro?
ION has been consolidating the CTRM/ETRM sector. Several years back, there were four major ETRM vendors: Allegro, Triple Point Technology, SolArc, and Openlink; ION now owns Triple Point Technology, SolArc and Openlink, and many of their customers are not faring well post-acquisition. As a result of these recent acquisitions, market participants are now faced with a choice between Allegro and ION. We clearly offer two very different models for customers. Our model is centred on customer satisfaction, product investment, world-class global implementation teams and an extensive partnership network – all of which are focused on enhancing long-term customer relationships.

This is not the first time we’ve witnessed a big ETRM market participant cannibalise the industry. Prior to the ‘big four’, Allegro competed with Zianet, Caminus, Altra, Nucleus and TransEnergy, which were well-known players in the market until they were all acquired by Caminus. Caminus, in turn, was acquired by SunGard, which was then bought by FIS. Although this move seemed to benefit SunGard’s investors, it did not work out for its customers.

With a noticeable jump in ETRM and CTRM vendor acquisition activity over the past five years, today’s CTRM software market can seem as volatile as the commodity industries it serves. Many industry professionals using commodity management platforms powered by recently acquired vendors have expressed concerns over a potential lack of investment in products – or, worse, being stranded on a legacy system that is no longer supported. Commodity businesses are looking for a stable solution provider that is invested for the long haul, offering scalability in performance and decision support. Allegro is that solution.

Allegro has attracted some of the largest and most advanced energy companies around. To what do you attribute this success?
Our success and stability in the market are unmatched. I’m very proud to say that we have more than 280 customers and 400 employees on six continents, with a large presence in many commodity markets, including crude oil, refined products, natural gas, natural gas liquids, LNG, power, edible oils, rubber, emissions and metals. We have provided world-class commodity management solutions to the market for more than 30 years; and by treating our customers as long-term partners, we have ensured less than five percent attrition.

Allegro’s commodity management solution is the best on the market. We continually invest in both organic and inorganic innovation to ensure we are the world’s leading CTRM software provider. A few examples of recent innovations include our cloud-enabled solution, Allegro Horizon, our new mobile application and our recent acquisition of Financial Engineering Associates (FEA), the world leader in quantitative analytics.

We keep hearing that businesses across commodity industries are moving to the cloud. Are you seeing a number of your clients move to cloud-based solutions?
The cloud has become a major asset for many commodity businesses looking to not only streamline their portfolio management, but also better equip themselves for the future. Most companies now require cloud capabilities when they submit a request for a proposal for a new technology.

We’ve invested heavily in our cloud-enabled solution, Allegro Horizon, to ensure that we can help our customers migrate to the cloud when they are ready. Our fully integrated, Microsoft Azure based and certified platform is the most up-to-date solution on the market.

Less than 10 percent of Allegro customers are fully integrated on the cloud, a number that should rise in the next few years. Meanwhile, we’re seeing many customers move to the cloud in phases, having started the process with disaster recovery and backup services. Eventually, we’ll see more clients move their full production capabilities into the cloud.

The Allegro team works in the cloud every day. Each time we start the implementation process with a new customer, we set up a cloud instance for their full commodity trading and risk management solution. This method not only enables us to get started on implementations immediately, with the ability to quickly migrate customers’ systems to on-site production, but also provides capabilities for efficient virtual-implementation support and services.

The rest of the market will continue to turn to cloud-enabled technology for fast and flexible solutions that meet current needs and align with future growth opportunities.

You mentioned Allegro’s recent acquisition of FEA. What drove that decision?
With the explosion of data and the increased complexity of portfolio management, advanced analytics are critical to the survival of our customers. Hence, we acquired the world’s best quantitative analytics business.

FEA is the gold standard in quantitative risk tools for traders and risk managers, providing valuing, modelling and hedging of physical assets and derivatives. Allegro’s acquisition of FEA brings a number of different analytics products to the table, including valuing complex physical assets and derivative instruments, asset optimisation and risk capabilities.

These solutions empower customers to make smarter decisions around how they dispatch assets and hedge portfolios, enabling them to maximise profitability. I like to describe it as a perfect acquisition, because FEA’s trade and portfolio analytics are a natural strategic fit with Allegro’s distribution channels and investment strategy, as well as its extensive commodity trading and risk-management software. The combined solution provides our customers with global commodity-trading quantitative analytics, which lead to better portfolio pricing, valuation, risk management, decision support and physical asset optimisation.

What does the future look like for Allegro?
I’m thrilled that we continue to lead the commodity management software market. We’re going to keep innovating, ensuring our solutions are at the forefront of future technology trends, and acquire businesses with offerings that enhance our customers’ experience. With the next big market trend set to be advanced decision support – in other words, analytics – FEA’s solution is a game-changer when combined with Allegro’s flexible and extensible software.

We expect more growth as we continue to expand within existing markets and geographies, as well as enter new markets. In fact, we’re about to formally announce our move into the metals market – an industry in great need of flexible commodity software solutions.

This is an exciting time for Allegro because we’re positioned to continue leading the commodity management software market. Meanwhile, our global team of experts will continue to help our customers streamline their businesses, grow and win for decades to come.

The emergence of development impact bonds

Posted on September 25, 2018October 5, 2018 by Max Tomlin

“Life has changed. We used to stay home helplessly, but now we plan. Having a business keeps you busy and brings you money,” Ojara Wilson told World Finance, reminiscing about the recent past. Ojara runs a business specialising in buying and selling silverfish in Nwoya, Uganda, backed by Village Enterprise, an NGO that supports micro-entrepreneurship in Uganda and Kenya.

Of all the parts of the world where humanitarian aid is needed, sub-Saharan Africa stands out as the most challenging

“Before the Village Enterprise training, we did not know how to run a business. But now we understand how to save money for the future, which can pay for school fees, medical care and small things in the home,” Ojara said. Through the programme, he explained, he learned how to keep records and use a bank account: “We used to keep our money here at home, but now we don’t because of Village Enterprise. Now we keep the money in the bank and only withdraw [it] when needed.”

A new development tool
Of all the parts of the world where humanitarian aid is needed, sub-Saharan Africa stands out as the most challenging. Around 51 percent of the world’s extremely poor children live in sub-Saharan Africa, according to a 2016 report by UNICEF and the World Bank (see Fig 1), with around 38 percent of adults in the region also living in extreme poverty (see Fig 2).

Village Enterprise is one of the many NGOs active in the region that focus on supporting sustainable entrepreneurship to boost growth. To fund its activities, the organisation has raised funds through a development impact bond (DIB), an innovative financial instrument that holds the promise of revolutionising international development finance. Issued in November 2017, the $5.26m bond will be repaid to its issuers only if the programme hits specific targets pertinent to consumption and net assets in the participating communities. Overall, the project is expected to support more than 12,000 households and 4,000 microenterprises in Kenya and Uganda.

DIBs involve an investing institution that is willing to offer a service provider – typically an NGO – the funds necessary to implement a project in a developing country. If pre-agreed, measurable targets are met, another donor organisation refunds the capital with a premium to the initial investor. The consortium backing the Village Enterprise DIB include the US and UK government agencies responsible for international development, an anonymous philanthropic fund, and the Global Development Incubator, a US social enterprise incubator.

As a new beast in finance, DIBs are often criticised as too arcane and time-consuming to design. This is partly true, according to Village Enterprise’s Senior Director of Institutional Partnerships, Caroline Bernadi: “Because we are paving new ground, figuring out the best structure for investment and the necessary steps to make it a reality [was] time-consuming, resource-intensive and complex.’’ Village Enterprise was responsible for raising the working capital, which created significant challenges: partway through the process, the organisation’s leadership realised that launching a new entity was needed to receive the investment. But in the end, it was worth it, said Bernadi: “It makes money more effective. By tying funding to measurable results, impact bonds reduce the risk of funding programmes that do not work.”

Results business
DIBs are the latest entry in a growing list of innovative financial instruments with a humanitarian focus. Some are replicating experiments already made in the developed world, such as the hotly debated universal basic income. GiveDirectly – an NGO funded by eBay founder Pierre Omidyar and Facebook co-founder Dustin Moskovitz and his wife Cari Tuna – has launched an aid programme in Kenya that will offer a fixed income to 26,000 people. Other organisations borrow ideas from the financial and technology realms: Laurene Powell Jobs, Steve Jobs’ widow, runs the Emerson Collective, an organisation that uses portfolio management strategies to fund charitable causes. Another donating organisation, the Draper Richards Kaplan Foundation, was launched by prominent venture capitalists and is applying a venture funding model to philanthropy.

The Brookings Institution, a US think tank that closely follows the evolution of international development finance, identifies in a recent report the confluence of three trends that contributed to the emergence of DIBs: impact investing, results-based financing and public-private partnerships.

Impact investing brings a new approach to financial investments that seek to have a positive effect on society with financial returns

Impact investing brings a new approach to financial investments that seek to have a positive effect on society with financial returns. It can take the form of investing in green bonds, financing environmental projects such as clean energy, or social impact bonds that fund welfare, employment and education programmes. DIBs apply the same concept in countries where humanitarian intervention is more urgent, going beyond traditional payment-by-results programmes.

They can also bring more private donors into the game, according to Bernadi: “By creating an investment opportunity that includes a financial return, impact bonds could exponentially increase the pool of capital available [to fund] international development projects around the world, [which] today depend on a limited pool of international development aid and donations.”

Focusing on measurable results is a response to the pressure NGOs and government agencies feel from taxpayers, who increasingly see foreign aid as a resource that could be better spent domestically. An overwhelming 84 percent of respondents in a 2018 poll by OnePoll supported the idea of diverting big chunks of the UK foreign aid budget to the NHS. The picture is similar on the other side of the Atlantic, where polls show that support for foreign aid is historically low. Private donors are also becoming more circumspect, demanding to see specific results whereas previously they were content with mere promises.

Avnish Gungadurdoss, co-founder of Instiglio, an international development consultancy specialising in results-based finance, said: “Usually with traditional development projects, people say what results they will achieve, [but] they are not really backed by any evidence… Nothing happens if you don’t achieve the results or you overachieve, so it’s an easy conversation to have.’’ Striving to convince taxpayers and large private donors that their money is not wasted, NGOs are putting more emphasis on matching payments to measurable outcomes.

Another reason international development organisations are changing their ways is the need to scale up interventions to meet the UN’s Sustainable Development Goals (SDGs), which envisage the elimination of poverty and hunger by 2030. The UN estimates that annual investments of $3.3trn to $4.5trn will be required to meet these targets.

DIBs can be a cog in the giant funding machine needed to meet the SDGs, according to Emily Gustafsson-Wright, a fellow at the Centre for Universal Education at the Brookings Institution and an expert on international development: “DIBs have the potential to focus attention on the targets associated with the achievement of the SDGs, and to engage private capital to bridge the financing gap to achieving them.”

Education, education, education
If there is one area where DIBs can bring change, it is education, said Vikram Solanki, Senior District Manager at Educate Girls, an NGO funding an education programme in the Indian state of Rajasthan through a DIB: “A results-driven approach forces one to repeatedly figure out what isn’t working and then think of solutions. So the DIB programme has made all of us thinkers and problem-solvers.” Launched in 2015, the programme aims to increase the number of out-of-school girls enrolled in primary schools, as well as the performance of all students in a range of subjects including English, Hindi and mathematics, within three years.

2030

The year by which the UN’s Sustainable Development Goals aim to eliminate poverty

$3.3-$4.5trn

Yearly amount the UN estimates will be needed to meet its Sustainable Development Goals targets

51%

Percentage of world’s extremely poor children that live in sub-Saharan Africa

$5.26m

Value of the Village Enterprise development impact bond issued in November 2017

12,000+

Number of households the Village Enterprise development impact bond will support in Kenya and Uganda

4,000

Number of microenterprises the Village Enterprise development impact bond will support in Kenya and Uganda

By using rigorous data studies, analysts and teaching staff can identify gaps and tailor the programme accordingly. Prompted by the failure to hit targets at the end of the second year, teachers divided the classroom according to learning ‘levels’ of students rather than age, while breaking down the curriculum to address the specific needs of individual children. Results released in July showed that learning and enrolment targets were met, with an impressive improvement in the performance of those girls who were hardest to reach. Enrolment was increased through a similar approach, Solanki said: “We realised that we needed to reach out to those students who were frequently missing from the classroom; our field staff started conducting home-based teaching. The DIB programme made us all truly focus on ‘the last child’.”

Thanks to the programme’s unique structure, the staff were free to make adjustments as they saw fit, according to Solanki: “The person working on the ground is the best person to suggest what the real problem is and how it should be solved. It is this flexibility that led to a host of creative classroom solutions.”

A significant problem facing NGOs involved in DIBs is the lack of quality data available in developing countries. Educate Girls carried out a door-to-door survey to create a list of out-of-school girls in 34,000 households, identifying 837 out-of-school girls and aiming to get four out of five back to school. However, the organisation was forced to renegotiate the programme’s targets when it found that government data on school population was inflated: “All this meant that in year one, we were only able to deliver seven of the planned 12 weeks of curriculum in the classroom and we had much less time to build relations with the community,” said Alison Bukhari, UK Director at Educate Girls.

Critics allege that collecting the data makes a programme more costly, thus defeating the very purpose of DIBs. But the problem justifies the emergence of DIBs rather than questioning their usefulness, said Grethe Petersen, Director of Strategic Engagement and Communications at the Children’s Investment Fund Foundation (CIFF): “The lack of data in many parts of the developing world is a reason to favour the DIB approach, since it forces the programme to collect rigorous, independent, and useful information.”

Others believe that creative thinking is all it takes to tackle the problem. Kate Sturla, Associate Director at IDinsight, an organisation involved in the programme as an independent evaluator, told World Finance: “Thoughtful decisions about when to rely on existing data and when it’s essential to collect information directly can mitigate data issues. For example, estimating changes in learning levels correctly was a critical part of the Educate Girls DIB, so IDinsight hired and trained surveyors to administer short assessments directly to students rather than relying on government-administered exams.”

UBS Optimus Foundation, a philanthropic branch of the Swiss bank, provided the initial capital for the programme, while CIFF, which is a UK charity, will pay back the investor with a return of 15 percent if the goals are achieved. As with the Village Enterprise bond, the launch of the programme was challenging. “Formalising a DIB contract is tricky. Agreeing key outcomes between investors and implementers can be a long process,” Petersen said. For Instiglio, which provided technical assistance to the programme, this is a form of ‘good complexity’. Gungadurdoss said: “It’s the stuff that we don’t do enough in international development, and end up spending money on things that don’t work.”

For philanthropically minded investors, DIBs are a boon, said Maya Ziswiler, Head of Innovative Finance at the UBS Optimus Foundation: “Investors are attracted by the unique opportunity to receive both social and financial returns. Their financial return is directly linked to outcomes achieved, and investors don’t have to make [compromises] between impact and financial return.” But patience is needed to see results, she noted: “Investors will have to remain cognisant of the fact that, given the nature of the DIBs and the likely need for implementation partners to innovate to meet efficiency targets, it may take time for programmatic changes to show results.”

A private-public partnership
Most stakeholders involved in this new investment instrument agree that cooperation between public and private institutions is necessary for DIBs to succeed. For governments, this is an unprecedented opportunity to transfer the risk of getting it wrong to private investors, according to Bernadi: “The vision for the scale-up for DIBs is to involve governments as outcome funders. This would eliminate the risk of governments paying for unsuccessful programs and increase the effectiveness and impact of their social protection initiatives.”

The push for results-oriented finance is putting pressure on NGOs to do more with less, forcing them to employ management methods borrowed from the corporate world

Private donors bring their competitive ethos and results-focused doggedness to international aid. “Private sector rigour and accountability mechanisms may make investors better placed to manage risk around delivery and implementation,” said Ziswiler. Teething problems facing the nascent market include a higher risk rate that puts off many investors. These should be compensated for risk-taking, according to Ziswiler: “Risk transfer is not free. Investors must be compensated for the risk of losing money. The perceived level of risk transfer, and the required level of financial returns, will also be greater the more a risk is believed by investors to be outside of their control.”

The extent of government involvement is another point of contention: some think that governments should always be at the receiving end of these programmes. “DIBs should only be used for demonstrating the outcomes-based contracting concept to national or state governments,” said Bukhari. “Impact bonds should be aligned with government priorities and should be working towards universally agreed targets, such as the SDGs.” However, in many cases, the most significant problem facing DIB programmes are linked to governments and their sluggish ways. Legislation in many cases is prohibitive to the participation of government agencies as outcome donors, while various bureaucratic hurdles also arise. As one stakeholder interviewed by the Brookings Institution for its DIB report said: “The main challenges came when most of the people who worked on the impact bond in the beginning started moving to other departments or leaving the government.”

Setting the standard
As the DIB market is growing, questions are being raised over the need to establish universal standards on their structure and purpose. An officer from a public donor involved in a DIB told World Finance that the evaluation of the programme will encompass a study of the role standards could play in reducing the cost of DIBs. Standards, said the officer, could focus on the potential outcomes of DIB programmes as well as the types of metrics and evaluation methods that could be used. Varying definitions of what a DIB is, as well as constant innovation in the field with the emergence of new types of bonds, make standardisation a difficult task. Universal rules would help create scale, Ziswiler said: “The next step if we are to attract more mainstream investors is transition to scale, and standardisation is a key prerequisite to achieve that.” Standards will also reduce complexity and costs, according to Bukhari: “The sooner there is some level of standardisation around the contracting and some of the required elements of the structuring and negotiations, the sooner the costs will come down and they will hopefully become more useful and value for money.”

A cultural shift
The advent of DIBs marks a significant cultural shift for NGOs. Results-focused programmes require rigorous evaluation, which is a challenge for organisations lacking relevant staff and procedures. In most cases, an independent evaluator is brought in to help. Bukhari said: “It took time to fully explain the DIB concept to the whole team and align them around the new way of working. We had to hire people with different skills, as well as train and give regular ongoing professional development to bring the teams up to speed, particularly in terms of the data analysis.”

The push for results-oriented finance is putting pressure on NGOs to do more with less, forcing them to employ management methods borrowed from the corporate world, such as ‘performance management’, which encompasses rigorous evaluation and specific targets to be met by each employee. Gungadurdoss from Instiglio, which is a pioneer of performance management in international development, said: ‘’The beauty of [DIBs] is that they create an environment where organisations are focused on learning how to manage performance and achieve better results.’’

If critics lament the increasing ‘financialisation’ of international development, others hail the efficiency this new ethos brings. Gustafsson-Wright said: “Impact bonds have the potential to bring in private sector discipline from investors to service delivery organisations.” She added, however, that setting financial incentives can be counterproductive: “One concern with outcomes-based financing is that tying payment to certain results may lead to providers ignoring other important outcomes, or to focusing on one metric, rather than providing more
holistic services.”

For the time being, these concerns are of little importance for the tens of thousands of people in the developing world who benefit from DIBs and the programmes they fund. For Ojara, passing on the knowledge he has acquired to his peers is the main priority: “I use the lessons learned with Village Enterprise to help people with their own businesses. The programme empowered me to serve the community.”

Barrick and Randgold agree $18bn deal to create world’s largest gold miner

Posted on September 24, 2018September 27, 2018 by Ashton Wenborn

Canada’s Barrick Gold has announced an $18.3bn deal to merge with UK-based Randgold Resources, creating a world-leading gold miner.

On September 24, the companies said that under the terms of the all-share deal, Barrick shareholders would own around two-thirds of the combined company. Stockholders in Africa-focused Randgold will hold the remaining shares.

The combined group will have a diverse portfolio of assets containing some of the world’s most profitable gold mines

The combined group, which will be listed in Toronto and New York, will have a diverse portfolio of assets containing some of the world’s most profitable gold mines, including Cortez and Goldstrike in Nevada and the Kibali mine in the Democratic Republic of Congo.

Mark Bristow, the long-serving CEO of Randgold, will become president and CEO of the merged company, while Barrick’s John Thornton will stay on as executive chairman of the group.

A possible merger between Barrick and Randgold had been in talks for around three years. With the world’s largest collection of Tier One gold assets, Thornton said the combination would create a “champion for value creation” in the gold mining industry.

“Our overriding measure of success will be the returns we generate and not the number of ounces we produce,” he added. “There are no premiums in the merger because we strongly believe in the opportunity to add significant value for our shareholders from the disciplined management of our combined asset base and a focus on truly profitable growth.”

In Barrick’s statement, Bristow said the new group would operate differently from typical gold miners and added that he is prepared to make tough decisions.

The industry has been criticised for focusing on short-term solutions and providing undisciplined growth and poor returns on invested capital. This, combined with the recent drop in the price of gold, means investors have not been enthralled by the sector.

The merger of two gold mining giants may be enough to excite investors, though Bloomberg reported that Barrick shareholders might not be pleased to inherit exposure to geopolitical risks in Africa, leading to a potential rival offer by US-based mining giant Newmont Mining.

For now, investors appear to be pleased. Randgold’s London-listed shares, which had fallen by about a third over the past year, rose more than five percent following the merger announcement. Barrick’s stock, which had dropped by around 50 percent over the course of the past two years, jumped nearly four percent in pre-market trading in New York.

Canales Auty helps clients master the complexities of renewable energy projects

Posted on September 24, 2018September 27, 2018 by Max Tomlin

Latin America has a considerable potential for renewable energy; large rivers, sunny deserts and favourable wind conditions provide abundant opportunities for hydroelectric, solar and wind power. As the region is increasingly taking advantage of these resources, the value of renewable energy deals in Latin America has surged from $975m in 2013 to $2.5bn in 2016. Investment is expected to expand further as more countries set renewable energy goals and offer financial incentives. With so much activity afoot, Canales Auty advises clients across Latin America on the importance of understanding the environmental, social and commercial risks of any project they invest in.

Canales Auty advises clients on the importance of understanding the environmental, social and commercial risks of any project they invest in

At present, Latin American governments are in the process of setting new renewable energy goals in order to meet multiple objectives, such as energy security, environmental sustainability and socioeconomic progress. Without a doubt, the Paris climate accord has been a major driver. Under the agreement, numerous countries have committed to reducing greenhouse gas emissions in a bid to limit temperature rises. The accord takes a ‘bottom-up’ approach, with each government determining its own emissions reduction plan. All Latin American governments are signatories of the agreement, and most have incorporated renewable energy goals into their current plans. The policies of Bolivia, Colombia and Mexico in particular provide ample evidence of the region’s current renewable energy push.

The policy drive
The Constitution of Bolivia obliges the state to develop and promote different types of energy, including, of course, alternative energies. The establishment of the Ministry of Energy in 2017 gave further importance to the sector; today, Bolivia has a strategic plan in place to become the region’s energy hub, exporting both renewable and non-renewable energy to neighbouring countries. The policies actively being implemented include the diversification of the energy matrix and the development of renewable energy with a low socio-environmental impact. As such, state-owned companies have been conducting tenders for turnkey projects, with a particular focus on hydroelectric ventures.

In Colombia, significant hydro, wind and solar resources exist. In 2013, the country made broad renewable commitments, including a target for 6.5 percent generation capacity from renewables by 2020 (with the exemption of large hydro). Recent policy changes have supported these goals further. Funds finance up to 80 percent of plans, programmes and investment projects for conventional and renewable projects in non-grid-connected zones. Moreover, legal changes in 2014 have encouraged capital investment in renewable energy projects through income tax deductions, VAT and import duty exemptions, and accelerated depreciation for investments.

In 2008, Mexico enacted the Law for the Development of Renewable Energy and Energy Transition Financing, establishing its own ambitious renewable energy targets in the process. Constitutional reforms in 2013 liberalised the energy sector, permitting private investment and transforming the power sector into a competitive wholesale market. Mexico’s renewable policy has become highly advanced in record time; the International Energy Agency considers the reform “one of the most ambitious, comprehensive and well-developed reforms undertaken in the world since the 1990s”.

The 2014 Electricity Industry Law, meanwhile, has sought to integrate renewable energy into the national grid, with the aim of reaching 25 percent integration by 2018, 30 percent by 2021 and 35 percent by 2024. Market liberalisation is also helping these targets to be achieved; Mexico is now conducting its fourth tender and has awarded almost 40 companies with renewable energy contracts, mostly in wind and solar. Furthermore, Mexico’s development bank, Nacional Financiera, offers financing with accelerated depreciation, while the country’s market for clean energy certificates has begun providing further incentives this year, too.

Considering environmental risks
Latin America has a diverse environment with large areas of protected reserves. Each country has strict rules and regulations governing permits, public consultations and environmental assessments. Each of these processes is time consuming, with bureaucratic administrative procedures generating project risk.

In Bolivia, which has one of the most diverse environments in the world, the constitution provides ‘Mother Earth’ rights, recognising the environment as an entity with legal entitlements and allowing individuals or social organisations to take legal action in the name of the environment.

Over the past year, the Chepete-Bala hydroelectric power plant project has fallen victim to this law, with protests and delays arising as a result. Bolivian environmental law relates to the project’s continuation, as well as compliance with environmental impact assessments (EIAs) and environmental quality control, which involves monitoring, inspection and environmental audits. The extent of these assessments depends upon the project type, with EIAs required to take place prior to the commencement of any work activities. Violations of environmental regulations can result in fines, project rescissions and criminal prosecutions.

In Colombia, the need to obtain an environmental permit depends upon business activity and the potential impact on renewable resources. The National Code of Natural Renewable Resources stipulates that anyone seeking to use natural resources must first obtain an environmental permit, of which there are 10 types. What’s more, as of 2015, the electricity sector requires mandatory environmental licences. These cover EIAs, as well as social and economic impacts in the area. In Colombia, environmental authorities can impose injunctions and sanctions on companies that violate environmental laws.

Similarly, the Constitution of Mexico recognises the obligation to guarantee environmental conditions and regards sustainability as a key component of national development. The environmental legal framework exists on three government levels: federal, local and municipal. This makes the environmental permit process complex, especially as there are various permit types, which take an average of six months to obtain. Again, permit requirements depend largely on the project type. Federal environmental violations can lead to administrative penalties (fines, cessation, confiscation or relinquishment) and criminal charges. It’s also worth noting that Mexico’s legal framework allows citizens to participate in environmental claims.

Recognising social pitfalls
Article 18 of the United Nations’ (UN) Declaration on the Rights of Indigenous Peoples provides indigenous peoples with “the right to participate in decision-making in matters affecting their rights”. Article 32, meanwhile, requires states to “consult and cooperate in good faith with the indigenous peoples… in order to obtain free and informed consent”. Moreover, the Indigenous and Tribal Peoples Convention (ILO 169) seeks to ensure that indigenous people enjoy human rights without discrimination and can participate in decision-making processes that affect their lives. As approximately 11 percent of Latin America’s population is indigenous, the region has become a leader in protecting indigenous rights, with national laws incorporating these international principles.

For instance, the Constitution of Bolivia requires all new projects to carry out a consultation process with affected parties and local communities prior to receiving authorisation. Land use rights and ownership also present a risk, as the constitution grants indigenous populations the right to the use and benefits of the land, as well as the protection of their sacred places. Claims that the land for the Chepete-Bala hydroelectric project is sacred, together with failings in the consultation process, have caused severe delays, as well as protests that have been registered with the UN.

Colombia also applies a prior consultation process with indigenous groups. The constitution states that the government will encourage indigenous involvement where natural resource exploitation is to occur. Between February and July, Energía del Pacífico completed a prior consultation process with four indigenous groups for the installation of two solar power plants. The process was arduous, consisting of: the opening of a consultation period; impact analysis and identification; the formulation of mitigation measures; the formulation of agreements; notarisation; agreements regarding follow-ups; and, finally, the closing of consultation.

With approximately 6.5 million indigenous people, Mexico was one of the first countries to sign and ratify ILO 169, as well as incorporate it into its constitution. Legislation concerning prior consultation of the indigenous population in Mexico is complex, existing at both federal and state levels. The legal framework concerning land rights of indigenous people is similar, and issues related to land ownership, rights of way and social aspects have generated significant delays for some renewable projects, making others unviable altogether.

Commercial tribulations
While international energy companies are accustomed to commercial risks, regional and local interconnection risks are greater than those in developed markets. That said, investments are needed to expand grid capacity, integrate intermittent and volatile generation of renewable energy sources, and secure a stable supply.

Bolivia currently has plans in place to construct 2,822km of domestic transmission lines and a further 1,221km for export projects. As The New York Times recently reported, an additional 12,000km of regional transmission lines are needed to enable cross-border energy integration – a pressing matter for Latin America. Unfortunately, large distances between supply and demand, as well as complex geographical landscapes, complicate this aim. Authorities in both Colombia and Mexico are all too aware of this, which is why Canales Auty is currently advising the Mexican Ministry of Energy on a new 1,200km transmission line that will integrate isolated systems into the expansion of the national grid.

Also crucial to consider are the Equator Principles (EPs), a risk management framework for determining, assessing and managing environmental and social risks in project finance. EPs provide a minimum standard for due diligence to support responsible risk in decision-making. At present, 92 financial institutions in 37 countries have adopted the principles. As such, the regional complexities of ensuring environmental and social compliance have become obligatory for obtaining financing, placing a higher governance standard on EPs.

Finally, there are those risks related to the region’s energy markets. In the 1990s, many Latin American governments reformed their power sectors, meaning prices for electricity generators are typically defined in the wholesale and retail markets. The wholesale market is reserved for power generation plants and distribution companies, and is overseen by regulators. This is an area in which governments frequently enact forms of price control, presenting risks to renewable generation. The retail market, on the other hand, serves unregulated users, with prices being negotiable. Consequently, medium and long-term auctions are now a common practice in order to make projects viable.

Despite these challenges, renewable progress in Latin America has been unprecedented. This has spurred more countries to follow suit, with many now committed to incorporating effective renewable energy policies and setting ambitious targets. As such, plenty of opportunities exist for all types of energy, engineering and construction companies, so long as they holistically consider the environmental, social and commercial risks first.

Emirates explores possible takeover of Etihad

Posted on September 21, 2018September 26, 2018 by Max Tomlin

Dubai airline Emirates is in talks with Abu Dhabi carrier Etihad over a possible merger, according to Bloomberg. Collaboration between the two firms would make the joint company the biggest carrier in the commercial aviation industry by people traffic, eclipsing American Airlines, which is the current market leader.

In the proposed deal, Emirates would acquire Etihad’s main airline business, but Etihad would retain its maintenance arm

On September 21, anonymous sources indicated that talks remain at a preliminary stage. In the proposed deal, Emirates would acquire Etihad’s main airline business, but Etihad would retain its maintenance arm.

Until this point, the two airlines have been arch rivals, as they compete over the same passengers making long-distance trips between the West and Asia. Both firms have previously downplayed the possibility of a deal, with Emirates chairman Sheikh Al Maktoum stating in May this year that merger talks had never been held. Neither Etihad nor Emirates would comment on the talks at this time.

A drop in crude oil prices has posed significant challenges for Gulf airlines in recent years. Etihad’s business has particularly suffered, with the company posting a loss of $1.52bn in 2017. The airline had recently embarked on a programme of cost-cutting measures, including abandoning less popular routes and paring back the size of its fleet. These measures have not proved effective enough to pull the airline out of debt, though, with credit ratings firm Fitch stating last month that it expects the airline to continue posting a loss until 2022.

Emirates was not immune to the decline of oil prices either, but thanks to strength derived from its extensive network of international routes, it was able to rebound more effectively.

Etihad has also been suffering from the failure of its so-called equity alliance strategy. This constituted investments in a number of ailing foreign operators in an effort to feed more traffic through Abu Dhabi, in order to generate additional business for the company. In a significant blow to this strategy, two of the companies that Etihad invested in, Air Berlin and Alitalia, collapsed last year, causing a total of $808bn of losses for the airline.

Emirates is the largest global airline on international routes and ranks fourth in the world overall behind US carriers American Airlines, Delta, and United Airlines. Emirates’ passengers flew 270.8 billion kilometres in 2017, while Etihad’s flew 89.5 billion kilometres. If the airlines were to team up, they could expect to carry passengers over 360 billion kilometres, far surpassing American Airlines’ 2017 total of 320 billion kilometres.

A merger deal would provide benefits for both participants. For Emirates, the creation of an alliance would allow the company to substantially increase its market share and eliminate its largest regional competitor. For Etihad, a partnership would prevent it from spiralling further into debt, providing a valuable lifeline at a challenging time for the company.

Bank of the West is overcoming geopolitical uncertainties to drive growth for clients

Posted on September 21, 2018September 26, 2018 by Max Tomlin

Businesses today are operating in an age of unprecedented connectivity. Technology and operational integration continue to bring multinational companies closer together, regardless of where they operate. But at the same time, the world is becoming less connected. Competing trading blocs, economic models and rising protectionism are creating new geopolitical barriers within our global village.

Ultimately, local knowledge and tight coordination are essential to any business battling fragmentation

As PwC’s 21st annual CEO Survey noted: “The global innovation model based on the free flow of information, money and talent across borders is at risk.” Fittingly, this year’s World Economic Forum in Davos, Switzerland, focused on “creating a shared future in a fractured world”.

CEOs around the globe seem to agree that the world is increasingly fragmented, posing significant risks to their businesses. According to KPMG’s 2018 Global CEO Outlook, which surveyed 1,300 CEOs across 11 of the world’s largest economies, corporate leaders view “a return to territorialism” as the greatest threat to future growth, followed by cybersecurity, emerging/disruptive technology and environmental/climate change risks.

Coordinating operations
To drive growth in an increasingly fragmented world, businesses need the global support of a commercial banking partner that is on the ground in local markets. This is critical, because such a partner can help a business to understand the nuances of a local market, enabling it to implement smart financial strategies in any region, whether it’s the Americas, Europe, Africa, Asia-Pacific or the Middle East. This is especially important given the rise in national regulations and compliance rules we are seeing in countries around the world, representing ever-changing landscapes that companies must navigate.

In this environment, a commercial banking partner needs to do more than just deliver smart and innovative financial solutions. Above all, it needs to provide specific insights about a particular market, covering topics that range from compliance requirements to the documentation and local regulations involved in opening a bank account. Ultimately, local knowledge and tight coordination are essential to any business battling fragmentation.

A global reach
As a subsidiary of BNP Paribas, Bank of the West connects clients to commercial banking solutions and expertise in 73 countries, minimising geographic and organisational borders that can otherwise inhibit growth. Our One Bank for corporates team accompanies our clients as they expand and operate around the world. Our goal is to improve efficiency and understanding, create consistency, and increase transparency and control across a business’ operations.

To do so, we break down siloes. We assemble a collaborative team that mirrors a client’s footprint, with a global relationship manager based in its home market and relationship managers present in every subsidiary market. By staying close to our clients wherever they are operating or expanding, and keeping aligned with their vision, we deliver proactive and practical guidance on local markets – as well as a full range of financial solutions, from global cash management and trade solutions to credit and leasing – that helps facilitate growth.

Consider a leading French business services company – with BNP Paribas as its core banking partner in its home market – that expanded to the US and began growing there through strategic acquisitions. When the BNP Paribas senior banker overseeing the global relationship recognised that the company’s existing regional US banking partner could not keep pace with its rapid growth trajectory, he contacted Bank of the West to present a financing solution. Our team proposed a highly complex and customised $35m asset-based financing line tailored to the company’s detailed requirements. Furthermore, a sophisticated suite of cash management solutions was developed to keep the company well placed to continue growing in the US. Bank of the West is now the company’s core US banking partner, coordinating closely with our colleagues in France to support its ongoing growth.

Transcending payment borders
Global cash management is another area where a banking partner needs to deliver considerable guidance due to the constantly shifting dynamics of local markets. The payments landscape is a prime example. Many markets, including the US, are fragmented. Legacy rules, substantial regulation and differing payment formats mean multinational businesses may encounter surprises when they make assumptions using their knowledge of other markets. Essentially, a company may not know enough about a local payment landscape to make good decisions that support their overall strategy.

At Bank of the West, we leverage BNP Paribas’ global network to ensure our clients have a grasp of local regulations and requirements in specific markets. For instance, we share dedicated user guides that explain how to originate payments in the US. We break down borders wherever possible, offering a single point of access to our clients. This means that businesses do not need to establish separate connectivity for payment initiation and reporting received from their global entities. Using a single bank for all treasury needs, rather than multiple banks and platforms, translates into tangible time and cost savings, including IT implementations and training.

We also try to minimise operational disturbance by offering standardisation, thereby fitting our solutions to a company’s existing processes as much as possible. For example, a business may want to use a single file format, while the local clearing house in a particular country may require another. Bank of the West addresses this challenge by offering seamless file format remapping, which allows companies to maintain the file format their enterprise resource planning (ERP) system produces regardless of market norms. We can convert payment origination, account statement reporting, reconciliation and treasury process files, and adapt them to the local format without loss of data or aggravation.

Most of all, to help navigate an increasingly fragmented and complex business landscape, a commercial banking partner cannot simply process payments and deliver basic treasury solutions: it also needs to serve as a consultative advisor. That means adding expertise and value to a client’s treasury team, enabling it to not only increase efficiencies on a daily basis, but to also execute the company’s strategic vision.

It was on this basis that a global management consulting firm – headquartered in the US and with offices in more than 40 countries – turned to Bank of the West to leverage our deep cash and liquidity management knowledge, as well as our strong global network. The company was already working with us to manage its payments, collections and liquidity management across Europe, the Middle East and Africa (EMEA) through Connexis Cash, BNP Paribas’ e-banking platform.

When the company began migrating to a new ERP platform, while simultaneously moving to a new payment file format, it asked for our help to understand the payment landscape differences across EMEA, where BNP Paribas is its primary cash management banking partner in 24 countries. We are now guiding the company on local market payment methods, rules, file formats, payment cut-off times and much more to ensure its new ERP system is integrated efficiently across the region.

Cross-border financing
As companies continue expanding in markets around the globe, it is essential to draw financing expertise from a banking partner with boots on the ground in those countries. This includes: multi-currency credit facilities; direct finance needs in foreign jurisdictions that need to be provided locally in those markets; and the most tax-beneficial way to raise debt to fuel growth in markets around the world. Ideally, a commercial banking partner will consider all of a business’ needs and deliver strategic, objective and holistic financing solutions.

But having global capabilities isn’t enough if a bank’s infrastructure and communications are disjointed. By using a synchronised strategy like One Bank for corporates, banking partners should coordinate closely and constantly across countries to deliver strategic cross-border financing solutions.

For example, when a US-based client started to explore an acquisition opportunity in Argentina, our financing team engaged with BNP Paribas’ local mergers and acquisitions (M&A) team and flew down to be part of the due diligence process. Furthermore, when a US-based client in the food industry looked to support its international growth by refinancing a €500m ($581m) bond – matching its debt to its primary revenue-generating currency – it sought experience in the European bond market. The company selected Bank of the West’s parent to lead the bond issuance, as a result of our own US debt capital markets team’s expertise, coupled with the deep European bond issuance knowledge of our parent company. Since joining the company’s credit facility five years ago, we have continued to share consultative advice and growth opportunity ideas with the leadership team, coordinating closely with our European M&A and corporate and institutional banking colleagues at BNP Paribas.

It is easy for a bank to talk about coordination and cohesion, but execution is what matters. In a business landscape marked by growing complexity and barriers, a commercial banking partner that delivers seamless advice and solutions wherever a business grows is central to tearing down those walls.

The true cost of large infrastructure projects

Posted on September 20, 2018September 26, 2018 by Max Tomlin

Earlier this year, the world was swept up in World Cup fever. Just a few months later, however, and the quadrennial tournament has already faded from our collective memory. Nonetheless, for 11 cities in Russia, a reminder of the tournament sits on their doorstep: enormous stadiums that cost billions to construct and operate.

Government subsidies should not be used to pay for new arenas, as estimations of their economic impact tend to be exaggerated by the failure to recognise opportunity costs

Russia wrapped up the most expensive World Cup in history in July, having spent around $14bn on stadiums, transport and other infrastructure, according to The Moscow Times. Hosting one of the world’s biggest sporting events could boost tourism figures – market research firm Euromonitor said the tournament would directly cause the number of travellers to Russia to rise by 1.4 percent in 2018 – but there are significant doubts over President Vladimir Putin’s calculations for the long-term benefits of the investment.

According to Deputy Prime Minister Arkady Dvorkovich, the World Cup will generate as much as $30.8bn for Russia over the next decade. Ratings agency Moody’s, however, described the economic benefit of playing host to the month-long event as “short-lived”. Around the world, plans for billion-dollar stadiums get the green light in the belief that they will increase economic activity, but is there truly any payoff in shelling out for an event like the World Cup?

Beware the white elephants
Most economists agree that sporting mega-events like the World Cup or the Olympics provide little to no economic benefit to the host nation. Victor Matheson, an economics professor at the College of the Holy Cross in Massachusetts, told World Finance that indicators such as employment, GDP or income fail to show a big uplift following an event.

In an annual phone-in with the public in June, Putin admitted that “a lot of money” was spent on stadiums and infrastructure to host the World Cup. The government also plans to allocate around $200m to help cities cover stadium costs over the next five years and to encourage youth football development following the tournament, but Putin has stressed the arenas should become self-sufficient.

Historically, Russia has struggled with stadiums becoming white elephants, and this looks unlikely to change, as engineering firm AECOM said in a research note: “It is very difficult to see how such stadium capacities can be economically sustainable without major changes in the supporter demographic.”

Andrew Zimbalist, a professor of economics at Smith College, Massachusetts, said there was “no basis” for Russia’s claim the event would generate close to $31bn. “The notion that there’s some important advertising effect here, it just hasn’t borne itself out empirically.”

Matheson agreed that, in his experience, this theory doesn’t hold up because governments tend to invest in things they don’t need, like airports that are twice as big as they should be or stadiums that will only be used a handful of times. There is also the pervasive idea that hosting a mega-event will put the host city or country ‘on the map’ – but this, too, fails to play out as expected. “It takes a very special circumstance for this to work, and I call this the ‘hidden gem’,” said Matheson. The key is to identify a truly underrepresented place that will continue to lure people in after the event is over.

This tactic has worked once: the 1992 Summer Olympics in Barcelona. The city did two things right, Matheson said: “First of all, it spent most of its money hosting the Olympics in general infrastructure improvements to the city as a whole rather than sports stadiums.

“The second thing is Barcelona really was, I think, a good example of a hidden gem.” While it’s “absolutely spectacular” to visit, few international tourists at the time had given it much thought, he said. This is more the exception than the rule, however. From this evidence, it seems Russia is unlikely to benefit much from the World Cup in the long term.

Bad economics
Matheson gave three reasons why local and mega sporting events fail to provide as big an economic boost as politicians promise. First is what is known as the substitution effect, which is when people in the local economy go to a sporting event rather than another form of entertainment with a similar economic impact. This just shifts money around, rather than creating a new economic impact. Next is crowding out, which occurs when congestion associated with a sports venue pushes away economic activity that would have normally occurred. For instance, an office building would not want to be located next to a major league baseball park because it would have to contend with large crowds for a significant portion of the year.

Third are leakages, which occur when money spent in the local economy does not stay there. For instance, when a consumer spends money on Super Bowl or Olympics tickets, the money is funnelled into the NFL’s corporate headquarters in New York or the International Olympic Committee in Switzerland. Another example of this is when hotel rooms near a big sporting event double or triple in price. Because the wages of the hotel workers are not also raised, these gains simply result in corporate profits, which go back to the company’s headquarters and its stockholders.

Location, location, location
To host the Olympics, a city must provide approximately 40 sporting venues, an Olympic village that can house around 17,000 athletes, trainers and coaches, and transportation links. “It’s very difficult for any city, or even a whole state, to find the resources to do all that building,” Zimbalist said.

But it is not as simple as categorically declaring the Olympics a bad investment. “Every economist out there will say that bringing the Olympics to Los Angeles was, flat out, a good thing,” Matheson said. The 1984 Summer Olympics in Los Angeles is considered the most financially successful iteration of the modern games: the event cost approximately $550m, or $2bn in today’s dollars, but the city managed to recoup the whole amount and even make a profit.

But for a country like Brazil, where virtually all of the necessary infrastructure had to be built from scratch, it is a very different story. The country spent around $13bn hosting the 2016 Rio Olympics, and that was just two years after it spent another $13bn on the 2014 World Cup.

It will never make economic sense to spend $13bn (like Brazil) or $45bn (like Beijing during the 2008 Olympics) or $200bn (which is what some estimate Qatar will spend on the 2022 World Cup) on a single sporting event. “It’s always about the costs and the benefits. If you can figure out how to do one of these big mega-events at a low cost, you should do it, but it’s all about what you have to pay for it,” Matheson said. Furthermore, even if the estimated cost of such an event is manageable for a city, the actual amount spent often exceeds the original budget.

Subsidy conundrum
More than half of the cost of building a stadium in the US, which ranges from $700m to $3bn, tends to be funded with public money. Zimbalist said taxpayers could cover up to 90 percent of the arena’s cost. A 2017 article for the Federal Reserve Bank of St Louis titled The Economics of Subsidising Sports Stadiums concluded that government subsidies should not be used to pay for new arenas, as estimations of their economic impact tend to be exaggerated by the failure to recognise opportunity costs. What’s more, in one study from 2006, 86 percent of economists surveyed agreed that local and state governments in the US should eliminate subsidies to professional sports franchises.

So how should stadiums be funded? Zimbalist said arenas that come along with larger commercial, retail and residential development projects could actually have a positive impact on the local economy if they are financed privately. These projects are able to bring in more ongoing activity by attracting new residents to properties or by encouraging new businesses to start up in retail spaces.

A case for mega-events
When confronted with this data, it is difficult to understand a sensible rationale for campaigning to host a sports mega-event or building a subsidised stadium. Of particular consideration is the motivation of politicians who sign off on these projects. While some may be under the impression that a new stadium will pay off economically, Matheson said many politicians become enthralled with the idea of hanging out with millionaire athletes and team owners – and what better way to do that than to build them a stadium? While that may be true for some politicians, cities might vie for the chance to host mega-events for more selfless reasons: sporting events make us happy.

A 2016 study titled The Host with the Most? The Effects of the Olympic Games on Happiness claimed to show the first “casual evidence” that the Olympic Games positively impacts local residents. According to the research, Londoners felt increased happiness and satisfaction with their lives during the city’s 2012 Olympic Games, particularly around the opening and closing ceremonies.

Matheson compared hosting a mega-event to holding a wedding: “The parents of the bride and groom aren’t throwing a big party at the wedding in order to make money on it. As a matter of fact, it’s exactly the reverse. But this doesn’t mean you shouldn’t have weddings… You should have a wedding because this is going to be a great, fun event for everyone. And that’s why you should agree to host a mega-event.”

While every expense does not have to turn a profit, it is important that decision makers recognise the economics behind building a new stadium or hosting a mega-event. In both cases, little to no economic uplift should be expected. It’s time politicians started being honest with the public about this, especially when taxpayer money is at risk.

Top 5 sustainable banks

Posted on September 19, 2018September 24, 2018 by Max Tomlin

September 15, 2018, marked the 10 year anniversary of the collapse of the Lehman Brothers. It has officially been an entire decade since the financial crash rocked the global economy and the very foundation upon which the banking system was built. Many changes have transpired since that tumultuous time – from new regulations (such as Dodd-Frank and KYC) to greater transparency and accountability in the industry as a whole.

From implementing new governance structures, to integrating environmental, social and governance principles into decision-making, the financial industry has evolved

Among the biggest changes is the importance now placed on thinking in the long term. Essentially, banks have realised the importance of maintaining high standards and practices in every area of their business. In order to realise this goal, many institutions have drastically enhanced their sustainability policies. From implementing new governance structures, to integrating environmental, social and governance principles into decision-making, the financial industry has evolved, with sustainability at the core of this transformation. World Finance looks at some of the banks leading the way.

Arab African International Bank
Arab African International Bank has done its utmost to promote sustainability in the UAE region, through its 360° programme. It is committed to protecting nature, improving compliance and educating on sustainability – as well as ensuring the bank helps the community at large. For its efforts, the bank was awarded Best Bank for CSR in the Middle East in 2016 by Euromoney, among other accolades.

Compartamos Banco
Based in Mexico, Compartamos Banco is the largest microfinance bank in Latin America, with over 2.5 million clients. It has a large number of community programmes on offer, including one run in collaboration with Mexican youth organisation Gente Nueva, to improve life for the country’s marginalised communities.

Access Bank
Nigerian-based Access Bank has become a world leader in sustainability efforts, and publishes a report each year to elucidate on its progress in these areas. It adheres to the AA1000 Assurance standards, as well as the Global Reporting Initiative G3 reporting guidelines. The bank puts the community at the heart of all of its operations, to ensure that Nigeria receives social and economic benefits.

Bank of the Philippine Islands
The Bank of the Philippine Islands works hard to create combined value for customers, shareholders and the whole of society. It produces reports annually to document its most supportive initiatives, many of which have helped to decrease electricity and water consumption, as well as increasing entrepreneurship and female representation in banking.

Banco Bci
Banco Bci, has driven sustained efforts in Chile to promote the country’s prosperity. Last year, it joined Start-Up Chile, the largest business accelerator in Latin America, to ensure that over 250 start-ups had access to banking services. It also developed the Social Store, a digital window to showcase 350 entrepreneurs supported by its programme Bci Nace. Merco has awarded Banco Bci the accolades of Most Responsible Company and Best Corporate Governance in Chile.

Diamond market continues to open up as confidence in the luxury commodity grows

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

Diamonds have captivated humans for millennia, having been cherished as precious gemstones for perhaps as long as 6,000 years. Their popularity has increased even further in recent decades, as they have come to be highly prized as fashion accessories as well as practical cutting tools. They are also extremely valuable: the most expensive diamond sold to date, the Pink Star, was purchased for $71.2m last year.

Despite the fact that diamond investing is more open than ever, individuals should not make the mistake of thinking it is a get-rich-quick scheme

And yet, despite the fact that diamonds represent huge amounts of wealth in a relatively small size, they have yet to take off as an investment asset. This is in spite of a number of efforts over the years to make them more popular among investors.

There is, however, one simple fact that keeps bringing speculators back to the diamond market: there is money to be made. Over the past 10 years, the value of rough diamonds has increased by 33.7 percent, while prices for rare, cut stones have gone up substantially more. These price increases have caused the market to take notice, but as with all assets, investors must do their homework before they get involved.

All that glitters
One of the most important rules of investing is having a diversified portfolio. Recommendations often focus on having the right mix of stocks and shares, spread across a variety of industries to protect against risk. Sometimes, however, investors diversify in other ways, such as by purchasing real estate. Another option involves investing in movable assets like jewels and precious metals.

Although diamonds are one way to invest in commodities, more often than not, investors have chosen to store their wealth in the form of gold instead. Yaniv Marcus, founder of the Diamond Investment and Intelligence Centre, explained that there are a multitude of reasons why diamonds have not traditionally received the same prominence among investors as gold.

“The main reason for investors choosing gold is that it has a spot price on the market and is managed by several major financial institutions,” Marcus told World Finance. “Diamonds, on the other hand, are not traded at a spot price, as each diamond is unique in various ways.”

Even though many of the financial institutions that manage gold have, in the past, been accused of manipulating the value of real assets, the extra credibility they have given the gold market ensured the metal came to be viewed as something of a sure bet. In fact, gold has historically been seen as a safe-haven investment, particularly in times of economic trouble. Its value is not directly impacted by government actions, such as raising interest rates, and it has maintained its value over a prolonged period of time.

But regardless of its long-term durability, gold is not immune to volatility. In fact, the precious metal is in the midst of a prolonged decline in value, with prices falling steadily since a 2011 peak (see Fig 1). With the global economy looking increasingly robust, there are no guarantees that gold will arrest its downward spiral any time soon. Investors looking at commodity assets, therefore, should view diamonds as a potential alternative.

The benefits of investing in diamonds are manyfold. First, they are an extremely compact form of wealth: they are easy to store and transport and require hardly any maintenance costs. As the hardest substance on Earth, diamonds are also extremely resolute. Like other commodity assets, they are inflation-proof but, unlike gold, their value has increased over the last few years on average. Perhaps the most compelling argument for investing in diamonds, though, is the fact that using them does not reduce their worth. They are an investment that can be enjoyed in a way that is not possible with stocks, or even gold bullion.

Opening the vault
Speaking generally, the investment space has become less of a closed shop in recent years, with plenty of websites offering beginner advice and a host of mobile apps allowing traders to speculate while on the move. This too is true in terms of diamonds, which were previously restricted to a small, opaque community of investors.

One of the reasons diamond investment is becoming more popular is the expectation of higher returns. Demand in developing economies, including India and China, is expected to grow, while the US market remains significant. Globally, the demand for rough diamonds is predicted to grow between one and four percent annually through to 2030, while supply is only forecast to increase by zero to one percent across the same period. And, of course, when demand outstrips supply, price increases are sure to follow.

The rise of diamond investing, however, is not driven by economics alone. The market is opening itself to innovative developments that give investors something different to think about. Late last year, the Singapore Diamond Investment Exchange launched Diamond Bullion, a new, standardised form of the stone that should make trading less subjective.

Diamond Bullion is a collection of investment-grade diamonds stored in portable, credit-card-sized packages and issued in denominations ranging from $100,000 to $200,000. It is tamper-resistant and each package comes with a unique serial number that can be instantly verified using a smartphone app. Not only will this new development help standardise the diamond investment market, it will also bring greater transparency.

Similarly, in April 2018, the Indian Commodity Exchange launched a 30-cents diamond future contract, adding to its existing one-carat and 50-cents contracts. This is another example of the way in which diamonds are increasingly viewed as a viable option for traders. The creation of exchanges that accept diamond investing helps raise awareness of the commodity, bringing it further into the mainstream.

Not a monopoly
Diamond investing is also growing because the market has shown itself to be more robust than initially thought. In recent times there have been a number of scares that threatened to send prices plummeting, only for values to hold firm. There was a perception that Anglo-American firm De Beers continued to dominate the diamond trade, something Marcus claims no longer holds true.

“There is still a misconception that De Beers controls the market,” Marcus explained. “That is no longer the case. Up until the 1990s, De Beers controlled 90 percent of the [world’s] colourless diamonds; today, it is about 35 percent, with Russian mining company Alrosa a stronger player.” By showing that it was about much more than a single player, the diamond trade has demonstrated its durability to investors.

The market also weathered the development of synthetic diamonds, something that could have conceivably destroyed the jewel’s value by rapidly increasing supply. Instead, while the price of lab-grown diamonds continues to fall, the price of their natural equivalents has gone up. Although the two are chemically identical, there appears to be no substitute for the real thing in the eyes of consumers.

Know your stuff
Despite the fact that diamond investing is more open than ever, individuals should not make the mistake of thinking it is a get-rich-quick scheme. As with any other investment, traders are advised to gain as much knowledge as possible regarding the market before risking their hard-earned cash.

“The most important step is to engage a professional who understands the asset,” Marcus said. “This professional should have previous experience within the industry, know how the value chain works and have access – as close as possible – to traders and polishers. At the same time, you want to ensure that this individual does not own any inventory, otherwise a major conflict of interest will arise.”

A good first step for investors is familiarising themselves with the four Cs: carat, colour, clarity and cut. Although the value of diamonds depends on more than just these four qualities, they will help new traders gain a grasp on why particular gems are worth more than others. In addition, as is the case with other asset classes, investors should start diversifying their portfolio by making a small acquisition and holding onto it for a prolonged period of time. Taking a long-term view is vitally important, and diamond investors should expect to hold on to their assets for between five and 10 years at least.

It is also worth considering the negatives. Diamonds do not generate a yield and, in fact, could result in owners paying out for transportation or storage costs. Selling stones at an auction house will also incur additional fees that must be considered. That being said, a canny trader can certainly make a sizeable profit if they are willing to invest the necessary money and time.

Unlike other assets, every diamond is unique. This means it takes more than a cursory glance at market trends to turn a novice trader into an expert investor. For anyone who wants to develop a truly diversified portfolio, however, this knowledge is worth acquiring now. As the diamond trade becomes more accessible, it might not remain a hidden gem among investment circles for much longer.

A wealth of potential awaits those who look east

Posted on September 18, 2018September 21, 2018 by Max Tomlin

As the world continues to become increasingly interconnected, relationships among the members of the international community are key. There are many reasons why western countries should think east when it comes to working together and expediting business opportunities. This is particularly relevant to the UK as it considers the prospects for post-Brexit trade deals, but the rest of the world will also benefit from many potentially lucrative opportunities if it looks eastwards.

By building significant amounts of infrastructure and connecting countries, the BRI is predicted to lift economies not only in China’s vicinity, but also far beyond

The growth pathway
China’s Belt and Road Initiative (BRI) is increasingly reshaping Asian markets, by enhancing connectivity, developing infrastructure, boosting trade and stimulating economic growth across Asia and the rest of the world. Indeed, the BRI has already been identified as the greatest global investment opportunity in recent memory. In the five years following the unveiling of the BRI, we have seen Britain take a lead by being the first major Western country to respond positively to the initiative. This is particularly relevant for a post-Brexit Britain that has pledged to be a truly global nation. By facilitating cooperation, not least in third markets, the initiative has already proved to be capable of generating tremendous growth opportunities and prosperity for Asia and the world. By building significant amounts of infrastructure and connecting countries around the globe, the BRI is predicted to lift economies, not only in China’s vicinity, but also far beyond.

Due to its competitive advantage, Britain is considered a ‘natural partner’ for Asia and it can also lead BRI cooperation in the West. This partnership will increase connectivity and should reduce costs and times. With an improved rail network, an essential part of the Belt and Road Initiative, the time and cost of moving goods back-and-forth between China and Europe has already started to improve. As a result, travel costs are set to be reduced, and a number of further possibilities will follow. Making travel time shorter and sending British heritage items to China, for instance, should have a transformational commercial and cultural impact on both countries.

Forging new roads
Though China has no territorial claims within the Arctic Circle, this is a region that has rich natural and mineral resources and offers a strategic link between northeast Asia and northern Europe, as well as North America. Recently, Beijing proposed a polar Silk Road, as the Arctic channel now has the potential to become an important shipping route as a result of climate change, as well as scientific and technological advances. All this can help open the door to more trade possibilities and will shorten journey times considerably. Some predict that it will make it 12 days shorter than travelling the traditional route via the Indian Ocean and Suez Canal; saving 300 tonnes in fuel, thereby making mutual exports cheaper and more attractive.

As no nation has sole or undisputed sovereignty over much of the Arctic, and indigenous peoples have rights over much of the area, this is a vital time for the international community to come together and create a route that will be beneficial to all. Collaboration will allow for many countries to create new commercially viable routes. Furthermore, a number of European cities could look to revitalise and expand their traditional ports to act as staging points in this extended route to North America’s east coast. There is much opportunity here to build more trade capacity, tackle barriers to commerce and demonstrate the importance of global connectivity.

A complex market
Ultimately, China offers manifold opportunities for businesses considering overseas growth. However, it is vital that anyone considering doing business there does their homework and is fully aware of the unique and complex features of this market.

When considering if conducting business to the east is the right option, it is important to bear in mind that there is a widespread assumption that the Chinese market is easy to enter because of its mass consumer base – it has a population of some 1.3 billion, including a rapidly growing middle class. However, this is a far too simplistic view. Rather, it is crucial that you conduct thorough due diligence to properly understand this most complex of markets. You must find the right business partner – one you can trust and who will help you to navigate the nuances and mores of the Chinese market. This is a key part of the work of the Global Group.

World Finance Wealth Management Awards 2018

Posted on September 18, 2018November 29, 2018 by Max Tomlin

In June 2018, a remarkable milestone was reached: according to Capgemini’s World Wealth Report 2018, the total wealth of the world’s high-net-worth individuals surpassed $70trn for the first time. Over the previous 12 months, the demographic grew by 10.6 percent – its sixth year of consecutive growth.

The wealth management sector is only expected to grow more as the world’s economy continues to perform well

The wealth management sector is a large global market by any measure, and it is only expected to grow more as the world’s economy continues to perform well. For wealth managers, this is exciting news, and for those already operating at established firms, it is easy to assume that the next few years could be profitable with little effort. However, with the market as big as it is, there are others waiting and willing to take advantage of any complacency.

Tech threats
The businesses that could soon be threatening wealth managers are not currently operating within the sector. A particular development identified by Capgemini’s report is the potential for technology companies to overcome the challenges and inefficiencies that exist in the sector.

Almost three quarters of all major technology firms are pouring a significant amount of money into both intelligent automation and artificial intelligence. These two technologies have a lot of potential applications in wealth management back-office operations, and could achieve a level of efficiency previously thought impossible. There is also room for these companies to enter the market as well, with the report highlighting that, despite growing financial returns, satisfaction levels with wealth managers has not grown.

For companies operating in the wealth management space, this all presents a major challenge. Wealth managers will have to continue to deliver solid results and capitalise on the strong market conditions, but also do more to impress their clients while preparing for the potential arrival of new challengers. The winners of World Finance’s 2018 Wealth Management Awards have all the skills necessary to succeed in this competitive market, while also doing more for their clients than simply posting healthy returns. As the demand for wealth management grows, these companies are rising to meet the challenges ahead.

Working on relationships
As the World Wealth Report 2018 identified, despite consistent and healthy results, clients are generally not fully satisfied with the relationship they currently have with their wealth managers. Anirban Bose, Head of Capgemini’s Financial Services Global Strategic Business Unit, explained in the report: “There is clear opportunity for wealth management firms to strengthen their relationships with their high-net-worth clients, as nearly half say they don’t connect well with their wealth managers. Providing an innovative digital client experience is one way to strengthen the bond between wealth managers and their clients.” Capgemini found that 64.3 percent of high-net-worth individuals said they would use an improved system for locating a wealth manager, whether it is a firm-specific initiative or provided by a third party.

The new types of digital wealth management services that become available will almost certainly be determined by how major technology companies, such as Google, Apple and Amazon, approach the industry. The immediate fear might be that these companies will directly enter the market with their own asset management systems, capitalising on dissatisfied customers and a new generation of high-net-worth individuals more accepting of digital systems. While it may seem unlikely, it is not beyond the realms of possibility: Amazon in particular has a habit of making a splash in unexpected industries, and in Asia, tech companies such as Alibaba and Tencent have already entered the payments industry.

Another possibility is that these companies become partners for wealth managers, offering products that assist back-office processes and decision-making. If this is the case, wealth managers will have to make careful choices as to which products genuinely enhance their services and meet the needs of clients.

Cryptocurrencies are another instance of technology impacting the wealth management industry, albeit in a very different way. Since 2016, digital currencies have garnered mainstream attention that has attracted many general investors to the asset class. Tempted by the seemingly impossible growth posted by the likes of bitcoin and Ethereum, younger investors in particular are interested in exploring the potential of cryptocurrencies. The generational divide is key, with the World Wealth Report 2018 finding that just over 70 percent of high-net-worth individuals under 40 place a high degree of importance on receiving cryptocurrency information from their primary wealth management firm. This contrasts with high-net-worth individuals over 60, only 13 percent of whom expect updates on cryptocurrencies.
Despite this, the industry is still not acting on this desire, with only 34.6 percent of high-net-worth individuals saying they have received cryptocurrency information from their wealth managers. For wealth mangers looking to improve their relationship with clients, this is a good place to start.

Global growth
Another major factor shaping the wealth management industry is the locations in which wealth is currently growing. At surface level, the spread of wealth is quite stark; according to EY’s 2018 Wealth Management Outlook, the expected growth of net investable assets between 2016 and 2021 is remarkably concentrated. The US and China alone are expected to account for 45 percent of total growth. Russia, Brazil and India – the next three highest-ranking countries – will only account for 10 percent of total growth.

Despite being flush with cash, the US is not the first destination wealth managers should look to for investment opportunities. At 4.4 percent between 2016 and 2021, North America was found to have the lowest expected growth of the seven regions examined in EY’s report. This is in contrast to the Asia-Pacific region at 5.9 percent, Eastern Europe at 6.3 percent and the Middle East at 7.2 percent. Furthermore, all of these regions’ expected growth rates are far higher than the global average of 4.7 percent; they therefore present opportunities for both lucrative investments and potential new clients.

As with all international transactions, the navigation of differing regulations adds a layer of complexity, and the next few years could bring even greater difficulties in this respect. Between the UK’s Brexit negotiations with the EU and the mounting trade spat between the US and China, wealth management firms operating across multiple regions could soon find themselves contending with a number of new challenges. Firms will have to make hard decisions in this regard, while also making sure staff are equipped to hurdle the regulatory barriers that could arise at very little notice.

The wealth management businesses of the future will need to focus on developing personal relationships with their customers, while also pursuing the latest technology to remain at the forefront of the industry. To be future-ready, firms will need to make tough choices, but those that can keep a level head will tap into a market that is going from strength to strength. The winners of World Finance’s 2018 Wealth Management Awards are the businesses and individuals best equipped to make the most of the current financial climate, navigating the changing tides of technology while remaining trusted
partners to their clients.

World Finance Wealth Management Awards 2018

Best Wealth Management Providers

Andorra
Crèdit Andorrà

Antigua
Global Bank of Commerce

Argentina
Santander Río

Armenia
Unibank Privé

Australia
Westpac Private Bank

Bahamas
CIBC FirstCaribbean

Belgium
ABN AMRO

Bermuda
Butterfield Bank

Brazil
BTG Pactual

Canada
RBC Wealth Management

France
BNP Paribas Banque Privée

Germany
Berenberg

Ghana
The Royal Bank

Greece
Hellenic Asset Management

Hong Kong
EFG Bank Hong Kong

Hungary
K&H Bank

India
Kotak Wealth Management

Italy
Mediobanca

Kuwait
KFH Capital Investment

Lithuania
INVL

Luxembourg
BGL BNP Paribas

Malaysia
Maybank

Mauritius
MCB Private Banking

Netherlands
Van Lanschot Kempen

Nigeria
Standard Bank Wealth and Investment

Norway
Formuesforvaltning

Oman
Bank Muscat

Philippines
Bank of the Philippine Islands

Portugal
Santander Totta

Qatar
QNB

Saudi Arabia
SABB

Singapore
EFG Bank Singapore

South Africa
Investec

Spain
Santander

Sweden
Carnegie

Switzerland
BNP Paribas Wealth Management

Taiwan
King’s Town Bank

Thailand
Bangkok Bank

UAE
First Abu Dhabi Bank

US
BNY Mellon Wealth Management

Vietnam
BIDV Securities

Special Mentions

Best Global Custodian, Cyprus
Eurobank Cyprus

Best High-Net-Worth Wealth Manager, Switzerland
UBS

Best Multi-Client Family Office, Liechtenstein
Kaiser Partner

Best Real Estate Investment Company
SFO Group