World Finance

Good things come to those who wait

Posted on January 5, 2011 by

After the United States, China is the second largest economy in the world. It has long been recognised as the fastest-growing globally, having recorded annual average growth rates in excess of 10 percent over the last quarter-century. In Q2 2010, China’s economy was valued at $1.33trn, and it is estimated that by the end of the year the nation’s total GDP will be approximately $5.7trn. Given these impressive figures, for many years global financial institutions have been holding their breath, waiting for an opportunity to tap into such a potentially lucrative market.

Their wait has been a long one. It was in 1978 that investors first pricked up their ears, when China began to make wholesale reforms to its economy in order to address its burgeoning social and economic problems. One key aspect of such a restructuring was that – for the first time in the 20th century – the government began to encourage foreign trade and permit foreign direct investment (FDI) in the areas of the country where it was most needed.

Following this, throughout the 1980s, the number of regions that could accept FDI grew and China began to adopt some ‘western’ principals, particularly in the fields of legal and financial infrastructure, which were key to handling FDI.

Recent developments within China’s financial infrastructure have left the door ajar for international banks, wealth managers and fund management firms to make their moves.

Banking
The Chinese banking sector has traditionally been dominated by four institutions: the Industrial and Commercial Bank of China, the China Construction Bank, the Bank of China, and the Agricultural Bank of China. Today these banks hold between them more than half of China’s total banking capital.

However, change is afoot. Recent years have witnessed a glut of high-value IPOs, which have seen the top five Chinese banks raising almost $60bn. Capping this trend, in July this year, the Agricultural Bank of China achieved a $19.2bn public listing, valuing the company at approximately $128bn – bigger than the likes of Goldman Sachs or Citigroup. These listings have allowed international investors to take significant shareholdings in the Chinese banking industry.

Of course, doing business in China has often been fraught with difficulties, with excessively high minimum capital adequacy requirements proving prohibitive for foreign firms. But, in 2001, upon accession to the World Trade Organisation, the Chinese government consented to the creation of a more level playing field for foreign banks.

Whereas some British banks have been well established in China for some time – HSBC and Standard Chartered have managed operations for over a century – these have been the exception to the rule. The figures show that today overseas banks are taking full advantage of this new freedom. According to figures published by UK Trade & Investment (UKTI), between 2003 and 2008 foreign investments in Chinese commercial banks stood at $783m, and the number of Chinese banks with foreign capital grew from just five to 32.

And the expansion has continued. To date, foreign banks from 12 countries have established a total of 28 foreign-funded banks, in addition to two joint-ventures and two overseas-funded finance companies. In total, 196 foreign banks from 46 countries have set up 237 offices in China.

The boom in commercial and investment banking has already begun, but there remains a huge opportunity in the localised retail banking sector. In 2007, HSBC was the first bank to receive approval from the China Banking Regulatory Commission to establish a bank in rural China, and although the hook has not yet caught, given China’s eye-catching demographics, many others are sure to follow.

Fund management and private equity
The fund management industry in China has played an increasingly important role with the Chinese economy over the last 10 years. Formally established in 1998 when the government launched the first batch of six fund-management firms, China is currently home to some 60 fund management organisations, bearing total assets under management of some Yuan Renminbi (RMB) 2.3trn (around $350bn).

The private equity (PE) industry, as a sub-sector of general fund management, is also in overdrive. A report published in August by M&A advisory firm China First Capital, details how China is flooded with PE capital ready for investment, having raised over $50bn over the last four years.

Driving this innovation is the Chinese government, which in 2007 pushed through a Partnership Enterprise Law, effectively imitating a western LLP structure and thus allowing the development of PE and venture capital investment into China. Steps have also been taken to ensure a sound and accountable professional services environment, allowing for the development of a supporting legal, accountancy and corporate finance services community.

The enormous flow of capital is not looking to dry up. As recently as August this year, CDH Investments, one of China’s leading PE firms – with $4bn of committed capital – closed its fourth investment vehicle on $1.46bn.

Furthermore, according to Deloitte’s annual Private Equity Confidence Survey, published in September, over three-quarters of respondents expected levels of PE investment to increase over the next 12 months, and not one respondent predicted it to decrease.

Another big attraction for foreign investors is sure to be the forthcoming launch of what will prove to be the largest pool of investment capital within the global PE industry. With assets of close to $120bn, China’s National Social Security Fund is mandated to commit over $3bn a year in new capital for PE investment in China.

Currently the fund is in the process of selecting suitable private equity fund managers and fund-of-funds to make investments on its behalf.

Given the government’s commitment to supporting the industry and with such prizes at stake it is no surprise that international funds are flocking to China, hungry for a piece of the pie.

However, they now have a great deal of competition on their hands. Until now, many domestic Chinese PE funds have operated on an opportunistic basis, aiming to make a ‘quick flip’ of an entrepreneurial business into an IPO, but without fully grasping the long-term effectiveness of a sustainable PE investment model.

But now, many Chinese funds have become enlightened and are contending on a credible – if not financial – level with the international funds. One of the key ways they are gaining a competitive advantage is by setting up RMB-denominated funds, which are able to invest more quickly and effectively into local businesses than foreign USD funds. Furthermore, their understanding of the dynamics of their home market often surpasses those of funds that fly in from London or New York. In short, local players have the advantage of speed of execution and local knowledge.

As testament to this, Deloitte’s survey states that “2010 will be remembered as the year the RMB funds found their pace and became a major factor in China’s capital landscape.” Also according to the report, “In the first half of the year, some 32 new PE funds were set up, 26 of which were RMB denominated.”

However, the foreigners are fighting back. It is for this reason that it is widely believed that Carlyle, one of the largest global PE players, is looking to launch a RMB fund, and Reuters reports that major US investor Blackstone has this year made a further three additional commitments to its $732m RMB-denominated fund.

As the Deloitte report also points out, “Foreign funds have encountered regulatory and market challenges in meeting their RMB funding goals.” Nevertheless, foreign-run RMB funds have raised a disclosed RMB 23.8bn ($3.5bn) to date.

All told, there is a massive opportunity for international funds to make their move on the sizeable Chinese PE playing field. However, in order to play their part they will need to act fast to compete with the growing masses of local funds and – perhaps more importantly – get to grips with an unfamiliar environment.

Wealth management
According to Celent, a research consultancy firm focused on the financial services industry, wealth management services provided by Chinese banks have shown impressive growth in recent years and have an even greater potential going forward. In 2007, for example, the size of the market for individual wealth management in China was over $350bn – more than double that for the year 2000. Furthermore, this figure is expected to double again by 2014.

Celent’s research reveals that at the end of 2007 China boasted almost half a million individuals with a net worth of more than $1m – an increase of over 20 percent from the previous year. Also, the number of ultra-high net worth individuals (those with assets exceeding $30m) now exceeds 6,000.

According to UKTI statistics, the wealthiest one percent of Chinese households own more than 70 percent of the country’s total personal wealth. Over the past five years the astronomic rise in the number of millionaires has meant that China now holds the global rank of fifth place in terms of the number of millionaires. All told, China’s richest people have an aggregate wealth of more than $2trn.

The concentration of wealth among such a small proportion of the population makes China a huge market for wealth management services – in fact the second largest in Asia outside Japan.

Unsurprisingly, there is a sizeable opportunity for international firms to take a foothold in China’s wealth management market, and there are opportunities to exploit such a market.

Economists have long commented that many of the local banks lack a sufficient portfolio of investment products to cater for the increasingly affluent class of Chinese high net worth individuals. Also, as investments through private structures such as venture capital trusts are not fully available to the wealthy, the best that they can achieve is high interest rate accounts offered by local banks. As such, there is an enormous opportunity for foreign private banks – especially those that have lost clients in their home markets thanks to cautionary measures caused by the recession – to enter the market with their full portfolio of products and services to cater to the needs of private banking customers.

Potentially lucrative
Over the past few years China has experienced a continued expansion and diversification of financial players seeking to take a share of the market. As the sophistication of domestic investors has improved, so too has the window for foreign financial investment widened, as many sectors of the economy have become more liberalised.

Against the backdrop of global economic turmoil, China’s economic growth remains impressive, and international investors of all kinds will continue to find China hard to ignore – especially if opportunities remain thin on the ground in their home markets.

Gold up; emerald down

Posted on January 5, 2011 by

Ireland’s property market crash has exposed years of reckless lending and has forced the government to nationalise large parts of the banking industry, leaving the taxpayer with a bill of €50bn or more to clean up the mess.

The scale of the disaster is unprecedented in Ireland. By 2008, some 40 percent of Irish banks’ loan books were related to real estate, equivalent to some €160bn. Much was lent at high loan-to-values and when the market crashed, borrowers swiftly saw equity wiped out, leading to breaches of debt terms. The banks, in effect, became the owners of so many billions of euros borrowed against poor quality property and land that their own balance sheets were unlikely to cope.

And that’s not all. Morgan Kelly, a professor of economics at University College Dublin who predicted Ireland’s property collapse, is forecasting that a new wave of toxic debt related to domestic mortgages could sink the country entirely.

He believes that Irish households are stretching themselves to the maximum to pay mortgages they cannot afford because of the stigma attached to default. “That will change,” Professor Kelly wrote in the Irish Times in November. “The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording.”

Professor Kelly’s comments have been seized upon as evidence that the country’s financial woes will get worse before they get better. He says the cost of the bank bailout, estimated at €50bn, will be far higher than the government has admitted, with losses at Allied Irish Bank and Bank of Ireland equalling those of toxic bank Anglo, leaving the taxpayer with a €70bn bill – nearly 50 percent higher than estimated. And there are concerns that the wrong banks may have been supported. While Allied Irish and Bank of Ireland have received billions in state aid to cover their dud loans to bankrupt construction tycoons, Irish Life & Permanent has received no bailout help, even though it is the most exposed to Ireland’s depressed market for residential property.

Bleak expectations
The Irish banking crisis has also been compounded by revelations that banks failed to take out insurance to protect themselves against losses on their mortgages, increasing the cost to taxpayers of rescuing them. Irish banks used to ask customers to take out compulsory mortgage insurance but this practice was abandoned at the height of the boom by most lenders. There is about €148bn of mortgages outstanding in the Irish market.

Professor Kelly was vilified when he warned of a property crash in 2007, earning the nickname “Dr Doom” for his gloomy – but accurate – predictions of economic woe. Now he has painted an even bleaker picture of the future and suggests that hundreds of thousands of people will go into mortgage default. “The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War,” he said, in reference to public defiance
in the 19th century when tenants refused to pay their rents.

Yet the country seems ill-equipped to deal with the problem, and some critics point out that the European Central Bank’s decision to pursue policies that favour Europe’s economic powerhouses like France and Germany, are having a detrimental effect on countries like Portugal, Greece, Spain and Ireland. The interest rates charged on the treasuries of Ireland, as well as fellow indebted eurozone members Portugal and Spain, have been rising ever since German Chancellor Angela Merkel said in October that she expected any future EU bailouts to come with new rules requiring bondholders to absorb some losses.

Economists warn that a rise in ECB base rates, potentially late next year, is the biggest threat to bank mortgage books. A rise in these rates will hit tracker mortgage holders, many of whom took out their loans in the last few years of the boom when prices were at their highest and deposits at their lowest.

The combination of bank bail-outs, government debt, collapsed property prices and a rising ECB interest rate all spell calamity for Ireland’s financial services sector and for its investor attractiveness. By the beginning of November, shares in Ireland’s banks had hit record lows and national borrowing costs had reached new euro-era highs as the government presented its latest plans for financial survival to the EU’s economic commissioner.

Furthermore, investors are shunning Ireland’s government and bank debt in expectation that the country will eventually require a bailout by the EU and International Monetary Fund, as happened to Greece in May.

The bad bank
Economists say that Ireland is experiencing by far the greatest scepticism from would-be lenders, who look with horror at the country’s projected deficit of 32 percent of GDP – a modern European record. While Ireland says it has sufficient cash until mid-2011 and has announced plans to resume bond auctions in January, its bank stocks and bonds have been dropping since Finance Minister Brian Lenihan announced plans at the beginning of November to slash £5.16bn from its 2011 deficit – double his previous target. Lenihan said he wants to cut the 2011 deficit to 9.5 percent and reach the EU’s limit of three percent by 2014. The European Commission thinks it can be done, but few others are so sure.

The government has made efforts to try to stem the crisis and to increase the flow of credit through the Irish economy. The National Asset Management Agency (NAMA) was created in late 2009 and will function as a “bad bank,” acquiring property development loans from Irish banks in return for government bonds – which may lead to a significant increase in Ireland’s gross national debt.

There are five participating institutions in NAMA – Allied Irish Banks, Anglo Irish Bank, Bank of Ireland, Irish Nationwide and EBS. The original book value of these loans is €77bn (comprising €68bn for the original loans and €9bn rolled up interest), though the current market value is estimated at €47bn as many of the loans are now non-performing due to debtors experiencing “acute financial difficulties.”

NAMA is buying the loans at an average of 52 percent discount to November 2009 values, paying an estimated €35bn for the €73bn of loans. Initial discount estimates were 32 percent.

There are up to 10 years to work out the loans, although there are goals of repayment of 25 percent by 2013 and 80 percent by 2017. It is hoped to make a profit of at least £1bn by the end of NAMA’s life.

Lenihan said the banks would have to assume significant losses when the loans, largely made to property developers, are removed from their books. If such losses resulted in the banks needing more capital, then the government would insist on taking an equity stake in the lenders. Economist Peter Bacon, who was appointed by the government to advise on solutions to the banking crisis, said the new agency has the potential to bring a better economic solution to the banking crisis and is preferable to nationalising the banks.

NAMA has caused equal measures of anger and worry in Ireland – anger that taxpayers could be saddled for years to come with debts on ill-timed investments made by property tycoons who have evaded the fallout and are still living in mansions, while there is a worry that these property loans could capsize the economy. The agency also has its critics: Nobel Prize-winning economist Joseph Stiglitz has said that the plan amounts to “squandering” public money to bail out the banks.

The agency is also likely to face criticism when deciding which schemes should be supported through new capital.

Many development sites, particularly on un-zoned land, will not be viable, and also offer no income to service interest, which means that they will be unlikely ever to cover the associated debt – not exactly the news that taxpayers and investors have wanted to hear. As much as €33bn of the land and development schemes are expected in Ireland, with another €10bn in Great Britain and €3bn in Northern Ireland. Some will be partially complete; others simply unwanted farmland standing fallow. Some observers point out that the political aspects of what stays and what goes may be heightened by the fact that many loans have personal guarantees from borrowers.

Potential opportunities
Yet besides the political sensibilities that the agency has to navigate, it is the operational side of the organisation that is causing most concern at the moment. Investors who have come to Ireland to carry out commercial property deals looking for a return over five or seven-year investment periods have given up due to the length of time it takes to complete transactions – or even get them started. One fund manager said, “We have put real estate investment in Ireland on indefinite hold.” Instead, fund managers may look at markets like France and Poland to pick up bargains.

There is little doubt that there are bargains to be had for investors who stayed out of Ireland during the boom. For example, in upmarket Booterstown in south Dublin, Irish Nationwide is selling two-bedroom apartments at €289,000 – 50 percent below prices in the same neighbourhood three years ago. Meanwhile, receiver Martin Ferris & Associates is behind a plan to sell 30 apartments at Blakes Road in Mulhuddart, west Dublin, for less than €1.9m – or €63,000 each. The Construction Industry Federation (CIF) reckons that such sales are at or below build cost, even reckoning land values at zero.

Domestic property professionals are unwilling to talk down NAMA but this is hardly surprising as the €81bn property vehicle will be by far the biggest user of professional services for a decade. But off the record, many say that NAMA is, at best, slow moving. “People are saying that NAMA is a white elephant, and like an elephant, it is proving difficult to shift in a hurry,” said one source.

A civil engineer for all seasons

Posted on January 5, 2011 by

Prasert Bunsumpun
Age: 58
Education:
Harvard Business School
MBA, Utah State University
Career highlights:
2003 President and CEO, PTT Group
2001-2003 Senior Executive Vice President, Gas Business Group, PTT Public Company

When Prasert Bunsumpun, then 51, was appointed President of Thailand’s national energy company, PTT Plc in 2003 it was yet to join the ranks of the Fortune 500 elite. By 2004, it was listed at 456. Later in 2005 PTT was ranked 373; by 2006 it had climbed more than a hundred places to reach 265; 2007 saw it at 207; PTT had reached 135 by 2008 and in August 2009, Fortune 500 magazine ranked it 118 and recently 155 in 2010 among the world’s largest companies. Under Prasert’s bold, industry-smart leadership, marked also by an intuitive politically nuanced style, PTT today is Thailand’s fully-integrated energy company with leading position in exploration and production, transmission, petrochemical, refining, marketing and trading of petroleum and petrochemical products.

So what of the man behind the company’s impressive transformation from a small, state-run enterprise to an oil and gas group with investments in Exploration and Production (E&P), refining, and petrochemicals? Now in his second term at 58, Prasert Bunsumpun is variously described as tireless, focused and adept at selling his often visionary and occasionally radical ideas.

A 1977 MBA graduate of Utah State University and an Advanced Management Programme certificate holder of Harvard Business School in 1998, Prasert Bunsumpun entered the high-octane world of petroleum products at the age of thirty in 1982, joining the then Petroleum Authority of Thailand, later to be privatised in 2001 as PTT Public Company Limited, but with the Thailand Ministry of Energy holding a controlling interest. A former director of Siam City Bank, Prasert is also known for his financial acumen and his ability to recognise an acquisition bargain.

Described by those who remembered him at the time as “quiet and determined” Prasert would not really find his stride and the opportunity to exercise his special talent for decisive leadership until he took over the helm of PTT as its president in 2003. The responsibilities of the job that involved safeguarding and developing much of the nation’s vast energy assets while balancing the often pressing demands of a volatile global energy market and juggling the necessity to play to the political balcony, require special qualities. Resilience, tenacity, a big picture mindset while still grasping the details, are all part of the mix. Add in a Bill Clinton-like ability to ‘compartmentalise’ and Buddha-like, to live in the moment, and the secret begins to emerge.

Prasert would though, be the first to point out that we’re all different and clearly there’s no one formula that guarantees success as a business leader. Whatever the complete recipe in his case though, it appears to have worked remarkably well.

His first notable recognition came in 2005 when he garnered a clutch of awards – Corporate Executive of the Year by Asia Money magazine; Asian Best CEO in Oil and Gas Business 2005; Thailand Best CEO 2005 by Institutional Investor Magazine; Thailand Business Leader of the Year 2005 by CNBC; and Best CEO of the Year 2005 by Stock Exchange of Thailand Awards 2005. There was more to come in 2008 when he shared the Oscar of the energy sector – Platt’s Global Energy Award for CEO of the Year.

In 2005 also, BusinessWeek placed PTT at the top of its list of Asia’s 50 best firms and said this about the company and its president: “with the spectre of $60-$70 oil hovering over energy-hungry Asia, a mad scramble is under way by regional oil and gas companies to lock up resources overseas and ramp up refinery capacity at home.”

“The unassuming civil engineer”, the article continued “is president of PTT Plc, a $15.7bn state-controlled energy giant that is enjoying windfall profits at home thanks to inspired management and spiraling gas and diesel fuel prices. The Bangkok company’s second-quarter profits alone rocketed 30 percent, to $449m, while sales jumped 50 percent. And no wonder, since PTT makes money all the way from the wellhead to the gas pump.

“PTT is now leveraging its supercharged shares – up 40 percent over the last year – to develop oil and gas assets from Algeria to Oman. ‘We want to have at least 20 percent of our revenues coming from international operations within five years,’” says Prasert.

The BusinessWeek article concludes, “In many ways, PTT is emblematic of the sudden fortune visited upon hundreds of companies supplying Asia with the energy it needs to stoke its growth. What sets the Thai company and a handful of other top performers apart is a shared drive to prepare the stage for future growth through rapid acquisitions while maintaining stellar profits and rich shareholder returns.”

Awards, peer and public approbation have no doubt been welcome by the PTT president and CEO. If nothing more, they suggest he must be doing something right, but what has his much vaunted ‘visionary’ leadership actually done for PTT? Even a cursory glance at the fortunes of the PTT Group during his tenure show they have improved massively. Under his unerring guidance the group now controls a vast network of interrelated companies in oil, gas exploration and production, transmission petrochemical, refining and marketing and trading of petroleum products. The Group’s revenue in 2009 amounted to $46.04bn with a net income of $1.73bn. Unsurprisingly the awards for PTT in 2009 also kept coming.

Achieving success in the high stakes and high pressure world of energy inevitably invites the “What’s your secret?” line of questioning. Prasert Bunsumpun would likely attribute his success to an overriding objective of attaining sustainable growth. To do that, he has said that he focuses on leadership development, employee competency improvement, and creating a culture of innovation. Part of that, means a strong adherence to good corporate governance and from every individual, a firm commitment to corporate social responsibility.

Prasert believes that any organisation is only as good as the sum of its parts and in his case this means ensuring transparent management practices in everything it does. Prasert has high ethical standards, values he expects of all those he works with and which are now enshrined as part of PTT’s core values and culture. Employees with a former ‘public servant’ mindset now see themselves as professionals working in a very professional organisation.

Part of this change in attitude no doubt stems from the very hands-on approach Prasert uses when dealing with, and motivating staff.

In 2009, besides monthly labour relations meetings, PTT, led by its shirt-sleeved president instigated head-to-head meetings to get immediate feedback from staff on their opinions from important strategic decisions to the more mundane matters of administration and welfare. Effective communication, believes Prasert will lead to positive relations, taking the organisation to agreed unified goals. Nothing new in that of course, but making it work in the Thai culture where the boss is generally obeyed in silence and where opinions, even when sought are seldom forthcoming, is something to be roundly applauded.

In matters of earning staff loyalty, the PTT president displays an instinctive understanding of the European notion of business democracy where everybody is equal, eats in the same canteen, and the bosses at every stage of the hierarchy are accessible and the really big boss is more accessible than most. Again this is contrary to the traditional Thai cultural mores where senior figures are not only obeyed, but expected to remain distant.

Prasert is also seen at many company functions and makes regular visits to companies under the PTT umbrella.

Further insight into the Prasert management style is seen in his reported comments on what he describes as a ‘Learning Organisation.’ “To become a Learning Organisation, we rely on human intelligence. Learning is an ongoing, lifelong process”.

Expanding on his theme of building competent and righteous members of PTT and of society, Prasert talked about the company’s core values summarised in that very apt PTT acronym, ‘Spirit’ – synergy, performance excellence, innovation, responsibility for society, integrity and ethics, trust and respect.

In a June 2009 meeting organised by Thailand’s Institute of Directors the PTT leader voiced his opinion about the right course of action in times of financial crises. “Cash is the first priority in a time of crisis and because of high uncertainty, firms have to plan for different scenarios and conduct a stress test,” he said

Prasert noted that since the eruption of the worldwide crisis late 2008, PTT had moved the quickest to raise funds from the market, totalling more than Bt100 billion thus far. “It will issue more debentures very soon just before government bonds flood out the market,” he said.

“On the other hand, it is also important to look for opportunities,” he continued. «We must clean the house, developing personnel, restructuring, consolidating and reviewing operations, while also seeking opportunities. The last crisis had helped PTT grow several times. We can grow several folds this time because we are much stronger. There are more opportunities,” he said.

“We are aiming to turn the downturn into our turn,” he said, adding “communication is key.”

One example of Prasert’s leading-by-example method is his active support of the Thai government’s Energy Industry Act that sought to promote energy security for the nation through transparency in the provision of services, fair prices for consumers and licensees, and an equitable network access for competitors, although this law would mean more regulations to deal with for PTT’s gas business.

Bold decisions when other leaders might be inclined to be more conservative are also a mark of the Prasert style. His determination to build PTT through both organic and inorganic growth led for example to PTT investing almost $5bn in expanding gas pipeline networks to double capacity to stimulate the economy, improve domestic gas development, and increase PTT’s corporate value. This was in spite of the fall in demand following the 1997 Asian crisis. Since then, the demand for gas has risen rapidly, suggesting that in five years the pipeline will be fully utilised.

M&A has also been a strong vehicle for PTT growth under Prasert. Refineries and petrochemical ventures have been acquired and restructured during down cycles and nurtured to top performing companies in their market sector. An example is Prasert’s turnaround of Rayong Refinery Company (RRC), which PTT bought from Shell during the crisis and then successfully listed. In 2007, Prasert further strengthened RRC by merging it with Aromatics (Thailand) Public Co., Ltd., to finally become PTTAR, Thailand’s largest integrated aromatics refinery. Merger master Prasert later brought NPC (National Petroleum Corporation) and TOC (Thai Olefins Co.) together to become PTT Chemical, PTT’s petrochemical flagship company. Today, the two companies generate some 40 per cent of PTT’s earnings.

CSR fundamental to ptt’s sustainable development
A fundamental commitment to CSR that sees the implementation of good governance and social and environmental practices as a priority, has long been established at PTT. Reflecting the strong personal commitment and support from the current PTT president, a comprehensive CSR programme is now in place. The importance of the active promotion of a management and employee culture that embraces a socially responsible mindset at individual level has been the hallmark of the Prasert approach to making sure Good Corporate Governance and CSR translate into sustainable development for all concerned.

Today at PTT, not only is there an extensive and far reaching CSR programme in place that stretches across all its operations, it is one marked by a carefully planned framework that meets international CSR standards of reporting to maximum practical effectiveness across all business units. The objective is to lower PTT Group risks and to satisfy all stakeholders while providing maximum benefits to the community.

A response to global warming
The very nature of its business means that PTT has a major responsibility to take its response to the complex challenges of combating global warming very seriously. At every level, PTT has shown that it is committed to systematic management of this issue from carbon footprint management, including reduction of greenhouse gas emissions, to public educational campaigns.

Wider initiatives include promising research projects such as the application of biogases derived from industrial wastewater – expected to begin commercial production in 2011 – and construction of a prototype plant for bio-hydrogenated diesel and biojet, produced from diverse raw materials.

Another notable success has been a reforestation project in honour of His Majesty the King involving more than 400,000 acres. In the area of social and community development, an excellent example of PTT’s effort in 2009 was its cooperation with the International Union for Conservation of Nature (IUCN), in supporting the Sirinath Rajini Mangrove Ecosystem Learning Center in its efforts to preserve the Pranburi estuary mangrove forests. Another highly successful project, and one which took the 2009 Platts Global Energy Award, was PTT’s Sufficiency Path Project involving 84 sub-districts in Thailand. More recently PTT joined four other companies at a major industrial park in the province of Rayong committed to lifting social and environmental standards for local communities as well as transferring knowledge and experience.

PTT president Prasert Bunsumpun said the project was designed to give an example to other enterprises of all sizes in Rayong and elsewhere. “We met and agreed to join forces. We aim to share our experience in environmental care with others. We hope this will turn Rayong into the most liveable province. Rayong will become a green industrial town, an example for other provinces in terms of sustainable coexistence of factories and communities,” he said.

FX platforms target white labelling

Posted on January 5, 2011 by

Since its inception, Squared Financial Services (Squared) has continually invested in its product offering, technology and people, as it strives to become the platform of choice among all participants in the EFX market space. Today, the results of this investment are plain to see, as Squared Financial is poised to reap the rewards of its pursuit of excellence.

Squared was founded in 2005 by its current chairman, Philippe Ghanem, and director, Georges Cohen. It is an independent, full service broker headquartered in Dublin and is regulated (and MiFID authorised) by the Financial Regulator in Ireland.

At the very beginning Squared evolved from its founders’ frustrations as professional traders. The platforms Messrs Ghanem and Cohen were using did not give them the freedom, functionality or competitive pricing that their individual styles required. The decision was made to develop their own platform and Squared Financial was born.

Since then, Squared has continued to develop and enhance its platform and after considerable investment in late 2009, its executives believe it is in an extremely strong competitive position – nimble enough to adjust to individual clients’ needs with a product to compete with the very best in the market place.

Squared’s proprietary platform, Squared Trader, provides round the clock ECN-style (variable spread) precision FX trading from execution and reporting right through to settlement. Competitive access to the world’s largest FX liquidity providers is through Deutsche Bank, Credit Suisse, RBS, UBS, Goldman Sachs, Citi, Bank of America Merrill Lynch, BNP Paribas and Nomura – with more to come. They also use non-bank liquidity providers to deliver a product appropriate to different trading styles – this, says Mr Ghanem, is one of Squared’s keys to success.

“We recognised very early on that price and depth were our key USPs in terms of product, and in order to keep them competitive we had to enter into consultative relationships with our bank liquidity providers,” he says.

“In order to enhance these relationships further it was essential that we developed a separate stream, outside of our major bank relationships, for our more aggressive order flow.”

Squared Trader users can choose from a range of multi-panel trading modules to reflect their preferences and strategies. Squared Trader has the ability to quote for different trade sizes, both in the normal quote window for the best bid/ask for a particular size and a different window is available so that the best bid/ask and the best prices for each bank at those sizes is shown.

Both spot and forward transactions are supported and the swaps window allows the user to price these via a ‘Request for Quote’ and then to execute via the online platform.

For asset and money managers there is a unique multi-allocation grid, allowing an executed trade to be split between multiple managed accounts according to allocations defined by the manager – one click trading for multiple client accounts.

They also have an Order Management System which operates similar to an exchange. As soon as an order limit is reached it is executed immediately. Also on offer is a cross currency margin netting functionality which allows clients to offset long and short positions, in different currencies, against each other, allowing the individual client to optimise their margin levels or trading power.

Throughout the trade process clients have access to trade confirmation and reporting facilities. Trades are confirmed within milliseconds as soon as they are hedged with Squared’s trading counterparty and Straight Through Processing considered a vital offering in today’s market. A variety of real time and historical reporting tools are also available, providing a complete audit trail of all executed trades.

In addition to trading and confirmation, Squared recognise the importance of the highest level of client support and service and have a 24 hour multilingual team available to deal with queries or execute trades on a client’s behalf.

There are, however, certain areas of the business that are always a concern for any EFX broker. John Miles, managing director, believes this can sometimes be the key factor that distinguishes one provider from the other.

“Whether you are providing institutional type spreads to high net worth individuals, the very best in client service and support to asset managers or user friendly ultra-fast execution on tight spreads and large volume to institutions, there are always two areas of EFX trading that can catch you out – slippage and latency,” he says.

“We at Squared recognise that unless these are eliminated from the trade cycle clients will ultimately lose confidence in the platforms functionality and to this end, this elimination remains a constant priority on the technology side of the equation.”

Major changes have occurred in the way banks provide rates in the FX market. In mid-2010 the number of prices per second (ticks) sent by banks to Squared’s servers had increased 5 fold in some instances, over the levels seen in 2008. The direct consequence of this phenomenon, if not addressed, would be a significant decline in price validity and an increase in slippage and requotes on trades. This, for some providers, has induced a lot of uncertainty among their professional users relying on automatic FX trading systems and day traders dealing with high volume per trade.

Latency is also a critical issue for all traders since it creates risk no matter where it is introduced into the trading cycle. It can be affected by a number of factors – the client’s own system and quality of internet connection, the architecture of the liquidity provider’s system and its connection, as well as the computing time of the EFX broker’s platform itself. Squared admits that some of these factors are outside of their control for obvious reasons – and hence there is a certain amount of latency that will never be eliminated – but it is continually investing in ways to reduce it to an acceptable level.

One method adopted to address this issue was the design of a proprietary trading algorithm and several trade execution modes which enabled traders to execute trades with the minimal amount of slippage. Because the market has developed and the number of ticks has increased dramatically from only a few years ago, Squared is continually upgrading to higher speed data lines from the liquidity provider to its servers and, in some cases, to its clients.

Squared’s innovative business model provides complete transparency throughout the trade cycle: no fixed spreads, streaming prices from the world’s largest liquidity providers, no speculative positions against the client and no competing with their positions. Its best of breed platform gives the end user the opportunity to see the depth of the market and enough liquidity is available to accommodate any category of client.

FX broking has developed to a very diverse and sophisticated level, with clients demanding more and more from their providers. Squared has moved progressively with this demand, continually investing in platform evolutions in order to meet client needs and those of a rapidly changing trading environment.

White labelling is one area which is experiencing dramatic growth and evidence of Squared’s professionalism and adaptability was witnessed by the recent awarding of a large deep white labelling contract in the UAE. As Philippe Ghanem points out, “the awarding of this project was testament to our ability to deliver, in record time, exactly what the client required. To win this contract against competition from some very well known larger institutions, and the professionalism of the team from inception to delivery of this, is indicative of where Squared currently stands in this market place.”

Squared recognises that it operates in an exceptionally competitive market place. As the market changes, continual evolution is paramount but the future is looking bright – after a year of investment in technology there is a renewed focus on sales, there are more white labelling projects in the pipeline, its Dublin operations are expanding, and there are plans for a London representative office in early 2011. Its “wait and see and move late” approach to the EFX market will have reaped its dividends and further success will ensue.

For more information tel: +353 1 6621913; jmiles@squaredfinancial.com;
www.squaredfinancial.com

All hands on deck

Posted on January 5, 2011 by

A provider of world class international shipping and transportation services, Qatar Navigation was named Best GCC Cargo Shipping Company 2010 as part of the World Finance GCC Trade & Industry Awards Programme for this year. When the firm was founded in 1957, the Qatari economy was in urgent need of an organisation that would cater to its growing shipping and transportation requirements. Originally, it focused solely on marine transport, shipping and travel agencies, but has grown its range of business operations considerably over the past 53 years. As well as these three original areas of operations, it now also works in offshore support services, port services, ship repair and fabrication, logistic services, commercial activities and real estate.

As such a key player in many aspects of the national economy, health, safety and environmental considerations are of the utmost importance to Qatar Navigation. It is fully certified by Lloyds Register for work at all of its fleet of ships and floating docks. It is also ISO 9001:2008 certified and has been for the past seven years. In addition to this, the company has developed its own internal safety management systems, which ensure staff are fully trained in the use of protective clothing and equipment. The corporation also carries out continuous quality assessments and uses this data to maintain its leading position in the market.

While the recession did reduce freight volumes and prices, the company was still able to achieve strong results due to its diversified activities and strategic investments. In fact, rather than seeing the downturn as a challenge, Qatar Navigation took it as an opportunity instead. One of the most important developments in the company’s history – the successful acquisition of Qatar Shipping Company (Q Ship) – took place during this difficult period, in April 2010. This has created a major new regional shipping and transportation force, with interests in a number of different market segments. Q Ship brings with it five tankers, eight harbour tugs and two LPG (liquefied petroleum gas) carriers, enlarging group shareholding interest in a total of nine LNG (liquefied natural gas) tankers and four large 82,000cbm LPG carriers. Through its subsidiary Halul Offshore Services Company, the organisation now also owns a total of 32 offshore support vessels, and one dry cargo vessel in the fleet, the 2009-built, 57,000dwt bulk carrier, Qatar Spirit.

In order to facilitate continued growth, the organisation has hired external consultants to assist with the management of its long-term strategy. They have been charged with evaluating and assessing existing and potential business segments with an eye to carrying out any restructuring, as well as overseeing the continued integration of Q Ship into Qatar Navigation. It is a three-pronged project: study all the businesses and, based on core competencies and market analysis, identify which businesses to grow, and which to possibly divest from; study all the internal departments and processes; and develop a strategy and organisation structure for the company. The project commenced in September 2010 and is expected to be completed during the first quarter of 2011.

There have been a lot of other changes and improvements recently. The company completed construction of the 52-storey Navigation Tower building, which was to house its management operations. However, as it was able to find one tenant to rent the whole tower, it was decided that it would make better business sense for Qatar Navigation to rent the whole building to this one tenant and move into the Al Jazeera Tower in West Bay itself, which it did in September. The firm has also invested in new IT systems and software, created new departments and hired additional staff. This final element – personnel – is a vital component of the organisation’s continued growth and success; indeed, as with many companies of its size, its people are its biggest asset. As such, finding well-qualified staff is a key goal on an on-going basis. Fortunately, Qatar is a hotbed of talent when it comes to entrepreneurs and top-level management and all members of the Board of Directors are well known and talented local businessmen. Their experience in the Qatari markets, the logistics and transport business and their knowledge is invaluable in driving forward the business. Additionally, this expertise has been drawn upon by Lloyds Register and the American Bureau of Shipping, with the firm actively participating in their technical advisory committees.

The continuous evolution and development of the company is extremely important for its continued success. As such, it has a number of major projects currently on the table that are at different stages of the planning process.

Once they have come to fruition, they will increase the firm’s market share and strengthen its position as a major player in the local and regional markets.

Outside of Qatar Navigation’s own investments, there is another major project that, when it is completed, will provide a major opportunity for the business. Construction of New Doha Port is due to commence in Q1 2011 and is scheduled for completion in 2023. This development is vital for the sustainable growth of the local economy and will transform Qatar into a major transit hub. It is envisaged that this port will act as a gateway for export products manufactured in the Special Economic Zone. This area is next to the site of the new port and was itself developed specifically to be a location for export-oriented industry. The company will seek to gain mutual benefits from involvement in the completed port by bringing its knowledge and experience in cargo handling and port management services to the table. The firm has been carrying out cargo handling services in Mesaeed Port and the existing port at Doha for over 15 years and its expertise in the area is second to none. The new port is designed to meet Qatar’s requirements for the foreseeable future and will attract major liner operators to start calling at Doha directly. This means that the port will become a major hub, which, in itself, represents a great opportunity for the expansion of Qatar Navigation’s logistics and feedering services too.

While the increased openness of the Qatari economy and the unprecedented economic boom in the country have brought tremendous benefits to Qatar Navigation, there have been challenges as well. Increased prosperity and a greater amount of freedom in the market have led to more international companies establishing a presence in Qatar. This has brought with it increased competition, but where Qatar Navigation excels is in offering a unique, knowledgeable, established and reliable service. By the effective use of these skills, it has succeeded in maintaining a good market share in all of its activities, as well as facilitating the continuous expansion of its activities through the introduction of new services and products.

The firm can only see competition increasing in the future as an inevitable outcome of a growing economy – however it is a welcome challenge. Through continuous investment in its staff, levels of quality and health and safety, as well as technology systems, it has anchored itself firmly in the centre of the shipping and export industry. There are many opportunities on the horizon for Qatar Navigation and, through strong strategic alliances and with the continued support of the Qatari government, this newly award-winning firm will continue to pursue success.

Walmex bullish in operations merger

Posted on January 5, 2011 by

One thing that hasn’t changed though is Walmex’s rapid growth and impressive financials as it continues to spice up the retail market in Central America. The challenge for Scot now, is to keep this Latin American retailing success story on track.

In a country famous for its chilli peppers, it is only fitting that giant Latin American retailer Walmart de Mexico – or Walmex – has been hot on the acquisition trail. In the twelve months to April 2010, Walmex was doing some shopping of its own, acquiring 519 retail stores spread across Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, right through Central America. The stores were bought for an estimated $2.6bn – part shares, part cash – from Walmex’s US parent Walmart Stores, which has a 31 percent stake in the Mexican Stock Exchange quoted company.

The 519 Walmart Centroamerica stores added to Walmex’s existing portfolio of over 1,400 store and restaurant outlets, operating under a number of brands, including Walmart, Bodega Aurrera, Superama and Suburbia. It makes the company, now named Walmart de México and Centroamérica, which traces its origins back to the Aurrera stores founded in the late 1950s (subsequently named Cifra, and then Walmex), and is headed up CEO, Scot Rank, one of the largest employers in the region, and the largest private sector employer in Mexico.

Integration and differentiation
So what was the rationale behind the Centroamerica deal? “We have a long history of continuous profitable growth and we acquired Walmart Central America because we were convinced that there were important profitable growth opportunities in the region, and that we could drive synergies and improve Central America operations, an in this way we could thus drive incremental value for all our shareholders,” says Rank.

“It is worth noting that we have very similar customers across the two regions and that makes it easier to ensure you are giving value to those two customer segments. And then there are important similarities between the Mexico and Central America operations. The company we bought is a multi-format company, a leader in its market, with a strong management team, and one that operates with negative working capital requirements.

Basically, we bought an attractive asset, that we believe can be improved, and that has significant profitable growth opportunities.

“It is also important to emphasise the opportunities that are there for the interchange of best practice between the two different regions as we integrate the countries. There is a lot of learning around small formats, for example, which we are bringing to Mexico from Central America, helping us improve the quality of our small format business. So the integration is not just all about the challenges of standardising operating procedures, making sure that people have the same focus and the same outlook towards the business, and so on.”

As Rank points out, the numbers following the acquisition suggest that the integration is going well to date and appear to justify management’s decision to do the deal. Take the results for the first nine months of the year, for example, which were impressive and no doubt made appealing reading to investors. Total income was up by 6.1 percent, gross margin was up by 7.4 percent, and up by 22.2 percent from 21.9 percent year on year. General expenses were a fairly restrained 4.4 percent, against the 6.1 percent increase in sales. As a result, EBITDA for the first nine months of the year grew 17.2 percent. Thus the story of the integration so far, says Rank, has been one of continued improvement.

Making sure that the integration of retail operations in Mexico and Central America is a long term success means that Walmex must ensure it differentiates its value proposition and retail offerings from its competitors, while at the same time continuing to meet the needs of its customers across a number of countries. So far, Walmex appears to have doing a good job meeting this tough challenge.

“Our knowledge of the customer and passion for constantly improving our value proposition is a differentiating factor,” says Rank. “For example, if you look at our multiformat approach, both Mexico and Central America are similar in the sense that they have diverse populations with different income levels. It’s income level that differentiates most customer behaviour. So we have a multiformat strategy that allows us to segment the market with sufficiently different and strong formats that target different income levels, different sizes of population, or different purchasing occasions. In other words, we have clear and differentiated strategies for the different formats.”

Rank also highlights a number of other areas where he believes Walmart de Mexico and Centroamérica is outmanoeuvring its competitors, differentiating its market offering, and at the same time still meeting customers needs, not least in terms of providing value.

“Take price leadership,” he says. “We have been aggressively and consistently lowering prices. During the year we have increased our price gap versus our competitors, and we continue to grow sales at a faster rate than the rest of the market. Or look at the choice available to customers, through focusing on providing assortment and unique products in all of our different formats. A good example is Walmart Supercenter where we have prepared with a very good assortment for different purchasing occasions related to the Christmas season including at-home entertaining, travel, cold weather, decoration, gifts, Christmas trees and nochebuenas, and festive season dinners.”
Several other factors are also key, says Rank. The organisation is continually searching for ways to evolve and adapt its formats so that it can keep up with the customers’ changing needs. It is also important to deliver a consistent value proposition and strategy throughout the country and across territories and formats. And the store format needs to be kept fresh and updated, maintaining the level of shopping experience, which means an ongoing programme of store refurbishment, indeed store remodelling was up 21 percent in 2010 on the previous year.

Good housekeeping
Detailed attention to the customer value proposition is essential. But it has to be backed up with sound financial management, especially in a business operating on the scale that Walmex is. Rank is quick to stress the company’s solid financial position.

“We have a strong balance sheet with no debt, as of September 2010 our cash position amounted to $15.3bn pesos, that’s equivalent to $1.2bn dollars. That cash is generated from our operations, it is based on good close management of inventories to make sure we have negative networking capital, good management of our accounts payables, being very careful to make sure our investments have the highest possible return – all of our new business have higher returns than our base business – and an every day focus on not making decisions that are bad for the financial results of the company,” says Rank.

“And that cash our business is continuously generating allows us to have an aggressive pricing strategy, and to invest in new stores, remodel existing ones, invest in distribution, pay dividends and buy back shares – all at the same time. And we will continue investing because we are confident on the medium and long term prospects for the region.”

The recent growth figures underpin Rank’s bullish view. Installed capacity increased by 12 percent in self-service formats in Mexico, 11 percent for total Mexico and 3.5 percent in Central America. A new distribution centre opened in Villahermosa, Tabasco, and an existing distribution centre in Mexico City was automated. Store refitting was up 21 percent. The company made an investment in 2010 to September of some $2.3bn pesos in buying back shares. The price differential between Walmex and the competition increased. And, on top of all this, Walmex paid a dividend of $5.7bn pesos, as part of its policy to pay 35 percent of the previous year’s earnings.

Delivering year-on-year sales growth and robust financials to date in 2010 is impressive given the difficult economic climate that Walmex has been operating in. It is true that while Mexico’s economy contracted by 6.5 percent in 2009 during its deepest recession in many years, there has been a stronger than expected rebound of the economy in 2010, and this encouraging bounce back has, no doubt, helped to support Walmex’s business. However, there is more than a recovering economy behind Walmex’s growth story.

“It is partly some of things I have mentioned already – focusing on the customer, a relentless search to improve our value proposition, price sensitivity, especially given that our customers now have less money to spend and are a lot more price-conscious,” says Rank. “Our Every Day Low Prices strategy, based on having the lowest cost structure in the market, allows us to consistently lower prices. We compare prices every week, store by store and against the most relevant competitors. As a result, our price gap versus our competitors, as measured using AC Nielsen data, increased in 2010 compared to last year.”

It is an approach that has been well received by Walmex’s customers, as evidenced by sales that continue to grow at a faster rate than the market, both at comparable stores and for total stores. That’s on top of strong growth in 2009. So for the first nine months of the year comparable store sales for self-service formats grew by 2.9 percent, more than double the rate of growth of the industry as measured by Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD – National Association of Supermarkets and Department Stores), which increased by 1.2 percent, excluding Walmex. And in terms of total stores, self-service formats in Mexico grew by 9.9 percent, which compares very favourably with the 5.8 percent growth of ANTAD members, excluding Walmex.

Looking to the future
With many successful organisations, one of their biggest challenges is maintaining that success over the long term. The same is true for Walmex. So far the business has managed to combine rapid growth and investment, with increasing return on investment at the same time. That’s not easy, and continuing to provide financial results that satisfy the investors may well be a tough task.

Inevitably, there will be a focus on continuing to excel at things that the business already does well. The focus on the results is aided, for example, by an approach that encourages the store associates to link their everyday actions to the broader business performance. Each store is measured against a business plan, and the company pays a cash bonus depending on whether certain targets are met or results exceeded. Then, on a weekly basis, the performance against the business plan is shared with all associates, as well as explaining exactly what needs to be done not only to meet that business plan, but to outperform it. Stock options aslo helps to increase the employees’ focus on and commitment to long term success.

The search for synergies between the Mexico and Central America operation will continue. At the moment the organisation is working on improvements in a number of areas including procurement, assortment, the value proposition of different formats, inventory efficiencies, logistics, and other areas of operations best practice.
Rank has some very clear ideas, though, about how the organisation will keep on improving its performance, where Walmart in Mexico and Central America goes from here, and what the future looks like.

To start with, he notes, there are opportunities to grow off of the existing base business, and to leverage the company’s leadership position and even extend its lead in the marketplace.

“We can leverage the advantage we have versus the rest of the market, we have a great financial position, we are investing more than other companies in the market, have been doing so over the last twelve months, and will continue to do so moving forward. We have a cost advantage with the lowest operating costs in the market. And then there are the multiple formats which allow us to grow more quickly than some of our competitors. So just growing the base business, by leveraging the advantage that we have versus the rest of the market, is key,” says Rank.

“Also we have comparatively low retail penetration at the moment. In Mexico, for example, in an estimated $241bn dollars market, 60 percent of that it represented by the informal market – so that’s a large part of the retail market here. As a formal retailer we have an opportunity to take market share from the informal retailers.”

The retail market in the region will also be growing substantially over the next decade, points out Rank.

There is a demographic bonus for Walmex. With a comparatively young population in Mexico and Central America, as that population ages over the next 15 years, it will bring an additional 25 million new customers into the market. So the demographics are very positive.

And it is worth remembering, notes Rank, that after the latest acquisitions Walmex is an international company trading in six countries, and every one of those countries offers strong growth potential.

“So, for example, there are still a lot of cities where we don’t have a presence. Today we operate in about 380 cities across the six countries, but in addition to that there are 300 towns and cities that we have identified where we could introduce at least one of our formats over the next few years. So that’s 300 cities where we can expand our operations as well,” says Rank.

“The future is about making the most of a combination of opportunities: the opportunity to grow the base business in cities where we are already operating, currently; and also the opportunity to take advantage of a retail market that will continue to grow substantially over the next ten to fifteen years.”

It sounds as if there are still exciting things in store for Walmex and its investors.

New Europe, new energy

Posted on January 5, 2011 by

RFV Plc is one of the most exciting young Central European companies in a dynamic and developing energy sector. The company was established in 2000 by two Hungarian private investors, Csaba Soós and József Makra, as an energy service company. During its 10 years of operation the firm has evolved from a small enterprise into a regional company which finances and executes projects in the range of tens of millions of euros. The management are developing RFV into one of Central Europe’s leading alternative energy suppliers.

Since its foundation, RFV has been focusing on projects to reduce the energy consumption of its customers, resulting in lower expenditures and emissions. Although the company has several experimental projects in the energy sector, its current focus is district heat supply. RFV is modernising outdated and inefficient district heating systems and services as well as providing heat supply on the reconstructed system. Clients include municipalities, public institutions, industrial customers as well as households.

In most East and Central European countries public institutions and municipalities use obsolete and inefficient energy systems, which means a comprehensive upgrade to the latest technology will result in significant energy and cost savings. This encourages larger scale investments and provides excellent returns to investors. RFV’s goal is to play a pioneering role and become a regional market leader by applying world-class technologies and introducing alternative energy systems whenever possible.

“We were easily able to achieve 30 percent energy efficiency improvements in Hungary’s public institutional system during recent years,” says chairman Csaba Soós, adding that other countries in Central and Eastern Europe offer possibilities for even higher efficiency savings and thus a better return on investment.

Genuine sustainability
RFV always adopts a sustainable approach for locally applied energy solutions; the company’s sustainable ethos plays a key role in defining corporate vision and business objectives. The technologies used and RFV’s growth and operational excellence can be steadily maintained only by a sustainable business philosophy with an ongoing interaction with all stakeholders. The company believes that energy solutions must be provided by using an optimal energy mix: the right combination of fossil and renewable energy sources. Renewable and sustainable primary energy sources have been playing an ever growing importance in the company’s investments, whereas leveraging local biomass bases has often been a preferred and feasible option. RFV applies cutting-edge technologies for its modernisation projects, and after completion its long-term energy service contracts ensure a safe supply of energy for clients and an excellent return for investors.

Besides fossil fuel RFV is investigating alternative energy sources and considers biogas, biomass and geothermal energy as having heat services potential in specific regions of Central and Eastern Europe.

In order to maintain sustainable development and the ability to deal with technical, human and financial challenges, the company needs to continuously adapt to changes. Throughout 2010, several young and dynamic leaders have joined the company, who are not only able to keep up with the fast development of the enterprise, but have become the engine of continuous growth. As CEO Ákos Kassai defined the criteria of selecting manpower, “We understand that exceptional people make an exceptional company. In our selection process we rather focus on the personality of the candidates and often make some concession regarding the directional work experience.”

Such different approaches are represented in other corporate decisions as well. While most enterprises reacted to the long-lasting economic crisis by reducing their costs and investments, RFV chose a different path. In 2009 it strengthened its capital base, expanded its range of financing and undertook several large-scale heating modernisation projects, as well as extended its existing investment agreements. The company’s unusual approaches seem to have borne fruit, because by 2009 the company’s group-level revenues increased by 208.8 percent, with EBITDA increasing by 250 percent, and after-tax profit by 281.3 percent.

“Our strategy is to play a keystone role in the alternative energy business,” says Mr Kassai, “linking customers’ needs with locally available energy resources and best suiting technologies. This keystone strategy and transparency as the core of our corporate culture provide us long term competitive advantage to achieve sustainable growth even in time of economic crisis.” Constant renewal, innovation, technical excellence coupled with fast decisions and a unique corporate culture set a new growth path for the company, Mr Soós adds.

RFV has long used the capital market and bank funds to finance its investments. The company had an IPO in 2007 and SPO in 2009 amid the world crisis. In 2010, the growing number and size of projects necessitated a further increase in the number of banks financing the company. In order to make RFV’s liquidity easier to plan, as well as to significantly accelerate the planning and implementation processes for new projects, the company also started a bond programme. The bonds recently issued very successfully by the company are traded on the stock exchange and became a benchmark for its kind through Central Europe. There has not been a corporate bond program of this type on the Hungarian market in 16 years, so RFV again played a pioneering role in this field. The bond programme provides additional flexibility for the financing of RFV’s Romanian heating and district heating supply projects, as well as further diversifying funding sources. RFV’s contracts include long-term operation and maintenance as well, in addition to the modernisation of district heating systems.

On its way to emerging into a leading regional alternative energy company, RFV has recently won contracts for district heating development projects in three Romanian cities –Gheorgheni, Zalau and Tirgu Mures – and has a good chance to win contracts for other Romanian towns as well in future tender processes. But the young Hungarian company thinks even bigger. It considers Romania only a first step in its international map of expansion and plans to enter two more countries in the region in the next three years and then to enter a new market every 12-18 months.

Europe’s time to learn

Posted on January 5, 2011 by

Crises are a chance to learn. For the past 200 years, with the exception of the Great Depression, major financial crises originated in poor and unstable countries, which then needed major policy adjustments. Today’s crisis started in rich industrial countries – not only with sub-prime mortgages in the United States, but also with mismanagement of banks and public debt in Europe. So what will Europe learn, and what relevance will those lessons have for the rest of the world?

Europe’s contemporary problems offer striking parallels with previous problems on the periphery of the world economy. In successive waves of painful crisis – in Latin America in the 1980s, and in East Asia after 1997 – countries learned a better approach to economic policy and developed a more sustainable framework for managing public-sector debt. Today it is Europe’s turn.

The European crisis is coming full circle. Initially a financial crisis, it morphed into a classic public-debt crisis after governments stepped in to guarantee banks’ obligations. That, in turn, has created a new set of worries for banks that are over-exposed to supposedly secure government debt. Sovereign debt no longer looks stable.

One of the most important precedents is the debacle of Latin American debt almost 30 years ago. In August 1982, Mexico shocked the world by declaring that it was unable to service its debt. For most of that summer, Mexico, with a projected fiscal deficit of around 11 percent of GDP, was still borrowing on international financial markets, though at an increasing premium. Banks had reassured themselves with the belief that countries could not become insolvent. But then a wide range of inherently different countries seemed to line up like a row of dominos.

While Mexico had a petroleum-based boom in the wake of the second oil-price shock of the 1970s, Argentina suffered from economic mismanagement under a military dictatorship that then staged its disastrous invasion of the Falkland Islands/Malvinas. Brazil had experienced an earlier version of its current economic miracle, with stunning growth rates financed by capital imports. But in the end, these very different circumstances produced a common and inherently simple problem: over-indebtedness.

A Latin American default would have brought down the banking systems of all the major industrial countries, causing something like a replay of the Great Depression. Exposure to Mexican debt alone represented some 90 percent of the capitalisation of major US banks.

The solution that was eventually adopted was considered brilliant at the time, because it avoided formal default by any of the big Latin American borrowers (though Brazil briefly defaulted five years later, in 1987). It involved a combination of three elements: immediate international assistance, through the International Monetary Fund; severe domestic retrenchment, enforced by the highly unpopular conditionality of IMF programs; and additional financing provided by the banks.

There was no institutionalised write-down of Latin American debt until five years after the crisis, when a haircut no longer threatened banks’ stability. It was only at this moment that real lending for new projects could really begin. In the meantime, Latin America remained mired in what became widely known as “the lost decade.”

The contemporary European solution seems to be repeating the same time-buying tactics of the lost decade of the 1980s in the developing world. There is the same combination of international support, highly unpopular domestic austerity measures (which are bound to set off major protests), and the apparent absolution of banks from financial responsibility for problems that they produced.

Major European banks – in the United Kingdom, Germany, and France – have, like their 1980s predecessors, built up a gigantic exposure to what they erroneously thought was safe debt. A substantial immediate haircut on the sovereign debt of the vulnerable eurozone countries would be so destructive that it would set off a new round of bank panics. Recognising this problem, banks can hold their host governments to ransom. That is why the crisis has become a challenge for the UK, Germany, and France.

The Franco-German initiative unveiled at Deauville in early November, which would require some possible measure of restructuring for debt issued after 2013, tried to avoid the immediate shock of a haircut. But the pre-announcement of possible write-downs still led to a major wave of uncertainty about banks.

A long-term alternative requires some capacity to write down debt where it has reached excessive levels. But it is also necessary to establish an iron-clad guarantee of some part of the outstanding debt, in order to remove fear of a complete write-down.

A mechanism for dealing in an orderly way with sovereign bankruptcy would be a major contribution to global governance, and to solving a longstanding problem of sovereign-debt markets. Such proposals were widely discussed in the 1990s and early 2000s, and IMF Deputy Managing Director Anne Krueger pushed a Sovereign Debt Restructuring Mechanism that would have offered a legal path to imposing general haircuts on creditors, thereby ending the collective-action problems that impede the efficient resolution of sovereign bankruptcy.

If Europe could show – in the worst possible scenario of sovereign default – how such a process might operate, uncertainty would be reduced and markets would be reassured. And, in the longer term, we would have a viable international model of how to tackle severe sovereign-debt problems.

Harold James is Professor of History and International Affairs at Princeton University and Marie Curie Professor of History at the European University Institute, Florence. His most recent book is The Creation and Destruction of Value: The Globalization Cycle.

Ports gain in pro-business market

Posted on January 4, 2011 by

Deemed one of the most prestigious projects in the Sultanate of Oman, the Port boasts the four largest shipping lines. Business is booming. Both its terminals saw double digit growth in the past five years, with general cargo growing at over 20 percent per annum, despite the onset of the recession.

We spoke to the CEO Peter Ford, about the secret of Salalah’s success, the company’s continued growth and expansion plans, and to find out what the future has in store.

Mr Ford joined the Port of Salalah from APM Terminals, which manages the Port, where he worked for more than sixteen years. He has as a wealth of experience in the shipping industry both on vessels and in terminal management; is a graduate of both the US Merchant Marine Academy and the Lloyd’s Maritime Academy; holds a BSc in Marine Transport and Business and an MBA in Global Management.

The Port of Salalah itself began operating in 1998, at what used to be Mina Raysut and developed with extraordinary speed. Its strategic location made Salalah an ideal location to tranship cargo to destinations such as the Arabian Gulf, Red Sea, East/ South Africa and the Indian subcontinent.

Now the biggest port in Oman and the second largest in the region, Salalah is thriving but the secret to its success is down to a number of different factors according to Mr Ford; location, expansion, good leadership and a pro-business environment.

Unique advantages
All the ports in the region are competing for business, but it is Salalah that has a number of unique advantages keeping it ahead of the competition; it’s main ones being its location, strong vibrant economy and its pro-business climate provided by the Omani government, Peter explains.

“We also ensure that Port of Salalah builds on its natural advantages and maintains high levels of productivity with state of the art equipment, a focus on innovation and a commitment to earning our customers.”

A new methodology is also being rolled out by the company. Lean Six Sigma has already been deemed a great success within APM terminals, its key features being to improve customer service, reduce waste and improve agility. Mr Ford added that:

“We will continue to improve efficiencies to both allow our existing customers the opportunity for consolidation and to take advantage of scale as well to attract new customers to our port.”

Tough on results
Leadership is a crucial part of the Port’s success, according to Mr Ford. He believes that it is his more inclusive style of leadership that is the most effective, balancing delegation and empowerment with accountability.

“We believe that the command and control version of leadership does not work in today’s workplace. The workforce is smart and they have opinions and views on the world and we should listen to the people doing the work rather than direct from the top down.

“I encourage freedom of thought amongst my managers and staff but I ensure that each one has the proper training and background as well as understanding their responsibility and accountability. I think for the most part my leadership style could be described as allowing individual responsibility but being tough on results.”

Expansion plans
Business may be going well, but there’s always room to build on the Port’s success continues the company’s CEO.

The key to further improving the Port’s success is to build on the fantastic location that Salalah already has and expanding when it comes to distribution, according to Mr Ford.

Both the Omani government and Port Salalah agree on the way forward following the company’s impressive growth to date.

“We cannot and will not rest on that advantage and both the government and the port plan to invest significant amounts in equipment, land and the ability to serve our customers.

“The vision of our business is to improve our levels of service beyond even what the current customer may desire in order to cater to the future growth they will deliver and attract new customers to Salalah.

“Between the government and Port of Salalah we have invested over $1.3bn in the current facilities. The government of Oman envisions the Port of Salalah to continue to maintain its premier position as a regional transshipment port and to also play an increasingly important role in the maritime trade of the world.”

The Port of Salalah is also committed not only to providing world-class port facilities, but also to creating new jobs within the country.

“With the continued support of the government we expect to act as a catalyst for the economic and social development of the southern region of Oman and provide career opportunities to Omani nationals.”

The secret of their success
In just one generation, Oman has become a role model for social and economic development. Ford praises the government and holds Sultan Qaboos in high regard, as he is of the opinion that both are responsible for the country’s success.

“There have been numerous remarkable achievements during the 40 year reign of His Majesty Sultan Qaboos particularly in education, health, human rights and the standard of living of its citizens.

“The government has built a business friendly environment and developed a national infrastructure which has facilitated the launch of numerous major projects.

“A focus on education, investing in people and a national system that believes the people should benefit from the country’s economic and social development has meant that the country has done nothing but succeed.

“I can only describe Oman as a shining star and congratulate the people on their success and his majesty on his leadership.”

Investment
Oman as a country has also a long history when it comes to private equity investment. It is considered a stable, low-risk country and Mr Ford believes that there are many industries that could benefit from setting up operations in Oman in particular.

“Clearly infrastructure in a developing country is long term and stable cash flow that is attractive to many types of investors.

“I believe Oman is an ideal fit for a regional distribution hub. This will benefit from Port of Salalah’s existing development plan and strategic location. We sit at the centre of the Asia-Europe trade and north south from East Africa and the Arabian Gulf, as well as India and Pakistan, so we find ourselves at the centre of some significant emerging markets that are incredibly attractive to the manufacturers of consumer goods.”

Oman’s also shares cultural similarities with the locations from which equity funds are managed, which is another benefit for those wishing to invest.

They wish to highlight and build on the benefits a world class port and free zone like Salalah can offer and also push its potential as an ideal warehousing location.

“By marketing ourselves with the Salalah Free Zone and offering attractive investment packages we believe we will attract significant interest from some of the world’s major manufacturers and distributors wishing to reach these markets.”

The port has also recently joined forces with a government entity called the Salalah Free Zone to try and attract major blue chip companies to come and set up in Salalah.

Mr Ford continues, revealing that Salalah has in fact just recently been ranked as the second best warehousing location in the region by LOG Middle East.

The Master Plan
So what does the future hold for the Port? More success if the past is anything to go by. Salalah is prepared for the future and their plans are focussed on growth, innovation and a commitment to their customers.

Mr Ford explains that they’ve recently completed a new 20 year master plan, outlining their future campaign for development and expansion.

The plan includes immediate expansion of their General Cargo Terminal, to handle up to 40 million tons of dry bulk commodities and over 5 million tons of liquid products annually, and, when required, an expected 6m TEU expansion at the container terminal.

“The tender process is finalised for the General Cargo terminal and 1.2km of multipurpose berths with drafts of 16 to 18m and work is expected to begin in the coming months.

“This expansion will lead to additional developments of bulk and liquid handling facilities and provide space for cruise and ferry facilities at the port.”

Vatican praises ‘ethical’ Sharia banking

Posted on January 4, 2011 by

Haitham Abdou, director of marketing and product strategy for the ITS group, the biggest supplier of Islamic banking solutions in the world, confessed he was shocked to read Pope Benedict praising Islam’s bankers in the pages of the official Vatican newspaper. However, Abdou said, the article convinced him that Islamic banking is now ready for a rebranding as ethical banking, a system that could find new customers in the western world and elsewhere, as well as its traditional home in the Islamic world.

“Pope Benedict urged the western community to look at the Islamic banking model because of its ethical principles, to restore confidence amongst their clients at a time of global economic crisis,” Mr Abdou says. “It was really quite shocking to me to read such a thing coming from the Pope, but that’s what led me to believe that Islamic banking is crossing the religious boundaries and being seen as an ethical business model.”

The new focus on Islamic banking in the west comes just as ITS prepares for a global roll-out of its latest suite of banking solutions, called, but no coincidence, Ethix.

The name is not just a reminder of the ethical basis of Islamic banking principles, with their refusal to allow ‘usury,’ the charging of interest, but a hint, although Mr Abdou is too polite to say so, that western banking has not necessarily been that ethical recently.

Top tier
ITS was established back in 1981, in Kuwait, where it was (and still is, mainly) owned house. “So because of their needs, our main focus from the beginning was supplying solutions for Islamic banking,” Mr Abdou says. He joined the company 13 years ago, and swiftly rose up from being a programmer, analyst, designer, project manager and product strategist. Three years ago he moved into the commercial side and is now director.

“We supply more than 85 banks in our part of the world. In the past couple of years we’ve started to grow into Africa, and into the Far East from Malaysia to the Philippines. Our core expertise is in Islamic banking, but we also supply into the conventional banking industry as well. We have a lot of the tier one banks as customers; we supply conventional banks in Africa, in Nigeria and South Africa,” Mr Abdou says.

“Conventional Western banks are looking to open up Islamic ‘windows’, especially with the global banking crisis. Islamic banking saw a boom starting a couple of years ago and we feel it’s been growing at about 15 to 20 percent here and globally and we don’t see that slowing down.”

Islamic banking started in the Middle East “probably because of the religious side of things,” Mr Abdou says, and then as western countries started to see the business model of Islamic banking they started to realise the attraction of sharing the risk with the consumer, so banks get more involved. The sector is now in a transitional period where the boundaries of religion are dropping; Islamic finance is now perceived as an alternative financial model rather than just targeting the Muslim community specifically.

“We’ve seen some of the tier one banks such as HSBC, Citibank, Citibank, abn amro, all established Islamic windows in their operations. We’ve seen in London, for example, official regulations covering Islamic banks have been brought in by the financial services agency in the past few years and there are five or six opened there now,” Mr Abdou says.

“France has issued licenses for the establishment of Islamic financial organisations. In my discussions with US regulators, the Islamic front end side of things, that’s where we’ve developed our own products. We are looking into the legality and regulations of the Islamic model, and I have started to see many conferences being held in north America. There’s a global trend in the industry.”

Alfred Dunhill welcomes you ‘home’

Posted on January 4, 2011 by

Alfred Dunhill is the definitive men’s luxury brand, committed to challenging the notion of luxury and what is expected of an international luxury brand. With over 220 stores across the world, the globally acclaimed ‘Homes’ retail lifestyle environments in London, Shanghai, Hong Kong and Tokyo are a perfect example of dunhill’s ability to push boundaries. A unique global concept, they embrace and provide the ultimate in masculine luxury and retail lifestyle.

Created for the discerning and modern gentleman, the brand as a whole echoes Alfred Dunhill’s own legacy as a curator of the very finest. Alfred Dunhill the man was a true innovator of his time. He broke rules and refused to conform. His extraordinary spirit and dedication to luxury and innovation is as much at the heart of the brand today as it was in 1893.

Reflecting this heritage and its pillars of elegance, culture, creativity and Britishness, the Homes of Alfred Dunhill epitomise the third dimension of luxury – The Experience, allowing the customer to truly live the brand. The Shanghai Home of Alfred Dunhill has among its features an art gallery and games room, Tokyo’s distinctly modern Home boasts a bar lounge and an exceptional valet service, and in Hong Kong visitors to the Home can enjoy the dynamic atmosphere of Alfie’s restaurant and a fine wine reserve.

Although every Home of Alfred Dunhill is of course outstanding, the true spiritual home of dunhill is without question London. A freestanding Georgian mansion in the heart of Mayfair, Bourdon House embodies the heart and soul of the brand.

Characterised by proportion and balance, Bourdon House has long been considered a fine illustration of Georgian architecture. The Georgian style of architecture is now, more than ever, held as the epitome of refinement – beautifully proportioned, elegantly understated and much copied, but never surpassed. The Duke of Westminster set his sights on Bourdon House in 1911, displaying an overwhelming interest in its unique setting from the start, and made it his official London residence until his death in 1953.

Much time and care has been invested by Alfred Dunhill in renovating and modernising the House to evoke the same warmth and magnificence, but without compromising on its impressive heritage and spirit. Beautifully carved cornices, wood panelling, impeccably positioned antiques and perfect proportions echo the same elegant air and the building’s magnificent past fittingly.

Quite simply, the genuine character of the illustrious 18th century residence has been fully restored to its former glory, when it was called ‘Home’ by the second Duke of Westminster, but brought up-to-date by Alfred Dunhill with the progressive and enlightened concept of the ‘Homes.’

Every Alfred Dunhill Home is distinguished by a range of unique services, complementing a superior and effortless retail experience. Each one shares Alfred’s signature touch and personality, whilst still reflecting the respective culture of the environment surrounding it.

The three-floored retail aspect of Bourdon House, which is open to all, undoubtedly caters to every modern gentleman’s needs. The ground floor is home to the thoroughly impressive Alfred Dunhill emporium – the very best in luxury menswear, leather, accessories, gifts and gadgets.

The second floor reflects the brands commitment to personalisation, luxury and exclusivity – a spa, complete with two treatment rooms; a traditional gentleman’s barber – where guests can enjoy a hair cut or cut-throat shave in classic barbershop chairs covered in Dunhill’s Tradition leather, while checking the latest news and sports results or watching a classic movie on their personal TV screen; and the “Discovery Room” which presents custom-made menswear and leather and an dunhill museum curating both vintage leather and archive pieces spanning over 120 years.

In the basement you will be delighted to find a subterranean 12 seater private cinema complete with a state of the art Meridian sound system. The Cellar Bar and lounge area, serving seasonal British food and drinks, is adjacent to the humidor.

Service even continues into the walled courtyard – where guests can enjoy table service, under heaters during inclement weather, taking refuge from the hustle and bustle of London life.

The London home of Alfred Dunhill is overall an unforgettable and unique experience, which embodies a lifestyle that has long since represented grandeur and distinction in British luxury. To this day, Bourdon House is fit for royalty, revering its rich and reputable past but challenging the expected and demanding the very best.

Gruma meets expansion targets

Posted on January 4, 2011 by

In 2011, GRUMA will likely face various challenges. Thanks to the company’s preparation – much as in previous years – its strategic business approach will allow it to move forward with great success.

The Mexican multinational, with 93 plants strategically located to sell its products in 102 countries throughout America, Europe, Asia and Oceania, is already aware of some of problems it will encounter. Grain price volatility, maintaining consumption levels – mainly in the US – and utilising optimal flow generation to maintain a healthy financial structure are all concerns. In light of this the company is already prepreparing to meet these challenges head on.

GRUMA has now purchased all the corn to cover its production needs in the US, the market currently with the greatest grain price volatility impact. Having addressed this situation, the company can now offer a competitive price strategy and continue growing in the tortilla market.

On the consumption side, the company’s basic and defensive character of its products continues to allow it to ensure sales volumes in Mexico and Latin America, its core business after the US. However, GRUMA is always looking to broaden its reach and as such includes market expansion activities in all its strategic planning schemes.

According to the philosophy of its chairman Roberto González Barrera, the key to GRUMA’s world success is to adapt to the cultures, people and laws of each and every country where it invests. At the same time, its founder also believes that crises constitute growth opportunities, for constant portfolio evolution to meet customer and consumer needs.

In 2000, this most globalised of Mexican food companies went into the European tortilla market, with the construction of its first production plant in Coventry, England. Now, 10 years later, GRUMA has production operations in the UK, the Netherlands, Italy and the Ukraine, and exports products to most of the countries across the continent, as well as to Africa and the Middle East.

Furthermore, in 2006 GRUMA built and launched its first tortilla production in China and, through acquisitions, went into Australia, where it recently opened a state-of-the-art tortilla and chips plant, fully developed by its own technological area.

With these facilities, GRUMA has not only consolidated its international presence in the tortilla market, but allowed the production of a large range of flat breads (wraps, chapatti, naan, pitta bread, pizza base, piadina and more). This has allowed GRUMA to establish a major presence in those continents, aiding the expansion into these potential markets.

GRUMA sales worldwide are currently around $4bn, and there’s great potential to continue growing through products where a lot of experience has already been acquired. Implementing vertical integration through corn flour and grits production operations as raw materials in the aforementioned regions will also be an aim.

In 2011, GRUMA’s challenge in these regions is to expand its customer and product base. This will be achieved in part through strategic acquisitions to cover new regions. More importantly though, GRUMA aims to become more familiar with consumer tastes and preferences and thus meet consumption needs. For this objective, GRUMA has adapted many of its products to the culinary customs of the regions where it’s located. At the same time, GRUMA is aiming for increased consumer interaction, showing the variety of ways its high quality and value-added products can be used and consumed.

In Asia and Oceania, with 62 percent of the world population – over 4 billion – GRUMA and its management are certain that their products and opportunities will prove more than attractive.

Of course, this is not neglecting its operations in America and Europe, where each market offers near infinite growth opportunities. GRUMA’s future challenge is to continue consolidating its presence in the regions where it already operates, as well as to take advantage of all new market opportunities that occur across the planet.
Over the next year, GRUMA plans to grow sales and profits in all the regions where it operates, to continue reducing its leverage levels and enhancing its financial structure, which is the basis behind the company’s sustained growth.

The most globalised Mexican food company, that nourishes the heart of Mexico and the world, therefore has enormous global growth opportunities. With the world population now 6.5 billion people, all seeking high quality products that are healthy, practical and environmentally friendly characteristics, GRUMA has taken great strides to meet these needs, as it continues to demonstrate through the regions and markets where its products are already available.

World wide wells

Posted on January 4, 2011 by

First established as the Oil Surveying State Enterprise in Krakow in 1946, OGEC Cracow today executes large oil and gas drilling contracts across Europe, Asia and Africa. From initial contracts involving just the delivery of drilling rig crews, the company has led a programme of modernisation to its drilling rig fleet resulting in a shower of ‘turn key basis’ contracts. Nowadays, the company is one of the key players in the contractors’ market, beating competitors thanks to a combination of the high qualifications and experience of its employees, and its expeditious and reliable execution of works.

OGEC Cracow now stands at the forefront of exciting new markets. Poland recently became the subject of interest from global firms due to the discovery of shale gas deposits. OGEC Cracow has been an active member in the process of its recovery, participating in the exploration of the shale gas and crude oil, and extracting methane from hard coal deposits through four units working under the direction of PGNiG SA and other domestic market operators.

For 20 years, OGEC Cracow has also had a branch registered in the Czech Republic. Its first works there were executed on behalf of the Czech Geological Office when the country was still Czechoslovakia. Now OGEC Cracow has returned to this market, drilling for Česká Naftařská Společnost s.r.o surveying bores in the vicinity of Breclav. OGEC Cracow has also formed a consortium with the OGEC Jasło, and together the companies are completing an agreement with RWE Dea’s operations in the Czech Republic; once signed, the enterprises will execute the drilling of underground gas stores.

For many analysts, drilling in the Czech Republic and the potential of this market is quite a surprise. For the Polish firms, it is an excellent market and the beginning of new cooperation within the Capital Group.

European expansion
Ukraine holds tremendous potential in terms of its raw materials and attracts the best firms from around the world in search of what is buried beneath. OGEC Cracow’s first contract in the Ukraine was executed back in the 1990s for the operator JKX/PPC Poltava. From this, the firm committed to developments in Ukraine for the long term, running among other things works in the vicinity of Poltava where it has been drilling exploration and production wells using the N75 unit. In total, 20 specialists from Krakow have worked there.

OGEC Cracow also has its share in the extraction of natural resources in Kazakhstan. The company has been in this market since 1998, when it established its own branch and signed a contract for drilling works for KaraKudukMunai. After this contract, there was again a deluge of other offers, including some from the largest firms operating in that market: KazMunaiGaz, Lukoil, Chevron, Petro Kazakhstan, Orient Petroleum, Kazakhmys Petroleum and KazakhOilAktobe.

Unfortunately the economic crises which affected Kazakhstani and Chinese expansion in this area caused a slow withdrawal from the Kazakh market. Currently in Kazakhstan there are three rigs operating mainly for local firms. One of the larger units in Europe, the N1625, is drilling for Kazakhmys Petroleum while for North Caspian Oil Development LLP – another giant from the Krakow stables – is working with the Midco. The third contract is being carried out with the H1000 unit, which, for a few years, has been drilling for the Kazakhstani contractor Ken Sary. The number of workers employed in Kazakhstan currently stands at about 100. However, the firm remains poised to take advantage of better circumstances in the country as the market improves.

Into the east
Despite its expertise, some of the company’s largest successes have happened by chance. Over 13 years ago, OGEC Cracow and PGNiG SA were interested in the positive attitude of Pakistani authorities toward investment in the country, as well as the possibilities created by the presence of many international operator firms in this market. PGNiG SA procured concessions for surveying works in three provinces – Punjab, Sind and Baluchistan – and the Surveying Enterprise from Krakow quickly signed a contract with the American firm Occidental. The tender was won through the quality of the IRI 1700 unit contracted for the work, as well as the standard of the crew operating it. The unit was transported by sea from Gdynia to Karachi, and it continues to work in Pakistan to this day.

After works for Occidental, the OGEC Cracow procured contracts for drilling works by public tender for such internationally recognised operator firms as Premier Oil, Orient Petroleum, OMV, British Gas, BP, Lasmo, ENI and Petronas, as well as for domestic companies including OGDCL, MariGas and PPL.

Expansion into the hydrocarbon market in Pakistan was the joint idea of PGNiG SA and OGEC Cracow, which brought about an opportunity for cooperation. In 2009, OGEC Cracow won the tender for drilling exploration wells for PGNiG SA. The principal target for surveying was the Pab Formation, located at a depth of 2,642m.

This was not the first time that OGEC Cracow had worked for its owner in Pakistan, previously being in the vicinity of Sabzal and also in Sindh province in 1999.

Today in Pakistan two Polish drilling units are working with the Swab Unit, on which 30 Polish people are employed as key personnel, together with 100 Pakistan personnel. The IRI 1700 and RR 600 units run operations for the Pakistan operator OGDCL, which has contracted them for the next three years.

Africa’s rising star
OGEC Cracow has also had a strong interest in the African market for many years. The company’s first forray into the continent was a contract in Ghana with the Australian company Fusion Oil & Gas. The next followed in 2007, with an agreement for the execution of drilling for the international concern SASOL. These took place in Mozambique, in the vicinity of the town of Vilanculos. For the drilling tasks, two OGEC Cracow units and one of ZRG Krosno were contracted. After the contract was over, the RR 600 unit started drilling works for the Norwegian oil company DNO International before returning to work in Poland in September 2008.

This was not the end of the African adventure. The company attracted the attention of Tullow Oil in Uganda. The first supplies from IRI 750 reached the town of Butiaba in Uganda at the end of February 2008. After a short overhaul, the first well was drilled – Taitai-1.

From this, OGEC Cracow commenced a substantial programme of drilling for Tullow Oil plc in an area near Lake Albert, northeast Uganda. This ongoing project caused a great boom for the firm in the African market and in July 2010 OGEC Cracow again signed a contract with SASOL in Mozambique, using a K900 unit for the works.

The geographic range of works that OGEC Cracow undertakes is evidently stunning. However, the best commendation for the company remains its workers. Their versatile professional experience, unique knowledge, and their ability to undertake and happily complete even the most ‘mission impossible’ tasks make them the key to OGEC Cracow’s international successes. This combination of knowledge, experience and high work-ethic, along with access to the best equipment for the task, enables the company to set high standards and fulfil all of its customers’ requirements.

China shifts outbound investment focus

Posted on January 4, 2011 by

In China, FDI policy has shifted from inbound to outbound investment. Furthermore, outbound investment is migrating up the value chain from resources through knowledge-based industries. China’s huge financial resources provide a sound foundation which needs to be supplemented with information and tools to assist Chinese
companies to make objective investment decisions.

Everyone is aware of the massive economic changes that have taken place in China over the last few decades. Focusing on the trade balance and the financial resources (estimated at over $2trn), many people assume that China’s rise is based on low-cost manufacturing capabilities supplemented by an essentially limitless supply of people. However, in reality China’s vision and aspirations are global, broad and achievable.

With its membership in the WTO, China became part of the global marketplace. The country now has 46 companies in the Fortune 500 – three in the top 10. Contradicting the view of China as a specialist in low-end manufacturing, the country has developed the world’s fastest supercomputer, the Tianhe-1A, which at 2.5-petaflops surpasses the Jaguar supercomputer in the USA.

It has become important for China to diversify, partially as a result of negative perceptions about trade imbalance and currency exchange rates, but also because of political ambitions. Chinese facilities, factories and distribution centres in all parts of the world will utilise knowledge from the approaches successfully taken by Japan and Korea.

It will mimic successful aspects of those approaches, while skipping those aspects that didn’t go well. Case in point: in response to external demands for Yen, Japan revalued. The trade imbalance did not change, but the Japanese economy entered a 10 year deflationary period. It is unlikely that China will follow this example.

Historically Chinese outbound investment has been aimed at securing natural resources, a situation that resulted in a substantial African presence. The focus is now changing. During the recent UNCTAD World Investment Forum 2010 in Xiamen, the Ministry of Commerce of the People’s Republic of China presented a plan and strategy for more diverse outbound investment.

The ministry released detailed economic reports in Chinese language about the investment environment of 22 countries. They also proposed Global-Arena.com to work with them on a “Global-Arena.cn” initiative. Managing outbound FDI is very different from managing inbound FDI. Moreover, as China has changed, the government wants to diversify its FDI by complementing State Owned Enterprises’ FDI activities with Privately Owned Enterprises’ foreign investments.

As a global leader in online business location information, providing innovative online analytics tools to support objective FDI allocation decisions, Global-Arena.com is uniquely qualified to assist with China’s outbound FDI strategy. Global-Arena.cn will bring an enormous amount of information (in Chinese) to the Chinese outbound FDI market.

In addition to Global-Arena’s patented ranking technology, which supports evidence-based location decisions, Global-Arena.cn will provide essential information (cost, taxation, legal, education, infrastructure) to ensure successful implementation of the FDI strategy. Companies and governments outside of China which are increasingly interested in entering the Chinese market, will benefit through mirrored capability available on the Global-Arena.com website.

Having the financial resources to invest is adequate but not sufficient to ensure global success. Local FDI knowledge and access to information that allows objective and evidence-based decisions is equally important.

China is ambitious – but it is also realistic and practical. Most of all, China has a unique long term planning capability combined with an unparalleled sense of focus and patience. China wants to become the world economic leader. Chinese FDI is instrumental to that ambition.

Dr Dan Martin Zürich is Chief Innovation Officer at Global Arena

ICIS launched to protect investors

Posted on January 4, 2011 by

The long history of Cyprus indicates that its strategic geographic location had a central role in rendering it an important commercial centre. More recently, Cyprus’ EU membership, as well as its favourable tax and legal regime, its surprisingly wide network of double taxation treaties and its high level of professional services have made Cyprus one of the most attractive financial destinations in Europe and worldwide. Among many other economic sectors which benefit from its business friendly jurisdiction, Cyprus has had much success attracting International Collective Investment Schemes (ICIS). The main objective of the ICIS is to promote ‘merging’ of different unit holders’ assets and the collective investment of these assets, within Europe or abroad, with the purpose of achieving considerably high returns on the one and risk-spreading on the other.

Establishing a stable legal framework, which provides investors with certainty and flexibility, in May 1999 Cyprus adopted a codified law governing ICIS. The International Collective Investment Schemes Law 47(1)/1999 regulates the functioning of these schemes to ensure the highest possible protection for the investors.

An ICIS can take one of the following legal forms:
– International Fixed Capital Company
– International Variable Capital Company
– International Unit Trust Scheme
– International Investment Limited Partnership

Moreover, all of the above legal forms enjoy the option to be established with either limited or unlimited duration and can vary in respect of the target group they attract. Depending on the promoter’s determination, an ICIS may be established as private. On the other hand, it may be addressed to the general public or exclusively to experienced investors. The flexibility in designing the type of ICIS guarantees that the scheme is established solely for the best interest of the unit holders and exactly as desired by the promoters.

Types of ICIS
International Investment Companies (Fixed or Variable Capital)
An ICIS which consists of an International Investment Company with variable capital benefits is not subject to a minimum capital requirement. In contrast, an International Investment Company with fixed capital must fulfil the minimum capital criterion established by the Central Bank. The above criterion applies identically to ICIS marketed to the public or to experienced investors, but it does not apply to private ICIS, which enjoy no minimum capital requirement. As a result of the above exemption, and since ‘private’ cannot be interpreted objectively, the law includes a restriction stating that only schemes with 100 investors or fewer can be approved as private. A private ICIS is the most common type of scheme currently used by most promoters in Cyprus, primarily because it can benefit from a number of exemptions from administrative and compliance requirements.

International Unit Trusts
The central concept of International Unit Trusts is that the legal owner of the trust assets holds the assets’ legal title for the benefit of the beneficial owners, in accordance with the instructions of the settlor; as indicated in the trust agreement, and for the best interest of the unit holders. The main advantage of establishing a trust scheme is that Cyprus provides a legal framework which ensures the protection of the assets and guarantees the desirable confidentiality. Confidentiality is achieved through the duty of the Central Bank of Cyprus and other involved parties not to disclose any detail of the trusts to anyone (except in the case of a Cypriot court ordering it do so so). Assets protection is achieved because the trustee can be found liable to the unit holders for any losses suffered as a result of the improper performance of his duties and renders it very difficult for a third party to invalidate the trust.

Trusts established in Cyprus for the purposes of ICIS are defined as International Trusts and they are governed by the International Trust Law. According to s.2 of the Law, the settlor and the beneficiaries of the Trust must not be permanent residents of Cyprus while at least one of the trustees must be permanent resident. In addition, immovable properties in the territory of the Republic of Cyprus cannot be included in the Trust fund.

In the situation of establishing an International Unit Scheme for Collective Investments the Trustee can be a bank or any person, other than a bank, which provide trustee services, or even a subsiduary of any of the above, under the requirement that the criteria set in Sections 45 and 46 of the law are satisfied. In any of the above options the trustee must be considered by the competent authority as fulfilling the requirements set by the law and mainly needs to be found to exercise sufficient banking supervision in its jurisdiction. Cyprus is in a position to offer exceptional quality trustee services provided by experienced law firms, banks’ departments, trustee services companies and accountants.

International Investment Limited Partnerships
Limited Partnerships registered under the Partnership and Business Names Law of the Republic of Cyprus can suffice as International Investment Limited Partnerships. Similarly to ordinary Limited Liability Partnerships, the partners enjoy limited liability which is equal to the amount they contributed to the capital of the Scheme. A general partner is appointed, either a natural person or a legal entity, who is the only person empowered to represent the partnership and responsible for the scheme’s obligations and debts. The code of conduct and the obligations of the general partner are indicated by the law and they are similar to those of the trustee in the trust scheme.

Taxation
Beyond any doubt, the most attractive factor for establishing an ICIS in Cyprus consist of the tax incentives which, during the last years, became even more advantageous for the prospective investors.

Fund taxation
Generally the net income of the fund is subject to 10 percent flat corporate taxation. Dividend income, profits from sale of shares and other financial instruments and fair value gains are exempt from taxation. There is no withholding tax in Cyprus on any payments of dividends or interest abroad, irrespective of whether there is a double tax treaty or not with the country involved.

Investor taxation
Dividend distributions in respect of registered ICISs are taxed at three percent only applicable to Cyprus tax resident unit holders. Thus dividends paid to non Cyprus residents are totally exempt. Additionally, the redemption of units in ICIS is considered as disposal of securities; subject to the provisions of the latest law amendments are exempt.

Double taxation treaties
The double taxation treaties signed between Cyprus and other countries encourage the establishment of Cyprus registered ICIS. Since such treaties ensure the transfer of funds between the contracting countries with very low or even no further taxation, cheap or tax free repatriation of funds is ensured. Moreover, the fact that Cyprus retains double taxation treaties with non-European Union countries gives the opportunity for the citizens of these countries to invest in Europe through Cyprus ICIS and be treated as if they were Europeans.

Conclusions
It is useful to summarise the key factors that render Cyprus an attractive ICIS hosting state and constitute a safe environment for prospective investors.

Firstly, the promoters are able to select the legal form that best matches their needs, choosing from a wide choice of vehicles that can be used to establish the scheme. In addition, the establishment and the operation of the scheme is supervised and regulated from the Central Bank of Cyprus or from the Cyprus Securities and Exchange Commission (depending on the type of the scheme), which aims to ensure that all the involved parties meet the requirements set in the law and that unit holders’ assets are handled with reasonable care and transparency for the income and confidence of the promoters, unit holders and beneficiaries.

The common law based legal system of Cyprus in combination with the exceptional piece of legislation governing Cyprus registered ICIS and compatibility with EU ICIS law provides a certain, stable, safe and predictable legal environment for the unit holders. The high level of professional services offered from Cyprus firms in reasonably low costs is another reason for preferring Cyprus instead of any other EU jurisdiction.

The above findings along with the low corporate tax, the exemption of ICIS from the majority of taxation, the tax benefits of investors in an ICIS and the wide network of double taxation treaties undoubtedly render Cyprus an ideal financial centre for the establishment of International Collective Investment Schemes.

Areti Charidemou is a Partner, Areti Charidemou & Associates LLC

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