Helen | World Finance

Valeant to undergo management restructure

Posted on March 22, 2016April 10, 2018 by Helen

No stranger to controversy, Quebec-based drugmaker Valeant Pharmaceuticals has initiated the search for a new chief executive, with current CEO Michael Pearson set to step down once a replacement has been found.

The Canadian company has lost nearly 90 percent of its value since August, owing to criticism of its pricing and distribution methods, along with investigations into improper conduct among the firm’s top finance executives.

Howard Schiller, Valeant’s former CFO, refused a request to step down from the board, despite admissions from the company that he had contributed to the “misstatement” of Valeant’s results.

Schiller responded, stating: “As a result of the fact that I did not engage in any improper conduct regarding this proposed restatement [of results], I have respectfully declined the request from the company’s board to resign from the board”.

The firm is currently facing an investigation by the SEC into its ties with online pharmacy Philidor and an investigation by Congress centring on its drug pricing structure.

Corporate Director Katharine Stevenson, meanwhile, has voluntarily resigned in order to make way for investor, nine percent stakeholder and Chief Executive of Pershing Square Capital Management, Bill Ackman. In a statement, Ackman said that the company’s large scale and dominant franchises in eye care, dermatology, GI and other therapeutic areas, together with its low valuation, make for “a spectacular opportunity for a world-class healthcare executive”.

Pearson noted that it had been a privilege to lead Valeant for the past eight years, although he admitted the business had been adversely impacted by controversies in the last few months. Chairman of the Board Robert Ingram struck a relatively positive note, saying: “While the past few months have been difficult, Valeant has a collection of leading brands, valuable franchises and great people, and I am confident that the company will be able to rebuild its reputation and thrive under new leadership.”

ASX chief steps down amid bribery allegations

Posted on March 21, 2016April 11, 2018 by Helen

Elmer Funke-Kupper has stepped down from his position as Chief Executive of the Australian Securities Exchange (ASX) while allegations of bribery during his time as CEO of gambling giant Tabcorp are investigated. His resignation is effective immediately, with Chairman Rick Holliday-Smith filling the role until a permanent replacement can be found.

“The board accepted that Elmer wanted to direct his full focus to the investigations which may be made into the Tabcorp matter, and not have them interfere with the important role of leading the ASX,” Holliday-Smith said in a statement.

His resignation comes after it was revealed that the Australian Federal Police is working alongside international authorities to investigate claims that an AUD 200,000 bribe was paid by Tabcorp in 2010.

The payment was allegedly made to a business with links to the family of Cambodian Prime Minister, Hun Sen. Tabcorp considered obtaining an online gambling licence in Cambodia in 2009, when it appeared that regulations might be softened in some Asian countries. The allegations were raised following an investigation by Fairfax Media.

Following the report, Tabcorp released a statement saying that it had explored a Cambodian business opportunity in 2009, but chose not to pursue it. The firm also said that it would willingly cooperate with investigators.

Funke-Kupper has also stepped down from his position as a Non-Executive Director on Tabcorp’s board, a position he has held since 2012. He led Tabcorp from September 2007 to June 2011, and has been Chief of the ASX since October 2011.

In an interview with the Australia Financial Review, Funke-Kupper denied any wrongdoing and said that his decision to resign was aimed at protecting the integrity of the ASX and avoiding a trial by media. He also said he will be cooperating fully with the investigation.

Obama makes historic trip to Cuba

Posted on March 21, 2016April 11, 2018 by Helen

On March 20, US President Barack Obama arrived in Cuba, making him the first sitting US president to do so in almost 100 years. With the removal of sanctions against Cuba progressing positively and the historic trip now underway, it seems that the last chapter of the Cold War is finally coming to an end.

Just days before the president’s plane landed in Havana, further concessions to sanctions were revealed, with the aim of promoting engagement and business between the two neighbouring countries. US citizens can now travel to the Caribbean island as individuals for ‘people-to-people educational travel’, as opposed to under the sponsorship of an organisation, as was previously permissible. Furthermore, Cuban citizens can now earn a salary in the US.

It seems that the last chapter of the Cold War is finally coming to an end

Numerous other amendments were also announced, including one that allows approved cargo to be transported from the US to Cuba. Additionally, Cuban-origin software can now be imported to the US, and “certain dealings in Cuban-origin merchandise” are now permitted.

Promisingly, Cuban Foreign Minister Bruno Rodriguez responded to the US’ decision to ease currency restrictions with a reciprocal resolution: following a trial period of trading in USD, which will involve transfers to financial institutions in third-party countries, Cuba will then be allowed to remove the 10 percent levy it currently has on cash dollars.

Despite these major developments, Rodriguez insists that Obama can do more for US relations with Cuba without congressional approval – namely, he can remove the embargo altogether, a feat that many hope will be achieved during his presidential visit.

While Obama’s trip is of considerable symbolic importance in the thawing of dealings between the two states, a lot more still needs to be done in order for relations to be fully normalised. For example, while travel restrictions for US citizens have been reduced, a formal ban is still in place, and although the exportation of essential goods to Cuba has been approved, trade has not yet started.

Now is a crucial time in the chequered history of the US and Cuba: one false step or one unfulfilled promise could send it hurtling back decades. Issues such as the highly contentious Guantanamo Bay may prove to be the sticking point that causes such a breakdown.

Yet with all that can be achieved through this partnership – in terms of business, trade and, in particular, Cuba’s much-needed economic development – it is reasonable to assume that everything will be done by both sides to ensure the conclusion of this long-overdue transition.

Critical infrastructure could be the next target for cyber attackers

Posted on March 16, 2016April 11, 2018 by Helen

On the evening of December 23 last year, an electricity blackout left half of all homes in the Ivano-Frankivsk region of Ukraine without power. According to reports, 103 cities were completely blacked out and another 187 were plunged into partial darkness. Notable not only for its size, the incident was important as it was the first recorded blackout in history to be triggered by a cyber attack.

As the emphasis among the hacking community shifts onto physical infrastructure, attacks like the one in Ukraine are especially significant – not just for those living in the immediate vicinity, but for society at large. “It’s a milestone because we’ve definitely seen targeted destructive events against energy before – oil firms, for instance – but never the event which causes the blackout,” said John Hultquist, Head of iSIGHT’s Cyber Espionage Intelligence Practice, in an interview with Ars Technica. “It’s the major scenario we’ve all been concerned about for so long.”

Critical threat
Most worrying of all is that the situation has confirmed many people’s fears about critical infrastructure and its susceptibility to cyber attacks. The case in point is proof enough that the threat from cyber attacks does not exist in some far-off future, but here and now. For companies, the fear is that in an already fragile environment, cyber attacks could disrupt business as usual just as easily as, for example, climate change or geopolitical instability. Effectively, what we’re seeing here are security issues that stretch far beyond the realm of finance or privacy, and threaten to disrupt everyday processes, both on a national and international front.

Emerging technologies have revolutionised critical infrastructure, yet they have also introduced the potential for critical vulnerabilities. Matt Devost, Co-Founder and CEO of cyber risk management company FusionX, told World Finance that these technologies are being developed and deployed without a thought for security being included in the design process. For example, the attack surface has increased significantly with the universal adoption of SCADA and ICS systems.

The threat from cyber attacks does not exist in some far-off future, but here and now

“There is no doubt that this hyperconnectivity is a powerful development tool and opportunity for growth for governments, business and individuals alike – a tool that must remain open and accessible despite the inherent risks,” said Adam Blackwell, Secretary for Multidimensional Security for the Organisation of American States, in a recent report. “The challenge lies in our ability to balance and manage these risks for the foreseeable future.”

Defined by the Department of Homeland Security as any one of 16 industries “whose assets, systems and networks, whether physical or virtual, are considered so vital… that their incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety”, any threat to critical infrastructure is a threat to the population at large.

A growing threat
Fortunately or unfortunately, developments in the modern world are such that critical infrastructure is becoming increasingly connected, and it’s not inconceivable to suggest that a well-orchestrated cyber attack could cripple essential public services. “This perfect storm of current and emerging technology coupled with a wider array of sophisticated attackers has put critical infrastructure at significant risk, and deliberate and thoughtful cyber risk management approaches are needed to shore up our defences and ensure attacks are quickly detected and mitigated”, said Devost.

While this wave of hyper-connectivity has benefitted host communities, it has given rise to new vulnerabilities, and ones that require a new type of defence – that is, if the economy hopes to escape unscathed. According to a recent McAfee report: “In an ever-more networked world, the cyber vulnerabilities of critical infrastructure pose challenges to governments and owners and operators in every sector and across the globe.”

Oil and gas pipelines, water distribution networks and electric power grids are all essential services that today rely on the internet as much as any manual system. And though the advantages number in the many, so do the challenges.

As Tripwire noted recently, 48 percent of US utility providers said they were in need of additional cyber protection, whereas 20.1 percent said they just “didn’t know” – something that is, in itself, cause for concern. These responses align with research to show that the prevalence and sophistication of these attacks is on the up, and as the warnings get all the more severe, organisations are beginning to put in place technologies and procedures to limit the damage.

Improving systems accordingly
Doubters need only look to December 2014, when the German Government released evidence to suggest that hackers had infiltrated the industrial controls of a steel mill, to see that cyber attacks can inflict massive damage on critical infrastructure. Another report, published by ESG, shows that, of a sample of critical infrastructure organisations, 68 percent claimed they had been subject to one or more cyber security incidents over the last two years. On top of that, 36 percent said that the incidents had disrupted critical processes, and 36 percent again claimed they had disrupted critical business applications.

$77bn

Estimated value of the cyber security market

$100bn

Amount spent by the US on cyber security in the last decade

150%

The cyber insurance market has grown this much since 2013

Source: Forbes, 2015

“Typically the biggest challenge to deterring cyber security threats is getting the business to engage the problem from a business and risk management perspective,” said Devost. “To be effective, security efforts need to be closely tied to business objectives and supported at all tiers of the business, from governance to operations.” A recent study by Accenture and the Ponemon Institute, The cyber security leap – from laggard to leader, found that 63 percent of companies that improved their cyber security effectiveness significantly over 24 months aligned their security objectives with business objectives, whereas only 40 percent of those that saw no improvement did so.

“Forward-looking companies also see that traditional endpoint security and perimeter security measures are not enough, and are moving towards proactive risk and intelligence driven approaches to security management, analytics-driven event detection, and machine speed orchestration of response,” Devost added. And although discussions on the topic often point to cyber security as a consideration for the future, there are countless studies to show that it is a hot issue at the moment. For example, National Security Agency (NSA) Director, Navy Admiral Michael Rogers, told the House Permanent Select Committee on Intelligence in November 2014 that foreign governments had already infiltrated energy, water and fuel distribution systems. “This is not theoretical”, he said. “This is something real that is impacting our nation and those of our allies and friends every day.”

The situation is made all the more problematic by the systems themselves. Many of these processes were installed years – if not decades – ago, without a thought for connectivity. This means technological innovations are often patched into existing systems, and the result is a hotchpotch system that is, by design, vulnerable to attack.

Industrial control systems
The systems that allow businesses to collect and control data on a colossal scale are the same systems that allow hackers to access, exploit and ultimately disrupt essential services. While the opinion holds that the best way of combatting these threats is to focus on IT, there is still a human element to these issues that no amount of technology can account for.

Technical training, as much as improved technology, is critically important in boosting cyber security measures and in warding off ever-evolving threats to critical infrastructure. However, there is a serious shortage of professionals who understand both the digital security landscape and the way in which these threats manifest themselves in critical infrastructure. Furthermore, the issue with improved technology as a security measure is that it can be static in a way that hackers are not. Qualified experts can respond to threats as they emerge, which again highlights the importance of people over systems.

“There is certainly a talent gap that exists within the field of cyber security,” according to Devost, “and that chasm is even wider for professionals that can work within the specialised control system space. The dynamic nature of the security environment also means that organisations are not going to ‘solve’ the problem on their own and will utilise trusted partners to identify and adopt best practices, and to efficiently support security functions and operations as needed.”

Should businesses – and perhaps more pertinently, governments – take seriously the cyber threat facing critical infrastructure, it’s fair to say that investment in security solutions and personnel will increase in the coming months and years. Failing that, critical infrastructure could come under siege, and with little in the way of answers, defensively speaking.

It’s time to end the talk of hackers as if they were a distant threat, and concede that cyber security issues number among the biggest threats facing critical infrastructure today. Cyber terrorism is still seen as the stuff of science fiction, and it’s about time to acknowledge that the risks are both immediate and real.

For how much longer can Hong Kong’s currency stay pegged to the dollar?

Posted on March 16, 2016April 11, 2018 by Helen

Since the US Federal Reserve chose to lower interest rates in reaction to the economic turmoil that followed the financial crisis, China’s economy has gone from strength to strength, with the country boasting impressive annual GDP growth statistics year-on-year. All this combined to create an extremely favourable environment in Hong Kong for the past decade, but now the city-state looks likely to face some serious challenges.

The influx of cheap money since the US adopted a monetary easing policy in the wake of the 2008 financial crisis has served to increase capital inflows for investment in the city, with depressed rates helping to raise Hong Kong’s aggregate banking balance by more than HKD 300bn ($384bn). At the same time, historically low interest rates led to investors looking for a more profitable haven, Hong Kong being among them. It was no surprise then that the head of the Hong Kong Monetary Authority (HKMA), Norman Chan Tak-Lam, expressed concern over a US rate hike and the impact it would have on the capital outflows and the general economic prosperity of the city-state.

Braced for repercussions
However, prior to the rate hike, bankers in Hong Kong were more concerned about the impact of policy decisions emanating from Beijing, with the CEO of Christfund Securities telling South China Morning Post that investors were prepared for a rise in US interest rates, but that a devaluation of the renminbi is the real worry.

“I do not think it will shock the market even if the Fed will decide to increase the interest rate this week,” Cheung said. “The devaluation of the yuan, as well as whether Beijing has enough measures and policies to rescue the weak stock markets in the mainland, may have a bigger impact to the Hong Kong stock market outlook than the US rate rise.”

Interestingly, when the US finally did raise its base interest rate by 0.25 percentage points in mid-December, Hong Kong’s economy was buffered against the hike by the mainland’s decision to cheapen its currency, but only slightly.

“We had the best of all worlds for years — we had very low US rates and a boom in China,” said Frederic Neumann, Co-Head of Asian economic research at HSBC in an interview with the Financial Times. “Now China is slowing and the Fed is raising rates, so we get a double whammy for Hong Kong.”

The temporary cushion that the renminbi devaluation provided from rising US interest rates is the result of the territory’s currency being pegged to the dollar, while its economic future is becoming increasingly tied to Chinese mainland. As this trend continues, with China choosing to expand its trade links with the special administrative region (SAR), the question of whether or not the Hong Kong dollar should break away from the US and peg itself to the Chinese renminbi will be increasingly raised.

Since the handover of Hong Kong from the UK to China, the city-state has gradually become more and more integrated with the economy of the mainland

Stick or twist
Since the handover of Hong Kong from the UK to China, the city-state has gradually become more and more integrated with the economy of the mainland, with more than half of all exports coming out of Hong Kong finding their way to China.

What is more, the tourism and retail sectors in Hong Kong, which account for roughly a 10th of its GDP, are bolstered by the special relationship it has with the People’s Republic. In fact, just by looking at the substantial increase in the amount of trade and the financial flows between the SAR and the mainland it is clear that China now plays an increasingly dominant role in determining Hong Kong’s economic future.

“Hong Kong is more integrated with China now and so its economy could be dragged by China’s slowdown,” Mole Hau, a Hong Kong-based economist at France’s largest bank, told Bloomberg Business. “On the other hand, Hong Kong’s monetary policy has to follow that of the US – that’s quite a dis-coordination for the city.”

After the Fed raised its base rate for the first time since the financial crisis, the HKMA followed suit – raising its key rate by 0.25 percentage points to 0.75 percent. This decision was taken during a period when emerging markets and advanced economies the world over have to adjust to a slowdown in China. The combination of raised rates and increased levels of volatility emanating from the mainland has put the world, in particular Hong Kong, under renewed pressure at a time when it needs it least.

“Closer integration with mainland China has delivered several benefits to Hong Kong SAR, particularly by way of an appreciable boost to tourism and financial services, and the offshore RMB business in the last five years,”ssssssss the IMF said in a report. “Hong Kong SAR remains well placed to act as the leading platform to intermediate two-way flows in and out of the Mainland as it opens its capital account.

“At the same time, the deepening linkages through tourism, cross-border bank lending, issuance of RMB and USD securities in Hong Kong SAR by Mainland entities, and equity market connect schemes also create more channels for transmitting shocks from the Mainland.”

Dollar allegiance
The Linked Exchange Rate System (LERS), which is the mechanism that forces the HKMA to adjust the city’s monetary policy in line with the Fed, was originally implemented in response to the Black Saturday crisis in 1983 in order to provide greater stability between the HKD and the USD. Since then, and with the recent rise in rates – combined with the increased levels of economic integration between the city and the mainland – some commentators suggest that it is now time for Hong Kong to start considering a new exchange rate regime.

“Over the next decade it would make sense for the Hong Kong dollar if it is pegged to anything, to be pegged to the renminbi,” said Michael Hasenstab, Chief Investment Officer of Templeton Global Macro at Franklin Templeton Investments in an interview with CNBC.

Because the LERS forces the HKMA to adjust its interest rate in line with the Fed, it prevents Hong Kong from being able to adequately deal with inflation and other economic challenges it may face. This has naturally led some to blame the LERS for the overheating of city’s property market, which been rising year-on-year for the last decade, as increased demand has been forced to compete with decreased supply.

This ongoing trend means that Hong Kong homes by square foot are the most expensive in the world. In fact, according to CBRE’s recent Global Living Report: A City by City Guide, homeowners in Hong Kong are paying around $1,416 per square foot, while Londoners come in at a close second, paying $1,025, and New Yorkers a mere $842.

With sky-high property prices and wages stagnating in the city, there is likely to be a renewed debate over whether or not the government should switch to a floating exchange rate regime, or even peg it to the renminibi. But, despite the fact that Hong Kong has been handed back to China and the mainland has embarked on an unprecedented and prolonged period of economic growth, along with the increased acceleration of renminbi internationalisation, the conditions are still not yet right for Hong Kong to peg its currency to the yuan.

“The Hong Kong economy is too small to adapt to a free float,” said Wilson Chan Fung-Cheung, a senior consultant at the Hong Kong Institute of Bankers in an interview with the South China Morning Post. “A currency-basket system lacks transparency. A peg with the yuan will not happen in the near future as the currency is not yet freely convertible.”

Another reason why the peg is unlikely to change anytime soon is that Hong Kong relies on it as a means of providing credibility among western investors. This is due to the relatively smooth manner in which the LERS functions, which is a characteristic that stems from the strong institutional, legal and policy framework that exists in Hong Kong.

Not only that, but there are considerable fiscal reserves to draw upon, which are capable of softening the city’s landing should its economy face any unfavourable shocks from outside. Therefore, for the time being at least, it appears that the LERS is the best option for Hong Kong, as it provides a decent anchor, giving the city-state the stability it requires at a time when global market volatility is high.

The future is bright for Angola’s steel industry

Posted on March 16, 2016April 11, 2018 by Helen

While 1975 heralded Angola’s independence, it also marked the start of a 27-year civil war that inflicted deep scars across the country. As the two former independence forces fought for power, railways, roads, bridges and agricultural infrastructural were destroyed. Foreign investment remained at bay, thus hurtling the country’s economy back decades in its development.

Yet in the years that have followed the end of this bloody chapter in the country’s history, Angola’s recovery has occurred at a rate faster than many could have expected. In fact, the once-warring state has become one of the world’s fastest growing economies, surpassing even China between 2001 and 2010 with an annual average GDP growth of 11.1 percent, according to the IMF (see Fig. 1).

“Angola has only been in peace for 14 years and has managed in a very short amount of time to become the third largest African economy and one of the continent’s most stable states,” explained Georges Choucair, Chairman and CEO of K2L Capital, the principle investor of Aceria de Angola (ADA Steel). “Angola has a lot of natural resources and a fast growing market that allows huge return on investment. To further encourage private investment, the government is taking very serious measures to make it a safe environment by building infrastructure and changing laws.”

However, although Angola’s oil wealth has provided a much-needed influx of capital to the government, it has also restricted the country’s economic diversification, in addition to prompting criticism regarding the high levels of poverty that continue to afflict the population.

Time for change
Being so wholly dependent on its oil sector for economic growth, Angola has recently hit a stumbling block. In 2014, the country’s GDP growth dropped to 4.5 percent from the impressive 6.8 percent rate it achieved in the previous year, and is estimated to have fallen further to 3.8 percent in 2015, says the African Development Bank (ADB). As well as a reduction in oil production, this decline can also be attributed to a prolonged drought that severely disrupted Angola’s agriculture sector – a vital economic driver for the country. “Angola is the second biggest oil producer in Africa and has been very affected by the oil crisis. It is therefore essential for the country to diversify its economy and produce locally in order to reduce imports,” said Choucair.

Angola is at a pivotal point in both its history and economic development. In order to maintain growth in the long term, non-oil industries must be spurred forward, while the country’s business environment must be improved further in order to encourage both domestic and foreign investment. That said, notwithstanding the global system’s modest recovery and an ongoing crisis in oil prices, Angola has fared considerably better than many oil-producers, as is indicated by the ADB’s forecast that GDP growth will rebound to 4.2 percent in the coming year.

Among the most promising glimmers of potential for the economy is its emergent steel industry. In December 2015, ADA opened the country’s first steel mill factory; at a cost of $300m, it is the largest in Central and West Africa and Angola’s biggest investment project to date. At present, the mill can produce 500 tonnes of steel rebars per annum, yet with more investment due in the near future, this volume is expected to grow to 1.2 million tonnes, thereby making the country completely self sufficient in steel by 2019 and saving $300m in foreign currency annually. Moreover, and significantly, in the coming years, the factory will also contribute to the state’s export revenue as it begins delivering the product to neighbouring countries as well.

Local stimulus
The ADA factory is located 40km from the centre of Luanda, a choice that was motivated by its proximity to the country’s capital, as well as the development potential of the Bengo province. By establishing a factory in Barra do Dande, ADA has breathed life into a once derelict area. “ADA has largely contributed to the development of the region of Barra do Dande by providing clean water to the local community, constructing a health centre and a training centre, in addition to its ongoing recruitment campaign that began in October 2012 when construction first started,” explained Sanga de Almeida, Group CMO for K2L and ADA Steel.

The impact of ADA in Barra do Dande has been nothing short of exceptional. In addition to the creation of hundreds of new jobs, as well as the necessary training required for employment at the mill, ADA offers support to the entire community. This can be seen via its continued assistance of the local hospital, providing it with access to clean running water and also sanitising the surroundings of the building itself.

Furthermore, ADA continues to support the hospital with necessary equipment and medicine, a pledge that is now taking shape as an annual programme, instead of a pro re nata basis. What’s more, ADA provided a school in the local village with electricity by connecting it to the national grid for the first time.

“ADA will create 600 direct jobs and over 3,000 indirect ones by creating a nationwide platform of scrap collection that will not only allow the population to have access to revenue but also to ‘clean’ the country of all the hazardous scraps that remain from the war,” de Almeida added. Through its support of crucial social infrastructure in the area, ADA has provided a springboard for other local businesses to also establish themselves there.

As well as new restaurants and a hostel, Portuguese group Soares da Costa recently opened a concrete factory, which first supplied ADA with its requirements during construction and now distributes concrete to the entire region. In facilitating a new network of enterprises, the presence of the mill has instigated a flourish of economic activity in Barra do Dande, which still continues with fervour.

In acknowledgement of the importance of new industries to the economy, the Angolan Government offered considerable assistance to the ADA project when it was first proposed. “The Ministry of Industry served as a coordinator at the government level to alleviate the high levels of bureaucracy, and gave us support throughout the project,” Choucair explained. “The Ministry of Energy also helped us to find a viable solution to channel the energy needed for the plant.”

To further encourage the development of non-oil sectors, the government is also taking measures to fight corruption, which has been a hindrance to foreign investment in Angola in the past.

For example, the Principles of Ethical Business in Angola and the Ethics Centre of Angola were both established in 2013 in order to promote ethical business values in the country. Additionally, recent legislation such as the Public Probity Law and the Law of Crimes Against the Economy is making a strong push towards greater transparency and accountability in the system.

Angola is at a pivotal point in both its history and economic development. In order to maintain growth in the long term, non-oil industries must be spurred forward

An African axis
Angola has a unique opportunity to capitalise on the array of economic benefits presented by the presence of its new steel mill. Not only in terms of the stimulus it provides to the area and the upcoming attraction of exports, but also, importantly, because it sets a precedent for other projects and investment in Angola, thereby indicating the vast potential of this fast growing economy.

Furthermore, through steel, Angola can become a driver for Sub-Saharan Africa – particularly if and when other promising industries and commodities follow suit. “Angola has enough potential to [become] a very competitive country in the years to come and I am convinced that it will become an exporting country in the next five years. This is already the case with coffee, cement, marble and granite,” de Almeida told World Finance.

Infrastructure and transportation are key aspects to helping this vision take form. As such, the Chinese-built Angola International Airport is scheduled for completion in 2017, while new railroads are currently under construction in order to make Angola far more accessible to neighbouring and international markets.

Then there is the recently announced sea terminal at Barra do Dande, which will act as a satellite port for nearby Luanda. Of course, such projects are sizeable – requiring time and regular injections of capital – but what is important here is that they have already begun and the potential they hold for the near future is high.

Given Angola’s geography, it has an enviable opportunity to boost its economy to new heights. “Angola has all the elements to become a hub for the region. Its geographical position is very strategic because it has easy access to all of the Southern African Development Community (SADC) countries on the east side and access to sea on the west, making it also accessible to Brazil and all of Latin America,” Choucair told World Finance.

Undoubtedly, Angola’s afflicted past has stunted its development and economic evolvement until relatively recently. That said, as evidenced by the country’s rapid growth in the past decade and the feats the state has achieved, Angola is fighting hard to not become yet another hostage to a troubled history.

Through new legislation, governmental reforms that facilitate business and investment and a steadfast focus on economic diversification, not only will the state prevail in this goal – it may exceed all expectations.

China sets new growth target

Posted on March 16, 2016April 11, 2018 by Helen

China’s Premier, Li Keqiang, has stated there will be no hard landing for China’s economy, as new economic reforms were adopted during the National People’s Congress. The country will target a growth rate of between 6.5 and seven percent per year until 2020.

Speaking at a news conference following the Congress, Li said supply-side reforms will create new growth drivers, and that not hitting growth targets would be “impossible”.

The five-year plan, adopted at the annual meeting of parliament, includes measures such as cutting high debt, streamlining state-owned enterprises and reforming financial markets. Li acknowledged while there would be job losses in state-owned industries, such as steel and coal, there will be no mass redundancies: “So long as we stay on the course of reform and opening up, China’s economy will not suffer a ‘hard landing’.”

The plan signals a shift in the direction of China’s economic policy, as it attempts to move away from export and investment-driven growth. By restructuring and reducing production at its costly state-owned industries, it plans to create more sustainable growth driven by domestic consumption.

While China’s state-owned industries flourished during the nation’s rapid growth period, many of these enterprises are now loss-making operations riddled with debt. The companies are commonly referred to as ‘zombie firms’, as they are unable to cover their own debt and so require substantial support from the government in order to remain open.

China’s growth fell to a 25-year low in 2015 and has been plagued by volatility recently, leaving policymakers struggling to stabilise the economy. Only days after it was introduced, China scrapped its stock market ‘circuit breaker’, a policy designed to temporarily shut down trading if the market lost value too quickly.

Myanmar makes its third attempt at a successful stock exchange

Posted on March 15, 2016April 12, 2018 by Helen

Just up from the banks of the Yangon River, in the heart of Myanmar’s central business district, is the newly opened Yangon Stock Exchange (YSX). The exchange is housed in the former head office of Myawaddy Bank, a neoclassical relic of British rule that is located less than five-minutes’ walk from the iconic Sule Pagoda.

A large crowd gathered on December 9, 2015 to mark the exchange’s opening. They were there to celebrate not just the exchange itself, but also what has been widely perceived as a new era in Myanmar’s history. “Until recently, it was generally accepted by the investment community that there [were] two great untapped markets in the world: North Korea and Myanmar,” Aaron Armstrong, Asia Investment Analyst at Alquity Investment Management, told World Finance. Alquity has holdings in Myanmar and so, like many other frontier investors, is particularly excited by the prospect for growth in the country.

The country began its transition from a military regime to a democratically-elected government in 2011. In this time, with a new focus towards pro-business policies, Myanmar has seen foreign direct investment soar (see Fig. 1), jumping from near-nothing to a record $8bn by 2015; a figure double that of the previous year.

Although it might be a while before we start seeing Western-owned factories in the heart of Pyongyang, in Myanmar it’s a different story: since 2011, giants like Heineken, Coca-Cola and Unilever have been setting up operations in the country. Unilever is planning on eventually making the country its base for all Southeast Asian operations, having already begun construction on its second factory in nearly as many years. The firm has stated that these operations will bring over €500m ($656m) into Myanmar over the next decade.

A hallmark of a developing country’s stock exchange is weak corporate governance

Logical next step
Under-banked, under-invested and under-urbanised, Myanmar has one of the lowest minimum wages in the world: around $32 per month. This alone makes it a very attractive destination for producers and investors alike. With such a low base to start from, the prospects for growth are enormous, and Myanmar is being eyed up by an increasing number of multi-nationals, including, most recently, Colgate-Palmolive, Mitsubishi and Telenor.

Speaking to Bloomberg in 2012, Jim Rogers, Chairman of Rogers Holdings, compared Myanmar’s situation to that of China in 1979, when Deng Xiaoping’s campaign of economic reforms led to unprecedented growth over the following decades. Rogers told Bloomberg: “If I could put all of my money into Myanmar, I would.”

Thein Sein’s government has been working hard to attract this interest, inviting infrastructure players in various sectors to set up shop. Nine banks have received foreign banking licenses since 2013, and they will be the first in more than 50 years allowed to offer financial services in Myanmar. Foreign telephone operators have also been allowed in, with Telenor and Ooredoo winning the first round of bids.

A stock exchange certainly seems like the logical next step. But is the YSX to be a legitimate endeavour, or just a vanity project?

Learning from the past
The YSX is certainly a step-up from its predecessor: the Myanmar Securities Exchange Centre (MSEC), an OTC market, was set up in 1996. While it was technically still running until the opening of the YSX, the MSEC was long considered dormant. It had no trading floor and only two companies listed on it (Forest Product Joint Venture Corporation, a semi-governmental timber PLC, and the Myanmar Citizens Bank), and trading was so infrequent that the values of the two companies were manually updated by marker pen on whiteboard.

Weeks would go by without a trade, making life easy for the exchange’s eight employees. No new companies had ever attempted to list on the exchange – not even state-owned enterprises – and so most people were completely unaware of its existence.

This wasn’t even Myanmar’s first attempt at an exchange: the Rangoon Stock Exchange (RSX) was established in the 1930s and also traded very few stocks. This exchange operated sporadically until 1962, when the military government under General Ne Win nationalised Myanmar’s public companies. Again, few people knew of its existence at the time.

Both of these exchanges suffered from the same problem, one that plagues many exchanges in developing countries: they existed not to encourage real trading, but to lend an air of legitimacy to an economy lacking in any autonomy – in the case of the MSEC, an economy under colonial rule, and in the case of the RSX, a military dictatorship. To put it bluntly, the RSX and MSEC were vanity exchanges, and investors understandably took no interest.

By 2011, however, Thein Sein’s government had decided that the time was right for another go. To oversee the development, it brought in Daiwa Securities, the Japanese firm that had managed the MSEC, and the Japan Exchange Group, which operates the Tokyo Stock Exchange. With the assistance of these new partners, the Central Bank of Myanmar quickly drafted the Securities and Exchange Law, which officially authorised the exchange, and an estimated investment of between $25m and $30m was poured into the newly created Yangon Stock Exchange Joint Venture Company.

It is the involvement of the Japanese Exchange Group that has caught the attention of most investors. It sets the endeavour apart from the exchanges of neighbouring countries Cambodia and Laos, which list only two and four companies respectively and show no signs of growth at all, even after several years of trading. Like the two previous exchanges in Myanmar, these bodies are seen as prestige symbols, but offer very little in the way of serious institutional investment.

Rivalling neighbours
If there is a local success story that the YSX is hoping to emulate, it would be that of Vietnam’s Ho Chi Minh Stock Exchange (HSX). With more than 300 listed companies and a combined market capitalisation of $19.2bn, the HSX has shown that so-called frontier markets can establish themselves as viable destinations for investors. Myanmar’s Deputy Finance Minister, Dr Maung Maung Thein, has declared that he expects Myanmar’s new exchange to surpass the size of Vietnam’s in the next three years.

The best way for this to be achieved would be to allow more foreign ownership of publicly listed companies: a hallmark of a developing country’s stock exchange is weak corporate governance. While frontier investors are used to trading in environments with questionable corporate governance and regulations, having a higher level of foreign ownership would ease the worries of more conventional investors.

The YSX does have comprehensive criteria for listing on its exchange under its Securities and Exchange Law, including provisions for the number of shareholders, profitability and paid-up capital. It also includes provisions for good corporate governance and preventing insider trading. Investors will nonetheless be hesitant to invest in the exchange until its companies and trading floor have shown themselves to be stable over the long term, and this leads to possibly the most important lesson the YSX could take from its predecessor and local rivals: the YSX should take care not to rush the rollout of the exchange.

Obstacles to overcome
Given that this is a time of rapid expansion and growing interest in the country, Armstrong has high hopes for the future of Myanmar’s exchange. But he stresses that it takes time for a stock exchange to find its footing, and there are a lot of factors involved in making it attractive to outside investment. “To begin with, the number of companies listed on the exchange will be very low, and with low liquidity,” he explained.

“Questions of the quality of the listed companies, in terms of governance and standards, will need to be seriously considered, as the country is only getting its first real taste of corporate operations [in more than 50 years].” Armstrong also cautioned that turning all six of YSX’s initial companies out at once would overload the market and not allow proper time for vetting.

Indeed, launching the stock exchange too soon would run the risk of confusing an already apprehensive investor market. Without proper guidance and a measured rollout, experts worry that corporate governance will suffer, as companies not accustomed to long-term growth will look to cut corners in order to raise their list price in the short term.

Sanctions are another real obstacle standing in the way of success for the YSX. Many have already been lifted, or are in the process of being lifted, in the wake of democratic reform, but it is expected that many former military officials will retain positions of power in Myanmar’s private sector. Most notably, the Myanma Economic Bank – the majority shareholder in the exchange – remains sanctioned by the US Treasury Department’s Office of Foreign Assets Control, as do several securities companies looking to eventually list on the exchange.

Institutional investors will naturally be hesitant to commit to the market under this climate, though it is hoped that the incoming government of Aung San Suu Kyi – herself kept under house arrest by the former military government for over 15 years – will signal the lifting of many more sanctions, when Suu Kyi’s National League for Democracy (NLD) successfully wrestles control of Myanmar’s economy away from the old guard. Progress is already being seen, as the US recently suspended sanctions against Myanmar’s ports and airports in an attempt to encourage the NLD’s progress.

If these obstacles can be surmounted, there is great potential in the YSX. With a measured rollout of properly vetted companies, it could well achieve its goal of rivalling Vietnam’s success and play a part in Myanmar’s larger economic growth story – once trading actually begins, that is.

How the Trans-Pacific Partnership will affect global trade

Posted on March 15, 2016April 12, 2018 by Helen

On October 5, 2015, after seven years of drawn-out negotiations and meticulous bargaining, the day that thousands of manufacturers around the globe had been anticipating finally arrived: the Trans-Pacific Partnership (TPP) was concluded. The full impact of the new trade agreement, which is due to be ratified sometime this year, is not yet known, but what can be presumed is that a new era in global trade has begun.

The TPP is formed of 12 Pacific Rim countries: the US, Canada, Mexico, Chile, Peru, Japan, Singapore, Vietnam, Malaysia, Brunei Darussalam, New Zealand and Australia. The alliance seeks to open up markets, while enforcing a high standard of trade rules across an expansive area. The TPP partners also hope to create new opportunities for manufacturers, service providers and workers, in addition to supporting job creation and stimulating wages. Among the industries standing to benefit are pharmaceuticals, automobiles, tech firms and agriculture. That said, it is the textile industry that has sparked the greatest interest among international investors.

A rising star
Since the late 1990s, Vietnam’s textile and apparel sector has shown impressive growth and export revenue. In less than two decades, the country rose rapidly through the ranks to become one of the world’s top 10 textile exporters. This played a significant role in the socioeconomic climate of the country as a whole, as the textiles industry has contributed around 2.3 million jobs, 80 percent of which are held by women.

“The significant growth in Vietnam’s textile and apparel industry is due largely to two factors,” according to Christian Lewis, Lead Analyst on Vietnam and Myanmar for the Eurasia Group.

“First, Vietnam has had, and continues to have, cheap labour, which has become an increasingly attractive feature of the market, given the consistent upward trend in manufacturing wages in the other main engine of manufacturing, southern China. Additionally, during this period Vietnam’s business environment has grown more suitable for foreign investors to provide the capital inputs necessary to develop an industrial base.”

Government initiatives encouraging international investment have thus contributed to this recent success, with foreign firms accounting for 60 percent of the industry’s export revenue. Moreover, the nature of the business, in which only a small capital investment is required for fast profit turnaround, has further stimulated investment.

Without the TPP in place, manufacturers in Vietnam would continue to face a tariff of 17 percent for exports to the US – now, however, the levy will dramatically drop to almost zero percent. With textile exports expected to increase substantially, both domestic and foreign investment are starting to pour into the country. Notably, businesses from outside the TPP zone are also setting up production in Vietnam, in order to benefit from preferential treatment and favourable access to the US market.

“In anticipation that the TPP would be completed successfully sometime in the not too distant future, textile and apparel companies in Asia began investing in countries that would be part of the TPP. The most visible example is certainly Vietnam, where investments have surged in the past few years,” said Dr Christian Schindler, General Director of the International Textile Manufacturers Federation.

For example, South Korean-owned Don-IL Corp recently started construction on a $52m yarn factory in the south of Vietnam, while Taiwanese manufacturer Forever Glorious has announced plans to build a $50m weaving and dying factory for premium sports garments. What’s more, as Dr Schindler explained to World Finance: “Since China is not a TPP country, many Chinese spinning companies have already invested in Vietnam in order to benefit not only from the attractive labour costs and from the proximity to China’s textile industry, but also from the TPP.”

The course ahead
Despite its many benefits, there is one snag to the TPP for Vietnam: the ‘yarn forward’ Rule of Origin (ROO), which requires that, in order to export apparel to another member state, all materials used must have been produced within the TPP region. At present, Vietnam sources over 85 percent of the materials used in its garments from China and South Korea. As a result, Vietnamese manufacturers must now change suppliers to fellow TPP members, and will thereby lose out considerably when it comes to price competitiveness.

In order to offset these mounting production costs, domestic textile firms are now aiming to establish their own weaving and dying operations in the country – for example, state-owned Vinatex, Vietnam’s largest textile firm, recently announced plans to invest over $714m to expand and upgrade its operations, as well as its supply chain capabilities. Similarly, apparel giant TOMS signed a $12bn deal with a leading Japanese garment manufacturer last April, which will see a vast garment dying complex constructed in central Vietnam. While Vietnamese authorities have pushed for exceptions to the rule, ROO is a crucial tool in ensuring global competitiveness, and was also established to provide protection for the US producers who stand to lose out from the TPP.

The Vietnam Textile and Apparel Association estimates that the TPP will enable the industry’s turnover to double while creating 250,000 jobs for every $1bn of export revenue growth. Of course, in order to successfully capitalise on the opportunities now available to Vietnam, various measures must be taken. Additionally, the state must act fast in order to further facilitate foreign direct investment, particularly before the TPP is expanded. Likewise, being the least developed economy of the TPP countries, the competitiveness of Vietnam’s service sector is also expected to improve so as to meet TPP regulations.

“In terms of key challenges, there are few that will impede near-term textile sector growth, given that there is so much low-hanging fruit to be had,” Lewis told World Finance. “As industrialisation continues, however, the supply of electricity has the potential to become a more problematic constraint. The government has yet to adopt a price mechanism set by the market, and as a result there is an underinvestment in future capacity that could start to constrain output before 2020.”

Furthermore, as more international firms enter the market, Vietnam’s abundant labour supply – which the industry is largely reliant upon – will begin to decline, together with its low employment costs. During this transition period, it is therefore crucial for textile firms, including state-owned enterprises, to invest considerably in technology, in addition to improving corporate governance, in order to maintain their competitive edge in the global market.

Economic impetus
“Once ratified later this year, the reduction in trade barriers will create new and unprecedented market access for Vietnamese products in the US market, the world’s largest source of demand,” said Lewis. This closer alliance with the US, which Vietnam has been pursuing for some time, will enable the state to diminish its dependence on its biggest trade partner, China (see Fig. 1). In 2014, Vietnam’s trade deficit with the Republic was a mammoth $28.96bn, but the country’s new trade ties will enable it to take a bold step away from China’s economic influence, which in turn will enhance its autonomy and securitisation in the region.

In anticipation of Vietnam’s new economic standing, the World Bank estimates that the state’s GDP growth will increase by eight percent by 2030. What’s more, the administrative, legal and institutional reforms that must be made as part of the TPP agreement will naturally push the development of both private and public sectors considerably.

In essence, TPP market principles necessitate a more competitive and transparent system, which could very well lead to the expansion of Vietnam’s middle class in the not too distant future. This will be helped further by the explicit labour rights required by the TPP, including the right to unionise, which indicates that powerful social changes can be expected in the coming years. When these milestones are achieved, the comprehensive liberalisation of Vietnam’s economy is likely to follow, along with greater chances for the liberalisation of its political system in equal measure.

The family offices industry is due to undergo some major changes

Posted on March 15, 2016April 12, 2018 by Helen

New international fiscal and enhanced anti-money laundering requirements mean that private family offices have entered 2016 in the spotlight. Although the financial crisis is nearly a decade behind us, the complexity of implementing global financial reform means that 2016 will see the advent of two critical developments that may cause some family offices to consider relocation.

The first development is that, as of January 1, 2016, 50 jurisdictions have implemented new account opening procedures to record tax residence as part of a global reporting standard for the automatic annual exchange of financial account information between relevant tax authorities. This new fiscal disclosure model is built upon the success of the innovative US Foreign Account Tax Compliance Act 2010 (FATCA). The 50 countries involved are committed to information exchange in relation to new accounts and pre-existing individual high value accounts from September 2017.

The second development is that, from April 2016 in the UK, companies will be required to maintain a central register with information on any person with significant control (PSC) over that company. Companies will also be required to file PSC information with Companies House from June 2016, prior to incorporation and annually. This requirement in particular represents the UK implementation of a key provision in the fourth Anti-Money Laundering (AML) EU Directive 2015, which EU member states have two years to implement.

The relevance of this AML directive requirement for family offices is that each member state is now required to set up a central register with information on beneficial ownership of companies and other legal entities. Firms are also required to make such information available to the financial intelligence units of member states and to ‘obliged entities’ (formerly known as ‘designated persons’, and including financial institutions) on request and without restriction.

The comparative ease with which people will be able to access such detailed ownership information will be of concern to family offices, however, particularly as the legislation states that any person or organisation that can prove a legitimate interest in the information should also be granted access.

Changing definitions
In line with the new legislation, the definition of ‘beneficial ownership’ has been widened in a number of ways, and will now include trusts (for example, express trusts that generate a tax consequence in a particular member state), should they require the identity details of the settlor, trustee, protector (if any), beneficiaries or class of beneficiaries and any other person who may have an influence on the trust, to be disclosed. The disclosure rules also apply to foundations and other similar bodies.

The ease with which people will be able to access detailed ownership information will be of concern to family offices

For companies and other legal entities, in addition to the 25 percent shareholding interest, disclosure will be required relating to indirect and direct control by other means, including bearer shares other than those issued by a company listed on a regulated market that is subject to equivalent disclosure requirements. However, the UK implementation has gone slightly further: UK companies are required to seek out and report information on PSCs to Companies House from June 30.

The role of corporations
Governments have worked hard to successfully restructure since the financial crisis, but political appetites to cut public spending have been curtailed by weak economic recoveries. This has encouraged governments to seek alternative sources of finance.

In seeking to boost tax revenues, a government would usually turn first to businesses. However, they cannot risk jeopardising economic activity by raising corporation tax. The Financial Times recently reported that corporation tax contributed towards only 7.7 percent of all UK taxes last year – less than the OECD average of 8.5 percent, and the lowest share since 1994.

Instead, and following a number of headline cases, governments are turning their attention to transfer pricing. Research by the OECD estimates that between four and 10 percent of global corporate income revenues – amounting to between $100bn and $240bn annually – is lost due to multinational groups artificially shifting profits to low tax jurisdictions.

Furthermore, OECD and G20 countries are for the first time ever working together on an equal footing with more than 40 developing countries, which are particularly affected by these changes because of their reliance on multi-national corporate tax revenues. The aim of this partnership is to develop a package of tools to ensure that taxes are paid proportionately where economic activity is generated. It is anticipated that the multi-lateral instrument to implement the tax treaty change will be signed later in 2016.

FATCA’s success
The US Government introduced FATCA in 2010, with the aim of ensuring that US taxpayers with a financial income and assets outside the US pay their full share of US tax. Congress estimated that once successfully implemented and upheld, FATCA could bring in $800m annually. It was an innovative piece of legislation, particularly as it did not impose any additional taxes, but instead built on existing reporting requirements for persons required to file US tax returns and foreign financial institutions with US financial accounts.

FATCA imposed a certification and compliance programme for foreign financial institutions, based on an existing contract with the Internal Revenue Service (IRS), by adding a penalty of a 30 percent withholding obligation on payers of US-based interest, dividends and proceeds from the sale of US proper (excluding business income generated by US businesses) to non-compliant foreign financial institutions and non-financial foreign institutions who did not provide the necessary declarations.

FATCA’s success led firstly to the finance ministers of France, Germany, Italy, Spain and the UK – the countries that developed the FATCA intergovernmental agreement alongside the US – announcing their intent to exchange FATCA-type information among themselves, in addition to exchanging information with the US.

OECD programmes
Aside from FATCA, G20 leaders in their 2013 summit fully endorsed the OECD proposal for a global model of automatic exchange. The G20 endorsement of the standard was so strong that by September of the following year, nearly 50 jurisdictions had committed to early adoption of the standard. The standard differs principally from FATCA in that it consists of a fully reciprocal automatic exchange system based on tax residence, as opposed to citizenship. It does not have a threshold for pre-existing individual accounts and has special rules in place for certain investment entities, such as those based in jurisdictions that do not participate in automatic exchange under the standard.

Family office investors with multinational structures will find themselves deluged with differing reporting requirements and forms from banks and investment managers from the start of 2016. As part of alternative fund documentation, they may also see an increased requirement for them to make representations and warranties on the accuracy of the information provided with penalties, such as forced redemption and side pocketing for non-compliant investors.

The OECD has for some time been a supporter of voluntary disclosure programmes that encourage non-compliant persons to come forward, while discouraging non-compliance in the first place. In practice, voluntary disclosure programmes can be of particular use to inheritors of wealth and divorcing spouses who find that joint filing may not have been made correctly during probate or separation.

However, not all disclosure programmes are the same, and they must be carefully reviewed in order to check applicability, time limits and whether full and accurate disclosure will effectively bring an end to the matter in question. The review will also determine whether criminal charges should be brought, whether settlement terms are reasonable, whether the discloser should be targeted by enforcement in the future and, finally, whether the disclosure itself will be kept confidential.

These two new regulatory burdens mean that compliance costs are set to increase, unless a family office can simplify the advisory structure and identify any remediation actions. Family offices should consider using onshore-authorised fund structures that have inherent tax reporting, often with capital gains tax roll up and privacy built in.

Monsanto threatens to shut down Indian operations

Posted on March 15, 2016March 17, 2016 by Helen

Monsanto, the world’s biggest seed producer, has threatened to exit the Indian market after six decades of business. Following a mounting dispute with regulators, the Missouri-based agri-business giant has slammed the Indian Government for its recent decision to regulate the price of Bt cotton seeds.

Under the government’s new rule, Bt cotton seeds – the only genetically modified seeds commercially available in India – will have a fixed price for the first time since they were introduced to the country in 2002. Starting in April 2017, the maximum selling price will be $11.90 (INR 800) for 450 grams – a far cry from previous prices, which ranged from $12.30 (INR 830) to $14.80 (INR 1,000).

Bt cotton has been widely popular and quickly adopted in India: it has been modified to produce a toxin that can kills certain insects, including the moth larvae that consume cotton bolls and can therefore destroy entire crops. In fact, India is now the world’s largest producer and exporter of cotton fibre.

Along with implementing a maximum price, the Modi regime has also ruled that the whopping 74 percent royalty fee that Monsanto charges to local producers will be drastically reduced to INR 49 per 450 grams. Monsanto, along with its local partner Mahycom, currently licence the crop gene to 40 seed producers, thereby making royalty fees a large portion of its business in India.

According to a statement given by Shilpa Divekar Nirula, Chief Executive of the company’s Indian division, these new conditions will make it difficult to continue introducing new technologies to India, given “such arbitrary and innovation-stifling government interventions”.

Monsanto is currently under investigation by the Competition Commission of India, which launched a probe into antitrust pricing practices of the company in February.

Crowdfunding is no longer only an option for start-ups

Posted on March 14, 2016March 14, 2016 by Helen

At the Consumer Electronics Show this year, the technology sector’s best and most ambitious were showing their ‘next big things’ to eager attendees. Behind every buzzing drone or monstrous television, investors are paying careful attention to see if products are worth their attention and money. No longer the domain of small teams with a plan and a shed, crowdfunding is here for big business.

Launching that same week was a tool designed to bring in that funding: Indiegogo’s new platform – Enterprise Crowdfunding – provides support to established businesses looking to test the waters with a new product. It’s meant to be an extra tool for research and development departments, and works as a very low risk measure of public reaction. Projects that don’t get sufficient public support drift off into the sunset, and projects that do get some early interest, marketing and money. Indiegogo will provide strategy, support, promotions and analytics for enterprise users, as well as their users who have a track record of taking a gamble on new ideas.

“We created Indiegogo to empower anyone, anywhere to raise funds for their ideas, from the inventor working out of her garage to the largest Fortune 500 companies looking to create innovative new products that line up with what customers really want”, said Indiegogo CEO Slava Rubin. “Some of the world’s most successful companies are already using Indiegogo for product development, market research, and to support causes important to them. Now we’re taking that a step further with Enterprise Crowdfunding.”

Indiegogo has been testing corporate partnerships for a short while now, with a few projects already achieving some early success. General Electric’s FirstBuild has already funded two projects launched on Indiegogo: the Paragon Induction Cooktop and the Opal Nugget Ice maker.

Video games make up a big slice of Kickstarter’s projects; six of the top 20 most-funded projects in the site’s history were connected to games

Funding for the masses
The only risk for big companies would be a loss of good faith from the crowdfunding user base, who may see projects from big companies as a misuse of the system. The argument is that high-profile celebrities and companies can fund their own ventures, plus afford to take the hit if they fail. Kickstarter and Indiegogo are there to ‘give the little guy a go’, funding projects that would never get off the ground otherwise.

It was this argument that saw Kickstarter field criticism in the past when it hosted two high profile projects in 2013 that, debatably, could have been funded through more traditional methods: a reboot of the Veronica Mars TV series, and a film written by actor Zach Braff. Despite the negative publicity, both projects were successfully funded.

Kickstarter has always been supportive of these major projects, largely because they draw so much new blood to the service. According to figures released by Kickstarter at the time, 63 percent of the people who funded both those films were first-time backers. Thousands of those people went on to back other campaigns. Kickstarter has referred to this as the ‘blockbuster effect’; high-profile campaigns that draw a large number of new users. Discouraging them would be a mistake.

After years of running both small and large projects, Kickstarter and Indiegogo have amassed large pools of people willing to participate in the system, while absorbing some of the risk. Although the return for this risk has always been merchandise, backers don’t really have any stakes. More recently, crowd investments are becoming available.

Luke Lang is the Co-Founder and CMO of Crowdcube, a service that crowd sources investments. Crowdcube lets armchair investors pool their money to purchase portions of businesses alongside some of the biggest venture capital firms – Lang said 2015 was a standout year for the service.

“In total we’ve raised about £140m of funding for more than 300 businesses. In 2015 alone we raised around £75m to £80m for businesses. I guess the thing that really happened last year, which is what I feel was a real breakthrough year for us, was a trend towards much more established businesses using Crowdcube as a financer. I think there were 21 or 22 deals of £1m or more raising funding through Crowdcube last year. Five of them raised between £3m and £4m, so we’ve very much moved into that kind of ‘Series A’ funding round.”

As crowdfunding gets more attention from bigger businesses, more platforms are popping up to cater for the most specific users. Video games make up a big slice of Kickstarter’s projects; six of the top 20 most-funded projects in the site’s history were connected to games. Fig was launched last year as a crowdfunding platform that allows fans to invest to get games off the ground, plus investors have room to jump in for potential returns based on sales. The website features handy sliders for investors to see potential returns based on the sale price and copies shipped. So far the site has funded two projects for a combined total of just under $4m raised. Of that money, just under half came from accredited investors.

Lang said it’s changing the way investment works, and blurs the line between venture capitalists, angel investors and the general public. “When I look back to 2011, we were trying to disrupt angel investing. We were trying to enable everyday people like you and I to be able to get involved in angel deals that were previously out of reach of the average person.”

Kickstarter in numbers

$2.01bn

Total pledged

$1.73bn

Successful dollars invested

$243m

Unsuccessful dollars invested

$43m

Live dollars

Source: Bloomberg

The power of the entrepreneur
The deals Crowdcube now makes would be out of reach of most individual angel investors. “We’ve actually kind of stepped up a level and not just given people the opportunity to participate in seed rounds but venture rounds as well, which is really exciting. It feels like the balance of power has shifted slightly. With choice, entrepreneurs are not beholden to one or two inventors, whether they be venture capital firms or whether they be agent investors that are putting in the lion’s share of the money. A greater breadth of people participating in a round means the balance of power shifts back to the entrepreneur, which is certainly a good thing”, said Lang.

Another benefit companies will be seeing is a higher level of scrutiny. The public nature of a crowdfunding campaign puts an idea under the spotlight of potentially hundreds of thousands of eyes. Lang said even if a company fails, the feedback can result in a successful second round. “We have had multiple campaigns that have come onto Crowdcube that have been unsuccessful, learnt from the experience and come back at a later date and been successful. A lot of that is down to preparation and executing the campaign, but in some instances it’s about understanding the business and taking onboard feedback.

“I often used to say that a business that goes through a crowdfunding campaign at the other end, whether they’re successful or not, they’ll come out the other end as a much stronger company. The cross examination and the interrogation that investors give these businesses, I think can be invaluable.”

Undoubtedly of interest to GE will be the appliances that aren’t successful, perhaps even more so than those that are. Enterprise Crowdfunding’s biggest use would be as an incredibly wide-reaching focus group, tapping into the virtually limitless perspectives and options online users will offer up. Users may foresee not only design or production problems, but even potential legal issues too.

An early campaign in Crowdcube’s history was for a stake in an aperitif manufacturer named Kammerling. Its investors queried if the name would be an issue given the similarity to a German brewer. Turns out it was, and the product was renamed to Kamm & Sons before it was successfully funded. Lang said this avoided what could have been an expensive rebranding disaster. “I think people underestimate the power of the crowd, that collective wisdom and what it can bring to bear.”

Now crowdfunding is out of the bag, business has no choice but to take notice of the benefits small-scale outfits have been receiving for years. It’s applicable to virtually any type of business, and has so far produced impressive results. With a well made, open and clear campaign, big businesses can engage and expand their customer base by operating in a more public way. It’s more thorough than focus groups, and the benefits are impossible to ignore. Businesses will need to get smarter and let the crowds in.

Few rideshare companies insist on their drivers having adequate insurance

Posted on March 11, 2016 by Helen

For drivers who use ridesharing apps, time on the road is a gamble. Most US operators drive using only their private insurance, meaning that their finances could be at stake should an accident happen at the wrong time. Insurers who are quick to fill in the gaps for these drivers could attract a new wave of long-term customers.

Harry Campbell, founder of The Rideshare Guy blog and podcast, told World Finance that insurance is a huge concern for many drivers. “I have no idea why more insurance companies haven’t jumped at this opportunity – it is a huge business opportunity. There are 400,000 [rideshare] drivers in the US alone and, according to my poll of over 3,000 drivers, 90 percent of them do not have rideshare insurance”, he said.

Insufficient cover
A lack of suitable insurance is one of the stronger criticisms levelled at rideshare companies like Uber and Lyft. When drivers don’t pay expensive commercial insurance, they can offer lower fares, but by not having full and appropriate coverage, these drivers put passengers and other road users at risk.

The reality for drivers is more complicated: Lyft and Uber both require drivers to hold private insurance for their vehicles. Drivers are then covered from the time that they select a fare and leave to pick up a passenger up to the very end of the passenger’s journey. What isn’t covered is the time that a driver spends waiting around.

This waiting time, during which a driver has their app activated and is waiting for a passenger to request a ride, is known as ‘period one’. Uber and Lyft offer liability coverage if a driver isn’t sufficiently covered during this time, but still require their drivers to go through their personal insurance first should they need to make a claim. This is where the gaps appear, as drivers are unlikely to be covered while operating commercially under their private insurance. Regular commercial insurance would provide coverage here, but is too expensive for anyone who isn’t ridesharing full-time.

According to Campbell, this makes a little dishonesty regarding ridesharing work very tempting. “There’s no real way [insurers] could find out, but obviously it is still a crime”, he said. “Unfortunately, many Uber drivers don’t have a choice in the matter. If they don’t make a claim and get into an accident during period one, they will not get covered for collision by anyone, but if they do make a claim with their personal insurer and say they were just out driving around, they will be covered. You can see why it’d be tempting to lie.”

A lack of suitable insurance is one of the stronger criticisms levelled at rideshare companies like Uber and Lyft

Dodging potholes
The upside for insurers is that many drivers are now looking for policies that will cover them during this gap. On his website, Campbell has compiled a list of insurers who either won’t revoke policies if a driver is ridesharing, or offer a policy that covers the gap. However, many US states don’t have either of these options available to them. Campbell believes that state regulations and slow-moving insurance companies have left holes that drivers must try and avoid.

“There are many drivers seeking a flexible, commercial insurance-style product that would allow them to give rides off the app, based on usage as opposed to flat fee, regardless of how much/little you drive, but still be covered”, he said.

Campbell also said that many drivers would be happy to change to another provider if the new insurer allowed for ridesharing, with policies within 10-15 percent of a normal premium being a reasonable charge for most.

Outside of the US, regulations vary drastically from country to country, but more examples of rideshare insurance products are appearing across a variety of markets. Aviva Canada, for example, recently announced that specific policies will soon be available for rideshare drivers in Toronto.

“We’re excited to offer a simple and affordable solution within a driver’s existing personal auto policy, thereby providing drivers and passengers with absolute peace of mind that they have insurance coverage while ridesharing”, said Greg Somerville, President and CEO of Aviva Canada, in an online statement.

The new policy will cover drivers for the full extent of their journey, provided that they meet other requirements including passenger limits, clocking in less than 20 hours per week as a ridesharing driver, and not engaging in any other commercial work. Campbell said that the 20-hour limit would be enough for most drivers: according to figures released by Uber in 2015, 51 percent of its drivers work less than 15 hours per week. The cost of the policy is calculated by looking at how often the individual works, as well as their location and driving record.

For insurance companies, opportunities still exist. With most drivers working part-time and not able to obtain expensive commercial insurance, this is where – if regulations allow – insurers should step in. The sharing economy isn’t going away anytime soon, and insurers will have to adapt – it’s that, or risk being left behind.

We must end the age of exploration subsidies

Posted on March 11, 2016 by Helen

Somewhere around the halfway point of COP21, Oil Change International (OCI) took a moment to shine a light on fossil fuel subsidies, and revealed that support for non-renewables among the world’s wealthiest nations could derail outstanding commitments to climate finance. The findings, which took into account spending in the G7 countries and Australia, showed that the combined annual spend on fossil fuel subsidies totals around $88bn. As a means of comparison, support for the Green Climate Fund is around $2bn.

Looking at the figures for 2013, the US Government handed out $5.2bn in exploration subsidies, Australia $3.5bn, Russia $2.4bn and the UK $1.2bn, mostly in the form of tax breaks for deep offshore fields.

These results feed into a furious debate on the subject of fossil fuel support and whether it compromises the ability of major world governments to act on climate change. Following a (some would say) enlightening two weeks in Paris, where talk of climate finance fiercely divided negotiators, fossil fuel subsidies – particularly on the exploration side of things – have been chastised as a relic of former days.

“The challenge right now is that governments are not updating their fiscal policy to underline much wider objectives, particularly around climate, but also around other issues such as air pollution and energy security, where there is a need to diversify”, Shelagh Whitley, Research Fellow at the Overseas Development Institute (ODI) told World Finance. “For the most part, it has been more a question of governments maybe not taking a lot of these new factors into account when they’re making ongoing decisions, and whether they’re locked into old-fashioned fiscal policy.”

The case for fossil fuel subsidies is less now that the general understanding of the economic, social and environmental costs is greater

The World Bank, the International Monetary Fund (IMF) and the International Energy Agency (IEA) have all called on governments around the world to reform or phase out subsidies, yet a look at the headline figures shows that little progress has been made so far (see Fig. 1). Now that our understanding of the economic, social and environmental costs is greater, there’s no better time than the present to address the disconnect that exists between government actions and ambitions when it comes to climate change.

The same old story
Six years ago, G20 leaders gathered in Pittsburgh and promised to phase out unnecessary government-given support for fossil fuels – yet the situation is little changed. In fact, recent findings show that support for fossil fuels today is greater than it was when the initial pledge was made. This failed promise, together with recent studies that show the world is fast exhausting its carbon budget, has riled critics, for whom action on climate change has come too slowly.

“The big problem with producer subsidies is that we can’t afford to use all of the fossil fuel still buried in the ground – not without triggering runaway climate change”, said Chris Beaton of the International Institute for Sustainable Development (IISD), speaking to World Finance last year. “Claims that helping the fossil fuel industry is good for the economy and jobs are often inflated, or simply not substantiated with published analysis.”

For the very same reasons highlighted in the OCI report, fossil fuel subsidies are under fire. And while not all support should be tarred with the same brush, the case for exploration subsidies is growing thinner by the day. Dough Koplow, founder of Earth Track, told World Finance: “These subsidies create competitive impediments to cleaner energy resources, unlock enormous amounts of carbon from locations that would not otherwise have been economic to develop, and – as with the Arctic – can put at risk fragile ecosystems and other industries that depend on a clean environment.”

One report jointly penned last year by the ODI and OCI noted: “G20 governments’ exploration subsidies marry bad economics with potentially disastrous consequences for climate change.” Chief among the report’s findings was that governments were spending $88bn a year to support exploration; more than double the sum of private investment in exploration. By supporting exploration in this manner, continued the report, G20 countries are creating a ‘triple-lose’ scenario, and diverting funds into damaging investments.

Carbon budgeting
“The world already has a large stockpile of ‘unburnable carbon’. If countries intend to meet their commitments to the 2°C climate target, at least two-thirds of existing proven reserves of oil, gas and coal need to be left in the ground”, the report continued. “Yet governments continue to invest scarce financial resources in the expansion of fossil fuel reserves, even though cuts in such subsidies are critical for ambitious action on climate change and low-carbon development.”

The world economy cannot afford to burn any more fossil fuels than it has on its books, yet the $2.6bn in US exploration subsidies counted in 2009 almost doubled to $5.1bn by the time 2013 hit. This was partly as a result of US policymakers looking to cash in on runaway growth in the local oil and gas sector. Likewise, the UK government has deemed oil and gas majors worthy of additional support, and all in a period where subsidies for clean energy have been cut.

The central question here is whether policymakers – not to mention fossil fuels majors – will acknowledge the existence of a carbon budget and, if so, whether they’ll take steps to reduce their spending. As it stands, needless government-given support for exploration is actively incentivising an overspend, and for as long as these subsidies exist, it’s only natural that producers will expand their horizons.

Historically speaking, subsidies have been linked to energy security, domestic energy production and access to energy, all of which can bring material economic and social benefits to the host economy. “These justifications are often problematic and untested”, according to Koplow.

Rod Campbell, Research Director at The Australia Institute, told World Finance: “While I can understand exploration subsidies of mining in general – or the initial phase of any risky industry – the external costs that fossil fuels involve mean they should not be subsidised in any way.” As such, the case for fossil fuel subsidies is less now that the general understanding of the economic, social and environmental costs is greater.

If governments are serious about preventing a global temperature rise of more than 2°C, they must consider the way in which their actions conflict with the Paris climate deal, not to mention more general commitments to the climate question.

Encouraging reforms
According to the IEA, consumption subsidies in a sample of 40 countries accounts for approximately five percent of GDP and between 25 and 30 percent of government revenues. In the Middle East and North Africa, where the cost of subsidies is particularly acute, the price is closer to 13 percent of GDP and 35 percent of revenues.

In light of these costs, organisations around the globe are calling for subsidy reform in a bid to rebalance energy markets. To give one example, governments in the ODI study spent approximately four times more on fossil fuel exploration than they did renewable energy development.

In the Middle East, where a third of all electricity stems from oil, generous subsidies obscure the potential of low carbon alternatives and so actively incentivises fossil fuel development. Aside from slowing the transition to a low carbon economy, the level of support is at odds with the cost competitiveness and gathering adoption of renewables.

Serious reforms, according to critics, would level the playing field and alleviate some of the pressures weighing on state coffers. And while governments have been slow to act on this point, there is a growing recognition among major world powers that subsidies are in need of a radical rethink: according to the IEA and IMF, almost 30 countries introduced reforms in 2013 and 2014, with many more in the pipeline.

“People need to look at their energy resources as a system”, said Koplow. “They should not subsidise one field over another; should not subsidise any high-cost fields that have large detrimental environmental impacts if developed; and should force oil and gas reserves to compete without subsidies against alternative fuels and demand-side options to boost energy efficiency.”

Not only would reduced support for fossil fuels clear the way for a low carbon transition and significantly reduce environmental pollution, evidence in some circles suggests that phasing out subsidies could yield significant economic benefits. One review, as featured by The New Climate Economy, suggests that the phasing out of fossil fuel subsidies would result in a global real income rise of 0.7 percent per year through to 2050.

When asked about what’s preventing the reforms from happening, Whitley said that there are “several barriers that often interlock with each other, so unfortunately to get rid of one is not usually enough”. Lack of information, vested interests and policy inertia are the biggest three, she said. “It’s often the case that, even if you know all the information about these subsidies and even if you can kind of think of ways of shifting interests… it’s very difficult. It often takes a long time, even if everything is there at your disposal as a government to change policies.”

Putting aside the financial ramifications of such a sharp turn in policy, we should expect to see reforms in the near future as governments begin to make good on promises of reduced emissions. According to Whitley: “Change can happen quite quickly, but it often takes a long time to happen in the first place.” While reforms on this scale are seldom motivated by environmental stimulus, exploration subsidies are one area in which we could soon see an exception.

Several factors could stand in the way of the TPPA’s success

Posted on March 11, 2016 by Helen

The Trans-Pacific Partnership Agreement (TPPA) is considered to be the largest regional trade agreement ever made. Applying to nearly 40 percent of the world’s economy, with signatories including Australia, Canada, Chile, Japan, Mexico, New Zealand, the US and Vietnam, the TPPA, once it has entered into force, will provide protection to investments made by qualifying investors from one TPP member state in the territory of another TPP member state. Those protections will include minimum standard of treatment, national and most favoured nation treatment, free transfer of funds relating to a covered investment, and prohibition on expropriation without compensation. Enforcement of the rights stemming from these protections will be available through a mechanism set out in the TPPA’s dispute settlement chapter.

Settling international disputes
The dispute settlement chapter in the TPPA is intended to allow qualifying investors to address any disputes that may arise between them and any TPP member state with regards to investments covered under the agreement. Although it is a requirement that the parties make every attempt to resolve their disputes through cooperation and consultation (thus allowing and encouraging the use of other alternative dispute resolution methods, such as mediation), when this is not possible, a qualifying investor will be able to commence arbitration proceedings and participate in the selection of a panel to rule over the dispute.

The dispute settlement chapter gives investors the option of pursuing either institutional or ad hoc arbitration. This means that an investor may submit a dispute to the World Bank’s ICSID arbitration, the UNCITRAL Arbitration Rules (providing that both parties involved in the dispute agree), or any other suitable arbitration institution. If no suitable organisations can be found, rules may be chosen in the alternative.

The result of any such investment arbitration – an arbitral award – will then be binding internationally for both the complainant and the TPP member state. It will be possible to enforce it not only in the TPP member states, but also in any of the 156 countries that have ratified the New York Convention on enforcement of arbitral awards.

Global benefits
The TPPA and its dispute settlement chapter are expected to have wide-ranging benefits to investors whether they are from, or investing into, a TPP member state.

First, existing or potential investors from TPP member states who did not previously enjoy the above-mentioned protections under any other bilateral or multilateral investment treaties will now, for the first time, be able to submit an investment dispute to binding international arbitration. For example, for the first time in history, Japanese investors will be able to make use of this legislation in relation to investment disputes with Australia, Canada, New Zealand and the US. US investors, on the other hand, will be able to do the same with regards to similar disputes with Australia, Brunei, Japan, Malaysia, New Zealand and Vietnam.

While the current situation looks bleak for passage before the end of 2016, there is reason to be optimistic about congressional approval of TPPA

Secondly, the dispute resolution mechanism afforded under the TPPA is also relevant to both existing and potential non-TPP member state investors: for instance, the TPPA’s dispute resolution mechanism provides an alternative for any potential EU investors wishing to have recourse against the US through arbitration, but who do not like the idea of a court-like system (with an appeal mechanism), as currently proposed in the draft Transatlantic Trade and Investment Partnership Agreement (TTIPA) between the US and the EU.

It follows, therefore, that private individuals and companies from non-TPP member states, who possess an existing or planned investment in a particular TPP member state, should consider carefully how best to structure their investments if they would like to benefit from the TPPA and its dispute settlement chapter. This is especially apt if the dispute involves an EU investor hoping to bring itself within the framework of the TPPA’s (rather than TTIPA’s) dispute settlement mechanism. It is important that any such structuring of investment should occur before a potential dispute with a TPP member state has materialised.

Dispute resolution controversy
Despite the fact that investor-state dispute settlement (IDS) mechanisms have been included in numerous investment and trade agreements, including the North American Free Trade Agreement, and the fact that the US has never lost a case brought pursuant to such mechanisms, the concept is nonetheless controversial in certain legal and political circles: some legal scholars have long maintained that such provisions violate protections afforded to citizens by the US Constitution, including Article III, which establishes the judicial branch of the US government. The US Supreme Court ignored this argument in a 2014 decision, which decreed that domestic courts must defer to the arbitrators’ decision and not review the merits. Thus, at least for the time being, such mechanisms are permissible.

Some political leaders, especially progressives, have complained about the lack of checks and balances involved in this process. In particular, they have raised concerns about the challenge to regulatory sovereignty, while the White House has been criticised for including the IDS mechanism in TPPA. Among the arguments that the Administration uses for insisting that IDS provisions be included is the fact that TPPA, for the first time in history, includes a code of conduct for IDS arbitrators. The lack of standards for arbitrators has been a long-standing complaint about IDS provisions in other agreements, and in addition, the Administration repeatedly stresses that more than 3,200 treaties and other trade agreements already contain similar investor rights.

Political reactions
Beyond the dispute resolution mechanism, TPPA has become highly controversial, and so it is expected that Congress will not vote on it until after the 2016 presidential election, during the usual post-election lame duck session of Congress. Furthermore, it is quite possible that if the votes for passage do not materialise in that timeframe, a vote on TPPA could be postponed until the next Administration.

Different industry groups have raised serious questions about the way that their products and/or services will be treated as part of the agreement. Congressional committees are just beginning to delve into the details of the lengthy agreement and will not return to it in earnest for some time.

TPPA has become a key issue in both the presidential and some congressional campaigns, particularly with Republican senators in the lead-up to the tight re-elections of the coming year. While almost all of the Democratic presidential candidates oppose TPPA, most Republican candidates are either opposed to it or have expressed some concerns – some Republican candidates, however, view TPPA as an important step in maintaining US relevance in Asia and denying China free reign on trade in that increasingly important region. Republican presidential candidate Donald Trump, for instance, refers to TPPA as an example of what a poor job he believes that US trade negotiators have done in protecting US economic interests over the last few decades.

The Trade Preference Authority (TPA), which was authorised by Congress earlier this year and gave President Obama so-called ‘fast track negotiating authority’ so he was able to conclude the TPPA negotiations, passed the House of Representatives by a vote of 218-208, with only 28 Democratic members voting for it. The Senate, meanwhile, adopted the measure by the more comfortable margin of 60-38.

Generally speaking, labour unions and other liberal groups strongly opposed TPA, and continue to oppose TPPA. As a consequence, the Obama administration needs to hold virtually all Republican House votes on TPA in order to secure the adoption of TPPA. Obama administration officials are therefore working diligently with House and Senate Republicans to respond to their concerns sufficiently, in order to secure the votes needed for passage.

As with other recent trade agreements, the domestic politics are intense and can result in considerable delay in congressional consideration. Nevertheless, most agreements are eventually approved when the political circumstances improve after an election and intense lobbying by supportive business and other interests are brought to bear. Therefore, while the current situation looks bleak for passage before the end of 2016, there is reason to be optimistic about congressional approval. Similar debates are occurring in most of the countries party to TPPA, but on balance, it is anticipated the agreement will be approved by most – if not all – signatory countries.