Year: 2019

Paraguay’s underground economy

Posted on by Max Tomlin

Having waged war against Argentina, Brazil and Uruguay, Francisco Solano López’s belief that he was South America’s answer to Napoléon ended up as tattered as the replica Grande Armée uniforms borne by the remaining few Paraguayan troops. As desperation grew, children as young as nine were given fake beards and armed with sticks painted as guns as they stood against 20,000 Brazilian soldiers.

Despite a reduction in poverty, Paraguay remains one of the poorest countries in Latin America

The War of the Triple Alliance resulted in one of the costliest defeats ever inflicted on a modern state. Thomas Whigham, of the University of Georgia, estimates that 60 percent of the population and 90 percent of all Paraguayan men of fighting age died as a result of the war. Of the survivors, 106,254 were female, 28,746 were male, and 86,079 were children. The demographic imbalance within the war-ravaged nation stunted Paraguay’s development for decades to come; potentially one of South America’s wealthiest countries was instead gripped by poverty for the ensuing century.

The lack of stability following the war created an environment where corruption thrived. The Colorado Party, the dominant force within the nation’s politics, has governed Paraguay for over seven decades (barring a brief period from 2008 to 2013). Military dictatorships have consolidated its power and the party’s troubled history has done little to reduce the influence that its ‘business-friendly’ faction has over the country.

Price of peace
Elected as Paraguay’s new president this year, Mario Abdo Benítez is the son of the former private secretary to the nation’s most repressive dictator: Alfredo Strößner. During his 35-year-long rule, Strößner was able to maintain close ties with the US, which viewed him as a useful ally during the Cold War, even as he allowed regular human rights abuses to take place under his leadership. Known for authoritarianism, low taxes and low tariffs, Strößner famously called contraband “the price of peace”.

To ensure the loyalty of his allies, Strößner distributed lucrative shares in the twin foundations of the Paraguayan economy: agriculture and contraband. “The smuggling trade was carved out between different high-ranking generals and different parts of the armed forces,” says Professor Andrew Nickson of the University of Birmingham. “[It] primarily started with whisky, liqueur and cigarettes coming from Europe into the country on low tariffs and mainly smuggled out using military planes or the armed forces.”

Though he was overthrown in 1989 – dying in exile in Brazil in 2006 – Strößner’s legacy lives on. The Corruption Perceptions Index ranks Paraguay as South America’s second most corrupt nation, with the illegal economy totalling 40 percent of GDP in 2016. Gross inequality overshadows economic growth. The World Bank recently issued a report indicating that Paraguay had one of the highest levels of disparity relating to land ownership, one of many consequences from Strößner’s reign. The industries (mainly agricultural production of soybeans, beef, rice and maize) powering Paraguay’s growth are concentrated in very few hands.

“Paraguay is a rich country, but full of poor people,” says Eladio Flecha, general secretary of the Partido Paraguay Pyahura. “The distribution of wealth is very unequal: 80 percent of land is held by 2.5 percent of the population, and 161 people control 90 percent of the wealth of our country. Sure, the economy is growing fast, but it doesn’t reach the most vulnerable groups.”

Despite a reduction in poverty, which dropped from 32 percent in 2011 to 22 percent in 2015, Paraguay remains one of the poorest countries in Latin America. It ranks fourth in terms of extreme poverty, after Honduras, Guatemala and Nicaragua, according to a 2016 ECLAC report.

While the official unemployment rate hovers at around 19 percent, only 5.34 percent of Paraguayans are fully employed. Due to the country’s reliance on agriculture, many people work in the informal sector. “The statistics showing historically low unemployment are a farce,” Luis Rojas Villagra, an economist at the National University, told The New York Times in 2013. He estimates that as much as half of Paraguay’s workforce is unemployed or employed in jobs with degrading wages and poor working conditions.

Political deficiencies
Tobacco smuggling is the most lucrative business in Paraguay, with Nickson predicting that 90 percent of Paraguayan cigarettes are unlawfully exported. The MERCOSUR trade network, established in 1991, removed tariffs and increased trade activity between Argentina, Brazil, Paraguay and Uruguay. However, extensive loopholes and contrasting policies have enabled tobacco smugglers to thrive within the region.

When Brazil raised its tobacco tax in the 1990s in an attempt to reduce domestic consumption, Paraguay’s taxes remained modest in comparison. This created a situation where multinational companies located in Brazil would export cigarettes to Paraguay, to then have them smuggled back in.

The presidency of Horacio Cartes, from 2013 to 2018, also demonstrates how Paraguay’s political deficiencies can encourage the country’s illegal economy. At the heart of the tobacco smuggling trade is Cartes’ own cigarette manufacturing firm, Tabacalera del Este or Tabesa.

Established just a few miles from the Brazilian border in 1994, Tabesa’s cheaply made cigarettes are often sold to smugglers and illegally transported into Brazil. In January of 2018, 500 boxes of cigarettes manufactured by Tabesa were seized in Brazil, having been illegally smuggled over the border. Benoît Gomis, a research associate at Simon Fraser University who studies the Paraguayan drugs trade, observed: “The Cartes administration had little incentive to tackle the illicit tobacco trade, given the president’s business interests.”

Several additional accusations have been aimed at Cartes relating to corruption, fraud, smuggling and money laundering. However, they did little to disrupt his successful presidential bid. “In Paraguay, the vote is still determined by party affiliations, much more than by the voter’s social or economic reality,” said Nicanor Duarte, a former Paraguayan president.

Contraband cities
Carved from the jungle in the 1960s – just 15km south of Tabesa’s factory – Ciudad del Este or ‘City of the East’ clings to the Triple Frontier, an intersection of the border where Argentina, Brazil and Paraguay meet. Built without a serious urban development plan, Ciudad del Este grew into a chaotic tax-free shopping haven. Successive corrupt mayors would overlook the high-rise buildings constructed without proper authorisation and the invasion of street vendors, that remain a familiar sight in the city today.

The Paraná River marks a visual border between Brazil, South America’s largest country, and Paraguay, one of the continent’s smallest. The rusty Friendship Bridge, built in 1965, spans the half a kilometre gap separating the two countries and along its narrow paths, men and women lug all manner of goods between Ciudad del Este and the Brazilian city of Foz do Iguaçu.

Settlers from Iran, Korea, Lebanon and Taiwan nestle among the Paraguayan population of Ciudad del Este. Within the crowded town centre, vendors exhibit a wide range of counterfeit goods. Attracted by the lower prices, the city has a thriving Brazilian customer base. While restricted to buying $300 worth of items per person per month, stores inform customers that there are courier services available “with the help of friends in the right places.” At one point, Forbes rated Ciudad del Este, Miami and Hong Kong as the world’s three largest entrepôts.

Further north, the towns of Pedro Juan Caballero (Paraguay) and Ponta Porã (Brazil) interlock with one another. Dissecting the settlement, the barely distinguishable Brazil-Paraguay border separates what appears to be one city into two. “You just cross the road, and you go from one country to another, there are no border authorities there at all,” says Nickson.

Located just outside of Pedro Juan Caballero, the diminutive airstrip Aeropuerto Dr Augusto Roberto Fuster is allegedly used exclusively for drug trafficking. It is estimated that hundreds of private owners smuggle 40,000 kilos of cocaine through the airport each month.

Paraguay is the world’s fourth largest producer of marijuana. Amid the streets of Pedro Juan Caballero and Ponta Porã, across the vague border, drug gangs fight for control of the most lucrative trade routes. Violence has escalated. Murders are met, in response, with more murders.  Nickson says, “this is replacing Ciudad del Este as the haven for criminal activity; it [now] has one of the worst crime rates.”

It takes two
Upon his election in April last year, Mario Abdo Benítez pledged to deliver a “united Paraguay.” The following month, the government announced an open-ended suspension of arms and ammunition imports in a bid to fight illegal trafficking across the border. Benítez has additionally announced his decision to sign the WHO Protocol to Eliminate Illicit Trade in Tobacco Products. In 2015 alone, the government lost an estimated $1.1bn in revenue due to untaxed goods and services.

“I follow Paraguay very closely,” said one source, who asked to remain anonymous, “and I have been surprised at the statements coming from this government about clamping down on smuggling. A cynic would say it is because of the animosity between the current president and his predecessor Cartes.”

The former president – who unsuccessfully attempted to change the country’s constitution so he could remain a senator – remains an immensely influential figure within Paraguay. Cartes’ faction of the Colorado Party is strong inside both Senate and Chamber of Deputies.

“Conflicts of interest persist,” explains Gomis. “The Paraguayan Senate recently voted against a bill to enhance transparency along the tobacco supply chain and postponed a vote on another. At the moment, the illicit tobacco trade is a low-risk, high-reward activity. This equation must change for any significant progress to be achieved.”

There is also a significant role for Brazil to play. “This whole operation isn’t just corrupt Paraguayan politicians, police and military turning a blind eye to these goods that are smuggled over the border: there is, of course, the other side of the coin,” Nickson adds, pointing at the nexus of support by corrupt politicians inside Brazil.

Across the border, a substantial change in government is underway. Jair Bolsonaro has taken the reigns in Brazil after being elected on a mandate that viciously attacked crime and corruption. His protectionist ideals have drawn comparisons to Donald Trump, with Bolsonaro’s deputy, Márcio Tadeu de Lemos, even suggesting the construction of “a very high wall” along the Paraguayan border. Whether his regime will be able to crack down on corruption, however, is a different question.

“On the Brazilian side it is going to be more difficult because these are incredibly powerful politicians and Bolsonaro is president of a country where you don’t have national political parties, you have regional political parties,” says Nickson. “They have to be very careful with how he deals with very long-standing powerful, closely linked forces. That will be much more difficult than one might think.”

The trade of illicit goods cannot be blamed entirely on one country. Both Paraguay and Brazil will need to work together if they are going to tackle the issue. But as long as political corruption exists on both sides of the border, the illegal economy will continue to flourish.

Sovereign wealth funds continue to grow in power and influence

Posted on by Max Tomlin

When Norway’s sovereign wealth fund exceeded $1trn in value in September 2017, it sent a signal to the markets that states can do it better than private corporations. Apple and Amazon, two of the world’s largest companies, would only surpass this threshold a year later.

When sovereign wealth funds emerged decades ago, they were modest in scope

The Norwegian fund is a colossus of world finance, holding around 1.5 percent of global listed equity, but is far from an exception. Data held by the Sovereign Wealth Fund Institute, a US corporation, shows that assets held by state-owned investment funds, known as sovereign wealth funds (SWFs), exceeded $8.1trn in October 2018, more than double the value in 2007. More than half of these assets are owned by gas and oil-related funds (see Fig 1).

Oiling the cogs
When SWFs emerged decades ago, they were modest in scope. The first, established by Kuwait in 1953, received a fixed percentage of the country’s vast oil revenues nearly a decade before the country gained its independence. The number of SWFs swelled during the 1970s, when most oil producers established ‘stabilisation funds’ to protect their economies from the boom and bust of oil markets.

A second category appeared in the early 1980s, launched by countries enjoying large surpluses due to robust exports, such as Singapore. China Investment Corporation, the biggest of these new SWFs, was created in 2007 to channel China’s vast foreign exchange reserves into assets more profitable than government debt. Originally intended as rainy-day funds, by 2005 stabilisation funds were big enough to become known as SWFs, marking their transition from domestic-orientated financial vehicles to major players seeking sizeable returns in international markets – often quite aggressively.

A more idiosyncratic type of SWFs appeared with the dawn of the 21st century, dubbed by critics as ‘vanity funds’. Their home nations did not enjoy commodity exports or surpluses, and were often notorious for poor fiscal discipline. Governments of vanity funds’ home countries perceived SWFs as vehicles to boost the economy during global slowdowns or to attract international capital. Andrew Bauer, a consultant at the Natural Resource Governance Institute, a US think tank monitoring governance of natural resources, told World Finance: “In some countries, launching an SWF is fully justified. However, in others, debt levels are either too high or natural resource revenues or future fiscal surpluses [are] too small to justify creating a fund. So what explains countries like Ghana and Uganda having established funds, or countries like Lebanon and Kenya considering new funds?”

Critics worry that such funds, often orientated towards domestic investment, are vulnerable to politically driven investment decisions, cronyism or even corruption. A case in point is Malaysia’s 1MDB, which is currently being investigated in several countries for its alleged role in money-laundering violations. In Turkey, President Recep Tayyip Erdogan, the country’s ruler of 15 years, took control of the Turkey Wealth Fund in September.

Many countries hope that, through SWFs, they can gain access to exclusive industry associations and forums, which provide networking opportunities necessary to attract foreign investment. The sirens of international markets are too hard to resist, Bauer said: “Part of the problem is poor advice. Some international advisors mistake having an SWF with good natural resource revenue management. Another challenge is the influence of investment banks. They sometimes pressure governments to establish funds so they can manage the money.”

Status symbols
For emerging markets, launching an SWF has become a symbol of status. More than 40 new funds have been established since 2005 by countries as diverse as Mexico, Russia and Bangladesh, while South Africa is also considering launching its own fund. A notable exception is Brazil, which is currently in the process of liquidating its SWF.

Tensions between the US and countries such as Russia, China and Turkey have rekindled the idea that sovereign wealth should not be deemed a neutral market force

One reason for this growth in the number of SWFs is high oil prices between 2007 and 2014. But politics plays a role too, according to Bauer: “To some extent, SWFs have been used to make global statements about self-determination. They have become symbols of development and progress and are not always promoted as solutions to specific macroeconomic or budgetary problems. This lack of clarity presents a real danger, as poorly conceived funds can undermine public financial management systems and can lead to squandering of revenues.”

For developed countries, SWFs pose a conundrum: until the financial crisis in 2008, they were perceived as predators of national assets and, in some cases, even a potential national security threat. Gawdat Bahgat, a professor of national security affairs at the National Defense University, a US academic institution, said: “When SWFs started accumulating substantial wealth, the US and several European countries became suspicious. SWFs are not private entities, but they do have financial leverage, and gradually western governments have started regulating SWF investments.”

$8.1trn

Total value of assets held by state-owned investment funds globally

$1trn+

Value of Norway’s sovereign wealth fund as of September 2017

1.5%

of total global listed equity is held by Norway’s sovereign wealth fund

All that changed during the 2008 financial crisis, when SWFs became the white knights of the global financial system by boosting beleaguered banks such as Barclays and Citigroup. Victoria Barbary, Director of Strategy and Communications at the International Forum of Sovereign Wealth Funds, an organisation set up by SWFs at the peak of the crisis, said: “While politicians in the US and EU had previously been concerned about the motivations of state-owned investors’ (both SWFs and state-owned enterprises) acquisitions in their countries, their role in bolstering the international financial sector in its hour of need certainly made many attitudes less hostile.”

However, many interpreted their motivations for purchasing western assets as politically driven. By propping up US and European banks, Gulf states such as Qatar and the UAE won the hearts and minds of policymakers during a tumultuous era in the Middle East. Today, sovereign wealth in the region remains the long arm of the state and the elites who control it, said Bahgat: “SWFs and other forms of foreign investments are used to buy political leverage. The murder of the Saudi journalist Jamal Khashoggi is a case in point. The war in Yemen is another example. Given the huge [amount of] Saudi financial assets, the country is not likely to face sanctions. And if sanctions are imposed they will be [applied] for a short period, sadly.”

A balancing act
Concerns over the clout of SWFs have not subsided. Many experts worry about imbalances in global markets due to investment overconcentration by a small number of funds owned by countries with minuscule populations. For example, Abu Dhabi, with a population of 1.2 million people, runs an SWF worth over $683bn. Some also warn that the funds are partly responsible for the creation of asset bubbles in London and New York.

1.2m

Population of Abu Dhabi

$683bn+

Value of Abu Dhabi’s sovereign wealth fund

Many SWFs strive to strike a balance between meeting financial targets and pursuing a broader sociopolitical agenda in an era of rising economic nationalism. Some of these pressures come from benevolent forces. In July, six of the world’s biggest SWFs pledged via a charter to invest in companies that incorporate climate risks into their strategies. The Norwegian fund, one of the charter’s signatories, divested from six companies in 2017 due to social, governance and climate change considerations, and excluded another 11 companies from the list of future asset purchases.

It is now expected to exit oil and gas stocks completely in 2019. An increasing number of SWFs are also adopting guidelines on corporate responsibility, while at least four have adopted ethical investment guidelines.

However, geopolitical forces are coming into play as well. China is often accused of using its SWFs to exert influence in the developing world, and increasingly in Southern and Eastern Europe too. At least two of these funds are involved in the country’s ambitious Belt and Road Initiative, which aims to connect China to Europe through several infrastructure and investment projects and, according to critics, help the country boost its political and economic clout via a global trade network.

An increasing number of sovereign wealth funds are adopting guidelines on corporate responsibility

These concerns are not new or completely unfounded, given that many SWFs explicitly state their political mandate. But tensions between the US and countries such as Russia, China and Turkey have rekindled the idea that sovereign wealth should not be deemed a neutral market force. Bahgat told World Finance: “SWFs are likely to further reinforce economic nationalism and protectionism. Significant investments are made in creating jobs for nationals. In almost every oil-producing country, there is a programme to reduce reliance on foreign workers and replace them with domestic ones.”

The International Forum of Sovereign Wealth Funds has issued a list of voluntary standards and recommended practices, dubbed the ‘Santiago Principles’, to address concerns that SWFs mix business and politics and promote transparency and accountability in governance and investment behaviour. Barbary said: “The Santiago Principles were originally established to be a kind of passport to show that each signatory invested on a purely financial basis overseas. But increasingly, those funds that apply the Santiago Principles invest at home. For them, applying the principles is an important sign to their domestic stakeholders that they are committed to applying best governance and investment practices.”

More needs to be done to achieve a level playing field. As Chinese and Middle Eastern SWFs are becoming more aggressive in financial markets, authorities in the US and Europe, particularly Germany, are once again becoming wary of predatory purchases and consider tightening legislation on the grounds of national security concerns. Miles Kimball, a professor of economics at the University of Colorado Boulder, said: “[SWFs] should be diversified internationally, but because of the effect of government purchases of foreign assets on trade flows, guidelines for government purchases of foreign assets should be explicitly negotiated among countries.”

The tech rush
In an era of historically low interest rates, SWFs are striving to generate significant financial returns. Research by Invesco, a US asset manager, shows that SWFs are increasingly shunning active management for equities, favouring instead index-tracking strategies. An exception is the Middle East, where many funds employ active management teams. Some of these funds are becoming more aggressive, venturing into new, riskier areas, such as the tech sector.

A case in point is Saudi Arabia. Despite its vast oil reserves, the country is gripped by rising youth unemployment (see Fig 2). Under the leadership of Prince Mohammed Bin Salman, Riyadh has launched Vision 2030, an economic transformation plan aiming to reduce the oil sector’s grip on the economy and create more than 450,000 jobs. The main vehicle to implement the plan is the $360bn Public Investment Fund (PIF), which has set up and supported companies in a wide range of industries, from technology and energy to entertainment. In an unusual move for an SWF, the PIF raised $11bn in loans in September 2018. It is also behind the recent shake-up of Saudi Arabia’s national champions. Saudi Aramco, the country’s state oil company, is in the process of acquiring a 70 percent stake in SABIC, a PIF-owned chemicals manufacturer, to help the fund raise money for its ambitious projects.

The goals of such an ambitious diversification plan can be self-contradictory, Bahgat said: “In the West, privatisation means less government intervention in the economy. In Saudi Arabia and other oil-producing countries, the government (including SWFs) is leading the private sector. It is an extension of the government, not independent of it.” The project may also put off other investors, according to Dr Karen Young, a resident scholar at the American Enterprise Institute and an expert on the Gulf region: “The PIF is becoming a major outward investor to grow national wealth, but also a dominant partner for FDI inside Saudi Arabia. In that effort, many private firms that may want to compete in the kingdom may find there is a single source of domestic investment: the PIF. This creates some problems of crowding out other investors, and potentially also limiting competition as the firms that receive PIF investment are then favoured by the state.”

But what has really put a spotlight on the PIF is its rapid transformation into an idiosyncratic venture capital firm. Tech companies where the PIF owns a stake include Uber, Magic Leap, Tesla and Lucid Motors. It also holds a $45bn stake in Vision Fund, an investment fund focusing on tech start-ups, set up by the Japanese conglomerate SoftBank and its flamboyant CEO, Masayoshi Son. Young told World Finance: “The PIF has taken a higher risk appetite than traditional SWFs in the Gulf with respect to investment in private technology firms. This is a departure from traditional investments in fixed income, debt and real estate that have dominated most SWF allocations in the region in recent years.”

In an era of historically low interest rates, Sovereign wealth funds are striving to generate significant financial returns

In the long term, tech investment by SWFs may have geopolitical repercussions, said Dr Theodore Karasik, a senior advisor at Gulf State Analytics, a geopolitical risk consulting firm: “The PIF, along with its partners, [sees] the future and power of artificial intelligence across the spectrum of human security, including health and welfare. The triangulation of AI interests between Saudi Arabia, Russia and China needs to be watched in terms of how SWFs may cooperate in advanced technologies.” Furthermore, last October it was announced that the PIF will join the Russia-China Investment Fund, a joint SWF aiming to boost economic cooperation between the two countries.

For the time being, the PIF’s risky strategy encapsulates the dilemmas facing most SWFs, as they strive to strike a balance between serving their present masters and investing in the future. William Megginson, a professor in finance at the University of Oklahoma and the Saudi Aramco chair professor in finance at King Fahd University of Petroleum and Minerals, said: “What Saudi Arabia needs is more private investment rather than state-directed investment. Saudi Arabian investors (state and private) should be nurturing domestic industries that create massive employment opportunities for their well-educated young people and export earnings for the kingdom, not dropping $3.5bn into Uber or putting $45bn into Son’s Vision Fund to invest in Western hi-tech.”

Geological Survey of Finland is allowing the country to reap the mining rewards

Posted on by Max Tomlin

Since Tesla produced its first car in 2008, the transportation industry’s attention has shifted towards vehicle electrification. Volkswagen, Mercedes-Benz and General Motors, to name a few, are in the midst of a race to get their own electric cars onto people’s driveways as soon as possible. This is having a dramatic effect on demand for certain commodities as carmakers scramble to secure the raw materials needed to manufacture large batteries. According to McKinsey & Company’s 2018 report Lithium and cobalt – a tale of two commodities, global demand for lithium is expected to triple between 2017 and 2025 thanks to vehicle electrification. Over the same period, demand for cobalt is also expected to increase by 60 percent.

Geological Survey of Finland is one of the leading geological research and development organisations in the world

To meet this new reality, the mining industry is undergoing a lot of changes. One country playing a particularly important role is Finland. Speaking with World Finance, Harry Sandström, Programme Director at Geological Survey of Finland, said the country is currently the only European Union nation producing cobalt, and is already a critical player in European battery cluster development. Geological Survey of Finland is one of the leading geological research and development organisations in the world, and discovered most of the mines currently under operation in Finland. “It’s estimated that half of all the cobalt chemicals used in global battery production are produced in Finland,” Sandström added.

This has placed Finland at the forefront of the industry, but the country is now confronting the challenges presented by increased battery production. Vehicle electrification is guaranteed to increase, but the specific rate of growth is still up for debate. This has made establishing a sustainable rate of growth in the mining sector difficult. Sandström explained that there are also challenges arising in terms of mineral processing: “There is a growing worry regarding how the metals used in batteries are produced, and whether they are based on ethical and sustainable production practices in countries that respect environmental and social values.” However, with Finland’s impressive history of mining innovation, the country is perfectly equipped to overcome these challenges.

Rubble to riches
Mining in Finland dates back to the 13th century, but became a significant national industry after the discovery of the Outokumpu copper mine in the early 1900s. Following the Second World War, the Finnish metal industry grew rapidly thanks to a high global demand for metal products. After joining the EU in the mid-1990s, Finland saw a change in government policy that allowed the provision of mining licences to foreign companies, prompting the ownership of Finland’s mining industry to diversify. Today, Finland has more than 40 mines and quarries, and is the only EU country producing phosphate and cobalt. It is also the largest gold producer in Europe, and has an extensive downstream minerals industry.

300%

Expected increase in global demand for lithium between 2017 and 2025

60%

Expected increase in global demand for cobalt between 2017 and 2025

The Finnish mining industry has always put a lot of resources towards research and development. “Our ores are normally of a low grade and the metallogeny is difficult, making processing fairly challenging. Cooperation between mining companies and technology providers has been instrumental in paving the road for the world-class and innovative industry we are now home to. Today’s industry, which includes mines, research organisations and mining equipment technology and service providers, has good internal cohesion and strong international connections,” Sandström told World Finance.

The Finnish Government’s policy and regulation base is also reasonably stable and predictable, and has so far been supportive of the growing demand for sustainable mining. Between 2011 and 2016, Finland implemented a remarkable development programme known as Green Mining. The project had a budget of over €120m ($136m) and saw more than 150 participants take part. Currently, the government is financing the Mining Finland Programme, which aims to boost the export of Finnish mining technology and encourage growth in the sector’s small and medium enterprises.

These efforts have been adding up: for the last few years, the Fraser Institute’s annual mining industry survey has listed Finland among the top five mining jurisdictions in the world, and last year the country was ranked first in terms of attractive mining investment targets. According to Sandström, the country is also on the cusp of some major developments: “Finland has good potential for graphite and vanadium mining. Finland is also a significant nickel producer, and within a two-year period a new chemical plant for processing cobalt and nickel sulphates will be constructed by Terrafame Oy.” Keliber, a Finnish exploration and mining company, also has intentions to open the first European lithium mine with a lithium chemical plant between 2019 and 2020.

With Finland’s impressive commodity reserves, developments like these are only expected to continue. “Overall, Finland is still rich with undiscovered battery metals,” Sandström said. “Accordingly, Geological Survey of Finland has launched a dedicated mineral potential project for identifying battery metals.”

Geological Survey of Finland’s geological data collection is considered to be one of the best in the world: its reach covers the whole country, and data collected includes geological, geophysical and geochemical information, which is made readily available to exploration and mining companies. “Current mineral potential mapping is the key factor in terms of attracting mining investment to Finland,” Sandström explained. “Geological Survey of Finland has close links to the mining industry, and is consulting with mining companies to help them understand the country’s geological and ore formations.”

Unearthing sustainability
With more attention being paid to socially and environmentally conscious mining, both miners and technology providers are working to mitigate the impact their operations are having on the world. “The days when it was believed that one could produce primary raw materials in countries that might not respect sustainability are long gone,” Sandström said. “Ethical investment is quickly coming to the mining industry.”

One area of concern is the environmental footprint that mining leaves, and the potential conflicts of interest that arise between mining and other sectors, such as tourism and agriculture. Finland has tackled these challenges with the establishment of the Network of Sustainable Mining. The organisation consists of representatives from various relevant stakeholders and interest groups, with the goal of discussing and solving potential conflicts of interest before they escalate. “Handling land usage rights with the indigenous people located in the small, northernmost part of the country is an issue that has also been taken very seriously, and with full respect of the views of these parties,” Sandström told World Finance.

There are also operational challenges that mining is addressing. Productivity in mining has been declining for decades, and is far behind many other production industries. Sandström explained that this is due to the relatively high commodity prices, and the old, siloed operational culture that still persists in many operations. This has made the industry a prime target for disruption. “Sensor technology is becoming cheaper and cheaper, and mines can produce a lot more measured information from their ore body and processes,” Sandström said. “This digital information can be used to improve productivity in terms of material and energy efficiency.”

Harnessing technology
Another current global trend is that ore grades are decreasing in quality, demanding better processing technology and more selective mining, according to Sandström. “Finland’s approach is to improve productivity through technology, and we also already have knowledge of processing low-grade ores.” Finland is also home to some of the most cutting-edge mining and processing technologies, such as flash smelting, autogenic and semi-autogenic grinding, hydrometallurgical processes and automatic pressure filters. Even today, approximately 80 percent of all underground mining technology is developed in either Finland or Sweden.

Sandström explained that the major research and development focus areas in mining are currently unmanned operations, digitalisation and the electrification of machinery. “Water is also an issue all over the mining world: you either don’t have enough of it, or you have too much because of rainfall. Proper water-table management across the entire mining area is essential to understand the vulnerability of local water systems.” Finland has devoted a lot of resources to technology for both water and environmental management on regional and site levels. Mine closures are another issue Finland has focused on. “Mines do not last forever; even the big ones will eventually be closed,” Sandström said. “Finland has developed its own mine closure protocol, with steps that are undertaken even before the mine is opened.”

This is only the beginning of Finland’s efforts to become a significant actor in global battery production. “Finland’s aim is to concentrate on its strengths in the entire battery production chain: raw material supply, its processing, chemical production, control technologies of battery systems, development of electrified machinery and finally recycling technologies,” Sandström told World Finance.

This journey is still just beginning, but according to Sandström, Finland’s next challenge will be how to ensure mined and recycled material loops can be effectively connected: “Recycling is currently one of the key focuses of research and development. However, considering the expected increase in demand for battery metals, recycling also cannot satisfy demand. We also need primary raw materials.”

Another challenge is that Finland is currently not home to much car manufacturing, although it does have a pedigree in mobile technology development. “Finland is also looking for closer cooperation with other Nordic countries,” Sandström said. “In the future, Northern Europe will be very strong in the sectors of both raw materials and technology.” With its long history of success, there are few countries as well equipped to meet the challenges that vehicle electrification present.

India continues on its remarkable economic growth journey

Posted on by Max Tomlin

“Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

Those iconic words were spoken in 1991 by India’s finance minister at the time, Manmohan Singh, when the country embarked upon its most innovative economic reform yet. Since then, India has experienced extraordinary financial growth (see Fig 1), and is now the world’s sixth-largest economy by nominal GDP. The IMF predicts that by the end of 2018, India will have moved into fifth place, knocking the UK from the position that it has occupied since 2014.

Low standards of living, inadequate healthcare and corruption have prevented the country from escaping its emerging market categorisation

India’s journey to economic ascendancy has been facilitated by a multitude of factors, including an influx of foreign investment and an end to the country’s highly restrictive licensing regulations. These changes have bolstered the country’s international economic standing, allowing it to compete with developed nations like the UK and the US for market dominance in sectors such as technological infrastructure and e-commerce.

However, low standards of living, an inadequate healthcare system and high levels of corruption have impeded progress. These factors have prevented the country from escaping the confines of its ‘emerging market’ categorisation and ascending to the highly coveted ‘developed’ market status.

Road to modernity
India’s autonomous economic story began in 1947, after it was granted freedom from British rule. Prior to independence, the country’s economy had been relatively stagnant, growing at around one percent per year. It began to expand slowly in the late 1940s, but any significant growth was impeded by the country’s centralised, socialism-inspired economic model.

GDP growth in India remained at around 3.5 percent per year up until 1991, with per capita growth struggling at around 1.3 percent. This was down to the extensive nationalisation process that took place during the 1950s, which consolidated economic power in the hands of the state. The process began in 1951 with the Industries (Development and Regulation) Act, which gave the government control over 38 key industries and 171 products, ranging from coal and precious metals to fans and sewing machines. Economic freedom in the country was extremely constrained and regional disparity was common, given that the government had the power to determine the location and size of certain industries. It was handed even more power in 1953 with the Air Corporations Act, which effectively turned the market-driven, consumer-centric civil aviation industry into a nationalised moneymaking machine.

The state’s power was cemented further in 1956 with the Industrial Policy Resolution, which classified industry into three categories. Innovation and development of ‘category one’ and ‘category two’ industries was entirely driven by the state, while ‘category three’ industries were left to the private sector, although operational licences had to be obtained by citizens.

$39bn

Annual e-commerce sales in India in 2017

$200bn

Expected annual e-commerce sales in India by 2026

2nd

Largest global start-up hub

5,700+

Number of start-ups across India

Known as the Licence Raj, this series of policies strangled the economy by curbing entrepreneurship and putting the country’s fiscal future entirely in the hands of state bureaucrats. Dr Ruth Kattumuri, founder of the London School of Economics’ India Observatory, told World Finance: “1956 was the first consolidated industrial policy post-independence, and it reflected the government’s socialistic focus for the development of society. The policy structure allowed the state to exercise much more power, making the country much more inward-looking, which was detrimental to growth.”

India’s economic narrative continued in that same vein for the next 35 years, with the insurance, banking and coal industries also undergoing the nationalisation treatment during the 1960s and 1970s. A significant shift came, though, with the government’s statement on industrial policy in 1991. In his book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion, economist Gautam Chikermane remarked: “If the Industrial Policy Resolution of 1956 was the single most important policy that shut India down, the 1991 statement on industrial policy is the overarching architecture that opened all doors.” The statement abolished the Licence Raj, opened up state-controlled industries to foreign technology investment and regulated unfair trade practices: in effect, it set India on the path to becoming the modern open economy that it is today. Chikermane told World Finance: “This was the time that India became serious about GDP growth – it has been the landmark policy of the past 25 years. The India that you see today wouldn’t be there if it wasn’t for this policy.”

Unpacking the nomenclature
Today, India’s economy is caught somewhere between ‘emerging’ and ‘developed’ status. In some areas, it is nipping at the heels of its market neighbours; in others, it lags well behind.

India’s economy is caught somewhere between ‘emerging’ and ‘developed’ status

India was first classified as an emerging market by former Goldman Sachs analyst Jim O’Neill, who coined the term ‘BRIC economies’. He decreed in 2001 that Brazil, Russia, India, and China’s economies were expanding at a much faster rate than those of the G7. O’Neill posited that the BRIC nations could become the four most dominant global economies by 2050, but would have to take certain steps – including political cooperation with regards to trade agreements – in order to progress beyond emerging market status.

An emerging market is defined as a country that has some characteristics of an established market, but does not satisfy all of the demands for it to be categorised as a fully developed economy. According to MSCI, a provider of index data for global markets, the characteristics of an emerging market are: significant openness to foreign ownership and ease of capital flow; good and tested efficiency and stability of the operational framework; and a minimum of three national companies that meet certain market cap and liquidity criteria.

A mixed bag
India has embraced some emerging market characteristics more willingly than others. The country’s operational framework, including elements such as political leadership, health systems, educational opportunities and scientific research, has progressed rapidly since the economic reforms of 1991. By introducing sound fiscal policies of privatisation and tax reductions, the government has allowed industry to take off in cities including Bangalore, Hyderabad and Ahmedabad, which had a knock-on effect on unemployment and quality of living within the surrounding areas. The digital age has also greatly benefitted India, as it has given rise to a new generation of well-educated and highly skilled professionals across STEM industries. To further promote technological development, Prime Minister Narendra Modi has launched various campaigns, including Digital India and Startup India, to bolster digital adoption.

Political corruption remains a significant concern, and one that continues to hold India’s economy back

The country is also becoming more receptive to foreign ownership, with Modi introducing changes to regulation in 2016 and 2018 to make it easier for international firms to invest in Indian businesses. Under these reforms, airlines, some defence industries and real estate brokerages may now be 100 percent foreign-owned, while investment rules in pharmaceuticals and food production have also been relaxed. The government claimed in a 2016 statement that India “is now the most open economy in the world for foreign direct investment”. Kattumuri reaffirmed this, observing: “There is a lot of variation between states, with some more open than others. Modi’s government has really pushed for FDI, in part because Modi himself comes from a state where people are really entrepreneurial, so he has invested his energy into driving private sector investment and FDI.”

Political corruption, however, remains a significant concern and one that continues to hold India’s economy back. Transparency International, an NGO that works to combat global corruption, placed India 81st out of 180 countries on its 2017 Corruption Perceptions Index, due to complex tax and licensing systems, the prevalence of government bribing and state monopolisation on certain goods. According to a 2005 report by the same organisation, more than 92 percent of Indians had first-hand experience of paying bribes to public servants. The country is attempting to crack down on the practice, but the widespread nature of corruption in India means it is a lengthy process.

Still on track
Despite some political reticence, India does fulfil all of the emerging market criteria. In certain categories, in fact, the country extends well beyond the confines of that definition and into developed economy territory. In order to progress to this higher status, a country must achieve a high GDP and GDP per capita, a high level of industrialisation, substantial technological infrastructure, sustainable economic development, and a high standard of living.

India’s GDP is expanding at an exponential rate, having surged 8.8 percent between July 2017 and July 2018. The country is also performing extremely well with regards to other economic benchmarks including purchasing power parity, for which the World Bank ranked it third in the world in 2017. The country was also ranked first in AT Kearney’s Global Retail Development Index in 2017, and it has one of the world’s fastest-growing e-commerce markets, with sales expected to reach $200bn by 2026, up from $39bn in 2017.

However, India’s per capita GDP trails well behind its other economic benchmarks. According to 2017 statistics from the World Bank, GDP per capita equated to $1,939 (see Fig 2), making it 140th in the world. That figure is a far cry from the $12,000-$15,000 benchmark that most economists consider to be the necessary GDP per capita for a country to be labelled a developed economy.

“India is a very populous nation,” explained Chikermane, noting that the large population has a lowering effect on GDP per capita by distributing wealth over a vast number of citizens. “Our GDP is $2.6trn, which is approximately equal to that of the UK, but our population is 20 times theirs. Clearly in terms of per capita, we have a long way to go.” Inequality is also a particularly pertinent problem, as the gap between the richest and poorest residents of the country has widened significantly over the past 10 to 15 years. “The GDP per capita is an indication that India needs to focus on tackling inequality,” said Kattumuri. “This includes exploring how we can provide greater equal opportunities, and how we [can] enable more inclusive growth across different economic and social strata.”

In certain areas, though, India is on par with the world’s developed economies. It is a major exporter of business process outsourcing services, IT infrastructure and software services, all of which drove $154bn of revenue in 2017. It is the world’s second-largest start-up hub, according to Startup Ranking’s latest data, with more than 5,700 such firms located in the country. India has a highly advanced technological infrastructure, underpinned by an efficient quotidian service and manufacturing economy. It has the second-largest telecommunications market in the world and, according to the International Telecom Union’s Global ICT Development Index, India will soon be in the top 10, having been 134th just two years ago.

Faster and faster
It’s clear that rapid growth is a prominent facet of the Indian economy, but the key concern for the country now is ensuring that this growth is sustainable. According to MSCI, sustainable economic development is the vital characteristic that sets an emerging market apart from a developed one. It is defined as growth that satisfies contemporary human needs, but in a manner that sustains natural resources and the environment for future generations. It is here that India falls down.

Classification as a developed economy could provide India with a seat at some of the world’s most prestigious tables

The country does not have the societal infrastructure to support the needs of its population, let alone its future citizens – particularly if population growth continues to gather speed. The greatest issue at present is lack of access to clean water, which affects more than 163 million people across the country – the highest proportion in the world, according to a new study from Water Aid. Some 64.3 million people live in extreme poverty with no access to housing or healthcare. India also has the third-largest HIV epidemic in the world, with 2.1 million people living with the disease at last count.

Lack of sustainable development is also a major concern in the agriculture sector: India placed 33rd out of 34 countries in The Economist Intelligence Unit’s 2017 Food Sustainability Index. While the country has taken proactive steps to reduce food waste in recent years, nutrition remains a significant problem, with an extremely high rate of malnutrition and nutrient deficiency. Water availability is also problematic, as crops and livestock take a heavy toll on India’s already overstretched water system, while there remains a distinct lack of water-recycling initiatives.

“I think our healthcare, our education and the social infrastructure, the human development… They all need to be looked at and we need to work on them,” said Chikermane. “The good news is that we are. For instance, two years ago India had the world’s largest number of poor people, [and] that is no longer the case. Gradually we are pulling people out of poverty. There is also a new healthcare scheme that has just been introduced to try and reach the 100 million poorest households of India. So, one step at a time, we are getting there. However, any scheme needs a huge amount of money because our budget is allocated across a very large number of people. And there are many other needs – healthcare, education, infrastructure, security, defence and so on; all these are requirements that the Indian state needs to negotiate.”

Knock-on effect
While India does exhibit many of the characteristics of a developed nation, inconsistencies across the board and a lack of societal infrastructure hold the country back from attaining the corresponding status. That’s not to say that it won’t ever get there, as many economists have predicted. However, a 2018 report by SBI, the country’s largest lender, warned: “India has perhaps now only a limited window of a decade to get into the developed country tag, or stay perpetually in the emerging group of economies. Policymakers, wake up and smell the coffee!”

If India is to drive up its GDP per capita, it must reconsider the pricing of those aspects of its international relationships

Then there’s the question of what happens on a global level when India does rise to developed economy status. It would be the second Asian country, after Japan, to achieve that accolade, which could have major implications for international markets. “I think the rise of India will be good for the world,” said Chikermane. “India tries to be more inclusive – we are open to trade, we are accepting, we have really embraced globalisation.”

It could also affect business relationships between India and western nations like the UK, which is notorious for using Indian amenities such as call centres as cheap alternatives to employing British workers. If India is to drive up its GDP per capita, it must reconsider the pricing of those aspects of its international relationships. This could have knock-on effects for other countries, as they may find themselves facing the decision of paying inflated bills or risking an internal labour shortage. Moreover, if nations turn elsewhere for cheaper service in sectors such as business process outsourcing, India would lose a significant proportion of its import revenue – and the country doesn’t have many other highly developed industries to fall back on as yet. Such a move could see it knocked back down the global rankings in no time at all.

There’s also the geopolitical aspect to consider. Classification as a developed economy could provide India with a seat at some of the world’s most prestigious tables, including the G7. At those summits, discussion does not solely centre on economic factors, but also incorporates political values. Although India is steadily becoming more closely aligned with the values of G7 nations, particularly with regards to LGBTQ rights, it has not wholly caught up just yet: it has come under scrutiny in recent years for purchasing weapons from Russia, and its crime rates – particularly with regards to rape, kidnapping and domestic violence – are concerningly high. Being considered a developed economy comes with wider sociocultural responsibilities: the economic aspect will not be treated in isolation, but rather as part of a holistic view of the country.

Chikermane is confident that India will “rise to the occasion” in fulfilling the responsibility that comes with being a global economic power. “Given things today, I don’t see India as an aggressive player – it will be an all-embracing, peaceful power, catalysing other countries with regards to trade, FDI, and so on,” he said. With regards to India’s technological prowess and democratic values, there’s much cause for international optimism. First, though, the country must get its house in order.

Irkutsk Oil Company continues to set the standard in Siberian oil and gas extraction

Posted on by Max Tomlin

Russia is sitting on a gas gold mine. According to OPEC figures, the country has the world’s largest natural gas reserves, with an estimated 49 trillion cubic metres in its arsenal. This equates to over 24 percent of known global sources. There’s more to be discovered, too: the United States Geological Survey estimates that Russia possesses an additional 6.7 trillion cubic metres of unearthed resources.

Eastern Siberia has drawn interest from key market players as it contains a wealth of untapped oil and gas reserves

Eastern Siberia has drawn interest from key market players for some time, as it contains a wealth of untapped oil and gas reserves. However, there are no pure-play oil fields in the region, as all contain either large volumes of associated petroleum gas dissolved in oil or free gas accumulated in the so-called ‘gas caps’. More often than not, the two types coexist. There are also entire fields of gas condensate, or natural gas.

Many companies have turned away from these resources in the past, viewing the extraction of the valuable materials as too timely or inefficient cost-wise. Not the Irkutsk Oil Company (INK), though. The Russian firm has developed a unique process to extract the gas and separate it into its valuable components. This innovative approach has allowed the company to tap into vital resources, and has cemented it as a respected leader in the oil and gas sector.

An idea is born
Almost a decade ago, INK began work on the comprehensive development of gas reserves in the Irkutsk region of Russia. The first step in the implementation of this project was the ‘gas cycling’ process – the re-injection of produced gas back into the reservoir after the recovery of gas condensate. This serves to maintain reservoir pressure and prevent the process of retrograde condensation, which can make the gas difficult to recover.

24%

of the world’s natural gas reserves are in Russia

49 trillion

cubic metres of natural gas reserves can be found in Russia

6.7 trillion

cubic metres of unearthed resources can be found in Russia

In 2010, INK became the first company in Russia to successfully implement a large-scale cycling process project aimed at enhancing the recovery of heavy hydrocarbons from natural gas and from the associated petroleum gas. The project was subsequently replicated by other Russian producers of oil and gas fields in stranded gas areas where there is low or absent gas transportation infrastructure.

Having maintained the extractability of the gas, the company embarked on an even more ambitious project: in order to further maximise the efficiency of hydrocarbons production and gas monetisation, it decided to implement a massive project of advanced gas processing. The project is conventionally divided into five stages and is progressing fruitfully, with the first stage already accomplished and the second underway.

The beginnings
Within the framework of the first stage, the company has built and commissioned the natural and associated petroleum gas treatment plant with a feed capacity of 3.6 million cubic metres per day. It has also constructed a 196km-long product pipeline from its flagship Yaraktinsky field to the city of Ust-Kut, in the Irkutsk region, as well as a liquefied petroleum gas (LPG) collection and storage terminal to handle technical-grade propane-butane mix. In late 2017, gas processing at the treatment plant was launched, and in Q3 2018 the company began delivering LPG at its Ust-Kut rail terminal.

The project is unique not only for Siberia, but also for the entire country. For instance, the multiphase pipeline is designed to simultaneously pump propane, butane and ethane components. On a national scale, this is a pioneering project posing substantial technical challenges, which was implemented in cooperation with leading R&D centres. Shipment of LPG will also involve the use of innovative custom-built rail tankers, specially designed for INK’s project.

For the second stage, the company intends to increase the feed capacity fivefold and begin separation of commercial-grade propane and butane. To accomplish this goal, INK intends to build three more gas treatment units at the Yaraktinsky and Markovsky fields by 2020, with a total feed capacity of 18 million cubic metres per day, as well as a gas fractionation plant in Ust-Kut. These plants are being manufactured and supplied by US firm Honeywell UOP.

Annual output of finished commercial-grade product by all the company’s facilities will total 1.3 million tonnes of stable gas condensate, 555,000 tonnes of propane and 250,000 tonnes of butane. Dry gas (methane) would not be processed at this stage, and would be re-injected into the formation.

Natural and associated petroleum gas produced at INK’s fields carry helium, a valuable component that is used in the aerospace, mechanical engineering, electronics and healthcare industries, as well as in MRI machines and other technologies. To allow the company to extract this precious resource, INK intends to build a helium plant at the Yaraktinsky field during the second stage of the project. In September 2018, INK signed a contract with US-based Cryo Technologies to supply helium purification and liquefaction equipment. The expected product output is 10 million litres of liquid helium per year. Commissioning of the plant is currently scheduled for the first half of 2021.

In 2017, Cryo Technologies, a reputable firm specialising in the procurement of helium liquefaction equipment, was already engaged by INK to complete front-end engineering design. At the start of 2018, INK invested in the trial transportation of a helium container to assess the potential risks and bottlenecks. The container successfully travelled by truck more than 7,000km from Odolanów, Poland, to the Yaraktinsky field and then to the eastern border port of Vladivostok, Russia, where it was loaded on the ship and sailed to Japan.

All in all, INK has invested an estimated $2.5bn in the first two stages of the project. All equipment required for these stages of the project has been procured and manufactured, and most of it has been delivered to INK’s production sites.

Next steps
The third stage, which is yet more capital-intensive, involves the construction of a polymer plant. Assembly of the Irkutsk Polymer Plant will require additional investments in the range of $2.5bn. The polymer plant will produce 650,000 tonnes of linear low-density polyethylene (under Univation Technologies) and high-density polyethylene: these polyethylene types are the base materials for the manufacture of various packaging and containers, insulation materials and plastics. Ethane feedstock will be supplied from the Ust-Kut gas processing plant, which will have an increased capacity by that time. INK and Japan’s Toyo Engineering have agreed to cooperate within this project stage. The two companies have signed an integrated contract for engineering and equipment procurement for both ethylene and polyethylene units that will process ethane produced at INK’s fields. The creation of this gas cluster will contribute significantly to the development of economic cooperation between Russia and Japan. Furthermore, INK has already begun discussions with potential buyers
based in China and Russia.

Further development prospects for the gas-chemical complex in Ust-Kut are being reviewed as part of subsequent stages of the gas programme. In particular, the fourth stage involves the construction of a plant producing monoethyleneglycol (MEG) from methane. MEG is used to produce polymers, polyether fibres, electronic goods, pharmaceuticals and sanitary products. This part of the project will be implemented jointly with foreign partners through the procurement of advanced technologies and the supply of state-of-the-art equipment. As part of this stage, the company may also construct a small-scale LNG unit to provide local communities with a source of energy and help them switch from coal. As a local company, INK has a strong eco-friendly focus and implements its projects with environmental issues in mind. The cost of the fourth stage is estimated at roughly $2.1bn.

The fifth stage involves even further development and implementation of other gas-chemical projects – in particular, the production of polyformaldehyde. This product is used as a replacement for metals and alloys in mechanical engineering, medicine and food processing equipment. The anticipated amount of investment required is in the range of $1.8bn.

Wider implications
The implementation of INK’s gas project will not only revolutionise the oil and gas industry within the region, but will also contribute to an increase in processed goods produced within Russia. This increase is likely to equate to an additional annual revenue of $1.3bn from goods and products processed from the natural and associated petroleum gas when the project is fully complete.

INK’s work is also helping to boost the local economy in Eastern Siberia. Since its establishment in 2000, the company has spent over $3bn in the development of the fields and licence area, construction process, and utility and transportation infrastructure. This investment has boosted regional industry and has also helped to support local businesses.

Moreover, the company currently employs more than 8,000 people, many from the local area, which has helped to boost socioeconomic development in Russia’s fledgling northern territories. The modern and environmentally friendly technologies utilised by the company have also allowed production to progress in a sustainable way. It is hoped that the project will continue to bring prosperity to Eastern Siberia for many years to come.

Government shutdown could tip the US into a recession

Posted on by Max Tomlin

The partial government shutdown in the US could plunge its economy into recession if it continues for another month, a former White House advisor said on January 24.

Even a rapid resolution would not be enough to entirely eliminate the risk of recession

Financier Anthony Scaramucci, who served as Director of Communications for the Trump administration for 10 days in 2017, said in an interview at Davos with the Reuters Global Market Forum that the shutdown will cause a contraction in the US economy if it lasts “longer than another month”.

Scaramucci added that the shutdown, now in its 34thday, “will lead to slower growth this year globally.” Even a rapid resolution would not be enough to entirely eliminate the risk of recession, he asserted, which increases in likelihood in mid-2020.

In a separate Davos panel, David Rubenstein, co-founder of the private equity firm Carlyle Group, warned that the shutdown “will really impair the economy of the US” unless a swift solution is reached.

“We’ve never had a shutdown for this long,” observed Rubenstein, adding that economic models to assess the long-term impact of the action do not even exist.

David Solomon, chief executive of Goldman Sachs, echoed Rubenstein and Scaramucci’s concerns, advising that the chances of a recession in the US in 2020 are as high as 50 percent.

Similarly, economists at JP Morgan have trimmed their estimate for Q1 US economic growth to 1.75 percent from two percent due to the impact of the shutdown.

The partial closure on the government on December 22 was triggered by a conflict between Trump and Democrats over the president’s demands for a $5.7bn budget allocation to construct a border wall between the US and Mexico. Nine governmental departments are currently unfunded, with over 800,000 federal workers either furloughed or working without pay.

The Democrat-controlled House has proposed a number of bills to reopen the government while talks on border security take place. Trump, however, has refused to reopen shuttered departments until a full or significant down payment on a border wall is granted.

Over 420,000 federal employees, whose roles are classed as essential to keep the country running, have been forced back to work without their salary. These include 50,000 airport security workers and 150 Food and Drug Administration officials, without whom food safety inspections would not take place.

With Trump remaining resolute on his demands for funding for the wall, the shutdown shows little sign of drawing to a close in the near future. Meanwhile, federal workers’ financial situation grows ever more precarious, and the long-term risks to the world’s largest economy intensify.

Dana Holdings’ mega projects are driving significant growth in Eastern Europe

Posted on by Max Tomlin

Dana Holdings is one of Europe’s leading investment and construction companies. It is known for its large international projects and ambitious ventures, which have been implemented throughout Eastern Europe, Russia and the former Soviet republics. Its multifunctional residential complexes, with their ‘city within a city’ format, have swiftly become extremely popular.

The main goal of the Tesla Park project is to conquer a segment of the market that is absolutely free – namely, property functionality and apartment design

Dana Holdings’ largest and most ambitious construction scheme to date is the biggest single development project in the whole of Europe: dubbed Minsk World, the multifunctional residential complex located in Belarus is a game-changer for the country’s economy.

Minsk World
The project’s location in the centre of Minsk reflects the city’s position in the very heart of Eastern Europe. In addition to Belarus’ advantageous geographic position, the country’s sustainable development and diverse investment options – from agriculture to IT – were important factors in deciding the project’s location. The three million square metre Minsk World is made up of 24 quarters that are each named after famous people, countries and significant achievements in history. Though construction of the mammoth project only began in 2017, two quarters have already been built, with people currently living in the first.

The main feature of Minsk World is the international financial centre, which will be located in the centre of the complex and will be fully integrated with the city of Minsk and its infrastructure. The international financial centre has been modelled on the examples of Dubai, Singapore, Hong Kong and other world-class financial hubs.

The ambitious project started with a vision to allow Belarus to take a leading role in the region’s economic development. Though part of the country’s economic zone, the international financial centre will enjoy a special system of benefits and incentives to attract capital and provide financial services. Dana Holdings believes that, thanks to these incentives, Belarus can become the most competitive and interesting country for investments on the continent.

In 2018, I signed a memorandum of understanding on behalf of Dana Holdings with His Excellency Essa Kazim, the chairman of the Dubai International Financial Centre. It stated that both parties would share best practices and cooperate in the fields of design, development, function and operations.

Tesla Park
In 2018, Dana Holdings started the construction of a new multifunctional residential and business complex in Astana, the capital of Kazakhstan. Named Tesla Park, it will cover a total area of 1.5 million square metres and will include all the features needed in today’s modern urban spaces, such as social facilities, kindergartens, schools and sports centres.

3m sq m

Size of Minsk World

2m sq m

Size of Tesla City

1.5m sq m

Size of Tesla Park

On October 9, 2018, a ceremony took place at Tesla Park, during which President of Serbia Aleksandar Vucic´ and Prime Minister of Kazakhstan Bakytzhan Sagintayev placed a time capsule at the site of the project. The message inside reads: “Friendship between the residents of Kazakhstan and Serbia is one of the brightest pages in the history of the centuries-old relations of our fraternal peoples.” The mayor of Astana and the ministers of both countries also participated in the historic event.

Astana was chosen as the location of Tesla Park largely because of the vast scope of the capital’s potential. Over the past 20 years, Astana has grown from a town of 150,000 inhabitants to a city in which more than one million people live. Its population is expected to reach two million people in the next 10 years. Situated halfway between China and Europe, Astana is like a mini Dubai, and has great prospects both geopolitically and macroeconomically. It’s extremely interesting from an investor’s point of view.

The main goal of the Tesla Park project is to conquer a segment of the market that is absolutely free at the moment – namely, property functionality and apartment design. Nowadays, dynamic lifestyles demand functional apartments at prices that are affordable for businesspeople. This is where Dana Holdings comes in. Contemporary planning is our company’s main focus – it directly impacts city economics and can attract a young, talented workforce into an area, thus supporting urban growth and development.

Belgrade’s revitalisation
Always planning ahead, Dana Holdings is set to launch the construction of a vast multifunctional complex in the Serbian capital in the spring of 2019. With an area of two million square metres, Tesla City – a separate project to Tesla Park in Kazakhstan – will kick-start the modernisation of Belgrade and increase financial activity in Serbia generally. The project will include an international financial centre, as well as residential areas, shopping malls, entertainment centres, schools, kindergartens, hospitals, churches and hotels. Nestled among parks and gardens, the site will be fully integrated into the urban environment without violating the historical integrity of
this truly dynamic city.

Architecturally, Tesla City is arranged in a circle to create a concentration of activity. The rooftops of the buildings are cleverly designed to face the sun, forming a huge diadem that’s visible across the city; we believe it will become the new symbol of Belgrade. Offices and hotels are included in the project’s composition, forming an integral part of the complex.

The Belgrade International Financial Centre will lie at the heart of the Tesla City complex. With various business and entertainment facilities surrounding it, it will be the perfect combination of practicality and profitability. We believe that Tesla City and its international financial centre will turn Belgrade into a key economic player in Central Europe.

The Tesla City project is indicative of the harmonious development of Belgrade. It is carefully linked to the natural environment and is well balanced with the prestigious history of the city. Through its connection to the historic centre of the city, it will contribute to the revitalisation of urban activity. The complex will host a range of activities, from business meetings to large-scale events such as concerts. Its versatile event space is set under a wire cloth canopy, and upon completion will be an outstanding feat of architectural design. The complex will also have an aquarium, a high-end shopping mall and many restaurants. Additionally, Tesla City will have a swimming pool that can be used as an ice rink during winter.

Each aspect of the project will be connected by a metro station located within the development, making it convenient and efficient to negotiate. Set against this unique concentration of businesses, hotels, retail options and event areas, there will be residential districts comprising multifamily housing, townhouses and individual homes located along a network of beautiful avenues. Gardens and parks throughout the area will provide residents and guests with a strong connection to nature and a pleasant quality of living. Dana Holdings hopes the Tesla City concept will solidify Belgrade’s position as one of the most important capitals in the region while giving its residents a new symbol of hope for the future.

Climate change threatens to wreak havoc on the global economy

Posted on by Max Tomlin

In October 2018, a landmark report commissioned as part of the 2015 Paris climate agreement found that “rapid and unprecedented” change is needed to limit global warming to a maximum of 1.5 degrees Celsius. In the clearest warning to date, the United Nations’ Intergovernmental Panel on Climate Change said if global temperatures rise above this point – even by a fraction of a degree – future droughts, floods and heat waves will be drastically worsened.

For decades, the finance sector has dismissed climate change as too nebulous to worry about

Severe weather events are followed by equally extreme financial costs. As Morgan Despres, Head of the Secretariat of the Network for Greening the Financial System (NGFS), told World Finance: “Climate change will affect the global economy, and so the financial system that supports it.” A Stanford University study published in May said that failing to limit global warming would cost the global economy tens of trillions of dollars over the next century.

For decades, the finance sector has dismissed climate change as a threat that was either not credible or too nebulous and distant to worry about. But as scientific research provides more quantifiable data on the cost of failing to act, banks, insurers and investors are beginning to take responsibility for the climate problem.

Mitigating short-termism
The transition to a low-carbon economy will require shifting huge amounts of money over the next decade. “Public investment will not be sufficient,” Despres explained. “Institutional investors and other market participants alike should be in position to scale up green finance while being able to measure and mitigate [their] exposures to climate risk.”

The NGFS was created in 2017 to support the action undertaken by the 195 signatories of the Paris Agreement. It is formed of 18 central banks, including those of England, Germany, France and China, that have openly acknowledged that the financial risks of climate change are both system-wide and potentially irreversible if not addressed.

As the heart of the global economy, financial institutions have an outsized responsibility to help limit these risks. “Solving climate change is a very capital-intensive undertaking,” said Trevor Houser, a partner at the independent research firm Rhodium Group. Trillions of dollars of investment is needed to fund low-carbon energy production, more efficient buildings and new agricultural practices. The OECD has estimated that, for each year from 2016 to 2030, an extra $600bn worth of investment in infrastructure will be needed to reach the aims of the Paris Agreement, with the transportation sector requiring the highest proportion of this financing (see Fig 1).

“Financial markets will be a crucial source of that investment, and so financial institutions will play a key role in the redirection [of] capital from the types of investments that have contributed to the problem, to the types of investments that are going to solve it,” Houser told World Finance. While the benefit of these investments will only be realised in the long term, the scale of the problem calls for short-term action, according to Despres.

$600bn

of annual infrastructure investment needed in 2016-30 to reach Paris Agreement goals

47%

Increase in average returns among firms that focus on long-term issues

36%

Increase in average earnings growth among firms that focus on long-term issues

70%%

of bankers surveyed by the Bank of England recognise the financial risks of climate change

10%%

of bankers have a long-term strategy to deal with the financial risks of climate change

The financial sector has long been criticised for its inclination towards short-termism. Corporate entities have become increasingly focused on producing short-term rewards for shareholders, which often come at the expense of longer-term objectives, a 2017 study by McKinsey revealed. However, companies that focus on long-term issues dramatically outperform their short-term thinking peers: according to McKinsey’s analysis, between 1999 and 2014, average returns and earnings growth were 47 percent and 36 percent higher respectively among firms that said they focused on long-term issues.

In a recent survey, the Bank of England found out just how bad short-term thinking among bankers was: while 70 percent of respondents recognised that climate change posed financial risks, only 10 percent had taken a long-term strategic view of those threats.

Following this, the Bank of England’s regulatory arm opened a consultation on requiring the boards of UK banks, insurers and building societies to put an executive in charge of climate-related risks. The bank’s Prudential Regulation Authority said the “far-reaching and foreseeable risks” of climate change should be addressed through firms’ existing risk management frameworks.

A risky business
In addition to assessing how climate change will impact their own operations, banks can accelerate change by funnelling money towards sectors and technologies that aim to reduce the impact of climate change.

Arthur Lerner-Lam is a seismologist and the deputy director of the Earth Institute’s Lamont-Doherty Earth Observatory at Columbia University. He told World Finance that banks had begun evaluating climate-related risks more seriously through initiatives including environmental, social and corporate governance (ESG) investments and socially responsible investing.

A number of banks in Europe, such as HSBC and BNP Paribas, have vowed to stop providing financing for high-carbon-intensity projects, such as coal power stations, oil and gas projects in the Arctic or the extraction of tar sands oil, which is said to be the dirtiest fossil fuel on the planet. Dutch bank ING has gone a step further, saying it will reassess its entire lending portfolio based on climate impact.

However, the Banking on Climate Change report, published by the Rainforest Action Network, found that in 2017, 36 of the world’s biggest banks still poured $115bn into high-carbon-intensity projects, up 11 percent from 2016. Despite its pronouncements, HSBC, along with a number of other household names, appeared in the report’s top 10 list for banks that increased their fossil fuel financing from 2016 to 2017 (see Fig 2). Major banks outside Europe have “done little to adopt policies that would bring their activities in line with the Paris Agreement”, the report concluded.

But banks are increasingly realising that by continuing to siphon money into fossil fuels, they risk investing their money in so-called ‘stranded assets’. These are projects that unexpectedly lose value as a result of climate change. A 2018 study by Carbon Tracker found that up to $60bn of coal power assets in South-East Asia could cease earning an economic return in the next decade.

This issue is rapidly appearing on investors’ agendas. In a 2017 investor survey by Ernst & Young (EY), more than 60 percent of respondents said the risk of stranded assets had caused them to either decrease their holdings over the past 12 months or monitor their holdings closely. Even with these moves, though, some say the pace of change in the banking industry is too slow. In February 2018, socially committed investment manager Boston Common Asset Manager said the banking sector was “failing to capture the risks and opportunities of climate change”.

However, Mark Fisher, Associate Partner for Climate Change and Sustainability Services at EY, said that – compared with four or five years ago, when most banks relegated any understanding of climate change to a corporate social responsibility team – much has changed. “There was very little recognition or understanding of the financial risks that might be associated with climate change or the sort of strategic opportunities that might present to them,” he said. “Whereas now you’ll find reasonable pockets of people within those organisations… that can talk to the issue and understand the issue.”

While some companies still treat climate change as an investor relations box-ticking exercise, a growing number are considering the potential risks of both physical and transition impacts – that is, variations in the physical effects of a changing climate and the impact of changes on climate-related policy.

On the front line
Banks and investors typically focus their efforts on transitional risks, such as stranded assets, that could threaten their investments in the future. But the physical risks – the rising tides and intense storms – have already started to occur. As Houser explained: “Instead of the risk of a coal-fired power plant that’s no longer going to have a market because of changes in policies, this is the risk of a facility that’s going to be underwater because of global warming.”
Insurance firms are undeniably exposed to the physical consequences of climate change. According to Moody’s Investors Services, their losses from extreme weather events have jumped in recent decades.

Insurance firms are undeniably exposed to the physical consequences of climate change

In 2017, the insurance industry dealt with the fallout from three category four or higher hurricanes, wildfires in California, earthquakes in Mexico and a deadly monsoon season in South-East Asia. Extreme weather persisted in 2018, with the most destructive wildfires in California’s history, catastrophic flooding in the US and the strongest storm of the year in Typhoon Mangkhut.

The insurance claims from devastating storms all around the world come back to European insurance and reinsurance companies, according to Geoffrey Heal, a professor of economics at Columbia Business School. For this reason, homeowners in Florida can no longer buy commercial hurricane insurance. After insurance providers hiked their premiums, the state’s government blocked them from raising their prices any higher and they all pulled out. “The state of Florida runs its own hurricane insurance, which probably would have been bankrupted by the recent events there, but we don’t know that for sure yet,” Heal said.

In 2017, natural catastrophes cost the insurance industry a record $135bn in insured losses, about three times more than the 10-year average of $49bn, according to global reinsurer Munich Re. Including uninsured losses, the overall cost reached $330bn, the second-highest figure ever recorded for natural disasters. While it is difficult to trace individual weather events back to climate change, one study predicted how much man-made global warming worsened Hurricane Florence, which hit the southern US states in September 2018. Academic researchers estimated the hurricane would be about 80km larger and drop 50 percent more rainfall because of human interference in the climate system.

About two thirds of globally active insurance and reinsurance companies have fully integrated climate change into their business model, according to the Geneva Association think tank. But the Asset Owners Disclosure Project found the industry still has a long way to go, particularly in the US: after examining 80 of the world’s largest insurers, with $15trn worth of assets under management, it found all but three US insurance firms had no plans in place to decarbonise their portfolios or address climate-related financial risks.

Driving change
While industries such as banking and insurance are certainly modernising their views on climate risk, other areas, such as asset management, are lagging behind. “There’s still too much noise around there being a need to sacrifice performance in order to support ESG issues,” Fisher said. He added that ESG rules should be providing investors with another data set to help them make a sensible investment decision, not a distinct way of investing.

$135bn

Cost to the insurance industry in insured losses from natural disasters in 2017

$335bn

Cost to the insurance industry in insured and uninsured losses from natural disasters in 2017

13%

of assets managed by the world’s largest pension funds have been assessed for climate-related risks

In the world of pension funds, nearly 90 percent of assets managed on behalf of global savers are exposed to potential losses in the long term, according to a study by the Asset Owners Disclosure Project. Just 13 percent of the assets managed by the world’s largest public pension funds have undergone a formal assessment for exposure to climate-related risks.

But investors are increasingly voicing concerns about the nonfinancial performance of their portfolios. EY’s investor survey found that the proportion of investors that dismiss nonfinancial and ESG information as immaterial or trivial had fallen. Of the respondents, 68 percent said nonfinancial information had played a pivotal role frequently or occasionally in their investment decisions in the previous year, up by 10 percentage points from 2013.

As more investors seek to address global warming with their funds, Lerner-Lam warned that a climate innovation gap has opened up between research and development labs and the venture capital investors needed to get these projects off the ground. Communication between innovation labs and investment communities is necessary for the development of sustainable technologies, Lerner-Lam said. Columbia University is working to close this gap by holding a clean technology showcase to open up discussions about commercial opportunities with investors. Government policies could also encourage the investment community to get behind critical technologies.

Maria Connolly, who leads the clean energy team at law firm TLT, told World Finance that government policy could help push the finance sector into investing more heavily in green assets by giving sustainable technology the stability investors need. “It’s creation of opportunity, and I do think it needs to be led from [a] government level,” Connolly said. “It’s looking at areas of the market that might just need a kick-start.”

The political atmosphere around climate change shifted significantly after the Paris Agreement. Along with generating publicity for the issue, COP21 helped governments focus their attention towards specific targets. These goals have influenced the way financial firms perceive the risks and opportunities of climate change.

Even over the course of the past year, Fisher said he has noticed that executives have a better understanding and appreciation of environmental issues: “I think there’s lots of external pressures for those organisations that have made it somewhat easier for those who sit internally, who’ve been pursuing it from an environmental management point of view, perhaps, to make those links and push the agenda forward and get the ear of the executives.”

A united response
The sheer scale and the number of moving parts involved in the climate change problem remain daunting. While Fisher admitted he is often disappointed by the lack of knowledge and progress he sees in the financial industry, he said there are many days when he feels optimistic about the change occurring in the sector – from the increased pressure from prudential regulators to the widening interest in climate issues.

“It feels like that momentum is building fairly rapidly,” Fisher said. “So many more of those conversations [on climate issues are] now taking place within the finance community. It’s getting that elevated conversation.”

There is still friction in the global financial industry’s response to climate change, however, due to a lack of standardised rules and frameworks around green assets. For instance, Fisher said: “I see a certain amount of evidence of companies trying to retrofit existing initiatives or existing investments into a framework so they can define it as being green or sustainable.”

There is no existing taxonomy that has been universally agreed for what is green and what isn’t, Fisher said. One possible global framework for environmental disclosures was presented by the Task Force on Climate-related Financial Disclosures (TCFD) in 2017. The group, which was set up by the Financial Stability Board in 2015, issued recommendations on what companies should disclose to enable financial markets to understand climate-related financial issues.

Under these voluntary recommendations, companies are called to disclose their governance around climate-related risks and opportunities, impacts on the company’s business and strategy, and the metrics used to assess climate-related risks. “The purpose is to fill the data gap. We need financial stakeholders to produce comparable, granular data, with good quality,” Despres said. Some work is being done on this in France, where institutional investors are required to disclose their climate risk and alignment with a national low-carbon strategy. The European Union is now moving towards implementing similar rules.

“The ultimate purpose is to create fully fledged green markets relying on the same perception of greenness, which necessitates spreading best practices in order to infuse the whole financial system,” Despres said.

The private sector is waking up to the fact that good management requires addressing the climate change problem. Furthermore, as the international response to climate change gathers pace and focus, financial industries are seeing that this is a market full of opportunities.

“The capitalist system can be used productively,” Lerner-Lam said. “Let’s admit that we’re looking at an environmental situation which is with us now, as demonstrated by some of the [recent] extreme events.” The financial sector is recognising this and looking to it for opportunities for investment and to make returns, he added.

What started with the Paris Agreement in 2015 is now undeniably building momentum. With the help of new initiatives, such as the TCFD’s recommendations, businesses are better able to visualise and measure the change that must occur. Before the UN’s latest Climate Change Conference in Poland in December, Patricia Espinosa, the UN Climate Change Executive Secretary, said global action on climate change was taking another step forward. “COP21 saw the birth of the agreement. In Poland – as I call it, Paris 2.0 – we will put together the pieces, directions and guidelines in order to make the framework really operate.”

2018 proved to be a bumper year for dealmaking around the globe

Posted on by Max Tomlin

There was no shortage of disruption to global markets in 2018: the world’s two largest economies are engaged in a heated trade war, the clock is ticking on the UK’s departure from the European Union, and scandals at top tech firms have shaken a once-thriving market. Uncertainty has become the norm for companies operating in this environment, but despite the fact that even the experts cannot anticipate what new political and economic challenges will emerge in the next month, let alone the next 12 months, 2018 is expected to have been a milestone year for mergers and acquisitions (M&A) activity.

M&A activity follows the direction of global stock markets and broader economic developments, both of which were strong for most of 2018

In the first nine months of the year alone, deals worth $3.3trn were agreed, up by 39 percent from the same period in 2017. At the time of World Finance going to print, M&A activity for 2018 is on track to beat the $4.96trn record that was reached in 2007 on the eve of the global financial crisis (see Fig 1). But with many regulatory changes still up in the air, there are questions around whether this surge can be sustained.

Rise of the mega deal
Generally, M&A activity follows the direction of global stock markets and broader economic developments, both of which were strong for most of 2018. In August, for instance, the US achieved the longest bull market run on record after a stock rally that started in March 2009 surpassed a previous record. The market more than quadrupled in that time. In the eurozone, Deloitte said a “robust” economic recovery was underway in 2018, driven by strong consumption and employment growth.

Developments in Asia, meanwhile, were expected to account for nearly two thirds of global growth, according to the IMF. It called the region the most dynamic in the world.

The strong economic environment not only encouraged more deals over the course of the year, but it also spurred bigger ones. The value of the average M&A agreement rose to $1.07bn as of September 2018, according to an analysis by law firm Linklaters. This was just above the average values in 2015 and 2007, two other big years for M&A deals. Stefan Brunnschweiler, who heads up corporate M&A at global law firm CMS, told World Finance that while reviewing a list of the deals his firm had been involved in over the past year, he was surprised by how many were above $1bn.

However, the environment has been perfect for mega deals, which are typically defined as being worth $5bn or more. Large companies with access to finance spent the year refocusing their key operations and identifying which assets they could dispose of. “Large parts of companies are spun off and, therefore, mega deals can happen,” Brunnschweiler said.

The significant rise in M&A values even helped mask a five percent drop in the number of deals in the third quarter. Global M&A volume in Q3 2018 slowed after a boom in the first half of the year, according to data from Dealogic. But even with this dip in activity, the total volume in the first nine months of 2018 was still almost a third higher than the previous year, thanks to mega deals.

One of the biggest deals of the year was Takeda Pharmaceutical’s $62bn bid for rival drugmaker Shire. The US telecoms industry was also a strong area for M&A activity in 2018: volume in the sector reached $277.9bn globally in the first nine months of the year, the highest for the period in five years, according to Dealogic. Notable deals agreed during the year included T-Mobile’s $26bn acquisition of Sprint and US cable group Comcast’s $53.3bn takeover of Sky.

Protectionism worries grow
The rising wave of M&A activity in 2018 has been followed by a shadow of growing geopolitical tension. Boardrooms have taken note of protectionist and anti-globalisation policies in some areas of the world, and many worry that this will impact their ability to complete large, cross-border transactions. The most pressing concern on the list is the trade war between the US and China. Multiple Chinese acquisitions have been blocked by the US over national security concerns, including Alibaba’s planned $1.2bn takeover of money transfer firm MoneyGram and Broadcom’s $117bn purchase of Qualcomm. Now, US firms are worried about pursuing deals with any Chinese involvement.

$3.3trn

Value of M&A deals in the first nine months of 2018

$1.07bn

Value of the average M&A agreement in September 2018

5%

Year-on-year drop in the number of M&A deals in Q3 2018

32%

Increase in total M&A volume in first nine months of 2018

Accounting giant EY’s 19th Capital Confidence Barometer, published in October, made it clear that corporate takeover appetite was souring. Just 46 percent of executives expected to actively pursue an acquisition in the next year – the lowest figure for four years. In addition to trade issues between the US and China, the survey of more than 2,600 dealmakers across 45 countries said other trade and tariff issues, such as Brexit and the renegotiation of a trade deal between the US, Canada and Mexico, were compelling some executives to put their M&A plans on hold.

Steve Krouskos, Global Vice Chair for Transaction Advisory Services at EY, wrote in the report that the drop in corporate appetite for M&A was “not surprising”, but that it “remains robust on the whole”. Many companies will proceed with dealmaking plans as they look to gain a competitive advantage, he added. What’s more, in a seeming contradiction to their own plans, many executives predicted the global dealmaking environment would improve in the year ahead. Respondents expected the strongest outlook for the M&A market in the survey’s history, with 90 percent saying it would improve over the next 12 months, up from 57 percent in the same period last year. Just one percent predicted that the M&A market would decline.

While executives do not plan to make acquisitions themselves, they clearly believe others will keep the market alive. The authors of the report explained: “We have seen this dichotomy before in our survey. This is an indication that we will likely see a temporary pause in activity. A brief stop to refuel, so to speak.” This means there may be fewer deals in the near term as companies focus on the integration of any new assets they picked up in the last year.

This introspection will also cause firms to consider the strengths and, just as importantly, the weaknesses of their own portfolios. So while the next year or so may not be as strong as 2018, more assets will likely come to the market and cause deal activity to pick up as early as the second half of 2019.

Positive disruption
Brexit remains an issue for some dealmakers. As part of EY’s Capital Confidence Barometer, a survey of 156 UK firms found that the majority planned to increase their focus on existing operations rather than M&A over the next 12 months, sending M&A intentions to a four-year low. As the 2019 Brexit deadline looms, just 45 percent of UK respondents said they were actively seeking to pursue deals in the next 12 months, down 20 percentage points from July.

As the world’s most important dealmaking partner, the US economy remains the strongest indicator of M&A activity

But those outside the UK have not been put off by the prospect of Brexit Britain. According to Brunnschweiler, there was a surprising uptick in deal activity in the UK over the past year, helped in part by the drop in the country’s currency following the 2016 referendum, but also due to the fact that companies have been forced to reassess their needs in light of the pending regulatory changes. “M&A was pretty active in the UK [in 2018], which leads me to the conclusion that the insecurity and the need for companies to reposition themselves led to quite some deal activity,” Brunnschweiler said.

Others experts have said disruption to regulatory standards or the political norm could actually encourage deals. In an interview with CNBC, Robert Kindler, Vice Chairman and Global Head of M&A at Morgan Stanley, said companies that do not know what to expect in this unpredictable climate could act unpredictably as they come up with new ways to adapt. But Brunnschweiler believes the reaction towards Brexit was the exception to the rule: “All of these geopolitical tensions create an insecurity, and an insecurity normally leads to a situation where companies do less M&A.”

Change on the horizon
In any case, if it holds true that M&A activity follows stock markets and economic indicators, dealmaking in certain parts of the world could be in trouble. The STOXX Europe 600, an index of European stocks, is on track for its worst year since 2011, and Institutional Brokers’ Estimate System data from Refinitiv showed that European companies in the third quarter were delivering their most disappointing earnings in nearly three years.

What’s more, in September, the Organisation for Economic Cooperation and Development cut global growth forecasts for 2018 and 2019, warning that global economic expansion may have peaked. China’s economy, while still growing, has also slowed to its weakest rate of growth since around the time of the financial crisis. As 2018 headed to a close, Brunnschweiler warned that he was not as optimistic as he was in late 2017. “I think a positive environment is still what is driving M&A activity, and indications are there that a boom that was happening for a couple of years is coming to an end,” he said. “If the stock market goes down, if the economy slows down, that will in parallel also slow down M&A activity.”

As the world’s most important dealmaking partner, the US economy remains the strongest indicator of M&A activity. But warning signs are beginning to emerge there, too. Two thirds of US business economists in a recent poll by the National Association for Business Economics said they expect the next recession to begin by the end of 2020. The survey found that 10 percent of economists were expecting the next contraction to begin in 2019, while a further 56 percent said it would occur in 2020.

Experts tend to agree that the biggest current threat to the economy, and thus to resilient M&A activity, is global trade policy. With a number of trade issues remaining unresolved at the end of the year, a period of uncertainty that began in 2016 will likely extend into 2019, and possibly beyond. But companies cannot put their corporate strategies on hold indefinitely: while this M&A boom may have ended its run in 2018, another could be just around the corner.

Creating a bright line between strategy design and strategy delivery

Posted on by World Finance

The people that are responsible for developing a strategy aren’t typically the people who make it reality. There’s a disconnect between the executives who dream up the future of their organisation and the project managers who have to make that dream come true. Recognising this, the Project Management Institute is leading Brightline: a coalition that creates resources to help executives bridge the gap between strategy design and delivery. Cindy W Anderson from PMI explains Brightline’s vision and work.

The next video in this series is about how digital transformation is disrupting project management, or you can watch the full Project Management Institute playlist.

Cindy W Anderson: Project management is sometimes considered an ‘accidental profession’ – people fall into it when they realise that they have a knack for getting things done.

We sometimes talk about project managers as the people who make dreams come true. They turn ideas into reality. And that’s not really very easy. So, consider some of the research that we’ve done in the past, which finds that every 20 seconds, $1m globally is wasted due to poor project performance. Which means that every day it’s $5bn, and every year it’s $2trn of economic value that’s wasted because projects aren’t being completed successfully.

The people that are responsible for developing a strategy, developing that set of initiatives that are going to transform an organisation. They’re strategy people that sit around tables and come up with these great ideas and these beautiful strategies: they typically aren’t responsible for the delivering on those strategies. And that’s why we find that only one in 10 organisations is able to complete all of their strategic initiatives successfully.

The line right now between strategy design and strategy delivery is blurry. And we want to make it a bright line. And that’s why we developed the Brightline Initiative.

The Brightline Initiative is really targeted towards senior executives, typically in the strategy space.

We think the more that those executives understand that they’re accountable to deliver what they’ve promised; to actually have the capability in the organisation to make those dreams come true: we think that waste is going to go down dramatically.

So, we believe that once executives know they’re accountable, that that’s the first step. Right now that gap between strategy design and delivery is more like a chasm.

They think it’s going to happen by magic somehow. People have developed strategies over time, and over time they just don’t get delivered successfully. So we’re trying to raise awareness first of all. Making sure that these executives – especially the chief strategy officers – understand that they do have accountability. Even if they’re not the people who deliver it, they still need to know that their organisation has the capability to deliver. And they have to make that connection. Develop that bright line between strategy design and delivery.

And at that point, the project management function – and it’s called many things in different organisations, but it’s all the people who turn ideas into reality, it’s all the people who are developing the products and delivering the value that customers want – but at that point, that function can take over, and they actually deliver the strategy, and the connection is really that bright line between strategy design and strategy delivery.

Leveraging the full value delivery landscape with PMI

Posted on by World Finance

We don’t do projects just because we want to get a project done: we do projects because we expect they will deliver value to customers or stakeholders. That’s why the Project Management Institute talks about the practices and techniques of project management as the value delivery landscape. Cindy W Anderson from PMI, Suneet Prakash from Aditya Birla Management Corporation, and Peter Moutsatsos from Telstra discuss the value delivery landscape and how project management professionals can keep up to date as new and innovative approaches are added to it.

The next video in this series is about creating a bright line between strategy design and strategy delivery, or you can watch the full Project Management Institute playlist.

Cindy W Anderson: An organisation really needs the capability to deliver value. The capability to deliver projects and programmes that lead to value and competitive advantage.

At PMI we call that the value delivery landscape. And we call it the value delivery landscape because we don’t do projects because we want to get a project done; we do projects because we know it’s going to deliver value to our customers or to our stakeholders.

Projects require all sorts of different methods and approaches. And the value delivery landscape encompasses all of those practices from very traditional to cutting edge and innovative approaches to project management – and including what might be next, that we haven’t even discovered yet.

Suneet Prakash: We started with the very basic, fundamental processes of project management. And then we also have agile, we have predictive, we have iterative, we have waterfall. We also use – depending upon the type of the project – sometimes it could be a hybrid. That means in a phase of a project we would use the waterfall technique, in another phase of the project we would use agile technique, or the fundamental technique. So it depends really upon the project requirement.

Peter Moutsatsos: If we go back in the past and look at how, say, software development projects were executed 20 years ago, waterfall was largely the only choice. And project managers used waterfall methods to create all types of software projects.

If we now flash forward 20 years, there’s still software projects, but we’re seeing different types of software projects. We’re seeing social media, we’re seeing mobile apps. Those things can be better served by agile methodology, or perhaps even a hybrid approach. Because the stakeholder mix has changed, the complexity mix has changed, the business drivers are different. So adopting just the waterfall method may not get the best outcome.

Cindy W Anderson: When organisations have a lot of agility and flexibility in the way that they go about executing their strategies, they’re much more successful.

The business really needs to have a capability within its project management operating function that allows it to be able to staff across this value delivery landscape.

One of the ways that organisations can be sure that their project managers have the skills that they need not only for today but also in the future is making sure that they have a continuous development cycle.

Our main certification is called the PMP – the Project Management Professional certification – and it requires 60 hours of continuing education training every three years. To make sure that project managers keep up with the emerging skillsets that they’ll need to help their organisations deliver value in the future.

Suneet Prakash: I got my PMP certification in the year 2007. And I like this system of PMP renewal, because you are automatically forced to replenish your project management knowledge if you really want to retain your credential.

So it’s a very focused approach which helps you to learn new techniques and use them in your projects. And that’s how you keep learning, and that’s how you talk the same language.

Project Management Institute: How to get the best out of executive sponsors

Posted on by World Finance

Executive sponsors connect project managers and project teams to the rest of an organisation: they clear roadblocks, advocate for resources, and make higher-level decisions when they need to be made. But they’re also extremely busy, and need their organisation to support them in this role. Cindy W Anderson from PMI and Peter Moutsatsos from Telstra discuss the ways that executive sponsors help projects, and how organisations can help executive sponsors.

The next video in this series is about leveraging the full value delivery landscape, or you can watch the full Project Management Institute playlist.

Cindy W Anderson: Executive sponsors are important to a project or a programme because they connect the project and the project team to the rest of the organisation kind of laterally, and they also connect it upward into the executive suite.

Peter Moutsatsos: Our business has known the importance of sponsorship for quite some time. And so we do our very best to engage with our sponsors, to make sure they understand that they are a part of the project, and that they sign up and advocate the whole way through the project’s life.

Cindy W Anderson: Executive sponsors clear roadblocks. Executive sponsors are those who make decisions when there’s a decision to be made. They advocate for the resources – both human resources and budget – when projects need additional funding, or there’s competition for project work.

And without that, projects can get lost. They can get stopped or stalled. And I think that’s probably why an executive sponsor is so important. It’s that connection to the rest of the organisation.

Peter Moutsatsos: Project sponsors must understand that they are on the hook for delivery. Because they are the project. They are the ones who signed up to an idea, they secured company capital, they secured a project team and key resources to go and get this product or service built.

When the delivery phase is over and the project is in the market, they are the ones who are accountable to the leadership team for the benefits that are coming in the door – or not coming in the door – as a result of the project.

Cindy W Anderson: I think there are three things that an organisation can do to get the best use out of an executive sponsor. One of those is creating a culture where executive sponsors are really seen as a critical project resource.

If an organisation has a culture where it supports an executive sponsor, and gives that person the capability and freedom to actually sponsor in a meaningful way, then I think they can be very successful.

Peter Moutsatsos: The way we do that is explain to them the importance of being a sponsor. We induct them into the role. We train them. We put together roundtables, and get them to collaborate and share stories about the challenges they’re experiencing in being a sponsor.

Cindy W Anderson: The second thing I would say is that organisations that are most successful with executive sponsors really focus on the most important skills. Influencing. Being able to understand the organisation, and having the organisational savvy in order to influence across and up in an organisation.

Peter Moutsatsos: A good sponsor knows how to engage with the project, they understand that they are the advocate of the project, they have vested interests in the outcome.

Cindy W Anderson: And then the third thing I would say is that organisations that are most successful provide training for executive sponsors, the same way that they would provide training for anybody who’s moving into another role or another skillset within the organisation.

All of the presentations that we do, and the material that we provide to organisations, to help build that capability within their own organisation is all based on our research. And that helps the project managers, and the PMO directors, and the team that’s delivering the value within an organisation, be advocates for that capability within the organisation.

‘Laser-focused on outcome’: The changing role of the project manager

Posted on by World Finance

Projects today can last for multiple years, involving thousands of people across multiple continents, with business priorities changing regularly. That puts enormous pressure on project leaders to adapt themselves, their teams, and their technologies. Murat Bicak from PMI and Peter Moutstatsos from Telstra discuss the skills that project managers need to develop today to become the project leaders of tomorrow.

The next video in this series is about getting the best out of executive sponsors, or you can watch the full Project Management Institute playlist.

Murat Bicak: Projects became increasingly complex over time. If you look at a project today you may have thousands of people working together; collaborating on digital platforms, in multiple countries across the globe.

But some of these projects last for four, five years. And businesses change, requirements change over that period of time. Technology changes over that period of time.

So for a project leader to become successful, they must be laser-focused on the outcome, laser-focused on the customer needs, and constantly asking whether or not there are changes that they need to make to the team, to the capabilities underneath that team, to the technology that they might be using.

Which requires a very different type of person. A very strategic leader, if you will, who is able to think critically, negotiate, influence the organisation and leadership. And those are some of the changes that are already happening, at the project world.

Peter Moutsatsos: Over the last 10 years, we’ve noticed that project managers have become more professional. They’ve become an integral part of the organisational resource mix. And what we’re seeing is a recognition that project managers need skills that are going to serve them in the digital economy.

The future project manager has to be far more interpersonal. They’ve got to be far more connected emotionally with stakeholders, and have that emotional intelligence to understand what’s needed, to be a more effective leader. And also to be more servant in nature, in terms of their leadership style. So, to lead from behind.

Murat Bicak: The new skills that project leadership and project managers need to acquire is a tremendous understanding of customers. So, design thinking for example is going to be a critical enabler for getting to the question: why?

Every project delivers against a customer need. And with technology advances, the customers are much closer to projects and project leadership and project management and the team. So, putting the customer need up front is going to be the number one change for every type of project.

Number two, there will be a tremendous amount of iteration, prototyping, learning and testing, and failing! Risk taking. Which is also different from what many people are used to. Which requires a different type of leadership, a different type of skillset, which requires empowerment, different culture, and a way of working.

The line between strategy and delivery is blurring, and our project management professionals are going to find themselves at the forefront of delivering every strategic initiative for their organisations.

The world of work is changing, and so is PMI. In 2019 we’re going to be celebrating our 50th anniversary. And with the transformation programme that we have started, we’re making transformation part of our DNA. So over the next 50 years you’re going to see a very proactive PMI, continuing to deliver value to our stakeholders and customers.

How digital transformation is disrupting project management and leaders

Posted on by World Finance

Every sector is touched by digital transformation – and more and more project managers will be required to manage the rapid changes it’s causing. But it’s also changing the project management profession itself – so professionals and the Project Management Institute are having to adapt. Murat Bicak from PMI, Peter Moutsatsos from Telstra, and Suneet Prakash from Aditya Birla Management Corporation discuss the impact of digital transformation on project management, the role of the project manager, and the Project Management Institute itself.

The next video in this series is about the changing role of the project manager, or you can watch the full Project Management Institute playlist.

Murat Bicak: Every sector is touched by digital transformations. What makes digital transformations very different from previous transformative efforts is – first of all – the amount of change and the pace of change that is going on right now. Secondly, it’s the competitive environment that’s changed, because organisations need to worry about not only competition coming from their own industries, but competition coming from adjacencies, software sectors. And lastly, the amount of change that organisations go through as it relates to how talent, as well as leadership needs to react, is also a big driver of what makes digital transformations quite different.

Peter Moutsatsos: Digital transformation is changing our business in that it is – we are staring into legacy platforms and legacy products and systems that must be disrupted. And what we’re discovering is that in order to reinvent ourselves, we must disrupt ourselves or be disrupted.

And if we don’t, some young, fresh-faced, well-funded startup will come and take our marketshare and our customers away from us.

Murat Bicak: If you think about the amount of change that needs to happen because of digital transformations, all of that change is going to be delivered through a project or a set of projects, programmes, portfolios. So the opportunity for project management is tremendous, because the world is becoming projectised. There will be more and more projects, more and more change, and the project management profession is going to change with it.

Suneet Prakash: As technology’s coming, and as things are changing, a lot of traditional responsibilities of the project manager can actually now be taken over by technology. Things like scheduling and planning, and things which can be done by software or technology. And he or she can actually spend more time thinking how to get the business alignment of the project. Which is very important.

Today, projects are talked about as strategy: delivery of strategy. That’s the real project manager’s role. And technology will help project managers to align the business part of the project with the delivery.

Murat Bicak: Digital transformations are going to change the role of the project manager – and project management – in big ways.

They’re going to be strategic leaders of their organisations. They’re going to be using different ways and methodologies: so they will be agnostic how actually projects should be delivered, because they’re going to be focused on delivering the outcomes that their organisations are trying to achieve in the marketplace.

At PMI we are also going through a digital transformation, and we consider this a great opportunity for us to continue supporting project management professionals in a different way. We’re building the professional association of the future, by putting our customers in the middle, and really understanding the challenges and issues, and the skills that they need, to continue their careers in the organisations that they work at. And we will continue supporting them on a lifelong career journey.