Every day, Shenzhen, a rapidly growing city in Southern China, produces around 15,000 tonnes of waste. As a whole, China generates around 300 million tonnes of rubbish each year, according to the World Energy Council’s (WEC) World Energy Resources 2016 report. Due to swift population growth and urbanisation, this is expected to reach half a billion tonnes a year by 2025.
To answer Shenzhen’s growing waste management challenges, China is building the world’s largest waste-to-energy (WtE) plant on the outskirts of the city. WtE plants are able to generate electricity by burning waste – a particularly useful process for non-recyclables. Once operational in 2020, the Shenzhen East WtE plant will incinerate about 5,000 tonnes of waste each day, producing 550 million kWh a year, according to the project’s architects, Schmidt Hammer Lassen.
With China being one of the world’s largest energy consumers, WtE is viewed as a solution to both the country’s waste issues and its carbon emissions – but public concerns over negative health and environmental impacts threaten to hold the industry back.
Trash to treasure
Poor management of municipal solid waste (MSW) – the waste taken from residential, industrial and commercial sources – can contribute to increased air pollution, surface-water contamination, the spread of disease and increased methane production, all of which can cause numerous environmental and health problems. Following an analysis of Asia’s WtE industry, the International Energy Agency (IEA) wrote: “For these reasons, the impetus for cities to provide effective waste management is strong.”
Waste-to-energy provides a solution to the global waste crisis by converting surplus waste into a source of low-carbon energy
The WtE market makes up a small but growing proportion of the world’s waste management industry. According to the WEC, in 2015, the market was valued at around $25bn, with an average growth rate of 7.5 percent per year. This is expected to reach $36bn by 2020 – a projected increase of 44 percent in just five years.
According to Mark Sommerfeld, policy manager for the UK’s Renewable Energy Association, WtE is towards the bottom of the waste management hierarchy, suggesting authorities should first seek to prevent, reuse and recycle waste. Once these options are exhausted, WtE can be used to dispose of non-recyclables. “[WtE] provides a necessary solution for dealing with the section of waste that cannot be economically recycled, utilising it as a valuable energy resource, rather than seeing it sent to landfill,” Sommerfeld told World Finance.
WtE can produce energy in several different ways, Sommerfeld explained: “Most commonly, it is used in electricity generation, providing dispatchable low-carbon power and displacing fossil fuel use… Additionally, the heat from this process can also be captured and used within heat networks, which is now common across Europe, such as in Germany, Sweden and the Netherlands.”
Anaerobic digestion, meanwhile, is a form of WtE that uses organic waste from food or purpose-grown crops to produce biomethane to generate electricity, which can be used for the gas grid or transportation sector. Additionally, advanced conversion technologies (ACT) such as gasification and pyrolysis can produce green chemicals and renewable transport fuels. “In this way, ACT could help decarbonise difficult-to-treat sectors like aviation and shipping,” Sommerfeld said.
WtE essentially provides a solution to the global waste crisis by converting surplus waste into a source of low-carbon energy – a win-win result. However, there are concerns that when energy plants do not meet environmental regulations, they could end up damaging the surrounding ecosystem and harming public health.
Not in my backyard
China is emerging as the swiftest adopter of the technology; from 2011 to 2015, the country more than doubled its WtE capacity. The process was introduced in China in the 1980s, with the first modern plant built in Shenzhen in 1988. Since then, incineration plants quickly became an established means of waste management. China is the country with the largest installed WtE capacity in the world, with 7.3GW generated by its 339 plants in 2017, according to the IEA’s analysis. While the IEA expects the industry to continue growing – projected to reach 13GW by 2023 – the organisation warned that realising this growth would require responding to concerns raised by the public over air quality and health implications.
In Waste-to-Energy in China: Key Challenges and Opportunities, a 2015 report from the journal Energies, the research found public opposition was the industry’s biggest challenge to overcome. “With growing awareness of the need for environmental protection, public opposition has become the main obstacle to China’s WtE incineration [programme],” the report’s authors wrote.
The three main reasons cited were: opposition to the proximity of sites to residential areas, schools, lakes and rivers that provide drinking water; a lack of accountability; and a lack of public participation in decision-making.
“Due to the negative publicity of mainstream media and other factors, public opposition to the construction of MSW incineration plants has occurred in cities including Guangdong, Zhejiang and Shandong,” the report said. “Village demonstrations, student strikes and other protests affect social stability. These disturbances cause panic among members of the public.” In Shenzhen, for example, residents have been involved in a legal battle to halt the Shenzhen East project over fears pollutants will enter the air and nearby reservoir of drinking water, according to Yale Environment 360.
Hindering growth
China’s WtE plants take in a lower quality of waste due to the country’s lack of recycling programmes, meaning the waste has a higher organic composition and moisture content. This results in lower energy efficiencies and higher rates of pollutants. Where waste in Europe has an average net calorific value of eight to 11MJ/kg, China’s sits at around three to five MJ/kg. “[Improving] the quality of the waste that is fed into furnaces is crucial to achieving safe incineration”, the Energies report said.
Sommerfeld told World Finance it is important for WtE plants to have a good understanding of the nature of waste going into the site. “As such, the industry is supportive of policies that see different waste streams separated,” he said. “This also helps improve recycling rates. Avoiding contamination of waste streams as part of a modern waste management scheme is good for the whole waste industry.”
Along with promoting recycling, researchers in China have looked for ways to address this issue, including creating a new style of incineration plant that can extract more energy from waste with a high moisture content. This method also lowers dioxin levels to below EU limits. At the time of the WEC’s report in 2016, China had 28 WtE plants with this capability.
But even with these solutions, China still faces the challenge of high costs in the WtE industry. The WEC called high technology costs “one of the biggest barriers to market development”. These high costs often cause Chinese WtE plants to take the form of public-private partnerships, the Energies report found, which creates another problem for companies and results in an increased risk for fraudulent conduct. It also enables plants to avoid national emission standards or disclosing environmental monitoring information.
Even though many Chinese WtE operators claim to use advanced technologies in their environmental reports, there is little proof to back them up. In China, 16 percent of WtE incineration plants did not meet national standards in 2015, while more than three quarters did not meet EU standards. “Substandard incineration facilities and flue gas purification systems trigger a series of environmental pollution problems, and pollutants are generated in the process of incineration; in particular, emitted dioxins cause serious air pollution,” the Energies report said.
The prevalence of dioxins is one of the main reasons for public opposition to WtE, so firms must improve their standards to ensure they are not endangering public health.
Steps forward
Although China’s WtE industry faces controversy and challenges, the industry is a crucial part of the country’s response to its growing waste problem, especially as the region’s landfill are set to hit capacity in the next few years.
When built with state-of-the-art technology, WtE can deliver improved environmental and sanitary benefits when compared with landfill. For example, a WtE plant built to best-practice standards can reduce carbon emissions by up to 350kg of carbon dioxide equivalent to each tonne of waste processed.
According to Sommerfeld, WtE sites in the UK are subject to tight environmental legislation. He said: “Public Health England looked at WtE plants in 2013, with several studies also monitoring impacts since. They have concluded modern, well-managed WtE sites make only a ‘small contribution’ to local air pollution, and any health impacts, ‘if they exist, are likely to be very small and not detectable’.”
By continuing to research and develop new WtE technologies, pursue aggressive recycling programmes, create specialised regulatory agencies and guarantee public participation, China could enable its WtE plants to be safe for the environment and the surrounding population, while providing clear benefits in waste management energy generation.
As the global waste problem continues to pile up, WtE has a vital role to play. However, public health and environmental guarantees are needed to ensure incinerators aren’t doing more harm than good.
Saudi Arabia finds itself at a significant economic crossroads. Home to the second-largest oil reserves in the world, the kingdom’s economy has been largely defined by the crude industry since drillers first struck oil in Dammam in March 1938. The discovery marked a watershed moment in the nation’s history, sparking an economic boom and propelling Saudi Arabia towards becoming one of the world’s wealthiest countries. Today, the nation is recognised as a global economic powerhouse, sitting among the G20 countries and boasting one of the highest GDPs in the Middle East.
While oil has brought Saudi Arabia great wealth and prosperity, we know one thing for certain – it won’t last forever. Crude is a finite resource and, although there is much debate surrounding the extent of the nation’s vast oil reserves, some estimates predict that supplies will last just 70 more years. This looming time limit – coupled with a global push to create a greener future – has seen Saudi Arabia begin to craft its vision for a post-oil era.
In 2016, Prince Mohammed bin Salman launched the ambitious Vision 2030, a far-reaching reform plan that aims to diversify the economy away from oil, bolstering the private sector and improving employment opportunities for young people. The plan seeks to create a thriving economy where non-oil sectors such as tourism, manufacturing and renewable energy can drive growth, and entrepreneurial activities are encouraged. Small and medium-sized enterprises (SMEs) are a main focus for Vision 2030, with the project seeking to increase the contribution of SMEs to the Saudi Arabian GDP from 20 to 35 percent over the next decade. As the government forges ahead with its diversification drive, Saudi businesses must develop in line with these exciting transformations. A new economic ecosystem is emerging in Saudi Arabia and opportunities are plentiful for those businesses that contribute to its creation.
Burgeoning businesses
With Saudi Arabia ramping up its economic transformation plan, the nation’s private sector is truly coming into its own, and non-oil industries are beginning to drive growth. One such industry is the Saudi insurance market, which has shown great promise in recent years, emerging as one of the largest insurance sectors in the Gulf Cooperation Council (GCC) region. Since first opening its doors to customers in 1986, the Company for Cooperative Insurance (Tawuniya) has grown into one of the nation’s foremost insurance providers, offering more than 60 insurance products – including medical, motor, fire, property, engineering, casualty, marine, energy and aviation insurance – in order to protect Saudi citizens from all manner of risk.
A new economic ecosystem is emerging in Saudi Arabia, and opportunities are plentiful for those businesses that contribute to its creation
Throughout its long history in Saudi Arabia, Tawuniya has continuously adapted its offerings to meet both evolving customer demands and the country’s changing economic landscape, providing products that are practical and relevant for customers at every stage of their lives. This remains true today as Tawuniya continues to develop its business in accordance with the social and economic changes occurring in present-day Saudi Arabia, particularly focusing on the developments laid out in the wide-reaching Vision 2030 project. Given the integral role that SMEs are set to play in the Saudi economy of the future, Tawuniya hopes to assist burgeoning businesses by offering a range of practical insurance solutions.
It is with the nation’s nascent SMEs in mind that Tawuniya created its 360 Degree Integrated Insurance Programme. At Tawuniya, we understand that establishing and managing various insurance policies can be both arduous and confusing, taking up time and expertise that could be better used elsewhere. The 360 Degree Integrated Insurance Programme simplifies things for SME owners, allowing them to have all their insurance needs – including medical, motor and property policies – in one convenient place. This not only makes it much easier for SME owners and entrepreneurs to manage their policies, but it also reduces administration costs. By making life simpler for the country’s small-business owners, Tawuniya hopes that it will have a positive impact on Saudi Arabia’s emerging SMEs.
Hi-tech transformation
As the country continues on its path towards a brighter, more innovative future, it is clear that technological advances will play a key role in creating this new and improved Saudi Arabia. The nation is already in the midst of a technological transformation, with new technologies such as high-speed internet and contactless payments radically altering the daily lives of Saudi citizens. In the years to come, technology will also revolutionise the way we do business in Saudi Arabia, with cutting-edge developments such as artificial intelligence (AI), robotics and biometric identification all changing the world of business as we know it.
As Saudi Arabia embraces the digital era, businesses simply cannot afford to fall behind the curve. Future success is already largely dependent on the early adoption of new technologies, and companies of all sizes must put digital innovation at the very heart of their operations if they wish to stay relevant going forward. At Tawuniya, we recognise the importance of a strong digital strategy, and we fully embrace new technologies in everything we do.
As part of our digital drive, we have created a pioneering e-store, where customers can conveniently manage all their insurance needs. Available in both Arabic and English, the e-store is the first of its kind in Saudi Arabia and gives customers reliable remote access to their insurance accounts. At the click of a button, online users can quickly and efficiently update their insurance policies, manage their accounts, update their data, track their claims and find their closest sales office. The e-store also allows customers to compare various insurance products before purchasing a policy, helping them to find the package that is best suited to them and their needs.
Alongside this advanced e-store, Tawuniya is also introducing a range of cyber risk insurance products, specifically designed for clients who might be at a greater risk of cyberattack. Tawuniya understands just how valuable its customers’ digital data can be, and hopes to protect clients from every eventuality. The cyber risk insurance policy offers compensation for blackmail relating to cybercrime and makes provisions for reward payments for information leading to the arrest of anyone associated with a cybersecurity breach. The policy also provides compensation for losses related to illegal electronic publication, along with protection against losses to a company’s income that might be incurred during service restoration following a cyberattack. As technology continues to reshape our lives – both professional and personal – such protections are fast becoming indispensable.
Keeping it personal
While new technologies will prove critical to the future success of all businesses, large or small, we must not forget the importance of cultivating human relationships with our customers. It goes without saying that online solutions are practical, time-saving and convenient, but there are times when you might require an in-depth, face-to-face discussion with a trusted advisor.
Tawuniya has the largest network of sales offices of any Saudi insurance provider, with more than 115 branches open to customers. At any of these sales offices, customers can sit down with a knowledgeable advisor and discuss the various insurance options available to them, resolving any queries they might have and learning more about the policies that will best suit their needs. Tawuniya also makes sure to invest in human capital, ensuring it attracts and retains the very best industry talent and helps its workforce to grow.
In addition to offering a range of innovative insurance products – including cyber risk insurance, for example – Tawuniya also offers a range of traditional policies, such as health and travel insurance. Of course, even these more traditional offerings must change with the times and with evolving customer demands, so Tawuniya is continually reassessing its policies to ensure they are relevant and useful for modern Saudi citizens.
Travel insurance is one such area that has been updated to reflect modern trends. Tawuniya is set to introduce a new, low-cost insurance programme for those who frequently travel throughout the GCC region. The programme is primarily aimed at businesspeople and their families, and offers a 50 percent discount on coverage for children between the ages of two and 15, and free coverage for children under two years old.
The company is also looking to update its traditional health insurance offerings and recently signed a landmark agreement with Vitality, a global leader in integrating wellness benefits with insurance products. The agreement, which is the first shared-value insurance product created in the Middle East and North Africa region, will see Vitality’s health and wellness programme effectively developed and promoted across Saudi Arabia. The pioneering partnership aims to improve the health of customers and reduce the number of medical insurance claims.
From original insurance products to new digital solutions, Tawuniya is creating an exciting future for the Saudi insurance industry – one that’s very much in keeping with the nation’s Vision 2030 project. With innovation, entrepreneurship and ambition at the core of this long-term vision, Saudi Arabia is well on its way to crafting a dynamic new chapter in its history.
The Middle East and North Africa (MENA) region is home to around 381 million people, comprising six percent of the total global population. It also functions as a yardstick for the world economy due to its vast reserves of oil and natural gas, both of which underpin the global energy industry and therefore, by extension, the global business community.
Oil in particular is highly susceptible to price shocks, either as a result of oversupply or trade tensions, both of which have afflicted the global economy in recent years. The 2015-16 oil glut, caused by the US and Canada’s decision to ramp up production, saw the value of Brent crude tumble to below $30 a barrel in January 2016, severely dampening the economic fortunes of oil-producing nations in the MENA region.
In 2017, several of these nations, which form part of the Organisation of the Petroleum Exporting Countries (OPEC), elected to implement supply cuts in a bid to prevent a further slide in oil prices. While these succeeded in driving prices back up, the oil sector remains volatile, as it has faced additional headwinds over the past 12 months in the form of the global economic slowdown, the US-China trade war and the application of sanctions to Iran.
Iran’s oil exports plummeted to just 300,000 barrels per day in June 2019, from a high of 2.5 million barrels in April 2018. While this has driven up oil prices due to a supply shortage, it has also posed challenges for oil-importing countries that trade heavily with the US. The sanctions mandate that these nations can no longer purchase oil from Iran, forcing them to find alternative – and often more expensive – suppliers.
These various factors have weakened the MENA region overall, with oil-exporting nations hit hardest; their growth is expected to dip to just 0.4 percent in 2019, according to the IMF’s Regional Economic Outlook. Oil-importing nations will fare better, posting collective GDP growth of 3.6 percent, although this is still a decline from last year’s rate of 4.2 percent.
Breaking down barriers
Among the world’s oil-exporting nations, the countries that are faring best are those that are diversifying their economies by investing in non-oil initiatives. The UAE is one such example: it has accelerated work on the Etihad Rail network, a 1,200km railway construction scheme that will link all major ports in the country and encourage freight transportation of goods. It has also implemented reforms to its business environment, such as improving online registration for new companies and strengthening access to credit, according to the World Bank’s Doing Business 2019 report.
For a number of nations in the MENA region, ongoing violence, political conflicts and corruption are inhibiting meaningful investment and development
These actions have served to encourage foreign investment in the UAE’s start-up sector: according to a report by MENA start-ups directory MAGNiTT, the country captured 26 percent of all deals and 66 percent of all funding in the region in the first half of 2019. In particular, the $3.1bn acquisition of ride-sharing app Careem by its US rival Uber has served as testament to the calibre of firms being incubated there, thereby boosting investor confidence.
Oman has also taken steps to create a more robust regulatory environment and attract foreign business, notably through the introduction of the new Foreign Capital Investment Law. This legislation, which comes into force in 2020, aims to attract international investment by offering incentives and expanding sectors to external investors.
These two nations, however, are largely the exception to the rule with regards to regulatory reform. Regional integration across the MENA region overall is extremely poor, meaning countries are not able to take advantage of some of the business opportunities on their doorsteps. Tariffs remain high, while bureaucratic barriers impede the flow of both goods and services across borders.
Unbalanced books
In oil-importing countries, meanwhile, large public debt burdens are limiting their capacity to invest in infrastructure and tackle social issues. Jordan is one such example: in 2018, its fiscal deficit stood at 3.3 percent of GDP – 1.4 percent higher than the budget target – due to limited tax revenue growth. As a result, it has been forced to slash public spending, notably on food subsidies, which has led to civil unrest.
Morocco is also grappling with an elevated budget deficit of 3.7 percent of GDP, compounded by its decision to increase public spending in the education and healthcare sectors. The country is the largest energy importer in North Africa, meaning its national finances have been hit by the rise in oil prices since their 2016 lows. In a bid to balance the books, the government announced in October 2018 that it would look to generate MAD 8bn ($827.43m) by privatising a number of state-owned firms.
The one exception to this trend is Djibouti, a rising star of the region, where the economy has been expanding rapidly. GDP growth is expected to reach seven percent by the end of 2019, thanks to the development of new infrastructure such as the Djibouti International Free Trade Zone, an initiative that has helped to establish the country as a key trade and logistics hub. Concerns have been raised, however, about the loans from China that underpin the project.
Grinding to a halt
For a number of nations in the region, ongoing violence, political conflicts and corruption are inhibiting any sort of meaningful investment and development. This is particularly evident in Yemen, where a brutal civil war has been raging since 2015. The country’s economy is estimated to have contracted by 39 percent since the end of 2014, as the violence has disrupted all business activity and hindered any sort of foreign investment. Even if the conflict were to end tomorrow, a significant degree of foreign aid would be needed to solve the humanitarian crisis and restore basic services such as healthcare and education before business could resume.
In Libya, a conflict that began in April between the UN-recognised Government of National Accord and forces loyal to the Libyan National Army has left more than 1,000 people dead and thousands more injured. Production of oil – the lifeblood of the Libyan economy – has dropped following a number of forced closures at the country’s largest oil field, which are believed to be politically motivated attacks. “The associated lack of security and reforms hinders investment and development of the private sector,” noted the World Bank in its economic update for Libya in April.
As a result of this violence, the overarching security situation in the region has worsened, which has brought foreign investment to a standstill. Moreover, May’s attacks on vessels in the Strait of Hormuz by the Iranian Revolutionary Guard Corps indicate a deterioration in US-Iran relations, which will further inhibit development in the region as a whole. Finding a solution to this conflict and achieving peace across MENA is therefore essential in securing long-lasting and equitable growth. In the World Finance MENA Investment and Development Awards, we recognise the firms that continued to invest in the region in order to drive vital growth over the course of 2019.
World Finance MENA Investment and Development Awards 2019
Best Islamic Bank Kuwait International Bank
Best Retail Bank Arab National Bank
Best Commercial Bank
QNB
Most Socially Responsible Bank
Bank Albilad
Best Bank for Trade Finance
Ahli United Bank
Most Innovative Insurance Product
Tawuniya
Best Asset Management Company
Clarity Capital
Best Fund Management Company
Qatar Investment Authority
Best Investment Banking Company
KAMCO Investment Company
Best Islamic Investment Company
A’ayan Leasing and Investment
Best Telecommunications Company
Ooredoo
Best Logistics and Transportation Company
DHL Express MENA
Best Islamic Private Wealth Management Company
SEDCO Holding
Most Sustainable Energy Company
ACWA Power
Best Customer Experience
Majid Al-Futaim Group
Most Customer-Focused Brokerage House
ANB Invest
Best Organisation for Female Empowerment
Al-Tijari – Commercial Bank of Kuwait
Best Full-Service Law Firm
Al-Twaijri and Partners Law Firm
Best SME Finance and Support Programme
Commercial Bank Of Qatar
Best E-Services Trade Facilitator
Gulftainer
Best Pharmaceutical Company
Teva Pharmaceutical Industries
Best Investment Destination
Invest in Israel – Israel
Best Tourism Destination
SMIT – Morocco
Individual Awards
Business Leadership and Dedication to Community
Sheikh Mohammed Al-Sabah, Chairman of Kuwait International Bank
Banker of the Year
Raed Jawad Bukhamseen, Kuwait International Bank
Fintech CEO of the Year
Wael Malkawi, ICS Financial Systems
Pharmaceutical CEO of the Year
Kåre Schultz, Teva Pharmaceutical Industries
Telecommunications CEO of the Year
Sheikh Saud bin Nasser Al Thani, Ooredoo
Investment CEO of the Year
Mansour Hamad Al-Mubarak, A’ayan Leasing and Investment
Energy CEO of the Year
Paddy Padmanathan, ACWA Power
Logistics and Transportation CEO of the Year
Nour Suliman, DHL Express MENA
Retail CEO of the Year
Alain Bejjani, Majid Al Futtaim Group
Jewellery Designer of the Year
Fatima bint Ali Al Dhaheri, Founder of Ruwaya Jewellery
Just when it seems as if the trading relationship between the US and China is normalising, it breaks down all over again. In August, the US Treasury officially declared China a currency manipulator. Then, just a few weeks later, President Donald Trump claimed to have had a number of “very, very good” phone calls with top officials from Beijing keen to secure a trade deal. China claims no such talks took place; speculation has grown that Trump simply made them up.
So far, the US-China trade war has impacted as many as 1.9 million Chinese jobs and cost the US economy $7.8bn in 2018 alone, according to a paper published by a team of US economists. The lack of certainty surrounding future trading conditions continues to cause chaos for several industries in both countries. In the US, one industry in particular is in danger of missing a huge opportunity for growth.
In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances
China’s pork market, by far the world’s biggest, is in trouble: since August 2018, African swine fever (ASF) has devastated domestic supply. This will inevitably lead to price rises and necessitate the procurement of new suppliers. In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances.
Pigging out
The first outbreak of the ASF virus is believed to have occurred in Kenya during the first decade of the 20th century. It has remained endemic to Africa ever since, greatly hindering the development of the continent’s pig-farming industry. The virus, which is highly contagious, results in blotchy patches on the skin of the animal, diarrhoea and respiratory difficulties. Death usually occurs after a period of seven to 10 days.
Although contained to Africa for many years, the virus has subsequently proven itself to be a keen traveller, after a case of ASF was reported in Lisbon, Portugal, in 1957. Since then, instances of the virus have been found in France, Belgium, Eastern Europe, the Caribbean and now Asia. The current crisis is believed to have started in Georgia in 2007, before migrating to Russia and then China – probably as a result of pig farmers feeding contaminated food scraps to their animals. The impact in China has been staggering.
“There is little doubt that China will face a pork shortage; the more difficult question is when it will materialise,” Joe Schuele, Vice President of Communications at the US Meat Export Federation, explained to World Finance. “Hog liquidation put large volumes of pork into cold storage in late 2018 and early 2019, and China now appears to be working through those inventories.”
According to Rabobank estimates, China’s pig population could fall by a third in 2019 as a result of ASF, with approximately 130 million swine set to die either as a direct result of ASF or due to culling. Consequently, the price of pork in the country has climbed significantly – a year-on-year rise of 20 percent was recorded in April 2019 – with further increases expected.
Went to market
China is the world’s largest producer and consumer of pork. According to the OECD, Chinese households purchase 55 million tonnes of the meat every year, fuelled by a domestic swine population in excess of 430 million. This market has always held huge potential for US farmers, but given the challenges presented by ASF, it is beginning to look like a once-in-a-generation opportunity.
But said opportunity is fast going to waste as trade tensions between the US and China rumble on. Tariffs on US pork products have risen substantially this year, limiting the competitiveness of American farms even at a time when Chinese consumers are getting used to paying more for their meat. If these barriers were not in place, it’s likely that US farms would have already ramped up their exports considerably.
“It’s actually very hard to say what ‘normal’ trading circumstances would look like for the Chinese market, because China’s pork imports fluctuate based on its domestic production,” Schuele said. “China’s pork industry is so massive that even a relatively small decline in production can create significant opportunities for pork-exporting countries. It is difficult to project how much pork the US would have exported to China in 2018 had retaliatory duties not been imposed, but in 2017 (prior to the tariff hikes), US exports to China exceeded 300,000 tonnes, valued at $663m. In 2018, volume declined to 220,000 tonnes, valued at $571m.”
How the market reacts to the ASF outbreak will, in part, determine what happens next. For example, China’s carnivores could switch to other varieties of meat such as chicken or beef, but these too are likely to witness some form of price increase in response to the value of pork going up. Alternatively, they could decide that the increased price of pork is worth paying. In that instance, China would need to maintain a constant supply from international sources to make up for domestic shortfalls.
“Were it not for China’s trade retaliation, US pork producers would be in a strong position to capitalise on an unprecedented sales opportunity in China, where domestic production is down significantly as ASF has ravaged the country’s swine herd,” Rachel Gantz, Communications Director at the National Pork Producers Council, told World Finance. “US pork producers face retaliatory tariffs of 60 percent on exports to China, in addition to the existing 12 percent duties on US pork, for a total annualised rate of 72 percent. According to Iowa State University economist Dermot Hayes, US pork producers have lost $8 per hog, or $1bn industry-wide on an annualised basis, because of China’s punitive tariffs.”
Tariffs represent a reasonable way of protecting vulnerable industries from outside competition, particularly when faced with rival businesses that can offer much cheaper products and services. The drawback, of course, is that retaliatory tariffs are often subsequently imposed. US pig farmers know this better than most: in addition to the trade barriers imposed by China, the American pork industry has faced tariffs from Mexico. A relatively competitive product that would normally help reduce the US’ trade deficit is therefore being prevented from doing so.
With ractopamine banned in China, each US pig farmer will have to weigh up the costs and economic drawbacks of removing the feed additive from their own herds
Chop and change
The lifting of trade barriers would certainly help US farmers, but it would not necessarily open up the Chinese market completely. Many US farms give their pigs ractopamine, a feed additive that promotes the growth of lean meat. Despite its presence in American pork, ractopamine is currently banned in 160 countries, including China. If US producers wanted to target Chinese consumers, they would have to either raise pigs without using ractopamine or hope that China relaxes its regulations. The latter seems unlikely: earlier this year, Beijing banned three Canadian exporters from selling to China after ractopamine was found in a pork shipment.
“Ractopamine has been determined to be safe by the US Food and Drug Administration, the UN’s Food and Agriculture Organisation and the World Health Organisation,” Gantz said. “It is approved for use in pork production in 26 countries, with 75 additional countries allowing the import of pork from ractopamine-fed hogs, even though it is not fed [to] their domestic herds. Pork producers have a right to choose how to raise their animals and ractopamine is a scientifically proven safe product.”
Despite being approved for use in the US since 1999, some farmers, at least, are reconsidering their use of the drug. Ultimately, though, each farmer will have to weigh up the costs and economic drawbacks of removing ractopamine from their own herds. Currently, around 60 to 80 percent of all US pigs are fed the drug, and some of the country’s top export markets, including Japan and South Korea, do not ban its use.
Any interest that currently exists in expanding ractopamine-free production would likely be much stronger if US pork had more consistent and reliable access to China, and was on a level playing field in terms of tariff rates. If the US remains priced out of the Chinese market, then pork producers elsewhere stand to profit. According to Chinese customs data, the EU already supplies approximately two thirds of the country’s pork imports, and will no doubt look to increase this figure in the future. However, cases of ASF have recently been found on pig farms in Romania, Poland and Bulgaria. The disease has even been recorded in wild boar as far west as Belgium.
“Thanks to vigilant oversight by the US Department of Agriculture and… US [Customs and Border Protection (CBP)], there have been no reported cases of ASF in the US,” Gantz said. “The agencies and our industry continue to remain on guard, and we have asked the CBP to add 600 agricultural inspectors at our borders and ports to ensure ASF or any other foreign animal disease does not enter our country.”
If ASF continues to prove difficult to purge, then markets where pork is popular will undoubtedly come knocking at the US’ door looking for uncontaminated produce. For now, though, it is unlikely to be Chinese consumers. With the trade dispute between President Trump and China continuing, it is US farmers who are missing out on an opportunity that may not present itself again for a very long time.
Across the globe, growth remains somewhat sluggish. After two years of relatively robust expansion, the global economic upswing has now slowed to a more subdued level, knocked back by financial market volatility and widespread political uncertainty. Trade and technology tensions between the US and China have seen tit-for-tat tariff increases on the nations’ respective imports, escalating an ongoing dispute between the world’s two largest economies. Over in Europe, meanwhile, prolonged Brexit-related uncertainty continues to weigh heavily on the eurozone’s economy. The pound hit a two-year low in July, and the UK economy has contracted for the first time since 2012 as the possibility of a no-deal Brexit looms large ahead of the planned October 31 exit date.
Elsewhere, growth in emerging markets and developing economies has also disappointed, with weaker-than-expected results across Asia and Latin America. While global growth is projected to pick up once again in 2020, this is decidedly precarious, hinging on favourable geopolitical outcomes and the successful resolution of current trade disputes.
Against this unpredictable economic backdrop, the investment management industry faces myriad challenges. In order to remain prosperous and ensure profitability for their clients, investment managers must successfully navigate this ongoing economic uncertainty, using their extensive knowledge and expertise to overcome ever-changing market conditions and capitalise on emerging opportunities. The winners of this year’s World Finance Investment Management Awards have shown themselves to be resilient, adaptable and innovative in such challenging conditions, establishing themselves as industry leaders that can be counted on to provide stability and security when it is needed most.
Playing by the rules
Last year, the investment management industry was largely concerned with exhaustive changes to establish regulatory frameworks. This year, the issue remains just as pertinent, as increased regulatory scrutiny continues to carve out a new landscape for the sector. From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business, and to effectively and expeditiously apply any required regulatory changes to their operations. Time is certainly of the essence, and those who fail to make the necessary changes can expect significant damage to both their wallets and their reputations.
The fine for failing to comply with the EU’s sweeping General Data Protection Regulation (GDPR), for example, is four percent of the previous year’s annual global turnover, or €20m ($22.1m) – whichever is higher. Investment managers must also take care to comply with the EU’s MiFID II legislation, which, when introduced in early 2018, was hailed as a key milestone in creating the new, more transparent financial landscape that legislators have been promising since the global financial crisis a decade ago.
From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business
The introduction of these frameworks last year reflects an ongoing trend within the financial sector towards greater regulatory oversight. According to a PwC report entitled Asset Management 2020 – A Brave New World, this flurry of regulatory activity is only set to increase over the upcoming months. As soon as 2020, PwC predicts “full transparency over investment activity in products will exist at all levels; there will be nowhere for non-compliant managers to hide as regulatory, tax and other information’s reciprocal rights will extend across the globe”.
However, just as regulatory compliance moves up the global financial agenda, meeting these requirements is also becoming increasingly complex as the investment industry digitalises. With data analysis set to play an indispensable role in the future of investment analysis, companies must stay conscious of both privacy laws and cybersecurity as they further digitalise their operations.
A new dawn
Even as the changing regulatory climate creates new costs for investment managers around the world, technological advances are helping to cut expenses quite dramatically. Traditionally, investment management has been a low-tech industry, but the sector is now in the midst of a comprehensive technological transformation. Robotic process automation has begun to redefine daily operations at investment management companies, taking over repetitive routine tasks such as data transcription – jobs that would otherwise take up a significant portion of an employee’s working day. This not only frees up workers to dedicate their time to more valuable tasks, but also allows companies to create a reliable, 24/7 workforce that can carry out essential data-driven tasks at any time of the day or night.
Machine learning and artificial intelligence (AI) are also set to transform the investment management industry, giving managers access to an extraordinary range of practical data, which will help them to better understand both their existing customers and potential clients. AI advisors and social media chatbots are particular areas of interest, as these can provide managers with a wealth of data on what customers are repeatedly searching for, allowing them to respond with suitable products and services. At the same time, customers themselves have grown to expect a streamlined digital experience when it comes to keeping track of their investments.
In order to meet this demand, investment managers must provide a range of innovative digital solutions that suitably satisfy their customers’ evolving needs – whether that be through round-the-clock personalised financial advice delivered by state-of-the-art chatbots or remote, on-demand access to their investment portfolios. As the financial services sector becomes increasingly digitalised, investment management firms cannot afford to fall behind the curve. If they wish to stay profitable and relevant in the years to come, now is the time to place technological innovation and investment at the very core of their businesses.
Appetite for change
Each year brings with it new opportunities and areas of interest, and 2019 could well be the year that environmental, social and governance (ESG) investments hit the mainstream. As climate change and environmental concerns continue to rise up the international sociopolitical agenda, investment managers would do well to consider their clients’ ESG preferences when moving forward. There is certainly a growing appetite for sustainable investments, with Moody’s predicting that green bond issuances will break $200bn in 2019 alone. This trend shows no signs of slowing down in 2020 and beyond, as the public consciousness shifts towards creating a greener, more sustainable future.
As we look to the months and years ahead, we can expect to see investment managers around the globe working to fully integrate ESG factors into their operations, using pertinent data analysis to assist clients in creating investment portfolios that truly reflect their own personal values. What’s more, as the ESG sector continues to grow, sustainable investments are set to create some substantial returns, making them increasingly attractive from both a financial and ethical standpoint.
In the rapidly evolving industry of investment management, only the most adaptable and forward-thinking firms can expect to enjoy continued success. The winners of this year’s World Finance Investment Management Awards have proved themselves in the most testing and turbulent times, finding opportunity where others have found adversity, and overcoming complex industry hurdles with ease. For an insight into the very brightest names in the world of investment management, take a look at our winners for 2019.
World Finance Investment Management Awards 2019
Antigua and Barbuda Global Bank of Commerce
Argentina Puente
Austria Erste Group
Bahrain SICO
Belgium
ING
Chile – Equities and Fixed Income
BCI Asset Management
International financial centres like the Bahamas play an increasingly important role in the global economy. The country is tax-neutral, which means it can avoid the distortions and the corresponding losses that occur when price changes cause fluctuations in supply and demand.
Tax neutrality can also ensure that the tax system can raise revenue and minimise the consequences of economic choices. This aids the notion that the same principles of taxation should apply to all forms of business, which further reduces the likelihood of biases influencing economic decisions.
Transparent environment
Wealth management accounts for a large part of the country’s financial sector. For many high-net-worth individuals, banking and wealth management outside one’s home country simply makes good business sense and represents a wise avenue for investment. There are several reasons for this.
The Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to develop the industry
For example, multinational and multigenerational families can preserve their wealth for the long term and transfer it to younger generations with relative ease when they place assets in a territory with trust laws. Their home country might be subject to civil unrest, or a history of political and financial instability. It is therefore prudent for high-net-worth individuals to offset these risks by protecting some of their assets. They can do this by keeping them in a jurisdiction that does not suffer from these problems. Furthermore, international banking and wealth management centres offer financial products that are usually more rewarding and secure than those found in their home countries.
The Bahamas also requires businesses and other entities to disclose information to the government about the ways in which they generate their income and the amount of tax they pay. This can be argued to be transparent taxation, as the Bahamas adheres to the doctrine that nations ought to exchange information with one another about the tax affairs of individuals and other entities.
New commitments
After tourism, financial services is the most important industry in the Bahamas. Governments have repeatedly recognised the importance of the industry to the country’s continual economic and social development. The financial sector’s viability for success is therefore a priority for both the public and private sectors.
This level of importance is indicated by the responsiveness of the legislature and regulators to the needs and demands of the market, as well as the swiftness with which these processes can take place. It is also demonstrated by the balance that regulators strike between ensuring the financial services industry keeps its integrity while still encouraging lively competition. What’s more, the Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to help promote and develop the industry.
In order to highlight the Bahamas’ strengths as an international financial centre, the Bahamas Financial Services Board was established in April 1998. It is funded both by private enterprise and the government, and continues to promote greater awareness across the globe.
Fiscal and economic stability
Representatives of the IMF visited the Bahamas at the end of last year, with a report from the organisation’s visit noting: “The Bahamian economy continues to recover, with real GDP growth projected to reach 2.3 percent in 2018 and 2.1 percent in 2019… The Fiscal Responsibility Bill will support the government’s efforts to secure fiscal sustainability and put debt on a downward path.” With the Bahamas’ GDP already having risen by more than $4bn between 2000 and 2017, this projection seems highly plausible.
Indeed, the legal system in the Bahamas has been very successful in helping the country respond effectively to the changing needs and demands of the market. It is based on English common law, which is (by and large) clear and simple for its citizens to understand. As an independent nation with a financial services industry bolstered by a strong public-private sector partnership, the Bahamas responds to shifts in the market swiftly and efficiently.
Less than a decade ago, Kuwait’s banking sector was stagnant, hindered by a slew of changing governments and crippled by political instability. Between 2011 and 2014, infrastructure projects were few and far between, public spending was at a low point and banks were suffering on the back of it. In 2015, the government announced its first budget deficit for more than a decade.
Over the past few years, though, that has all changed, with the government making efforts to diversify the economy through a series of measures – from allowing 100 percent foreign ownership in certain sectors to providing tax breaks to investors and relaxing the regulatory environment. The latter has been particularly beneficial to the financial industry, which is now one of the country’s biggest sectors and is propping up the economy at a time when volatile oil prices (see Fig 1) and OPEC production cuts continue to have a significant impact on the Gulf Cooperation Council (GCC) region.
According to the IMF’s 2019 Kuwait: Financial System Stability Assessment report, financial system assets represented 252 percent of the country’s GDP at the end of 2017, with the majority being held within the banking sector. KPMG’s 2019 GCC Listed Banks’ Results: Embracing Digital report, meanwhile, concluded that the nation’s banks had “witnessed one of the best years in the recent past”, with overall net profits in the segment rising 19.3 percent year on year and total banking assets in the country growing by five percent.
In the coming years, a raft of mega-scale infrastructure projects – including the construction of new cities, bridges and highways under the ambitious Kuwait Vision 2035 development plan – is set to bolster the sector even further. As a result, Kuwait is now a finance leader in the GCC – a fact that is reflected in its continued position as one of the wealthiest nations in the world per capita (see Fig 2) – and it doesn’t look set to slow down any time soon.
Leading the market
While conventional banks are playing their part in propping up Kuwait’s financial industry, it’s the Islamic finance sector that’s witnessing the strongest growth: according to the Central Bank of Kuwait (CBK), Islamic banking groups recorded a 22.5 percent growth in their net income in 2018, compared with 15.9 percent among conventional institutions. Sharia-compliant assets now account for 40 percent of the country’s banking sector, according to the IMF.
Such progress has been facilitated by various developments, not least the government’s decision to start issuing Sharia-compliant instruments in 2016, which gave Islamic institutions easier access to high-quality liquid assets. Various digital innovations in the sector have helped spur growth further, with the likes of electronic payment systems, teller machines and biometric security all being utilised, and partnerships with fintech firms gradually being established.
A successful business isn’t simply defined by the actions it takes to improve its profit
Together, these changes are putting Kuwait on the map at a time when the Islamic finance industry is growing as a whole – according to Thomson Reuters’ Islamic Finance Development Report 2018, global Sharia-compliant assets were worth $2.4trn in 2017 (up 11 percent from the previous year) and are expected to reach $3.8trn by 2023.
Among those benefitting the most from this growth is Kuwait International Bank (KIB). The Sharia-compliant lender stepped into the limelight recently when it was listed on Boursa Kuwait’s Premier Market – one of three new divisions introduced by the stock exchange in 2018 for companies excelling in terms of financial performance, share liquidity, corporate governance and other policies. It marks a new era for the former real estate specialist that became a fully fledged, full-service Islamic bank in 2007, boosting its investor profile within the region and beyond.
“KIB’s listing on the Premier Market reflects improvements in the bank’s operations and financial performance as part of its new strategic direction,” the bank’s CEO, Raed Jawad Bukhamseen, told World Finance. The new strategy involves a series of forward-thinking, client-centric digital innovations, an ambitious expansion plan and a focus on corporate social responsibility that puts company culture, the local community and the development of Kuwait’s wider economy at its heart.
Sukuk success
At the core of the global Islamic banking sector is the sukuk. Equivalent to a bond, a sukuk is compliant with Sharia law and gives the holder a portion of the earnings generated by the asset without the need to pay interest. “Sukuk are important financial instruments for the Islamic banking sector – not only in Kuwait, but all over the world,” Bukhamseen said. “These specialised financial instruments can boost the funding and capital position of financial institutions.”
Banks are catching on to this fact: according to the IMF, global sukuk issuances multiplied 20-fold between 2003 and 2013 to reach $120bn, as institutions recognised the importance of diversifying their funding. One such institution was KIB, which struck gold earlier this year when it successfully priced a $300m AT1 perpetual sukuk at an annual profit rate of 5.625 percent. Listed on Euronext Dublin, it was the first AT1 sukuk to have been issued in Kuwait since 2017 and became the best performer in the secondary market this year. A weeklong road show helped the bank generate interest from investors across 26 countries, with the order book reaching a peak of $4.6bn – a more than 15-fold oversubscription. Further, 51 percent of the final distribution went to international investors.
Bukhamseen believes the successful issuance represents another turning point for the bank: “With this important financing instrument, KIB will be able to carry out its local expansion strategy, build its capital base as per Basel III guidelines and add a new source of capital. It also enhances the bank’s capital adequacy ratios and diversifies its funding sources.” KIB’s expansion plan includes opening several new retail branches in the country over the coming years, with the bank considering the strongest growth opportunities to be present in the market where it already boasts a substantial customer base. “Every organisation seeks growth and expansion as a long-term goal, as this allows you to gain an advantage in a relentlessly competitive environment,” Bukhamseen added. “As well as presenting new opportunities for everyone in the bank and enhancing profitability, expansion is a crucial strategy for survival.”
According to Bukhamseen, it’s not just the bank that will feel the benefits, as sukuk like this are essential to the development of the wider economy: “In addition to supporting the bank’s accelerated growth plans, the sukuk is a strong testament to the region’s capabilities in driving greater economic development by enabling the exchange of expertise and pro-active collaboration. A more diversified, efficient and stable financial system is necessary for the development of the banking sector. The financial system’s ability to allocate resources effectively and efficiently is crucial to supporting Kuwait’s transformation into a high value-added, high-income economy.”
Banking on digitalisation
But the health of the financial system (and, indeed, Kuwait’s wider economy) does not just rest on the development of sukuk: it also depends on how such financial instruments are presented to the public. This is where technology – and the sector’s uptake of it – comes into play. “Now, clients across every industry want to be constantly connected in all aspects of their lives,” Bukhamseen told World Finance. “The banking industry must meet these demands by offering new services that deliver an enhanced client banking experience – one that is armed with innovative technology. Today, the banking world is being disrupted by new technology and digitally sophisticated clients, driving banks to innovate in order to maintain customer loyalty. By embracing technology, banks can continue to stay relevant and set themselves apart in an increasingly digital world.”
Put simply, technology is essential in a market dominated by young, digitally savvy consumers – according to the UN, over 70 percent of Kuwait’s population is under the age of 35. Technology is also a way of reaching the underserved, with access to payments, transfers and other transactions made easier through the introduction of digital systems. Such transactions tend to involve lower costs for both the provider and the customer.
With the help of the CBK, which introduced new regulations to promote innovation in electric payment operations last year, Kuwait’s financial industry has already taken several steps to implement digital solutions. Further, according to KPMG’s GCC Listed Banks’ Results: Embracing Digital report, this trend is set to continue in the near future: “The digital agenda for banks in Kuwait is expected to increase as Kuwaiti banks continue to invest in digital banking channels, infrastructure and solutions. This will involve investments in new-age technologies, such as intelligent automation, blockchain and artificial intelligence. It is anticipated that Kuwaiti banks will see an increased acquisition of customers through digital channels across most product offerings.”
But, as Bukhamseen told World Finance, banks can’t do it alone: “KIB believes that collaboration between fintech firms and banks is essential in order to advance processes and banking offerings. These collaborations have already paved the way for improved service and technological innovations.”
A client-centric strategy
In order to keep up with this changing landscape, KIB has made significant changes to the way it utilises technology: at the beginning of 2018, the bank implemented a new, client-focused digital strategy, introducing several new services to its online and mobile banking platforms. Among the most significant updates was KIB’s new multichannel contact centre – the first of its kind in Kuwait. The centre provides a centralised system for monitoring, queuing, routing and reporting transactions, improving services and revolutionising the customer experience.
KIB’s youth empowerment project encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs
The bank has also introduced a new ‘cardless’ ATM withdrawal system that enables users (including non-customers) to withdraw cash using their mobile phone number or civil ID. Other developments include an interactive voice response system and a live chat service, which provide clients with access to most of KIB’s services via a visual interface rather than just a voice-activated, self-service one. More recently, the bank launched a video call tool, enabling clients to complete a number of transactions face to face with a service representative, without having to go into a branch.
Of course, it’s how these services are accessed that is of the essence. With the aim of making its interface more convenient and user-friendly, KIB undertook an ambitious overhaul of its website. The new design features various advanced aspects to increase accessibility and meet the banking needs of all of its customers. For example, a special text-to-speech function has been introduced for those with reading difficulties.
Mobile compatibility is also an important consideration for any company making the move into the digital sphere. As such, KIB has used Unstructured Supplementary Service Data to ensure all of its clients can access the website, regardless of how new or old their phone is. The updated mobile website allows for all of the essential banking functions to be carried out on even the most basic of devices, from viewing account balances to paying credit facilities and transferring money between accounts.
“By incorporating more digital solutions, we want to deploy services across all channels and become a necessary extension to clients’ everyday lives,” Bukhamseen said. “We are putting the customer at the heart of everything we do, as clients continue to seek exceptional, personalised experiences.”
Digitalisation also comes with challenges, though – not least concerns around cybersecurity. Fortunately, the Kuwaiti banking sector is working hard to minimise risk, and KIB is no exception, having made data protection its priority through a series of new measures. This includes the introduction of a 3D secure authentication service, which is designed to offer an additional layer of protection against fraud during payments, and other software elements to pre-emptively combat and deter potential threats.
The bank has also established a dedicated information security steering committee – chaired by the CEO – to constantly monitor information security across the company and keep an eye on any security breaches in the wider industry to help protect KIB from similar threats. Further, the bank has implemented the internationally recognised ISO 27001 standard to ensure it is up to date with best practices. KIB has received several accolades in recognition of these security measures, including Cybersecurity Professional of the Year, Middle East, and Cybersecurity Team of the Year, Middle East, at the Cybersecurity Excellence Awards 2018, reaffirming the company’s commitment to its customers and their privacy.
The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City
The whole works
A successful business isn’t simply defined by the actions it takes to improve its profit margin. Central to any good business is a commitment to the employees within it – something that KIB has fully embraced. “For continued success in any industry, organisations must invest in their people,” Bukhamseen said. “Investing in the long-term development of human capital helps maintain a competitive edge both locally and regionally, and fosters a strong reputation for the industry as a whole. As one of the most valuable components of any organisation, investment in human capital is a necessary step in ensuring competitiveness in a changing market environment.”
KIB has introduced several policies to support its employees and the wider local workforce, nurturing and developing talent in the banking sector through various training programmes and workshops. These range from leadership skills sessions to classes focusing on specific roles and functions, with the ultimate aim being to develop its employees’ future career prospects. In 2018, more than 700 employees took part in these training programmes; as of September this year, nearly 600 – covering all divisions and levels within the company – have already participated.
“Human capital continues to play an increasingly critical role in the implementation of a bank’s future strategy, and KIB’s human resources department works hand in hand with the bank’s overall objectives to achieve a common goal, anticipating business needs and overall business direction,” Bukhamseen explained to World Finance. “The future will belong to those who pay attention to effective human capital management as an essential criterion for growth.”
It’s not only a case of training existing talent, though: recognising and recruiting the right individuals is just as important to any business wanting to boost its bottom line, create an efficient, cohesive company culture, engage and motivate staff, and provide the highest levels of customer service. “When employees are motivated and engaged, absenteeism and employee turnover are reduced, increasing productivity and efficiency, and improving overall results,” Bukhamseen said. “KIB has set forth clear, all-encompassing strategies with the goal of attracting qualified, talented individuals and matching them with career opportunities that fit with their professional aspirations. This ultimately allows them to grow and develop.”
A pillar of society
In recent years, financial institutions across the globe have been establishing and enhancing their corporate social responsibility programmes to the benefit of the wider community. Bukhamseen believes such an approach is essential to any organisation hoping for long-term success.
“In addition to providing a number of financial services, banks play a key role in community development by empowering youth, spreading fundamental financial and banking knowledge, and serving as a long-term partner in their everyday lives,” he said. “Today’s interconnected world has highlighted the influential role that financial institutions play in their local communities. As a corporate citizen, KIB focuses on addressing a diverse range of social issues, underscoring its integral role as a national financial institution.”
With the aim of supporting and bettering the Kuwaiti community, the bank has implemented a social responsibility programme based on four key pillars: financial literacy, youth empowerment, positive social impact and community development. KIB’s flagship financial literacy programme aims to promote financial and economic education through school visits and other means. By introducing students to the basic principles of saving, spending and money management, the project is designed to ensure younger generations grow up with a heightened awareness of financial products and the banking industry. This empowers pupils to propel the economy forward while improving financial inclusion and banking penetration.
The bank’s youth empowerment project, meanwhile, encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs. Beyond that, projects span fields as diverse as arts and culture, health, sports and the environment, with the overarching goal of having a positive social impact and developing communities throughout Kuwait. All of KIB’s projects tie in with the bank’s underlying aim of putting the customer first – of recognising them as an integral part of the business and reaching out to them in innovative ways that set an example for others in the sector.
“We believe this commitment brings benefits to both the organisation and the community,” Bukhamseen said. “Those benefits are manifold – it’s about uniting everyone while reinforcing the bank’s reputation and establishing it as a true partner for its clients. Time and time again, KIB has proven its dedication to meeting both the growing needs of its customers and the social needs of the community in the hope of accelerating Kuwait’s development across all areas.”
Building momentum
KIB’s ultimate goal is to develop Kuwait as a whole, and Bukhamseen believes banks can work together to achieve this aim: “The banking sector has always been the backbone of economic development in any country, providing financing to both the private and public sectors. Acting as intermediaries, banks channel funds from savers to investors in an efficient manner, enabling a more productive allocation of capital and higher income growth.
“Countries with a stable financial industry are generally met with faster, more sustainable economic growth than those in a more precarious position. A thriving banking sector also means a greater availability of capital for investment, presenting the opportunity for organisations to direct resources in a way that stimulates economic growth. Additionally, banks provide specialised financial services, reducing the cost of obtaining investment information, boosting the efficiency of the overall economy and driving GDP-per-capita growth.”
The Kuwaiti Government is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects
Among the sectors that hold the most potential for both private and public investment is, of course, real estate. As a former specialist in the field, KIB continues to focus a large portion of its efforts in this area. “Kuwait’s real estate market has witnessed outstanding performance in 2019,” Bukhamseen said. “In the absence of other investment opportunities, real estate continues to provide significant profitability and reel in investors. Over the years, the market has found itself in a position of importance with regards to economic change, and has played a pivotal role in transforming the built environment. With megaprojects and new cities at its core, the real estate market will have a profound impact on the national economy moving forward, as many sectors and industries will depend on it.”
The sector isn’t without its challenges: for instance, it still struggles with significant information gaps and insufficient data, which affects the investment decisions of individuals who want to buy real estate. Accessible, timely and accurate reports from independent bodies are also lacking, presenting hurdles to market regulation and slowing the sale and purchase of properties.
To help combat these issues, KIB has a dedicated real estate appraisal division (READ) that brings together a team of qualified specialists to offer a variety of services, including property management, economic feasibility studies, cost estimation and real estate appraisal. Drawing on the bank’s long-standing expertise, READ uses a combination of approaches to determine the real value of a property. It has served as a key source of information for a number of government entities, banking institutions and real estate firms, providing in-depth reports on the local market and offering insight into current trends to help customers make the right property decisions.
A site more
According to Bukhamseen, there are further challenges to potential homeowners, real estate developers and investors in Kuwait – not least a shortage of land. “A lot of land is either unsuitable for construction or in areas that do not appeal to buyers,” he told World Finance. “This means prime spots are sold at a premium.”
Fortunately, the country is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects that come under the far-reaching Kuwait Vision 2035 development plan. Announced by the government in January 2017, the plan was drawn up with the aim of further diversifying the economy and reducing its dependence on oil production at a time of volatility and instability. Its goal is to transform the country into a leading financial, commercial and cultural hub over the coming years, scaling back public investment and increasing the private sector’s influence.
The Kuwait Vision 2035 plan focuses on the development of seven key pillars: public administration, economy, infrastructure, living environment, healthcare, human capital and global position. Ultimately, though, it aims to create a favourable business climate and prepare the younger generation for more private sector involvement in the future. Currently, its most crucial elements concern infrastructure – notably, the construction of bridges, roads and government buildings, as well as larger-scale projects such as new cities. The latter, in particular, will bring huge opportunities for private investment.
Projects already under construction include: a new rail network; a metro system; a regional highway; a university campus; Kuwait’s largest housing project to date; the biggest hospital in the Middle East; and an extension to Kuwait International Airport. The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is also scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City. A whopping $100bn has been put aside by the government to support these projects in the next few years, with the aim of quadrupling the government’s total revenues by 2035.
“The real estate market is pivotal to the Kuwait Vision 2035 development plan, offering ample opportunities for private sector participation and providing a boost to related industries,” Bukhamseen said. “Currently, the Kuwaiti Government is focusing on encouraging more private investment in the real estate market, which has started to yield positive changes. In addition to reforming laws, the sheer number of major infrastructure projects currently underway is contributing to market momentum.”
Changing tides
Bukhamseen believes the country’s high per-capita income (see Fig 3) is also supporting this growth, with individual investors flocking towards the real estate market for investment opportunities – particularly the residential sector, where sales are valuable and frequent. With greater investment comes increased profits for the likes of KIB, which, in turn, helps such institutions achieve their individual goals and support Kuwait’s wider economy.
While there are still significant challenges to overcome, these ambitious moves signify a sea change for Kuwait and its private institutions. Combined with an advancing march towards the digital world, they represent a turning point in the history of a country that has depended almost solely on its oil exports for decades.
For banks willing to adapt to such a change, it’s an incredibly exciting time – there are more opportunities in the sector now than ever before. Financial institutions have the power to shape the future of the country by educating members of the younger generation and empowering them to successfully lead Kuwait’s changing economy. How they go about doing so remains to be seen, but KIB is one bank that has fully embraced the new opportunities, leading Kuwait’s financial sector into the future with confident strides.
India’s Finance Minister Nirmala Sitharaman announced on September 20 that the corporate tax rate would be lowered to 22 percent from 30 percent. It is hoped the $20.5bn stimulus package will spur private investment and help bring India out of a six-year low in economic growth.
The markets responded positively to the news. After the announcement was made, the country’s Sensex index leapt up by 4.5 percent.
The 22 percent corporate tax rate applies to companies that do not receive incentives or exemptions. For those that do, the corporate tax rate will be lowered to 25 percent down from 35 percent, while some new manufacturing firms will see their corporate tax rate cut to 15 percent from 25 percent.
India could be in prime position to attract more investment from companies that are trying to avoid supply chain disruptions caused by the US-China trade war
Unemployment in India is currently at a 45-year high and discontent has been rising in the country, particularly in rural areas. So far, the central bank has cut interest rates four times this year.
The cut will lose the economy $20.5bn in tax revenue and has raised concerns that Prime Minister Narendra Modi’s government may struggle to meet its fiscal deficit target of 3.3 percent for the year. However, the move is considered a much-needed boost to the economy. Bond yields in India rose to an almost three-month high as speculation mounted that the government may need to borrow more if it’s to meets its targets for 2019-20.
When Modi first came to power in 2014, investors welcomed an administration they thought would bring a wave of pro-business reforms to the economy. Many now feel that Modi has failed to live up to expectations. At the start of 2019, India was the world’s sixth-largest economy; it has since fallen to seventh place.
With the new corporate tax rate cut, Modi may be able to make amends with businesses and investors. According to Sitharaman, the rate cut will put India on an equal footing with its Asian peers. This means India could be in a prime position to attract more investment from companies as they try to avoid supply chain disruptions caused by the US-China trade war.
The Federal Reserve was forced to intervene in the US financial markets after overnight borrowing rates skyrocketed as high as 10 percent, more than four times the Fed’s rate. To ease the strain on the markets, the Fed came to the rescue with a $53bn injection – its first emergency intervention since 2008. Another cash injection of up to $75bn is expected on September 18.
During its overnight repo operation, the Fed purchased securities to inject money into the system and stop borrowing costs from exceeding the target range
Borrowing cash overnight through repurchasing agreements – commonly known as repos – is an often overlooked but nonetheless critical part of the financial system. Repos ensure that Wall Street firms and banks have enough liquidity to carry out their daily operations. Companies use US Treasury securities and other bonds as collateral to raise cash quickly, usually overnight, and then repay their loans with interest the next day and get their bonds back.
During its overnight repo operation, the Fed purchased securities to inject money into the system and stop borrowing costs from exceeding the target range. As soon as the Fed announced its decision, the repo rate dropped.
Many analysts agree that the sudden rise was largely down to two short-term factors: over the past few days, companies had withdrawn funds to pay their quarterly tax bills. At the same time, there was a sudden influx of Treasury securities due to the settlement of previously auctioned debt. This created high demand within the repo market at a time when the cash supply was low.
However, this alone should not have caused such turmoil in the market. One of the key underlying issues that may have exacerbated the repo market crisis is that bank reserves at the Fed have been steadily falling. With fewer excess reserves, banks are left vulnerable to short-term funding stresses.
Unlike in 2008, the sharp rise in the repo rate is not indicative of an imminent financial crisis. However, it implies that the Fed is losing control over short-term lending. It also suggests that Wall Street is struggling to absorb the record sales of Treasury debt, which is being used by the Trump administration to fund a swelling US budget deficit.
Oil prices saw their biggest jump on record as markets reopened on September 16, after an attack on a Saudi Arabian oil facility at the weekend caused huge disruption to global markets.
About 5.7 million barrels have been affected by the strike on Saudi Aramco’s Abqaiq oil facility in Buqyaq, cutting more than half of the country’s production and removing about five percent of global supplies. As a result, Brent crude, the international benchmark for oil prices, leapt almost $12 when markets reopened, climbing to $71.95 a barrel, in the biggest intra-day jump in dollar terms since 1988. Analysts believe it may be the single worst sudden disruption to oil markets ever.
Analysts warn that this attack may not be the last and that retaliation by Riyadh or Washington against Iran could create further turmoil within global energy markets
The attack, which the US claims was coordinated by Iran, has sent shockwaves through the world’s financial markets. Shares fell in early trading in Europe, with the FTSE 100 down 0.2 percent and Germany’s DAX index falling by 0.5 percent. Haven assets like gold surged, while commodity-linked currencies like the Norwegian krone and Canadian dollar also rose.
The market is likely to remain unstable until there is more clarity around how long it could take Saudi Arabia, the world’s biggest exporter of crude oil, to restore output. The kingdom has said it will tap into stocks from its large storage facilities. However, this may not be sufficient to meet demand in the long-term.
“Saudi Arabia has enough reserves to cover the shortfall over the next week, but if the outage extends, then filling the gap with the right type of crude quality could be a challenge,” Vima Jayabalan, Research Director at Wood Mackenzie, told World Finance.
Analysts warn that this attack may not be the last and that retaliation by Riyadh or Washington against Iran could create further turmoil within global energy markets. The main importers of Saudi crude – India, China and Indonesia – will be particularly vulnerable to such disruption in the oil supply. The sharp increase in oil prices also comes at an inopportune time for the global economy, as higher energy costs could spell trouble if the economic slowdown continues.
Over the past 10 years, Nigeria’s insurance sector has exhibited poor performance – in fact, it has not expanded at all. Gross premiums, for example, did not achieve any growth in inflation-adjusted terms during the period from 2008 to 2018. They also only grew very slightly in US dollar terms over the same period, according to a report by Coronation Research, one of the leading research houses in Nigeria and a subsidiary of Coronation Merchant Bank.
The implications of this become all the more obvious when you compare the sector to the country’s pension fund industry, where the total assets under management (AUM) grew at an average annual compound rate of 9.8 percent in inflation-adjusted terms. This can largely be attributed to the fact that insurance companies have not yet become part of Nigeria’s broader drive for financial inclusion – however, things could soon be set to change, thanks to new reforms that are due to be implemented in 2020. In light of this upcoming transformation, World Finance spoke with Guy Czartoryski, Head of Research at Coronation Merchant Bank, about the industry as it stands today and what’s on the horizon for the near future of the business.
Why is insurance penetration so slow in Nigeria? The Nigerian insurance industry is very fragmented: of its 59 companies, many lack adequate capital. When there are so many companies, it’s difficult for customers to compare service standards, for the regulator to monitor activities and fix problems as they arise, or for the industry to effectively engage with the regulator. Essentially, the industry lacks an adequate capital base while having far too many companies. Without these two problems being addressed, the industry is unlikely to grow.
What opportunities does this slow growth present? If you look at countries with a similar GDP per capita to Nigeria, you will find very big differences in insurance penetration, which measures the total gross premiums of the industry against nominal GDP. For example, India has an insurance penetration rate of 3.69 percent, while Kenya has a rate of 2.37 percent. Nigeria, on the other hand, has an insurance penetration rate of just 0.31 percent.
The systems already exist to turn Nigerian insurance companies – which are accustomed to managing thousands of customer accounts – into companies that are able to manage millions
Although concerning, this is a great opportunity for the country: if Nigeria can get close to India’s level (say, reaching 3.1 percent in the next 10 years), the industry’s total gross premiums would expand at a real-term compound annual growth rate of 25.9 percent. The encouraging thing is that this has happened before in the banking sector, during the five years following the banking reform of 2004. In that period, Nigerian banks’ total gross loans grew by a compound annual growth rate of 27.9 percent.
How can insurance penetration be increased? The essential thing to understand is that the building blocks for transformation already exist. For example, there are 38 million bank verification numbers in Nigeria, so banks’ abilities to distribute insurance or bancassurance is not in doubt. What’s more, there are 170 million mobile phone lines in the country, which suggests another effective distribution method. Number-plate recognition technology, using real-time referencing with insurance records, is already being used in some parts of the country, showing that the datasets, hardware and technology for rapid development are already there.
The technological platforms for managing high volumes of customers are tried and tested in other markets, and are available for deployment here too. In other words, the systems already exist to turn Nigerian insurance companies – which are accustomed to managing thousands of customer accounts – into companies that are able to manage millions.
In addition, there is microinsurance – low-cost insurance that is distributed in cooperation with state institutions, development finance institutions, foundations and other agencies. Microinsurance can help to familiarise a market with insurance products and pave the way for the expansion of insurance overall. It’s therefore a matter of which combination of these assets and initiatives will be deployed in Nigeria.
Can you tell us about the reforms due for completion in 2020 and what impact they will have on Nigeria’s insurance sector? Nigeria’s National Insurance Commission (NAICOM) has found a deceptively simple device to reform the industry as a whole. This involves helping insurance companies to raise extra capital.
In the coming months, the minimum level of capital for a composite insurer is set to rise from NGN 5bn ($13.8m) to NGN 18bn ($49.8m). Meanwhile, the minimum level of capital for a non-life or general insurer is set to increase from NGN 3bn ($8.3m) to NGN 10bn ($27.6m) and the minimum level of capital for a life insurer is predicted to rise from NGN 2bn ($5.5m) to NGN 8bn ($22m). In May 2019, instructions regarding these changes were given to insurance companies, and a further document was issued in July giving clarification to NAICOM’s precise definition of ‘capital’. The deadline for complying with NAICOM’s minimum capital requirements is June 2020.
In the process of recapitalisation, we expect two things to happen: first, we expect companies to raise fresh capital on their own. As of September 2019, we can already identify eight companies that are doing this, but there will be more companies raising capital over the coming months. Second, we expect more mergers and acquisitions to take place, consolidating some of the medium-sized and smaller players together and perhaps bringing them under the umbrella of one or two of the larger players. It is also possible that some of the weakest players will be eliminated entirely. The result – and we can see this evolving at the moment – is the creation of a suitably capitalised industry with fewer companies.
89
Number of banks in Nigeria in 2004
25
Number of banks in Nigeria in 2005
59
Number of insurance companies in Nigeria in 2019
25
Predicted number of insurance companies by 2020
The insurance reforms of 2020 looks very much like the banking reforms that took place in 2004. The banking reform of 2004 was introduced under Charles Chukwuma Soludo, who was governor of the Central Bank of Nigeria at the time. His reforms involved a steep increase in the capital requirements of banks; as a result, there was a round of capital raising and mergers and acquisitions. The number of banks in the country fell from 89 in 2004 to 25 in 2005. In a similar way, we expect the number of Nigerian insurance companies to fall from 59 today to around 25 by the middle of 2020.
The banking reforms of 2004 also re-established the credibility of the industry in the eyes of international partners, domestic commercial customers and, crucially, retail customers. The number of clients who entrust their current accounts and savings to banks has grown enormously, which in turn has expanded the measurable money base. There is a strong precedent for something similar to happen in the insurance industry too, starting in 2020.
In addition to these reforms, what else is needed to promote the growth of Nigeria’s insurance sector? The role of the government and regulators is very important. In countries where the government takes an interest in the development of insurance, there have been many instances of successful insurance rollouts. These governments understand the social benefits of widespread insurance deployment in providing a safety net for individuals, SMEs and businesses in sectors as diverse as agriculture, logistics, transportation and power generation. When it is understood that insurance is a social good and essential to the smooth running and development of the economy, then governments are likely to get involved.
Regulation is not restricted to insurance regulators. If the insurance industry is going to expand through bancassurance, then it requires both insurance and banking regulators to work together; if the industry is going to expand through mobile telecoms, then it requires the insurance and telecoms regulators to work together too. In fact, all three need to collaborate in order to create the optimal mix. Ultimately, what is required is a collaborative approach from NAICOM, the National Communications Commission and the Central Bank of Nigeria. It may be a tall order, but there are gains to be made for all the parties involved.
What role does Coronation Merchant Bank play in helping to make this change happen? Coronation Merchant Bank plays many roles in supporting the insurance industry in Nigeria. We have a strategic advisory role with our investment banking division, which has a clear insight as to how the industry is going to develop. We also have advisory and capital-raising capabilities in investment banking and Coronation Securities, as well as key contacts in the industry.
Part of the success of an insurance company comes from the effectiveness of its liquidity management – in other words, how effectively it manages the premiums it receives. This is an important factor in Nigeria, where risk-free interest rates are in double digits. It is therefore very important to judge fixed income markets well. Thankfully, our global markets and Coronation Asset Management divisions provide critical services and support for insurance company liquidity management.
What can we expect to see from Nigeria’s insurance sector in the coming years? It seems likely that the NAICOM reform will reduce the number of insurance companies to around 25. Within that number, it is possible to identify a group of six to eight largely foreign-owned insurance companies, and a group of six to eight wholly indigenous insurance companies, followed by a number of small companies. So, there is likely to be an even split between foreign and indigenous ownership among the biggest firms. This bodes well for the competitive aspects of the industry going forward, and for the relationship between the industry and its regulators.
Raising capital costs money, therefore there has to be a return on that money. Clearly, the recapitalised industry of 2020 needs to achieve scale if it to make the kind of profit that strategic investors and stock market investors demand. That scale can only be reached with rapid expansion. Fortunately, the industry is likely to work together with distribution partners and regulators to achieve growth.
It can also be expected that development finance institutions, foundations and other agencies will take greater interest in the industry, quite possibly through sponsoring microinsurance schemes. There could also be innovations in bancassurance and mobile telephony if regulators are prepared to amend existing regulations. As such, the insurance industry is likely to be very dynamic, with rapidly evolving partnerships and alliances forming over the coming years.
Tax technology specialists Vertex brought together tax professionals, solution experts, and its customers in Munich for its Vertex Exchange Europe event. World Finance interviewed half a dozen delegates for an update on Europe’s latest tax compliant challenges and technological advancements: you can watch them all in our Tax Automation with Vertex playlist on Youtube.
David Deputy: So blockchain can be used in I think three areas that stick out for me.
One is you’re seeing financial instruments, physical interest-earning assets, and cash flowing assets: they’re being put onto the blockchain as a system of record. So when these assets are transferred, there’s obviously tax involved.
The second is use of blockchain for the automation of approaches. So we’re seeing blockchain being a great way to store identities, to understand who the taxpayer is, for moving information – it’s a great data management system.
But concurrent with the movement of information, there’s the potential to move the actual tax payment at a very granular level. So you can get immediate compliance with no audits, no returns, certified compliance through use of the blockchain, which is one area we’re exploring.
Real-world examples of tax authorities using blockchain: there’s many in the income tax space, where they’re trying to understand who’s not paying on gains and losses in crypto. But to bring it into the transaction tax space, we’ve seen China take a leadership position. Shenzhen province did an e-invoicing experiment on blockchain, along with Tencent, who we had conversations with. It seems to have been successful. Questionable whether it will roll out more broadly, so these are still experiments.
You’ve also seen here in Europe, DG Tax, they asked for blockchain to be explored to reduce the VAT fraud – there’s $150bn roughly of VAT fraud in the European Union – so they’re actually funding grants with technology companies to explore how blockchain could be applied in the European context.
What we’ll see in the future for blockchain – at least our hope – is that blockchain can be the basis for automated compliance. So immediate certification – as soon as the transaction occurs – that you’re in compliance with the government regulations that are applicable. So we feel there’s a great opportunity for us to collaborate, not only with the taxpayers but also with the governments, to become a trusted authority that provides the ability to file your information as necessary.
Or better yet, prove to the government that you’ve used the right information to get to the right result, without sharing it with them. But also to pay your taxes due immediately.
That removes the opportunity for fraud in the minds of the government. And in return, to get a certificate of immediate compliance on a transaction-by-transaction basis. Removing returns, removing audits – absent finding of fraud, there would be no hassle. It would just be a seamless system where money is flowing to the government, and there’s no hassles for the business.
Thanks for watching. Click now for more videos from Vertex Exchange Europe 2019, and please subscribe for the latest international business insights from worldfinance.com
Tax technology specialists Vertex brought together tax professionals, solution experts, and its customers in Munich for its Vertex Exchange Europe event. World Finance interviewed half a dozen delegates for an update on Europe’s latest tax compliant challenges and technological advancements: you can watch them all in our Tax Automation with Vertex playlist on Youtube.
David Deputy: I think we’re seeing an increasing trend towards automation.
When new technologies like RPA, or artificial intelligence, machine learning, come out – there’s always an immediate reaction to uptake them. And the way that happens is, we copy what the humans do. So we replicate the human actions by mimicking it through automation. Which is great! You know, customers are receiving a lot of benefits. We’re working with customers who are going from 15 hours to 15 seconds type of benefits. But that’s only the first stage.
The next stage is always to reimagine why are we doing it this way? Because it was human based. The process was designed to accommodate humans. So we think the next wave of technology is to reimagine how things could be done. And that takes creativity. So we’re collaborating with our customers, we’ve got multiple projects going on, and machine learning, and robotics process automation. But always in conjunction with the customers, to understand how we could reimagine the process, and step beyond replicating inefficient human processes designed for humans with technology, and move to the next level of automation. Which is to streamline and really reimagine the whole process.
The way that Vertex is bringing this technology into the tax realm is, we’re working with both machine learning and robotic process automation in two different areas. One, we’re using robotic process automation to look into automating the process of filing returns. So currently the work’s being done in the US at the state level. So there are state websites where you go, and you have to click through and upload your return. That’s manual labour, it’s designed for humans, these interfaces. So we’re looking to put robotics behind it, to remove the drudgery work of humans going through these websites, clicking, uploading, all that.
Another one we’re doing is, we’re looking at the categorisation of products; for taxability, but more broadly for customs, even for search engine placement. So we’re working with large product catalogues and the mapping to tax categories. And working with multiple clients to build up a machine learning library, that understands how to take a product and make a recommendation on what the appropriate tax categorisation will be.
We’re seeing tax authorities use the technologies as well. For example, last month we hosted a delegation from the Korea tax administration. And in a couple of weeks we’ll be hosting the China tax administration. So they’re doing tours, the Asian countries specifically are doing tours, to understand the best practices in use of analytics for fraud detection and audits. So we’re working with them to explain that our customers would never conduct fraud, because they’re paying a lot of money for a high quality determination engine, and compliance and reporting. So we’re trying to make sure that there’s not a lot of false positives in the efforts. But we’re also educating them on the use of big data, and how analytics can help spot anomalies.
But the key thing is to make sure that the industry collaborates with the governments, so that we’re not stuck with analytics programs that kick out just a tonne of false positives, and we spend the next 10 years of our career responding to government requests for information that are perhaps ill-informed. So that’s our goal.
Thanks for watching. Click now for more videos from Vertex Exchange Europe 2019, and please subscribe for the latest international business insights from worldfinance.com
Tax technology specialists Vertex brought together tax professionals, solution experts, and its customers in Munich for its Vertex Exchange Europe event. World Finance interviewed half a dozen delegates for an update on Europe’s latest tax compliant challenges and technological advancements: you can watch them all in our Tax Automation with Vertex playlist on Youtube.
Andy Hallsworth: So the world of indirect tax is changing – where I suppose we see it changing most clearly is in compliance. Tax authorities want more data more rapidly than they ever have done before – it’s not just a quarterly VAT return.
Take Spain as the example: they want their SII filing every four days. Knock-on effect, it’s not just a compliance issue, it’s a getting-the-tax-right-up-front issue. If you have to submit every four days, you don’t have the luxury of a month-end process. So if you can get the VAT right up front, that’s going to help you meet your downstream reporting requirements in a much more streamlined way.
Tax engines I suppose replace a reliance on having to build rates and rules into the back of an ERP. All ERPs can handle VAT, but traditionally they are a blank sheet of paper. You are responsible for populating them with all those VAT rates and rules, and keeping them up to date as you go along.
A tax engine is full of content; and by content I mean indirect tax content, jurisdictional content – what’s in the EU, what isn’t in the EU, place of supply rules, tax types, tax rates, and so on. That sits already pre-embedded in the tax engine, and for Vertex customers, we, Vertex, keep all that content up to date.
So as rates change, as the UK leaves the EU, as the gulf region introduces VAT, we keep all that content up to date.
If you’re building your own rates and rules in the ERP system, you have to do all that job of maintenance yourself. And as everyone knows, the world of indirect tax is changing more rapidly than it ever has done before.
One other element of tax engines is visibility. It becomes much clearer to the tax person why taxes are being determined in such a way. And it’s much more straight-forward for a tax person to put their business-subjective spin onto things. No longer reliant on a technical team to build something around the back of the ERP. I as a tax person now have the ability to do this myself. It gives me the power to manage tax within my business that much better.
Thanks for watching. Click now for more videos from Vertex Exchange Europe 2019, and please subscribe for the latest international business insights from worldfinance.com
Tax technology specialists Vertex brought together tax professionals, solution experts, and its customers in Munich for its Vertex Exchange Europe event. World Finance interviewed half a dozen delegates for an update on Europe’s latest tax compliant challenges and technological advancements: you can watch them all in our Tax Automation with Vertex playlist on Youtube.
Aleksandra Bal: The European VAT system is changing all the time. And one of the major reforms of the last years is the VAT e-commerce package. The objective is to modernise the European VAT system, to make it fit for the modern economy, and of course to lower the associated compliance burden for online traders.
The VAT e-commerce package will affect sellers – both resident and non-resident – that provide electronic services and goods to European private individuals.
Some provisions of the e-commerce VAT package took effect in January of this year, but the main part will become effective in January 2021.
The first main thing that will change is that the distance selling regime will disappear. Currently, when European businesses sell goods to consumers in other member states, they have to register there if they exceed certain thresholds. This means you may end up having 27 registrations and filing complications in 27 member states. And that of course increases the cost of compliance.
Under the new rules, life will be simpler. You will no longer need to have 27 registrations. You will be able to register in one member state, and do all your filings there. And, if your revenue is below a certain threshold – if it doesn’t exceed €10,000 – you may even use your home country rules to calculate VAT.
Another important provision of the VAT e-commerce package is about online platforms. Online platforms will be involved in VAT collection on the sales they facilitate.
Currently, when you as a seller supply goods via an online platform, there’s only one transaction: seller to customer, and the platform acts as an intermediary, facilitating the transaction.
Under the new rules, there will be two transactions. The seller will sell to the platform, and the platform will resell to the consumer. And this of course means there will be more compliance burden for online platforms, but life will be simpler for online sellers.
So, just like with any reform, we will have both winners and losers.
Thanks for watching. Click now for more videos from Vertex Exchange Europe 2019, and please subscribe for the latest international business insights from worldfinance.com
