Author: Max Tomlin

Estonia pushes ahead in race to issue first state-backed cryptocurrency

Posted on by Max Tomlin

Kaspar Korjus, an Estonian tech entrepreneur turned top government official, agrees that his plan to make a government-backed crypto-coin is justly characterised as “a solution waiting for a problem”. He doesn’t, however, view this as a bad thing. If Venezuela doesn’t get there first, the tiny post-Soviet nation looks set to become the first country to issue a state-backed cryptocurrency.

Initially, the currency will be restricted to e-residents through a lock-up phase, but the aim is for them to reach both crypto and traditional exchanges

The topic first emerged in August 2017, when Korjus floated the possibility of Estonia becoming the first country to issue an initial coin offering (ICO) in a blog post. The aim would be to raise funds for Estonia’s e-residency project, a much-talked-about scheme that invites foreign entrepreneurs to become virtual residents of Estonia. The idea was to raise cash for the project while simultaneously creating incentives for investors and interested parties to support the growth of the e-residency community. It also hoped to put Estonia on the map as a haven for blockchain technology.

But the idea quickly ran into a stumbling block in the shape of Mario Draghi, President of the European Central Bank (ECB), who shot the idea down in September during a press conference. He stated: “No member state can introduce its own currency; the currency of the eurozone is the euro.”

The new digital nation
However, Draghi’s criticism has not stopped planning from going ahead, and has been largely dismissed by the assertion that an ‘Estcoin’ would definitely not be a currency. “Much of the criticism of Estcoin was based on the fact that Estonia simply can’t start its own cryptocurrency even if it wanted to… That’s why we have always referred to Estcoin as a proposed ‘crypto-token’,” said Korjus in a more recent statement. It is currently unclear what form the crypto-token will take. So far, Korjus has presented three proposals, all of which he insists can be introduced “without alarming [the ECB]”.

One thing all three proposals have in common is that they focus on providing some sort of crypto-enhancement for the country’s digital residency project. Under the project, anyone in the world (who isn’t a criminal) can become an e-resident and obtain an official Estonian digital ID for €100 ($123). The digital ID enables e-residents to identify themselves and sign documents online, making it possible to run a business through Estonia’s infrastructure or open a bank account from afar. They also provide a useful infrastructure for cryptocurrency projects. “Verified online identities give us a very good advantage for trading cryptocurrencies and it helps blockchain entrepreneurs with KYC [know your customer] requirements,” said Arnaud Castaignet, Head of Public Relations for the e-residency scheme.

Existing e-residents include Angela Merkel and Shinzo Abe, but the scheme has also provided a useful platform for entrepreneurs based everywhere from Bangalore to Turkey. In return for access to its hi-tech government infrastructure and ID cards, Estonia has been able to play host to, and receive corporation tax from, a growing number of flourishing small businesses. Korjus calls it the ‘new digital nation’.

The ambitious project is described as a way to break down barriers for entrepreneurs in less developed countries, while creating an online community of location-independent entrepreneurs. The official aim is to gain 10 million e-residents, a number that far outstrips Estonia’s actual population. This may seem ambitious, but the country’s e-resident population has soared to nearly 30,000 in just four years.

Community Estcoin
The goal of enhancing e-residency provides a common thread for the three Estcoin proposals that are currently on the table, but each one is wildly different in substance. The first proposal, which was laid out in a blog post at the end of last year, is to create a crypto-token that would act as a kind of loyalty token for the e-residency project. The concept – dubbed ‘community Estcoin’ – would provide a framework to reward actions that benefit the project, such as recommending a friend to become an e-resident, driving traffic to the website or providing advice to other e-residents. The coins would hold value within the e-resident community platform and could also be used to buy goods and services from other Estonian companies. Initially, the currency will be restricted to e-residents through a lock-up phase, but the aim is for it to eventually reach both crypto and traditional exchanges.

The kind of community effect that the proposal is targeting is popular among cryptocurrency heavyweights. Vitalik Buterin, the founder of Etherium, commented: “An ICO within the e-residency ecosystem would create a strong incentive alignment between e-residents and this fund and, beyond the economic aspect, [would make] the e-residents feel like more of a community since there are more things they can do together.”

The community Estcoin aims to be a useful tool for e-residents, but could also pave the way for the fulfillment of Korjus’ initial goal to make Estonia the first country to administer a national ICO. However, while Korjus’ vision of an Estonian ICO aims to “enable anyone to invest in a country for the first time”, many have described the idea as merely a variation of ordinary government bonds.

Identity Estcoin
The second proposal can be described as an ‘identity Estcoin’, and it holds the ultimate goal of improving the efficiency of the Estonian Government’s infrastructure. Under the proposed plan, identity Estcoins would not raise any funds for Estonia and would not be tradable. Instead, they would leverage blockchain technology to improve the infrastructure behind digital identities. Estcoins would become part of the process of signing digital documents, filing taxes and so on, improving the e-residency experience.

Under this set-up, the Estcoins themselves would be digital tokens that are used when e-residents carry out activities like digitally signing documents and logging into e-services. Each e-resident would be assigned a certain amount to start them off and may have to buy more as time goes on. Any funds would be used to uphold the network, but ultimately the project could be cheaper for everyone due to economies of scale. According to Korjus, they would enable the system to work on any device and without ever requiring updates. Castaignet told World Finance that the identity Estcoin is the “really radical” proposal of the three and is thus likely to be a more long-term project than the others.

Crypto-controversy
The second proposal may be radical, but the final proposal – the ‘euro-Estcoin’ – is the most controversial. It proposes a stable crypto-token that is pegged to the euro. Korjus explained in a blog post: “The way euro-Estcoins operate within the e-residency community would be similar to how other types of tokens operate within video games or simulated online worlds. E-residents could purchase euro-Estcoins within their new platform then trade them with other e-residents and cash out when required, while ensuring that all necessary banking and taxation rules are followed.” According to Korjus, the scheme would function through a government commitment to exchange any Estcoin back into a euro, and banks would be instructed to enable customers to switch between them freely. E-residents with euro-Estcoin balances would be able to make payments to one another without going through a bank. The idea is that transaction fees would be eliminated, creating a frictionless payments platform that could be used among members of the e-residency network.

Comparing the system to video game tokens makes it seem like a minor development, but a cryptocurrency that is protected from volatility while retaining the benefits of decentralisation has long been sought by crypto-enthusiasts. If widely adopted, however, it could run into unprecedented problems: one possibility is that people could skip the banking system altogether, holding most of their money in Estcoin wallets instead. This could strip banks of their deposits and provide a headache for the ECB.

Currency distinction
The claim that the Estcoin has always been referred to as a token is not strictly true. In a previous blog post, Korjus speculated about a future in which Estcoins might be “accepted as payment for both public and private services and eventually function as a viable currency used globally”. He stated: “By using our APIs [application programming interfaces], companies and even other countries could accept these same tokens as payment.”

There are technical distinctions between a token and a currency; a token is a piece of an existing blockchain, whereas a currency is an entire blockchain system in itself

Yet, there are broader technical distinctions between a token and a currency. For instance, a token is a piece of an existing blockchain, whereas a currency is an entire blockchain system in itself. The problem is that the official terminology has become blurred over time, and both crypto-tokens and blockchain currencies are now frequently labelled cryptocurrencies. Another distinction, which was underscored by Castaignet, is that a currency must be a means of exchange. This means that, as long as Estcoin proposals are restricted to those within the e-residency community, the coins won’t fulfil the full definition of a currency.

“Even the proposal that is seen as being the most controversial, euro-Estcoin, we still don’t see it as a cryptocurrency. It might be a new way of expressing a currency, but it can’t be a new currency in itself, at least in our definition,” Castaignet said. Instead, he described it as a ‘utility settlement coin’.

And yet, many maintain that the distinction remains fuzzy. For instance, Preston Byrne, a blockchain technologist and structured finance solicitor, responded to the proposals by tweeting: “Estonia’s Estcoin is going to stretch EU regulators’ tolerance for ICO garbage to breaking point. ‘It’s not a currency, Mario [Draghi], it’s a token’ likely to go down as well as a lead balloon with the ECB.”

Castaignet told World Finance: “Of course there are some legal discussions, and we are not going to launch anything that is in contradiction with our international obligations.”

The emerging university bonds market

Posted on by Max Tomlin

“Nothing short of greatness” – that is the motto of the University of Minnesota’s fundraising campaign to provide its sports programme with the state-of-the-art facilities it requires to dominate US athletics. For that purpose, the university has built the Athletes Village, a labyrinthine behemoth of concrete spanning 320,000sq ft at the university’s campus in Minneapolis. The complex, completed this January, already serves as a hub for the university’s athletes and sports teams.

The majority of US universities opt for municipal bonds, a financial vehicle traditionally preferred by US states or cities

The project cost $166m, a staggering sum even for an institution of the size of the University of Minnesota, with its more than 50,000 students and $3.2bn endowment. To bring it to life, the institution followed the example of other US higher education institutions and issued $425m of AA-rated bonds. Around a fourth of the proceeds will cover costs for the Athletes Village.

Issuing bonds is a way to finance infrastructure without taking too much risk, said Brian Burnett, Senior Vice President of Finance and Operations at the university: “The university can maintain its cash reserves for operations, while spreading the cost of a capital project over time.”

A market under construction
Higher education is the new frontier for the bond market, as an increasing number of universities issue bonds to finance debt or investment. Data held by Dealogic, a financial data provider, shows that the value of bonds issued by education providers worldwide nearly trebled from $2.2bn in 2007 to $6.4bn in 2017 (see Fig 1). Some of the biggest US universities, including Harvard, Yale, MIT, Stanford and Princeton, feature in the list of top borrowers.

In most cases, the money is spent on brick-and-mortar operations, from student residences to football stadiums and libraries: US universities spent a record $11.5bn on construction in the 2015-16 academic year. Many institutions hope to tap into the opportunities that come with globalisation; to lure international students, they invest in flashy dormitories or even campuses based abroad. Laureate Education, a multinational education provider and the top education bond issuer globally (see Fig 2), has campuses and online programmes in 23 countries and plans to expand its operations further.

The majority of US universities opt for municipal bonds, a financial vehicle traditionally preferred by US states or cities. The benefits are immense for institutions with an eye on the future rather than short-term profit, said Emily Wadhwani, an analyst at Fitch Ratings, a credit rating agency: “Municipal bonds have a lower cost of capital and wide market reach, as compared to other financing vehicles. They also allow the cost of a project to be spread over its useful life (30-40 years for most large capital projects), and also spread the resultant student fees more fairly over the life of the project. In addition, using long-term fixed-rate bonds removes the risk of increasing costs going forward.” As for investors, they pick municipal bonds for their low risk, a crucial asset in times of increasing volatility in US bond markets.

As with other institutional borrowers, universities have benefitted from an era of historically low interest rates. Most of them issue fixed-rate bonds that are immune to market volatility. “During the past 10 years or so, the interest rate environment has been relatively low, which allowed the university to lock in long-term debt at attractive rates,” said Burnett. However, some risks persist for issuers. A return to more normal interest rate levels could increase overall university borrowing costs and make it more difficult for financially strained bond issuers to service their debt. Taking a long view can save institutions from potential trouble, according to Karen Levear, Director of Treasury Operations at the University of Oregon, which issued bonds in its name for the first time in 2015 to invest in student housing: “Rising interest rates could impact the cost of future debt, but interest rates are still well below historic long-term averages, and since we issue debt for the long term, we keep a long-term view on our cost of capital.”

The double-edged debt sword
Debt can also be disastrous if a project takes a wrong turn. UC Berkeley offers a cautionary tale of what can go wrong: the Californian university borrowed $445m from the bond market in the aftermath of the financial crisis to rebuild its American football stadium. The plan overestimated the number of supporters the stadium could attract and the quality of football the university’s team could play, falling short $120m. Eventually the institution was forced to plug the financial gap with campus funds, including student fees.

$2.2bn

Value of bonds issued by education providers worldwide in 2007

$6.4bn

Value of bonds issued by education providers worldwide in 2017

Increasing levels of university debt can also have an impact on tuition fees, said Aman Banerji, Programme Manager of the Financialisation of Higher Education programme at the Roosevelt Institute, a US think-tank: “I worry about universities increasing the size of their debt portfolio simply to meet gaps in their operating expenses. The size of interest rate payments is another serious concern. While university administrators are likely to continue to deny that higher interest payments will drive up tuition costs, as the size of these expenses continues to grow, I worry that universities are likely to rely on students to fund the expense gap much in the way that student revenues have often helped fill revenue gaps with declining state support.”

One way to avoid such mishaps is to cast a wide net, said Levear: “We disconnect the cost of specific debt from specific projects by issuing debt for a capital pool. Then projects are funded from the pool at a blended rate. This means that all capital projects have to ‘pencil out’ at the same blended rate, [which] protects necessary projects from the risk of varying interest rates.”

The perils of extreme financialisation
Bond issuance has long been a common practice for US institutions but, according to many experts, the decline of public funding has turned it into an inevitable process for universities relying on grants to finance research. Data held by the Centre on Budget and Policy Priorities, a US think-tank, shows that public funding for the academic year 2016-17 was nearly $9bn lower than the figure in 2008, while tuition fees and student debt grew exponentially over the same period.

Leading universities are deemed credible borrowers with a global brand name, which is always an asset in bond markets

The drop in public funding has pushed universities to cosy up with the financial sector, said Banerji: “In the last couple of decades, we’ve seen a huge expansion in the nature and number of financial transactions between the financial sector and universities – interest rate swaps, letters of credit, bond agreements, hedge fund investments, and more – all of which handsomely benefit the financial sector.” The Roosevelt Institute’s report on university-linked interest rate swaps found that interest rate swaps cost 19 US institutions around $2.7bn.

Another reason why bonds have become more popular is the shifting nature of university leadership. More than one out of two members of university boards at research-intensive institutions have a background in finance, according to data from the Stanford Social Innovation Review report. Research by Charles Eaton, Assistant Professor of Sociology at UC Merced, shows that as more people with a financial background sit on university boards, financial solutions that would once seem unconventional to academics have become the norm.

Banerji told World Finance: “As universities shift to private and donor-funded sources of revenue and invest large amounts in the financial sector, they seek out experienced financiers who can guide their investments and supposedly ensure that they get the higher returns. Equally, as university boards become over-represented by those in the finance sector, they expand the type and amount of future engagement with the financial sector.”

Financialisation may also increase the gap between big and smaller institutions. Bond markets tend to favour universities that issue large chunks of bonds and penalise universities with more modest borrowing needs. Banerji said: “For small public schools, community colleges and others with lower credit ratings that must borrow at higher rates, this race is both unfair and dangerous. Smaller, less wealthy endowments appear to be investing in the types of hedge funds and alternative strategies that were once the sole purview of large public schools and wealthy private ones. The new entrants to these types of investments often generate far lower returns, along with pay management fees beyond their capacity, and put their financial model in danger through the process.”

UK universities playing along
For British universities, bonds have only recently become an option for raising funds, but demand is steadily growing. Dealogic data shows that the bond market for the UK education sector increased tenfold from £272m ($380m) in a single deal in 2007 to £2.4bn ($3.3bn) last year. As in the US, government funding for higher education has dropped by more than 30 percent since the financial crisis, pushing higher education institutions to consider alternative options.

Shifts in banking regulation have also restricted access to traditional finance options such as bank loans. Luke Reeve, a partner at EY, said: “UK universities, which have historically been relatively unleveraged and underinvested, had access to extremely cheap and long-duration bank credit prior to the financial crisis. Under Basel III rules, banks simply can’t offer long maturity debt anymore. So universities had to switch to the bond markets, where institutional investors such as pension funds and insurance companies are seeking long-dated liabilities.”

$380m

Value of UK education bond market in 2007

$3.3bn

Value of UK education bond market in 2017

Last November, the University of Oxford entered the fray, offering investors a bond with a record maturity of 100 years – the longest in the history of university bonds and longer than any publicly issued UK government bond. The current economic climate contributed to the decision, said a spokesperson for the university: “We did consider a number of options for financing our capital investment ambitions. We concluded that a bond represented a secure and predictable way to raise money over a long time and at low interest rates, particularly the historically low rates currently available.”

For their part, institutional investors opt for university bonds for their higher returns (compared with government debt) and their safety, since the UK higher education sector is highly regulated. Leading universities are deemed credible borrowers with a global brand name – always an asset in bond markets – and can therefore afford to offer long maturities. “We see the length of the bond, along with high demand from investors and the 2.54 percent rate achieved, as testament to external confidence in Oxford as an institution and in the high quality of its teaching and research,” said Oxford’s spokesperson.

For some universities, the obligations attached to bond issuance are too onerous to meet. Last May, the University of Bristol issued debt of £525m ($735m) to finance its plan to build infrastructure, including a new library and a hi-tech campus. Around £200m ($280m) was raised through private placement of unsecured notes in a bilateral deal with Pricoa Capital Group, part of the US group Prudential Financial. Robert Kerse, Chief Financial Officer at the university, told World Finance: “We principally selected a private placement over a publicly issued bond as we did not believe that the associated obligation of maintaining a credit rating for the next 30 to 40 years would leave the best possible legacy. Additionally, we felt that a private placement offered more flexibility with repayment profiles that could be selected to best manage future refinancing risk than a single bullet repayment, as is common with public bonds.”

Recent history has shown that caution about bonds is not unfounded. In 1995, Lancaster University issued a bond at a high interest rate. More than a decade later, the credit crunch pushed the university into financial strain because of the conditions attached to the bond. The University of Greenwich issued a bond in 1998, only to withdraw it four years later after its credit rating was downgraded.

Brexit also makes it harder for UK universities to access other finance channels in Europe. Kerse said: “The university considered taking borrowings from the European Investment Bank, but considered on balance that the political risk associated with new long-term borrowings from Europe was not something that it wished to accept.”

Australian universities tap into bond markets
Australian universities are becoming competitive internationally, poaching Asian students from US and UK competitors. To accommodate them, they have to invest in infrastructure, but traditional financial channels are less accessible. Last year, the Australian Government decided to wind up its Education Investment Fund, the public body funding teaching and research, forcing universities to consider alternative financing options, such as public debt. Bond issuance has increased from just $41m in 2008 to more than $1bn in 2016, according to data by Dealogic.

A case in point is the University of Melbourne, which issued $250m in bonds in 2014 to build student housing facilities and renovate existing ones. Katerina Kapobassis, acting Chief Financial Officer at the university, said the institution picked bonds over other financial routes for their combination of long maturity and low cost: “We are borrowing money to build long-life productive infrastructure assets to service our growth, so it is sensible to match asset and liability lives and issue debt with long maturities where possible. Banks and other credit markets donít currently offer such long maturities.”

The majority of investors are “insurance companies and other similar financial institutions”, according to Kapobassis. She added: “The average duration of certain insurance policies, such as life insurance, is very long. As these institutions are investing for a long period, they find the universityís strong reputation and robust AA+ credit rating attractive.”

Other Australian universities are exploring new territories in the bond market, such as up-and-coming green bonds that finance green projects. This summer, the Australian Catholic University became the first higher education institution worldwide to issue green bonds. Scott Jenkins, Director of Finance and Chief Financial Officer at the university, said: “Universities are large, complex organisations, [so] when it comes to financing expansion, many universities have seen that balance sheets are underutilised and have the capacity to borrow. In the current environment, the cost of funding is still low, although itís moving higher.”

As in other Anglophone countries, critics allege that bond issuance makes Australian universities vulnerable to the volatile forces of financial markets. But Jenkins thinks that universities can be more entrepreneurial, without compromising their educational purpose: “Over time, administrative areas of universities have become more businesslike, while the core mission and objectives remain unchanged.”

The holy grail of credit ratings
As universities become more active in the financial markets, their credit ratings become an important metric of their success. For critics, this is the last straw in the long way towards commercialisation of higher education, as universities are forced to take more wealthy international students, increase tuition fees and borrow to invest in flashy amenities, often with little educational value. Banerji said: “Credit rating agencies, especially through their credit upgrade and downgrade factors, can play a crucial role in determining a host of decisions on campus. On the student side, credit reports often suggest colleges maintain increasing out-of-state enrolment numbers to ensure the annual growth of net tuition revenue and maintain pricing flexibility. Equally, the agencies often highlight the importance of cost containment on the spending side that can have serious implications for faculty and staff on these campuses.”

The drop in public funding has pushed universities to cosy up with the financial sector

Many academics compare the increasing importance of credit ratings in higher education with university leaders’ obsession with league tables. But Wadhwani dismissed these fears as hyperbole: “Bond ratings are very different from academic rankings, the latter being an important marketing tool internationally, but less so historically in the US. Bond rating criteria do not require any particular level of academic standards; the focus is on financial sustainability within an institution’s unique educational niche.”

For some institutions, credit rating is not worth the trouble if issuing public debt is a one-off venture. That is the case of the University of Bristol, according to Kerse: “The university is unlikely to issue further long-term debt in the foreseeable future, and a credit rating would introduce another stakeholder to the institution. We would have considered a publicly issued bond if we were in an environment where we were issuing new debt more frequently.”

On the other side of the Atlantic, most US institutions view credit ratings and the scrutiny that comes with them as a necessary evil to further their institution’s mission. Levear noted: “We view our credit rating as an asset that can be used to help the university pursue its academic and public mission.” This is a view that is becoming increasingly prevalent in higher education circles globally, as financial stability and educational excellence can go hand in hand, according to Wadhwani: “Ratings tend to correlate favourably for universities with the financial capacity to support their mission and operating needs, rather than the reverse.”

Bridging Africa’s infrastructure gap

Posted on by Max Tomlin

More than any other continent, Africa is unfairly homogenised; talked about as if it has an unvarying history, is in possession of a uniform culture, and faces generalised problems. At times, it is even mistaken for a single country. Unsurprisingly for a landmass that is bigger than the US, China, India and much of Europe put together, Africa is incredibly diverse.

The African Development Bank will use this year’s Africa Investment Forum to bridge an infrastructure funding gap of $130-170bn a year

Unfortunately, one of the ways that this difference manifests itself is in terms of infrastructural development. According to the World Bank, it takes 12 days to export a container from Egypt, at a cost of $625, but transporting the same container from the Central African Republic takes four times as long and costs almost nine times as much. The infrastructure gap between Africa and Europe or the US may be significant, but national discrepancies remain a pressing issue too.

Hampered growth is one of the most disabling side effects of poor infrastructure. It’s easy to take roads, clean drinking water and electricity for granted, but without reliable access to these essentials, doing business becomes virtually impossible. This, in turn, makes it difficult to attract the investment required to fund new infrastructure projects.

In an effort to escape this vicious cycle, the African Development Bank (AfDB) will use this year’s Africa Investment Forum, due to begin on November 7 in Johannesburg, to bridge an infrastructure funding gap of $130-170bn a year. If the AfDB is successful, not only will it offer hope to its impoverished nations, but it will generate benefits for the developed world too. If it is not, Africa will remain a continent where some nations are on the road to prosperity, while others are in danger of being left behind.

A helping hand
Currently, Africa’s infrastructure is a mixed bag. While Angola has a road density of just 4km per square kilometre of land, South Africa’s figure is more than 15 times higher. Africa’s larger economies may be able to fund their own developments but for many others, this simply isn’t practical. Foreign investment, therefore, is set to play a major role in financing future infrastructure projects.

Professor Landry Signé, Distinguished Fellow at Stanford University’s Centre for African Studies and author of Innovating Development Strategies in Africa, believes that barriers to foreign investment must be eliminated, even though many of the struggles facing African countries today stem from their colonial past.

“In the 1980s, infrastructure for trucking, shipping and air transport was largely non-existent in Africa,” Signé said. “The infrastructure inherited from the colonial period (which was limited and generally served only to connect the administrative capital with sites where raw materials were mined) was either not kept or not maintained.”

Certainly, the growth rates being witnessed in many African countries will fill foreign investors with confidence that their funding will be generously repaid. Seven countries in sub-Saharan Africa (Côte d’Ivoire, Ethiopia, Kenya, Mali, Rwanda, Senegal and Tanzania) posted growth rates above 5.4 percent between 2015 and 2017, and – according to the World Bank – Africa is home to six of the world’s 10 fastest-growing economies this year (see Fig 1). That being said, high levels of risk can often accompany rapid growth, although that hasn’t seemed to deter everyone.

China-Africa relations are at an all-time high, with Beijing proving more than willing to extend its One Belt, One Road initiative across the continent. Last summer saw the completion of the Nairobi-Mombasa railway line in Kenya, with China agreeing to finance 80 percent of the $11.17bn cost. The new line will reduce travel times between the country’s two most important cities to 4.5 hours and help Kenya push its proportion of freight trade up towards its 40 percent target.

China-Africa relations are at an all-time high, with Beijing proving more than willing to extend its One Belt, One Road initiative across the continent

This is far from the only example. Across the continent, Chinese-backed railway, port and motorway projects can be found at various stages of completion. In Egypt alone, China has pledged $35bn to fund the creation of an entirely new capital city east of Cairo. Other nations are certainly helping with Africa’s infrastructure burden, including India and the US, but China is often considered the most noteworthy – and not always for the best reasons.

There is a growing concern, partly justified and partly inspired by western fears of a global power shift, that China’s infrastructural investments are not entirely altruistic. The cost of the Chinese-funded Addis Ababa-Djibouti Railway in Ethiopia totalled $4bn, almost a quarter of the Ethiopian Government’s expenditure over an entire year. It is possible that the economic benefits of the railway and other projects will help foster economic growth in the country and enable Ethiopia to repay this sum but, if not, China may seek repayment through political agreements or favoured access to natural resources.

Suspicions were certainly not eased in January, when reports indicated that China had been systematically hacking the African Union’s (AU) computer systems for five years. The AU’s $200m headquarters in Addis Ababa was financed by Beijing and built by China State Construction and Engineering, which allegedly allowed Beijing to conduct nightly data transfers and install hidden microphones in desks and walls. China has denied the accusation.

Of course, African countries are not naïve when it comes to international assistance. Having been subjected to colonial rule for a number of years, they are well aware that foreign investment is sometimes repaid with more than just interest. That being said, there is no reason why Chinese-backed projects can’t provide infrastructural and development gains in Africa in the here-and-now, while also providing long-term benefits for Beijing.

Looking closer to home 
Despite its size and abundance of natural resources, Africa is not a global player in terms of world trade. There is no doubt that challenges in the transportation and logistics industry have hampered the trading capabilities of many countries, not only intercontinentally but with their neighbours too. In 2011, for example, intra-African trade represented just 11 percent of African trade globally.

A train crossing the Kaaimans River, South Africa

Although South Africa sneaks into the global top 20 of the World Bank’s Logistics Performance Index, African countries also occupy five of the bottom seven places. Part of the blame for Africa’s infrastructural shortfall is geographic: the landscape varies hugely across the continent, with nations like Algeria and the Democratic Republic of Congo having to cope with vast deserts and extensive forests respectively. Human failings cannot be overlooked, however.

Past efforts to improve infrastructure on the continent have often come up short. Corruption, security concerns and the threat of political instability are, to varying degrees, issues that threaten to derail projects that get past the approval stage. While the Programme for Infrastructure Development in Africa has shown promise, only four of its 51 major projects have reached the advanced implementation stage so far. Whether the scheme can meet its ambitious funding goals remains to be seen.

If infrastructure can be improved, it would provide many African nations with a means of pulling themselves out of poverty. By improving logistic and trading networks, countries would be able to make better use of their natural resources. Mozambique, for example, is rich in aluminium, coal and natural gas, but poor in terms of its trade facilitation and logistics. Its current levels of coal production exceed its rail capacity, while the road network, which is largely unpaved or underdeveloped, causes further bottlenecks. Ensuring Mozambique can make the most of its resources will go a long way to improving citizens’ quality of life.

The growth rates being witnessed in many African countries will fill foreign investors with confidence that their funding will be generously repaid

Projects should look beyond road and rail networks too. “We all know that travelling in Africa remains inconvenient and costly,” said Pierre Guislan, the AfDB Vice-President for the Private Sector. “In the past 10 years, the AfDB has provided about $1bn to the African aviation sector. We have invested in airport construction or expansion in Morocco, Tunisia, Cape Verde, Ghana or Kenya, and in the improvement of air safety and navigation in the Democratic Republic of Congo… and West and Central Africa.”

Encouraging private transport and logistics (T&L) projects will also help stimulate domestic demand. T&L investors will have a keen eye on the retail, agricultural and manufacturing sectors, which are all performing strongly but have plenty of room to grow. In Tanzania, 20 percent of land is suitable for farming, but only five percent is currently cultivated. Energy exports to the US and China are growing rapidly, but further investment is needed to utilise untapped reserves. By investing in infrastructure, African countries are not just improving their business and trading capabilities, they are igniting a catalyst for future growth as well.

The road ahead
When news of the supposed AU hacking emerged, the biggest disappointment for AU Chairman Paul Kagame did not relate to Chinese surveillance. “I would only have wished that in Africa we had got our act together earlier on,” he said. “We should have been able to build our own building.” His remarks convey a sense of frustration that some African nations have not yet achieved the expected level of development, but the future still offers hope.

The 30th African Union Summit in Addis Ababa, Ethiopia

Signé believes that a number of infrastructure projects already in development, from the Trans-Sahara gas pipeline to the Kinshasa-Brazzaville Bridge road and rail development, could hold the key to closing Africa’s infrastructure gap. “Successful implementation of the already-funded projects is also one of the best indicators of the seriousness of African political leaders seeking infrastructure financing,” Signé noted. “They have no more excuses.”

Bringing these projects to completion would not only help improve the economic situation in the countries concerned – it would also provide a boon to investor confidence, giving them further reassurances that they will receive a return on any funding. This would encourage additional developments across land, air and sea that are much needed in a continent where the population is expected to double by 2050.

Africa’s wealthier countries also need to act now. Making greater use of municipal bonds would represent a good starting point, but this will require national governments to give major urban areas a greater degree of financial autonomy. Interference at the national level hampered Dakar’s efforts to sell municipal bonds to investors back in 2015, resulting in the loss of $40m of capital. Across the last two months of 2017, US cities raised more than $111bn of municipal bonds for infrastructure projects and other needs, but urban areas in sub-Saharan Africa have raised less than one percent of this amount since 2004. It is difficult to catch up with the West when countries are not taking advantage of all the investment opportunities available to them.

“Infrastructure projects are among the most profitable investments any society can make,” noted Akinwumi A Adesina, President of the AfDB, in the group’s recently published African Economic Outlook report. “When productive, they contribute to and sustain a country’s economic growth. They thus provide the financial resources to do everything else.”

Certainly, Africa has unique challenges to overcome if it is to develop its infrastructure further, but it also possesses countless opportunities. For national governments, identifying funding prospects, both domestic and international, must be made a priority. Strengthening financial regulations and political reputations will also encourage investors to back prospective developments. Each country, city and individual project must, of course, be assessed on its own merits, but if Africa’s infrastructural gap can be closed, then it could deliver great things for the entire continent.

Zenith Bank leading by example

Posted on by Max Tomlin

As with other oil-producing nations, Nigeria’s economy has been a mixed bag. In 2016, it experienced its first recession in a quarter of a century. It was an undeniably difficult year for the country as its finances bore the brunt of low oil prices. The situation was further exacerbated by a simultaneous reduction in output, caused by a series of militant attacks on crude pipelines in the Niger Delta.

In line with its socially conscious approach, Zenith Bank encourages gender equality and ensures that equal opportunities are offered to all

Last year, however, told a different story. After 15 months of recession, Nigeria’s economy finally rebounded in the second quarter of 2017, albeit at a GDP growth rate of just 0.6 percent. According to Nigeria’s National Bureau of Statistics, the economy achieved 0.83 percent growth overall for the year. Despite being slight, the figures are a positive sign of progress. In particular, they demonstrate the boost given to the oil sector thanks to a fall in the number of attacks on pipelines, which enabled production to increase by a third. Meanwhile, global oil prices also increased, helping to further bolster the economy.

Nigeria’s non-oil sector also played a significant role in the positive results of 2017. The adoption of a flexible exchange-rate policy, which aligned the naira with the black market rate, engineered a much-needed reduction in the shortage of dollars affecting importers. Accumulatively, a brighter economic and political outlook has been enticing investors back to Nigeria and the country’s stock market has rallied.

Against this bright backdrop, the financial sector continues to make significant moves, including the introduction of new technologies, which in turn have drastically improved the efficiency of financial transactions for customers. Various banks are also making a big push in terms of sustainability, creating better conditions for local communities and the environment alike. As an industry leader in Nigeria, Zenith Bank is a role model for both.

In light of the impact that the bank is having, both on the Nigerian financial sector and on local communities through an extensive set of corporate social responsibility (CSR) initiatives, World Finance spoke with the chairman of Zenith Bank, Jim Ovia, to find out more about the institution’s successes.

Laying the foundations for success
To understand how Zenith Bank is succeeding, it is important to go back to the very start. Established in May 1990, Zenith Bank began operating as a commercial bank in July of the same year. After 14 years of rapid growth and a highly successful initial public offering, the bank was listed on the Nigerian Stock Exchange in June 2004. The bank is also listed on the London Stock Exchange (LSE) and the Irish Stock Exchange (IRS). The bank’s listing of the second tranche of the $500m Global Medium Term Note programme broke ground with an overwhelming oversubscription of more than 300 percent. With its headquarters in the commercial capital of Nigeria, Zenith Bank now has more than 500 branches and business offices across the entire country – including, importantly, one in every state capital and major town in Nigeria. In 2007, it became the first Nigerian bank to be granted a licence by the UK’s Financial Services Authority, while it also operates in Gambia, Ghana, Sierra Leone, South Africa and China.

1990

Zenith Bank was established

2004

Bank floated on the Nigerian Stock Exchange for the first time

2007

The bank became the first Nigerian institution to be granted a licence by the UK’s Financial Services Authority

2013

Zenith Bank floated on the London Stock Exchange for the first time

In 2013, continuing along this path of expansion, the bank listed $850m shares on the London Stock Exchange, marking another major step in its status as a globally positioned financial institution. Today, Zenith Bank is the largest bank in Nigeria by Tier 1 capital and boasts a shareholder base of over one million.

“When Zenith Bank was founded, the intention was to meet the needs of Nigerians by providing excellent banking services,” Ovia explained. Given this steadfast focus on meeting the evolving demands and requirements of customers, the bank has placed cutting-edge technology at the core of its strategy. Consequently, by adopting the very latest innovations in fintech, Zenith Bank is able to provide platforms that are easy and intuitive to use, while also ensuring that transactions are carried out seamlessly, both online and in real time.

“From the beginning, the objective of the bank was to become and remain the leading brand in Nigeria,” Ovia continued. “That is why we have always strived to carve a global presence – and we have achieved this by offering a distinctive range of financial services. Since 1990, we have committed ourselves to building the Zenith brand into a reputable international financial institution that is recognised for innovation, superior performance and the creation of premium value for all stakeholders.”

In order to uphold this reputation, Zenith Bank maintains a continual state of evolution, constantly developing its services and adapting to shifting environments and customer taste. Ovia continued: “Over the years, business conditions have continued to change each year, bringing with them new prospects and challenges. That said, our objectives continue to be the provision of excellent financial solutions to our growing customer base across the world – and to do so in a way that creates value for all stakeholders.”

Thriving through technology
In order to stay at the top – and, in turn, provide the very best in financial services for its broad customer base – Zenith Bank is always on the look-out for new solutions that can improve the level of convenience and efficiency offered to its clients. Given the changing nature of financial services these days, it comes as little surprise that Zenith Bank has recruited Africa’s finest tech talent to work on new tools and platforms for the benefit of its customers far and wide. This is to complement its status as the company with the highest number of chartered accountants by any Nigerian institution.

“Zenith Bank is a trailblazer in the adoption of cutting-edge technology to provide banking solutions, which is why we are the bank of choice for millions of Nigerians,” said Ovia. “Our IT infrastructure is second to none in Nigeria, which is due to the fact that we have been able to adapt to the changing needs of the banking public by constantly coming up with new solutions. Our customer service is one of our pivotal attributes, upon which our institution has continued to thrive and won numerous endorsements and recognition for.”

As with any organisation worth its salt, Zenith Bank is all too aware of the importance of keeping clients happy. “We place the utmost emphasis on customer service, as we recognise that our customers are the primary reason of our business,” Ovia explained. In order to provide such excellent service, Zenith Bank places a lot of focus and resources into the development of its employees. He continued: “Our people are the greatest asset of our institution. We hire, train and retain the most diligent and highly motivated individuals that imbibe the vision of our institution.” It is to this approach that Ovia attributes the bank’s development. “Zenith Bank has grown organically,” he said. “Even when others have taken the M&A route, we have grown bigger and more sustainably due to the careful attention we have paid to retaining the best talent that Nigeria has to offer.”

Crafting a sustainable future
Over the past decade, sustainability has certainly become the buzzword of the corporate world. Much of this is based on a growing public awareness, which sees individuals opt for purchases and services that are less harmful to the world around them. As is the case with other spheres, this shared social consciousness has certainly made its way into the financial sector and transformed the way banks function.

The bank is involved in various community projects, including those dedicated to education advocacy, youth and sport empowerment and environmental sustainability

Given its size and leading position, CSR has become a core driver for Zenith Bank. According to Ovia: “It is necessary that banks operate with awareness and confidence – that their products and services do not have negative social and economic impacts on the environments in which they operate. This is crucial for the financial industry because every project they fund and every business banks invest in can affect the environment and local communities. This is why banks always conduct their business activities responsibly, without compromising the wellbeing of future generations.”

He continued: “For instance, in performing the crucial function of financial intermediation in the economy, sustainable banking requires financial institutions to deliberately channel funds away from investments and activities that harm the environment or cause social disorder. Instead, they should be channelled into areas that are environmentally friendly and enhance social development.”

As is the case with any nation working hard on its continued development, sustainable banking is crucial to the Nigerian economy. As stated by the Brundtland Report from the United Nations World Commission on Environment and Development: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Ovia said: “A safe and sustainable energy pathway is likewise crucial to sustainable development – this is something we have not yet found, but the rates of increasing energy use have been declining, at least.”

This point regarding clean energy is crucial for a country in the midst of large-scale industrialisation and agricultural development. When also combined with rapid population expansion, the energy required is enormous. “A safe, environmentally sound, and economically viable energy pathway that will sustain human progress into the distant future is clearly imperative,” Ovia told World Finance. “This, however, will require new dimensions of political will and institutional cooperation.”

With regards to urban areas, Ovia explained that good city management requires the decentralisation of funds, other resources and the will of local authorities, which are best placed to appreciate and manage local needs. “I agree that the sustainable development of cities will depend on closer work with the majorities of urban poor, who are the true city builders – namely, tapping the skills, energies and resources of neighbourhood groups and those in more informal sectors of work. Much can be achieved by the site and service schemes that provide households with basic services and help them to get on with building sounder houses.”

The benefits of sustainability
When asked how financial institutions can become more sustainable, Ovia replied that it involves carrying out banking operations and business activities with conscious consideration for the environmental and social impacts of those activities. “Sustainable banking integrates environmental and social criteria into traditional banking, and sets environmental and social benefits as a key objective,” said Ovia. “Financial institutions can become more sustainable by improving their activities to ensure that they create a very healthy environment, and they do the best they can in closing the social gap.”

There has been a major shift in sustainability when it comes to banking. This is in large part due to the kudos that comes with such actions. As indicated by survey findings, there are numerous reputational benefits that come with fulfilling regulatory requirements, which unsurprisingly act as the most common trigger for the adoption of sustainable banking practices. “Operational benefits – for example, increasing efficiencies and improving transparency – are the third most common trigger for banks adopting sustainable banking,” said Ovia. “The next most common trigger is the need for more employee engagement in terms of attracting and retaining talent. These top four triggers are in line with global trends, as demonstrated time and time again in recent years. But, as mentioned, the most common triggers for sustainable banking efforts remain the reputational benefits that come with meeting regulatory requirements.”

This shift is major news for Nigeria, to the extent that most banks in the country now compile annual sustainability reports that are submitted to the appropriate regulators. Zenith Bank has taken a lead in this direction, being the first company in Nigeria – and the first financial institution in the whole of Africa – to have adopted the GRI Standards in sustainability reporting.

“Zenith Bank promotes sustainability in terms of services and operations by making sure that sustainable business practices with reference to the environmental and social criteria of GRI Standards are embraced and executed. The bank adopted the green business option, which is committed to carrying out periodic reviews of our processes to identify areas of potential adverse environmental effects and mitigate them as efficiently as possible,” Ovia told World Finance.

He continued: “Zenith Bank is also conscious of the rising global concerns about environmental sustainability and has chosen to embrace ‘clean Earth’ principles. Our goal is to transform our banking operation into one that delivers low carbon emissions, energy efficiency, natural resource preservation, and protection of biodiversity and the Earth’s flora and fauna. We are fully dedicated to conducting our business activities in an environmentally friendly manner. The bank is mindful of the impact our business decisions could have on the career growth and overall wellbeing of our employees, and so these decisions are made with in-depth considerations.”

Zenith Bank also remains committed to adhering to all applicable labour laws and regulations in the different markets in which it operates. Consistent with international best practices, the bank establishes policies and guidelines covering grievance reporting and resolutions, disciplinary and reward procedures, paid maternity and paternity leave, employee training and performance management, and severance and separation benefits, among others.

Championing social initiatives
In line with its socially conscious approach, Zenith Bank strongly encourages gender equality and ensures that equal opportunities are offered to all personnel. “The bank strives to maintain a level playing field for all genders,” added Ovia. “As of December 31, 2016, we had a total of 5,970 staff in our employment, 2,859 of which are female and 3,111 male, representing 47.9 percent and 52.1 percent of our total employees respectively. There are 75 employees in the ranks of our top management group, which includes assistant general managers, deputy general managers and general managers. Of this number, 23 are female and 52 are male: the former represents a ratio of 31 percent.”

The bank is also involved in various community projects, including those dedicated to education advocacy, environmental sustainability, and youth and sport empowerment.
There is Zenith Bank’s multimillion-naira flagship Iga-Idunganran Lagos Island Community Healthcare Centre – a testament to its commitment to healthcare delivery in local communities. Not only did the bank fund the construction of the facility, but it also fully equipped it in order to meet the primary healthcare needs of Lagos Island residents. Along this vein, Zenith Bank donates equipment and facilities to hospitals across Nigeria, an example being its recent donation of incubators and other equipment for neonatal care to the University of Calabar Teaching Hospital in Cross River State in a bid to help reduce infant mortality.

Elsewhere, at institutions like the national hospital in Abuja, the bank has donated state-of-the-art ambulances, while it continues its work to help with the early detection of life-threatening diseases such as cancer and AIDS by providing free medical diagnosis kits to healthcare institutions. Other projects currently in the pipeline include a library project, which will see the bank fund more than 100 new libraries across the country, in addition to renovating existing ones in various different states.

Projects such as these are essential for Nigeria’s continued economic development and the improved welfare and wellbeing of its population of 186 million people. When asked about the bank’s role as part of this progression, Ovia answered: “The bank understands that the private sector is often seen as a driver of the economy and, in playing its part, the bank’s projects (which are collectively labelled CSR initiatives) have helped to improve the health and welfare of socially-excluded populations, thereby positively impacting their social status, earning potential and the access they have to services and resources.”

The necessity of ethical governance
Banks nowadays can’t escape from the necessity of corporate governance in their day-to-day operations, as well as their overall vision and direction. As such, Zenith Bank places corporate governance at the core of everything it does. “I believe corporate governance is the way a company polices itself,” Ovia told World Finance. “Corporate governance is intended to increase the accountability of companies and to avoid massive disasters before they occur.”

5 million

Number of free spectacles Zenith Bank has donated to women and children in the Maryland and Yaba communities

500,000

Number of wheelchairs the bank has donated to women and children in the Maryland and Yaba communities

Ovia gave failed energy giant Enron as a prime example of the importance of solid corporate governance in the long-term, sustainable success of any organisation – whether large or small. Through regular meetings with internal members, including shareholders and debtholders, as well as suppliers, customers and community leaders, companies can effectively address the requests and needs of affected parties.

He continued: “Corporate governance is of paramount importance to a bank and is almost as important as its primary business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. The bank’s image can also be enhanced in the public eye as a self-policing organisation that is responsible and worthy of holding shareholder and debtholder capital,” Ovia explained. “A bank without a system of corporate governance is often regarded as a body without a soul or conscience. If this shared philosophy breaks down, then corners will be cut, products and services will be defective and management will grow complacent and corrupt. The end result can be catastrophic.”

To avoid such disastrous circumstances, Zenith Bank goes to great lengths to ensure it complies with a solid corporate governance model. “Shareholder recognition is key to maintaining the bank’s stock price,” Ovia explained. “More often than not, however, small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Good corporate governance seeks to make sure that all shareholders get a voice at annual general meetings and are allowed to participate.”

According to Ovia, stakeholder interests should also be recognised by corporate governance. In particular, he explained, Zenith Bank takes the time to address non-shareholder stakeholders, which helps the company establish a positive relationship with both local communities and the media. To this end, board responsibilities are clearly outlined to shareholders in order to ensure that all board members are on the same page and share a similar vision for the future of the bank.

“Ethical behaviour violations in favour of higher profits can cause massive civil and legal problems down the road,” he added. “Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored.” To prevent this from happening, the bank established a code of conduct regarding ethical decisions for all members of the board. “This is crucial, because business transparency is the key to promoting shareholder trust,” said Ovia. “Financial records, earnings reports and forward guidance should all be clearly stated without exaggeration or ‘creative’ accounting.”

Zenith Bank’s corporate governance policies do not stop there, however, with new initiatives soon being rolled out. “The bank plans on reinforcing its corporate governance with a view to ensuring sustainable growth by launching proactive reforms to enhance transparency, as well as efficiency and manoeuvrability,” Ovia explained. “We will continue to introduce governance measures on an ongoing basis, as is appropriate to our aim of being a truly global company. Through such measures, we can maintain the trust of a wide range of stakeholders and continue to grow, while simultaneously responding to changes in the operating environment.”

Given the centrality of corporate governance to its operations, the bank now acts as a role model to others in the country, as well as the wider region. In recognition of its efforts, Zenith Bank was the first bank in Nigeria to win the award for Best Corporate Governance from World Finance magazine for three consecutive years (in 2014, 2015 and 2016). “This demonstrates that the bank is miles apart from its competition,” said Ovia.

In terms of its future plans, the bank will keep steady on its course of sustainability, community support, environmental awareness and solid corporate governance. “The bank plans on keeping a keen eye on the future and taking action to protect it,” Ovia noted. “A great way to do this is by focusing on our staff, the environment and achieving sustainable profits, which will help us achieve our medium to long-term goals.”

An oasis of fine wine excellence

Posted on by Max Tomlin

In 1990, a holiday to Argentina would change the lives of the Bousquet family forever. When Jean Bousquet laid his eyes on the Gualtallary Valley – a remote and arid terrain high in the Tupungato district of the Uco Valley in the country’s Mendoza region – he knew he’d found the location he’d been dreaming of. Here, where the condors circle above and the Andes Mountains stand imposingly in the distance, Jean had discovered his ideal terroir; a perfect place in which to nurture organically grown wines.

Although the location had a lot of potential, the only way to exploit it was through hard work and determination. Undeterred by such challenges, the family patriarch returned to France and, between visits to Argentina, set about divesting himself of virtually everything he owned, including the family winery and vineyards in Pennautier, near Carcassonne in the south-west of France. Industry experts in both France and Argentina questioned the decision, but almost 30 years after that fateful family trip, Jean’s risks have certainly paid off.

Consumers are changing and so too must the wine industry. Domaine Bousquet continues to focus on making high-quality wines that support the local community

Today, the future of the Domaine Bousquet winery rests with his son Guillaume, daughter Anne and her husband, Labid al Ameri. Following a 2001 trip to Argentina, Anne and Labid began investing in Domaine Bousquet, after a devaluation of the Argentine currency had rendered land prices cheap and Argentine exports very competitive. By 2008, both Labid and Anne had joined the winery full-time, eventually taking full leadership in 2011. In an interview with World Finance, Anne explained how Domaine Bousquet has managed to stand out in an incredibly crowded market.

“After two decades in business, Domaine Bousquet is a genuine success story,” Anne reflected. “Domaine Bousquet’s points of difference – certified organic fruit, high-altitude terroir and a French-Argentine profile – have proved to be a winning combination. Our major point of difference is much simpler, however: we just want to make high-quality wines that everyone can afford.”

Hitting the heights
With altitudes ranging up to 5,249ft, Gualtallary occupies the highest extremes of Mendoza’s viticultural limits. Today, wine cognoscenti recognise it as the source of some of Mendoza’s finest wines, but the same could not be said when the Bousquet family first set eyes on this cool-climate locale. Back then, it was virgin territory: tracts of semi-desert, nothing planted, no water above ground, no electricity and a single dirt track by way of access. Locals dismissed the area as too cold for growing grapes.

“My father believed that he had found the perfect blend between his French homeland – which has warm climate and potential low acidity wines – and the sunny New World, with its high thermal amplitude and naturally high acidity wines,” said Anne. “There was also another distinct financial plus: land prices at the time were approximately four percent of those for properties in more established districts of Mendoza.”

Anne’s father was not the first, nor the only wine producer to have his interest piqued by the Gualtallary Valley. But what set him apart is that he succeeded where several better financed, well-known names did not. What he seized upon, but others failed to grasp, was the singular importance of water. Water is hard to come by in Gualtallary; technically, the area is a desert. However, the family had done its homework and its first task in 1998 was to dig a well – all 495ft of it. Two years in the making, its completion was followed by the planting of vines. Other investors in the region, meanwhile, watched their hopes fade, chiefly due to an inability to extract water or secure water rights.

Working in harmony
Mastery of the natural landscape alone was not enough to turn an arid desert into an award-winning vineyard. Personal relationships have played just as important a role in the success of Domaine Bousquet, particularly in its early days. The complementary skill sets possessed by Anne and her husband, for example, helped take the vineyard’s success to another level.

“While we both consider ourselves brand ambassadors and focus on sharing our story, Labid is focused on the big picture and I’m the detail person,” Anne said. “We have structured our roles so that Labid is in charge of sales and marketing and I am in charge of administration, finance and operations. After living in Tupungato for seven years, we now alternate in spending one week each month at the winery there. We focus each trip on the quality of our wines. Passion and communication are the most valuable assets in our partnership.”

Broader community partnerships have also played a vital role in Domaine Bousquet’s success. Around 95 percent of employees come from the local town of Tupungato, 10km from the winery, and as a rural company, Domaine Bousquet’s partnerships with neighbouring vineyards have proven vital. Improvements to surrounding roads have bolstered access to markets, provided good local jobs and encouraged staff to achieve way beyond their expectations.

Domaine Bousquet also trains and promotes from within. Executive Chef Adrian Baggio, for example, was sent as an intern to New York, before rising through the ranks to take charge of the winery’s Gaia Restaurant. What’s more, all the harvest pickers are from Tupungato.

“We are aware that only by being successful can Domaine Bousquet provide much-needed jobs and opportunities for a poor, isolated community that has long been abandoned by the powers that be in Buenos Aires,” Anne explained. “That’s why we take a 360-degree sustainability approach that encompasses economic success, as well as environmental protection. At Domaine Bousquet, we believe that when our employees are empowered to achieve their potential, the wider community and the entire country also benefits.”

The story continues
The Bousquet family has been involved in winemaking for four generations, but this can only continue if they value sustainability over short-term success. With this in mind, Domaine Bousquet has made great efforts to pursue organic practices, a reduced carbon footprint and growth in the local community.

“When we set up home in Tupungato, the area was a rural backwater, abandoned by a failing central government,” Anne explained. “That meant building infrastructure from scratch. We joined an alliance of local wineries in funding construction of a new road to provide better access for employees, material deliveries and a growing number of tourists.”

Domaine Bousquet also made staff training a priority by creating development programmes that focus on a wide range of skills, from wine growing to office work. Every detail had to be considered, from transport for employees who don’t own a car, to microloans for continuing education. The wine industry as a whole has transformed the Tupungato economy, but Domaine Bousquet was there first.

Another major strand of the company’s sustainable ethos is its commitment to organic farming. Crops are grown in harmony with nature without using any chemicals, including pesticides, herbicides or synthetic fertilisers. Instead, natural fertilisers, such as Domaine Bousquet’s own compost, are used. Water shortages are averted through investment in water treatment facilities to limit waste. In addition, all vineyards use drip irrigation, and the winery is equipped with automatic cut-off cleaners to further reduce water consumption.

“Being organic was never a sales gimmick. Stewardship of the land is a necessity: the land was unspoiled when we arrived, and we weren’t about to spoil it,” Anne said. “Unlike many wineries whose organic wines are simply a small part of a larger portfolio, our fruit has been fully organic from the get-go, both estate and purchased. We have also played an instrumental role in converting fellow growers to organic principles.”

Anne and the other members of staff at Domaine Bousquet believe that the healthier the vineyard, the better the fruit and, of course, the wine. In other words, by nourishing the land and treating it with respect, the land will give back its best produce. But the company also likes to think more broadly in terms of sustainability. It has a capability programme for all its employees and subsequently decided to invest in achieving Fair for Life certification. In addition, by choosing to only use lightweight glass bottles across its entire wine portfolio, Domaine Bousquet has significantly reduced its carbon footprint.

“We continue investigating new techniques and methods to support our sustainability programme,” Anne explained. “Currently, we are looking forward to new fair trade projects to keep investing in our community and employee development. In order to take advantage of the great solar exposure at Mendoza province, which has more than 300 days of sunshine a year, we are working on installing solar panels to meet all of our electricity needs at the winery.”

Winemaking is a millenary industry that seemed as though it would never change. However, consumer needs are evolving rapidly, particularly with regard to what we eat and drink. Consumers today are increasingly conscious about how each product is made and respect brands that care about natural and sustainable processes.

Just as consumers are changing, so too must the wine industry. Domaine Bousquet is well aware of this and continues to focus on making high-quality wines that support the local community and bring pleasure to its global customer base. As long as the company continues on this path, it will surely achieve its goal of becoming the number one organic winery in the world.

Greece chasing a clean break

Posted on by Max Tomlin

The feel-good news of this summer is that Greece has entered the final throes of its economic nightmare. The country’s beleaguered economy is finally showing signs of a turnaround, and a sense of optimism has tentatively returned. In 2017, the country witnessed three consecutive quarters of growth for the first time since 2006, while growth has surpassed expectations for several quarters. But most significantly, the start of this year saw a landmark decision from international creditors that the Greek Government has completed almost all of the necessary reforms, and is close to unlocking the final slice of bailout funding.

Despite evidence of a turnaround, the Greek unemployment rate remains above 20 percent and the costs of the crisis will be present for years to come

The decision puts an exit date in sight for the country’s painful string of bailout programmes. As World Finance goes to press, there is just €1bn ($1.23bn) of bailout funds that have yet to be transferred, out of the €266bn ($328bn) total in emergency funding that had been allocated over the course of all three of its international bailouts. If all goes to plan, the transfer will constitute the last disbursement of the fourth and final tranche of Greece’s third and final bailout programme, with August 2018 earmarked as the date when Greece will be free to fend for itself.

All parties hope that this will foreshadow a smooth return to the markets, signifying a resolute end to a drawn-out crisis. Indeed, throughout this saga, this moment has always been touted as the overarching goal.

But as the bailout exit date – or ‘Grexit’, as it’s inevitably been dubbed – gets closer, the country will have to prepare for life without regular chunks of low cost finance from its ‘troika’ of lenders, and will have to rely instead on financial markets. For a successful transition into post-bailout life, it will need to persuade the markets that its bonds are a viable investment and its businesses are worthy of international capital.

Breaking the chains
Merriment at the prospect of a bailout exit will be subdued for Greeks, whose economic fortunes were the biggest casualty of the euro crisis (see Fig 1). Despite evidence of a turnaround, the unemployment rate remains above 20 percent (see Fig 2) and the costs of the crisis will be present for years to come. Under its bailout arrangements, the government has pledged to run a budget surplus of three percent for 20 years, and a further bout of cuts to public services are yet to kick in. “There is a sense of relief that the economy has moved to some recovery. But, in itself, this is hardly a cause for celebration,” George Pagoulatos, a senior advisor to former Greek Prime Minister Lucas Papademos, told World Finance.

What’s more, as the date for Grexit approaches, the exact form it will take is far from clear, and there remains the pivotal question of whether European creditors will totally relinquish their grip on reform efforts and let Greece govern itself. Both the IMF and EU creditors are reluctant to let this happen, fearing that the Greek Government will roll back measures, including pension cuts and other efforts to improve productivity.

However, the Greek Prime Minister Alex Tsipras has promised a “clean” exit from the bailout process, suggesting that the country will be able to break free entirely from any conditions attached to loans from international creditors, and determine its own economic policy. But such rhetoric may stray from reality in this case: the prospect of returning to markets will be far from simple, as will the question of breaking free from the dominance of international creditors on matters of economic policy.

Keeping it clean
When it comes to a return to the markets, the initial signs are good. Eurostat forecasts project growth of 2.5 percent for both this year and the next. Meanwhile, the country’s embattled banks have begun to return to bond markets, with the National Bank of Greece turning to international credit markets in October for the first time in three years.

Improved investor sentiment is reflected in the continued decline in government bond yields, with the yield on benchmark 10-year bonds dropping to an eight-year low at the end of 2017. Yields have since remained low – if not stable – during the first part of this year, sitting at 4.4 percent as World Finance goes to press. In January, S&P Global Ratings raised its sovereign credit grade, while Fitch lifted its rating in February.

As post-bailout life approaches, Greece has moved to test bond markets. In order to convince markets that it will survive without bailout funding, the government has set out to build up a cash buffer and has plans to raise as much as €19bn ($23bn) in total through three bond sales before the cut-off date in August. In July of last year, it successfully entered bond markets for the first time since 2014. In February, it tapped bond markets for €3bn ($3.7bn) in seven-year bonds in an issuance that ended up being oversubscribed and achieving a 3.75 percent yield.

The IMF, which has until recently been issuing dystopian visions of Greek’s economic future, published a 192-page report late last year that stated: “The Greek economy has remained more resilient than expected in a difficult environment: fiscal targets have been widely outperformed, and game-changing structural reforms – in areas such as tax administration, the business environment, energy, privatisation and public administration – have been launched.”

Adding shine to the numbers
But a closer look will show that the prospect of a completely clean exit remains quixotic. For one, there is also a notable political spin to the language used surrounding the crisis: at this point in time, it is in many people’s interest to paint Greece as a success story. Speaking to World Finance, Dimitri Vayanos, Professor of Finance at the London School of Economics and editor of a book on Greek reform, observed: “[The Greek Government wants] to give something to the voters. The European governance wants to sell Greece as a success story. They want to be able to say that they have effectively applied an adjustment programme and as a result Greece has returned to growth. Both the European Government and the Greek Government have the same incentive to paint it this way.”

The effort to add shine to the situation is also reflected in growth figures by Eurostat. “Based on the current projections, Greece is forecast to grow the slowest out of all eurozone countries in 2017 – save Italy, which is very close,” Vayanos explained. Growth figures for 2017 depict growth in Greece at 1.6 percent, while the eurozone as a whole has grown by an average of 2.2 percent. Projections for the following years remain below the eurozone average. Vayanos notes that this is discouraging because, with unemployment at 20 percent and significant amounts of idle capital, the economy is already running far below full capacity and should be capable of more rapid growth than its peers. “There is a lot of room for growth just by getting the economy back to full capacity,” he said.

Several key figures, including Bank of Greece Governor Yannis Stournaras, have argued that a return to the markets will be messy without a ‘precautionary credit line’

In addition, several key figures, including Bank of Greece Governor Yannis Stournaras, have argued that a return to the markets will be messy without a ‘precautionary credit line’ from European creditors, which would act as a halfway house between a fourth bailout and a clean exit. This would enable the government to access more funds from European creditors in the case of a negative shock, with the goal of creating a buffer that would quell any market fears over the
fragility of recovery.

However, this scenario is unpopular with the Greek Government owing to the fact that it is likely to come with certain conditions attached, and this would disrupt any realistic chance of a ‘clean’ exit. Greek Finance Minister Euclid Tsakalotos has railed against the idea, arguing that there will be no need for a credit line when the country already has a cash buffer for the same purpose. “It would be stupid to have two buffers… No serious person would suggest both,” he said in a recent statement. “There may be stronger monitoring, as was the case in Portugal and Cyprus, but we will have much more freedom and we need to let the society know how we intend to use it.”

As clean as possible
In order to exit safely, there must be some confidence that the current recovery can be sustained, but there is no guarantee that this will be the case. In addition to its vast sovereign debt levels, which are approaching 200 percent of GDP, the Greek economy remains dogged by structural issues, a weak banking system, a drought of investment and the hangover effects of a painful depression. Deep scars have been left behind by more than eight years of flagging domestic demand, and the slump has triggered a punishing brain drain that has seen many of the most skilled members of the workforce seeking employment abroad. The exodus has been worst among the young, who for some time endured a youth unemployment rate of over 50 percent, though this has since dropped to around 42 percent.

The good news is that the budget deficit has now been reversed, after reform efforts acted to cut spending and improve tax revenue collection, and the trade deficit has been eliminated thanks to reduced consumption and a rise in tourism. But at the same time, productivity-enhancing reforms are yet to fulfil their promise, which is causing potential foreign investors to hold back. Vayanos explained: “There has been some progress. But much more needs to be done, and the growth prospects still aren’t good.”

Scars have been left behind by more than eight years of flagging domestic demand. The slump has triggered a brain drain that has seen many skilled workers seeking employment abroad

Reforms of the labour market and product markets, as well as a large-scale privatisation scheme, are still in full swing. “On the labour market, there has been some progress. The labour market has become more flexible. Firing costs have decreased and disincentives for part-time work have gone down as well,” Vayanos said. However, labour costs remain far higher than those in neighbouring countries, which could be reducing the speed of recovery. “The other issue is that there are high barriers to entry. Privatisation is happening, but there is not massive interest from foreign investors. More needs to be done to open up product markets and oligopoly,” Vayanos continued.

The justice system is also another source for concern for investors, with years of crisis taking their toll on Greek institutions. “There have been some efforts to make it more effective, but progress has been slow,” said Vayanos.

The ever-distant promise
It would therefore seem that the prospects for Greece’s future hinge, to a large degree, on the prospect of debt relief, which has consistently been touted as the reward that would be granted upon the successful completion of bailout programmes. The worry is that, with sovereign debt so high, it may be impossible for Greece to attract enough foreign and capital investment to break out of its depressed state. Negotiations have now begun in the context of Eurogroup meetings, which in itself is a significant step given that discussions into the details of debt relief have remained purposely vague throughout the bailout process.

The boundaries of debt relief were laid out in ambiguous terms last June in a statement from the Eurogroup. Critically, it will consist of debt reprofiling rather than debt restructuring, meaning that while maturities may be changed, there will be no overall debt reduction. They are also likely to include the transfer profits built up by the European Central Bank from its holdings of Greek bonds. The agreement also states that gross financial needs should not exceed 15 percent of GDP in the medium-term, post-bailout phase, and subsequently should stay below 20 percent.

While there is broad agreement that the vast size of Greek debt is a dead weight that is holding back its economy, divergences in opinion emerge over the future prospects of the Greek economy. The debate centres on the topic of debt sustainability, and the extent to which the debt load can be sustained without stifling any hint of growth.

Out of the total €320bn ($394bn) in debt, HSBC estimates that 80 percent is owed to the eurozone, meaning any debt relief is predominantly a question for European creditors rather than private lenders. The IMF, which holds a much smaller proportion of Greek debt, has long held that the debt will be unsustainable without meaningful relief from eurozone lenders. In fact, last year the fund went as far as suggesting that Greek debt will become “explosive” after 2030.

European creditors, however, tend to disagree with the IMF as to how the future might pan out, predicting instead that Greece will be able to shoulder higher debt levels. This difference in opinion is derived in part from the fact that, from the point of view of European creditors, any outright cut in Greek debt would be politically unpalatable, despite being practically desirable. Ultimately, a compromise may be found in which debt relief is linked in some way to growth, so that debt payments would decrease if growth rates disappoint.

The Greek economy will remain under surveillance for many years – if not decades – to come

The question of whether there will be conditions attached will be a key part of discussions looking ahead. Crucial to this debate is European institutions’ distinct lack of trust in the Greek Government: many of them suspect that the government will roll back reform measures once conditionality is dropped. There have also been talks of a ‘no backtrack’ clause forming part of an agreement, which would make debt relief conditional on the basis of the government seeing out the reforms that have already begun. This would act to assuage fears from the EU’s side, such as the commitment to a further round of pension cuts in January 2019 and a reduction in the tax-free income threshold in 2020.

“The best thing that [Greece] can hope for is an upfront reprofiling of the debt that would clear the way for the next years and decades to remove the fear that they might not be able to service the debt,” said Pagoulatos. “The less optimal scenario is a gradual, step-by-step form of debt reprofiling that will maintain uncertainty.”

A long road ahead
In any case, the Greek economy will remain under surveillance, according to the framework of the European Stability Mechanism, for many years – if not decades – to come. Under EU rules, post-bailout countries such as Spain and Portugal are monitored on a biannual basis by the European Stability Mechanism until 75 percent of their loans are repaid. In Greece’s case, current projections suggest that it will remain under surveillance until 2060, with other more pessimistic commentators predicting this time period could stretch on till 2100. During this time, the European Stability Mechanism will continue to issue reviews and potential corrective actions.

Asked if a clean exit for Greece is a realistic prospect, Pagoulatos said: “Continuity is stronger than rupture in this case, in the sense that, whatever the form of the programme framework, Greece will continue to be an economy under very close surveillance.” Ultimately, Greece is exiting the bailout phase of its economic saga, but the moment will not spell the end of economic suffering, and is unlikely to mark a sudden cut-off point in its relationship with its creditors. The relationship will change with optimism in the air, but the prospect of a final exit from the crisis still lies far ahead.

The Brightline Initiative extracts the key lessons from Davos 2018

Posted on by Max Tomlin

Despite the incredible advances taking place in the world, a growing number of organisations will disappear in the next decade. The reality is that markets now shift in the blink of an eye, yet the underlying factors that cause them to change are often years in the making.

Consider blockchain, the underlying technology behind cryptocurrencies, which was one of the hot topics at the World Economic Forum (WEF) in Davos this year. Today, blockchain is everywhere, and a quick Google search for the words ‘blockchain technology’ returns over four million results. Blockchain is not new, however: it was conceptualised in approximately 2008, or around a decade ago. Its application opportunities are endless, yet it is only in the last two years or so that it really caught the attention of the mainstream media and organisations. How many firms started investigating blockchain technologies five or 10 years ago when they first appeared? Not many.

Leaders must be able to formulate solutions and implement them. The ability to turn ideas into results is the most important capability of any business

Disruptions and challenges
It is not the technologies themselves that scare business leaders, of course. It is their disruptive potential – how they will impact their businesses and society, and how that threatens the status quo. On top of that, business leaders face other, more profound, issues. Macroeconomic and social challenges are more prominent than ever, and require immediate action. Yet I believe that as leaders we must view these inherent uncertainties as an opportunity, rather than a threat.

This year, alongside the annual event hosted by the WEF in Davos, the Brightline Initiative, together with its founding members, the Project Management Institute and the Boston Consulting Group, supported an event hosted by The Economist. The main topic was the Business Case for Openness: Implementing Strategy in a Drawbridge-up World. The roundtable with global leaders covered the need to avoid protectionism and seclusion, and engage constructively with organisations, economies and societies to build strong alliances that can solve complex global issues.
The conclusion of this meeting forces us to rethink how we measure progress and growth, how organisations are structured, and how to deal with pressing new demands and challenges that are happening at a greater rate and speed than at any time in history.

Repairing fractures
Every annual WEF meeting has an overarching theme. For 2018, the theme was ‘creating a shared future in a fractured world’. It is an appropriate focus at a time when fault lines are emerging in many aspects of society; what leaders must now decide is how to respond to these challenges. I believe that the best response is to use the current uncertainty to develop talent for the future. After all, it is people that allow us to execute on strategy; it is people that get things done.

In 2018, we are at an exciting moment in terms of what technology can deliver – now and in the near future. Whether it is artificial intelligence, robots, self-driving cars, drones, augmented reality, virtual reality, the ubiquity of smartphones and apps, advances in biotechnology, the internet of things, or human machine interfaces – in every branch of science, it seems that progress is faster and discoveries are more astounding.

Spurring change
Klaus Schwab, founder and Executive President of the WEF, suggested that of the many trials in the world today, one of the most significant is dealing with the fourth industrial revolution, which is currently underway. Among the challenges this shift presents is ensuring that all of society benefits from this revolution. Business leaders must also ensure that their organisations do not become the 2018 equivalent of the buggy whip manufacturers that were put out of business by the automobile.

Technological change is now a constant. Combine this with the current unpredictability of our society and economies, and you have the perfect scenario for developing competencies among your people that will help your organisation become a change maker. And that is essential, because if your organisation is not a change maker, then it will inevitably become a change taker. As leaders, we must be able to formulate effective solutions and successfully implement them. The ability to turn ideas into concrete results is the most important capability of any business, governmental, or not-for-profit organisation today.

We need to develop adequate guidelines and practices for supporting leaders in leveraging their organisational delivery capabilities to overcome many of the strategy implementation challenges. So, I took away four insights from the session in Davos.

Principles to guide
The first is to observe and learn from the landscape. The Brightline Initiative offers a set of 10 guiding principles to help organisations bridge the gap between strategy design and delivery. One of those principles is: don’t forget to look outside, continue to monitor customer needs, collect competitor insight, and monitor the market landscape for major risks, unknowns and dependencies. This is more important than ever. As leaders, we need to be able to carefully observe the landscape and see what is challenging our basic assumptions and established views of the market, consumers and society.

Like the aforementioned disruptive blockchain technology example, we should place special attention on the emerging technologies that will challenge the way organisations operate in the next decade, and how we can use these technologies to help solve some of the most complex economic and social issues.

The second lesson is to continuously adapt your strategy. According to a 2017 Brightline survey conducted by the Economist Intelligence Unit (EIU), organisations that succeed in their fields “get insights from customers and the market to the people who matter and who can adjust the strategy and its implementation”. Strategy design and delivery are intertwined, and you need to continuously update both as new information emerges. Leaders need to balance a dynamic and flexible delivery capability with a long-term vision, the EIU concluded. It is critical to be able to actively address any issues discovered in this process and continuously assess your existing portfolio of projects and the organisation’s capacity to deliver. This brings me to the third insight: master implementation.

The EIU study highlighted that, if “all you are doing is developing documents”, it is a clear sign that your organisation lacks a set of core delivery capabilities, such as portfolio, programme and project management. More important than having a well-planned strategy is the ability to implement it. The EIU study also showed that only one in 10 organisations successfully reach all of their strategic goals. On average, organisations fail to deliver 20 percent of their strategic projects. Furthermore, almost two thirds of respondents admitted their organisations struggle to bridge the strategy-implementation gap.

Our 10 principles include a number of other practices, which are often ignored. These include: dedicating and mobilising the right resources; being bold, staying focused and keeping things as simple as possible; promoting team engagement and effective cross-business cooperation; and not forgetting to celebrate success and recognise those who have done good work. At the end of the day, we can all agree that strategy implementation is a team sport – it is not rocket science, but these simple axioms are too often ignored.

The final insight from the Davos session – to promote inclusiveness – was perhaps the most powerful. Every 20 seconds, one million dollars is wasted due to the gap between what an idea promises in terms of its potential and the actual results. This is an enormous amount of money and resources being wasted every day. As leaders, we need to find better ways to implement strategies and create prosperity for all. We must enable the right environment to share ideas and experiences, and combine profitability, prosperity, shareholder value and growth for society.

As Miki Tsusaka, Senior Partner, Managing Director and Chief Marketing Officer at the Boston Consulting Group, observed in Davos: “If you look at the notion of the corporate purpose and stewardship, this notion that we are doing something good for society is increasingly important.” Essentially, economic growth and doing good is not a trade-off.

Inspiring Israel’s fine wine renaissance

Posted on by Max Tomlin

Israel is both one of the oldest and newest winemaking countries in the world: a global leader of quality wine thousands of years ago, a young and identity-searching industry in the present. But the challenges it faces are many: a hot climate, limited rainfall, a lack of indigenous wine grapes, local consumers that rarely drink wine – and, when they do, mainly for sacramental purposes – and a world that, in general, is not familiar with Israeli wine. Collectively, these factors did not create the easiest starting point for Psagot Winery. Despite this, our wines are getting more and more recognition, awards and positive reviews. Winemaking to us is not an ongoing tradition, but rather an attempt to rejuvenate an ancient one.

In a hot climate, you are always facing a conflict of interests: harvest early and you might not have enough ripeness; wait too long and your alcohol levels may be too high

An inspired vision
Before we began our long-term planning, we first came up with a vision. At Psagot, this vision was clear from the start. When planting our first vineyard, we discovered an ancient cave nearby. When this cave was excavated, a 2,000-year-old ancient winery was found, alongside a coin dated to the second year of the Great Revolt (68AD). This deeply inspired our founder, Yaakov Berg, to try and revive the ancient prestige once held by the area as a superior wine-growing region. In reality, it meant starting from nothing. There was no blueprint to follow regarding which grapes to choose, how to grow them or what wines to make from them. So we simply got to work, learning from trial and error along the way.

When they wanted to generate international sales for their wines, traditional Old World countries (such as Italy, Greece and others) relied on what came to be called ‘international varieties’, which are in fact French grape varieties. These include Cabernet Sauvignon, Merlot, Chardonnay and Sauvignon Blanc, to mention a few. So, when rejuvenating a barren land without your own indigenous wine grapes, this is clearly the best place to start.

Grape expectations
One will struggle to make long-term plans when accumulative knowledge of wine growing and winemaking in the region is so sparse. So you start with short-term plans. You select grape varieties that are known and appreciated, and you set out to make the best wine you can. At Psagot, this was done by using international varieties, starting with small-scale production and evaluating the results. Fortunately, they were hugely promising: sales grew gradually and consistently, and we slowly started to understand what was happening, how to deal with any challenges and even how to allow our terroir, or environment, to express itself.

In hot climates, sugar levels increase at a faster pace than the rate at which aromas and flavours develop. So if you seek ripeness, you will end up with a lot of sugar content in the grapes, resulting in high-alcohol wine. We learned that leaner soils and limestone bedrock slow the pace of the ripening process, allowing the aromas and flavours to catch up, thereby generating sugar levels suitable for dry table wines. At Psagot, therefore, we keep our vineyards at the mountain peaks and not in the richer valley soils. By locating our vineyards a considerable distance from the Mediterranean sea, where temperatures drop fast, we can slow the plant’s metabolic breathing, allowing more acid to remain in the grape, while keeping the wines fresh and lively.

Wines from all over the world are generally made in a similar way, although this is only true to an extent. Taking a closer look, there are many details that can affect your wine, including the temperature of fermentation, length of maceration, methods of ageing and other factors. In truth, these considerations are not only regional, as the nature of your fruit can differ from vineyard to vineyard as well. At Psagot, we are gaining a better understanding of how to process our fruit every day. In general, we are located in one of Israel’s greatest growing areas, with fruit that can produce big wines with intense flavours. In our region, our wines must be carefully monitored to ensure that the results are not overwhelming; we are learning to tame the beasts, as it were. So we ferment at cool temperatures, keep macerations and tannin extraction relatively short, and we are gradually shortening the periods of barrel ageing for some of our wines. Altogether, we are reaching a more elegant style in our portfolio.

There is not much you can do about the hot climate of a region, yet you can learn to work with it. One of the most crucial decisions in winemaking is deciding when to harvest. You don’t want to harvest when underripe, nor overripe. In a hot climate, you are always facing a conflict of interests.: if you harvest early to keep your alcohol level moderate, you might not have enough ripeness. If you wait too long, your alcohol levels may end up too high. It is always a compromise. At Psagot, we try to get the best of both worlds. We don’t harvest the entire vineyard at once, but instead harvest multiple times in the same vineyard. Early harvests provide freshness and low alcohol, later harvests provide fruitiness and a full array of aromas and flavours – the combination of the two results in a full, yet balanced and elegant wine.

Glass half full
The winery has established itself gradually over many years. Its reputation grew, as did recognition of the terroir and the nature of the big wines coming out of it. Sales steadily increased each year until production reached 120 times the volume of the first year. Sales are international, and 65 percent of our produce is exported. Years after focusing on short-term plans alone, we can finally start thinking about our long-term goals, which can now be shaped by our accumulated knowledge and the experience we have gained.

The issues we must deal with are complex. We have to navigate a market in which critics are looking for a style of wine that is different from that which consumers seem to like and buy. We also have to make difficult decisions regarding our portfolio of grapes. Deciding between internationally renowned, best-selling grapes, such as Cabernet Sauvignon and Chardonnay, or Mediterranean varieties – which, although largely unknown, are better suited to our climate – is not easy. Assessing market trends is also challenging, particularly as it can take between seven and 10 years to perfect a new variety of wine – and, by that point, trends may have moved on.

Personally, I am not sure there is a methodical way to answer these challenges unless you shoot in all directions and hope some will hit the target. Even then, you lose an important ingredient for success in the wine world: your identity. The wine industry is so passion-driven that perhaps, when planning changes, you are permitted to be non-methodical. You are permitted to be driven by your heart and dreams too. Indeed, as problematic as that might sound, I believe it to be well-suited to an industry where we are all using largely the same grapes and similar technology, and we are all striving for appreciation from the same critics. It means that the results can become all too repetitive, lacking true personality. It is essential, therefore, that we encourage the wine enthusiast to look for identity in his glass of wine, not only fruit and soft tannins. Perhaps in the wine market, following your passion is not only permitted, but might even be necessary. The result will be a wine imbued with identity and personality, and in a market driven by the passion of consumers, this can be your most valuable asset.

So, at Psagot, we take all the above into account. We combine our growing understanding of our terroir, of how to grow our vines and make our wines, and the tastes of our consumers. Yet we do not forget what brought us to this industry in the first place, so we allow our passion to guide us as well. And from our experience, accumulated knowledge and passion, we can finally start making our long-term plans. In order to not compromise our identity, we are focusing on making wine from our own terroir, despite the fact that sourcing grapes from all over Israel might result in added complexity.

A toast to the future
We are also focusing on expanding our white wine portfolio because white, refreshing wines are enjoyable to consume in a hot climate, despite the fact that red wines are probably more profitable. We have begun a sparkling wine project out of admiration for this regal style of wine, even though expenses are rather high. And we are focusing on our reds, gradually making them less robust and more complex and elegant, simply because we believe that this is the more sophisticated and communicative way a wine should express its region and all the efforts that go into growing and making it. We truly believe that the passion that guides us is the best way to make long-term success in the wine industry, and we hope consumers will also appreciate and enjoy the results of this approach. To them we say, Le’Chaim!

A synergy of east and west

Posted on by Max Tomlin

China’s importance to the rest of the world is difficult to overstate. Already the planet’s second-largest economy, and set to take the top spot by 2030, the Asian country contributes more than 35 percent of the world’s economic growth. During this process, Chinese businesses have continued to learn from western counterparts, while retaining the Chinese virtues of diligence and inclusivity, and a willingness to contribute and promote common development. One of the businesses that embody this new Chinese spirit of global entrepreneurialism is HNA Capital.

HNA Capital has recognised the importance of mobile payments, blockchain and artificial intelligence in providing more customised financial solutions

Established in May 2007 as a financial branch of HNA Group, HNA Capital offers a comprehensive and integrated set of financial services, crossing a broad range of sectors, such as leasing, insurance, trust, financial innovation, securities, banking and guarantee. As the Chinese economy transitioned to become more market-oriented, HNA Capital recognised the new financial needs of individuals and businesses. As a result, the company has rapidly increased its overall capability and the range of its products by implementing innovative solutions and seeking new merger and acquisition opportunities.

Today, HNA Capital is able to provide diversified financial services to institutional investors around the world. With further market integration and globalisation, the company will keep its focus on banking, hedge funds and asset management companies as potential prospects for both acquisitions and strategic partnerships. World Finance spoke with Chris Jin, CEO of HNA Capital, about the company’s future investment plans and internationalisation process.

How does HNA Capital assess which businesses present valuable investment opportunities? Where can you see the opportunities?
HNA Capital has a comprehensive assessment process. Carrying out due diligence is important, of course, but we also take current policies, like the government’s Belt and Road Initiative, and the location of the investment opportunities into consideration. We analyse potential synergies between such opportunities and any of our member companies. Once the synergies are proven, we analyse the performance of the company, paying extra attention to the figures that will help us achieve our current objectives.

A lot of opportunities may arise in the synergy of technology and finance. Our company is one of the leading players in the fintech industry in China.

The constantly changing environment caused by technological disruption requires companies to take steps without any delay. HNA Capital has already recognised the importance of mobile payments, blockchain and artificial intelligence in providing more customised financial solutions and improving risk management practices.

Are international investments in developed economies preferable to those in emerging markets? If so, how?
The markets of developed economies are certainly attractive. Return on investment (ROI) is less volatile in developed markets, when compared with emerging markets, and companies have a stronger corporate governance structure, alongside a wider international presence. These factors play a determining role when deciding which market to invest in.

Nevertheless, HNA Capital has always emphasised the importance of seizing opportunities and being at the forefront of industry development. Although HNA Capital has not yet invested in emerging markets, Chinese investors have already identified the potential of these markets, and if a good opportunity is presented, HNA Capital will act on it with due diligence.

Additionally, China has recently initiated the Belt and Road Initiative, which we believe will bring prosperity to all participants and foster a truly global ecosystem. HNA Capital has also established a team that is in charge of monitoring the development of the initiative and identifying how HNA Capital can contribute along the way.

What is HNA Capital’s strategy on post-investment management of overseas companies? Could you share your experiences?
HNA Capital’s M&A strategy has always been to create operational synergy. Our primary goal is not to buy an undervalued company, apply a few superficial changes and make a quick profit. We aim to acquire well-established companies with proven revenue streams so we can diversify our services and products, complement our business ecosystem, achieve higher growth in new markets and utilise economies of scale to become more cost-efficient and profitable. For example, after the integration of Seaco and Cronos, our container utilisation rate reached 96.7 percent, higher than the average rates of Seaco and
Cronos individually.

We try not to restructure an organisation by enforcing significant institutional changes. HNA Capital understands the difference between western and Chinese corporate cultures, which is why HNA Capital does not impose its managerial methods on acquired companies. Instead, HNA Capital delegates a top-management team to the acquired company to facilitate integration and communication. By doing that, we can be assured that the goals and visions of HNA Capital and the acquired company are aligned together.

A good example of the independence we grant to the companies we acquire can be seen in Bohai Capital and the control that it retains over its subsidiaries. By allowing senior members of staff to manage partner firms in their own way, Bohai Capital has discovered new synergies with subordinate businesses like Avolon, Seaco and Cronos. In addition, when HNA Capital is dealing with international investments, we endeavour to form mutually beneficial support structures. For example, we augment post-investment management with exchange programmes so that Chinese colleagues will learn more about western culture and western colleagues will gain a better understanding of HNA culture.

How important is it for HNA Capital to have good knowledge of a foreign market before making an international investment?
Prior to investing, HNA Capital conducts thorough research and analysis of the market in order to eliminate any potential risk associated with outbound investments. The company will weigh economic, industry, political and sovereign risks and will make outbound investments accordingly. HNA Capital uses all available external and internal resources to gain the most comprehensive and in-depth outlook of the market.

Investments always come with an element of risk. How does HNA Capital conduct good risk management at all times?
Thorough due diligence is always conducted when evaluating a target. At first sight, numbers and synergies can be perfect, but integration still needs to happen, and this is the responsibility of the company making the acquisition. In our current position, we are invariably the acquirers. We do not spare costs for due diligence because this is an area where corners simply cannot be cut. We always have groups of experts assisting us with our acquisitions, alongside the very best consultants and investment banking analysts.

Our use of the Financial Enterprise Risk Management Platform also ensures that HNA Capital has a clear overview of its six main divisions: operations, investment, innovation, human resources, finance and risk control. By creating a unified system across the company’s huge portfolio, HNA Capital can carry out high-quality risk management in any location and at any time. In the future, HNA Capital will improve the level of refined management, further integrate business systems and optimise model analysis capabilities, in order to provide data support for enterprise operations, and speed up the process of identifying, managing and reducing risk.

What are some initiatives that demonstrate HNA Capital’s commitment to social responsibility?
At HNA, we encourage the harmonious coexistence of corporate and social goals within our business model. With the help of our volunteer associations, we have made full use of our financial resources to promote social development by investing in education, pensions, special group care, poverty alleviation and protection of traditional cultures.

HNA Capital and its member companies have made donations to schools, organised charity events for sick children and provided insurance for vulnerable individuals. We also realise the importance of financial education and have launched a number of initiatives aimed at improving the public’s financial knowledge and awareness of risk prevention. Environmental protection and disaster relief are also key components of the group’s approach to corporate social responsibility.

What are some of HNA Capital’s plans for the future?
With the advantage of a multi-industry background and an established financial supply chain, HNA Capital is committed to the sustainable development of modern finance. By bringing together an elite international team and improving levels of service, HNA Capital provides comprehensive support to its global customers and delivers world-class financial solutions and investment opportunities.

HNA Capital is committed to strengthening the foundations of the finance sector through making solid long-term investments. By espousing the importance of strong management, HNA Capital aims to improve the quality of business around insurance, leasing and other core sectors.

Moreover, HNA Capital plans to create a global investment service network. We will catch the needs of the information age, expand emerging business areas such as internet finance and payment platforms, and explore new directions for business excellency. Through incubation, investment, cooperation, sharing and promotion, we aim to create a dynamic global ecosystem for financial innovation.

Top 5 biggest financial scandals of all time

Posted on by Max Tomlin

When millions, or even billions, of dollars are up for grabs, some individuals are willing to play dirty to get their hands on them. Below, World Finance examines five of the biggest financial scandals ever to take place.

Charles Ponzi
In 1919, Charles Ponzi, an Italian immigrant living in Boston, came up with a scheme to get rich that involved purchasing international reply coupons for a low price abroad and then selling them for profit in the US.

He convinced numerous investors to back him, despite the fact his business was racking up huge debts as a result of logistical difficulties and mounting overheads. In what is now a well-known trick, Ponzi simply used the funds provided by new investors to pay existing backers (and himself). Although not the first example of this type of scam, its notoriety gave birth to the term ‘Ponzi scheme’.

Enron
Fortune magazine named the Texas-based energy business Enron the most innovative company in corporate America for six straight years between 1995 and 2000. By November 2001, however, its share price had plummeted to less than $1 following the discovery of hidden debt worth billions. Following this, the company had no other option but to declare itself bankrupt.

Worldcom
Worldcom took Enron’s title as the largest corporate bankruptcy in US history just a year later. Altogether, more than $7bn in ‘accounting errors’ were found to have greatly inflated the company’s assets. Worldcom’s former chief executive Bernard Ebbers was subsequently sentenced to 25 years in prison for his part in the scandal and has since been dubbed one of the most corrupt CEOs of all time.

Bernard Madoff
As the head of his own Wall Street investment firm, Bernard Madoff masterminded the biggest Ponzi scheme of all time, defrauding investors of an estimated $64.8bn. It’s believed that the scam could have been in place as early as the 1980s, but fell apart after the 2008 financial crisis. In December of that year, Madoff confessed to his sons that his business was just “one big lie” and they subsequently turned him into the authorities. Madoff received a sentence of 150 years in prison.

Lehman Brothers
The collapse of Lehman Brothers is an enduring symbol of the late-2000s financial crisis. The financial services firm had been in existence for more than 150 years, but its use of cosmetic accounting tricks was exposed by the subprime mortgage crisis, and the bank was forced to file for bankruptcy. The failure of what was, at the time, the fourth-largest investment bank in the US had severe ramifications for the global economy.

Global Housing helping customers realise their property dreams

Posted on by Max Tomlin

For many people, owning their own home is a goal that appears to drift further away each year. In much of the world, house prices have accelerated at a pace that wages have been unable to keep up with, making property increasingly unaffordable for many. According to the most recent data released by the International Monetary Fund, global house prices have now recovered to the peak they reached prior to the global financial crisis – with further growth expected. This surge has dramatically increased the amount of credit people have been required to take out in order to purchase a home, resulting in growing interest fees. For those who are able to meet these high costs, a home loan from a bank still comes with a long list of restrictions and expectations that some may be unwilling or unable to undertake.

The idea had by the founding members of Global Housing was to develop a solution where people could join forces to cooperate on home purchases

Idrees Malik, Director at Global Housing, told World Finance that recent surges in Norway’s housing market have had a tremendous impact on affordability. From 2016 until June 2017, Oslo house prices surged by almost 23 percent, with prices in areas surrounding the capital city growing by between 15 and 18 percent. Norway’s other cities saw similar results, with price increases ranging between 17 and 20 percent. “Therefore, at the end of 2016, it was very difficult for first-time buyers to buy a property in Norway, because of the extremely high prices,” Malik said.

Prices have started to come down since June, however, having decreased by almost 13 percent. “It is starting to get a lot better now, but Norway is still a country with some of the highest housing prices in the world,” Malik explained. “For first-time buyers, it is a requirement from the banks in Norway that the buyer has at least 15 percent equity. For second-time buyers, the government has raised the requirement so that you must have at least 40 percent of the equity needed to purchase your second house, in Oslo.” With such difficulties currently facing both aspiring property owners and seasoned investors, demand is growing for alterative finance models that provide a better deal.

Alternatives exist
Established in 2007, Global Housing now has more than 10 years of experience in the Norwegian real estate sector. Idrees came to the company later, while his partner Sohail Malik (pictured) was one of the founding members a decade ago. Idrees Malik explained that the company’s financing model to help people purchase property is quite different to a traditional loan from a bank. “In 2007, Global Housing launched a concept that combined partnership and rentals to facilitate housing purchases. The company creates deals that are an arrangement between a shareholder and Global Housing to buy and rent a property in partnership. The idea had by the founding members of Global Housing was to develop a solution where many people could join forces to cooperate on home purchases, thus avoiding interest-based loans. This was mainly a solution for people who did not want to borrow money from the banks.”

15%

Equity required for first-time buyers to purchase a house across Norway

40%

Equity required for second-time buyers to purchase a house in Oslo

The procedure is reasonably straightforward. Global Housing enters an agreement with a shareholder to buy a property, with each providing a portion of the purchase price. “Today, the requirement is that shareholders have at least 25 percent of the residual sum in the form of initial capital in order to enter the contract of buying a house in partnership with our company,” Malik said.

From there, part owners have the right to buy Global Housing’s portion of the property sporadically over time, or through fixed instalments. Global Housing also has the right to purchase the part owner’s portion of the residence if they are not able to buy out the company. The agreement also gives the part owner the right to rent the property from Global Housing, allowing the shareholder to start living in the house immediately after it is purchased. The deal offers a pathway to home ownership without the traditional restrictions that accompany a mortgage.

Malik explained that this model offers a more collaborative arrangement between the individual purchasing the property and the supporting business than a bank loan does. “Borrowing money will, in most cases, make people dependent on the lender. This creates an uneven relationship, where the lender steps into a position of power over the borrower. Loans also have an aspect of uncertainty in them because of fluctuating prices in the market and subsequent fluctuations in interest rates.

“You are also living with a liability when you borrow money. In difficult economic situations, liabilities such as these can make a bad situation even worse. With Global Housing, you have much more predictability. Your future is much more foreseeable.”

Apart from people who do not want the liabilities associated with a home loan, or have had negative experiences in the past, there are other reasons why many don’t want a traditional loan. It is a perception among many Muslims that both the charging of interest and paying interest is not allowed, making many financial products unsuitable for them.

Malik said the size of Global Housing’s target market of people who cannot borrow money from a bank, for religions reasons alone, is about 20,000 people. “Our total market in the long run may amount to between 170,000 and 200,000 people in future years, according to figures from Statistics Norway.”

According to Malik, the company’s model is unique in Norway. “Global Housing has currently no competitors in Norway offering the same housing purchase in partnership and leasing. This is a cultivated concept that focuses on investment in the housing market, while also helping people who have limited opportunities to enter the dynamic housing market in the country.”

This target market extends to the housing construction industry as well. “The total market in housing construction can be difficult to put a figure on,” Malik said. “In 2015, around 30,000 homes were built in Norway. Having compared the 10 largest residential builders in the country, we see that they all build at least 500 homes a year. Global Housing aims to initially invest in at least three housing projects a year, of good quality and style.”

Building and growing
Malik explained that, so far, customers have entered into agreements with Global Housing with the intention of eventually fully owning the property. “This has been the case regarding 31 house purchases in partnership and rental between 2007 and 2018. How long it takes for them to purchase the property varies from case to case. Factors like how big of a share the customer starts our housing partnership with play a big part.”

Apart from arrangements with individuals seeking to buy a house, Malik said Global Housing has also applied its model to two housing development projects in Norway. “For the first project, Global Housing was both the landlord company and the biggest investor. For the second housing project, which is ongoing, Global Housing is just an investor. In charge of the building projects is Global Building, another company established by the same owners as Global Housing.”

It is a pertinent time to undertake housing development projects in Norway, Malik explained. The country has a well-established housing market, but the record year for house prices posted in 2016 suggests that demand for housing is still much higher than supply can provide. Naturally, this has led to a surge in demand for equity in housing purchases in Oslo. “This is something that, in turn, has provided incentives for us to invest in adjoining areas around Oslo,” he said. “Our first two housing projects are in an area between Oslo and Nesodden.”

Global Housing’s 10 years of experience in the region will be crucial to how it navigates the future. Indeed, prices declined by up to 10 percent in Oslo between June and December 2017, although they are now starting to stagnate.
Malik said the future for Global Housing looks both positive and international. The company has registered to operate in both Pakistan and the US, with ambitions to open there in the future. Additionally, Global Housing hopes to expand to Scandinavia, the rest of Europe and South Asia. Right now, the company is looking towards investment opportunities, professional enrichment and growing awareness of its business and model.

“In three years’ time, we will be at a stage where we will not only be financially independent and operating a large business, but also inspiring a large group of people through our success and our work,” Malik said. “By that time, we will have made the company self-sufficient; investments and capital will be growing continuously in a mechanism that creates increasingly larger dividends for our investors.”

Malik said that in five years’ time, Global Housing expects to be among the largest players in Scandinavian housing, and in 10 years will be operating on an international scale. The issue of house prices is a global one, and combining part-ownership with a rent-to-own model is likely to become more prevalent in the future.

“We are aware that purchasing a house can be one of the biggest challenges people face today,” Malik explained. “Therefore, Global Housing believes that providing people with alternative ways of buying homes will give them broader opportunities. We believe in a future where it will be possible to buy houses without taking out a mortgage or loan.”

Top 5 riskiest investments of 2018

Posted on by Max Tomlin

Just because something is popular or talked about doesn’t mean it is a sure thing to invest into – no matter how appealing it looks. Here, World Finance lists the riskiest potential investments of 2018.

1 – Wynn Resorts
Stock in Wynn Resorts, the Las Vegas-based casino and hotel chain, was rising rapidly until it crashed in January, when The Wall Street Journal reported on a series of sexual harassment accusations against founder and CEO Steve Wynn. Wynn resigned in February, and while the dip in stock, the company’s expansion into Asia and whispers of an acquisition by MGM may make it seem like a tempting investment, it will be hard to completely expunge the stain from its name.

2 – Tesla
On paper, Tesla is one of the most recognisable and revolutionary companies around. However, if the aim is substantial returns in the short to medium-term, it is probably not best to buy stock in a company playing the very long game. You can count the number of profitable quarters the 15-year-old company has had on one hand. The rollout of the Model 3 may change that in the coming years, but the company’s stock price has remained somewhat level for the past year.

3 – Bitcoin
Perhaps the most talked about investment of the past couple of years, cryptocurrencies have come to define volatility in the financial space. The currency’s flagship product, Bitcoin, was all the rage in 2017 when it reached a peak value of nearly $20,000 in December. It has since cratered, and now hovers between $6,500 and $7,500. With analysts calling it a bubble and adherents preaching the gospel of buying the dip, the safest bet would be to stay out altogether.

4 – Snap Inc.
In what has likely been the most underwhelming tech IPO in recent memory, Snap has seen its stock fall by almost half since it went public in March 2017. Its popularity among coveted young demographics makes it attractive, as does its innovative array of augmented-reality face filters, but it is growing far slower than a young company of its kind should, and it is facing mounting pressure from Instagram.

5 – Facebook
The fallout from the Cambridge Analytica affair is still radioactive, and Facebook’s stock has not made any meaningful recovery since the controversy began. While it may be tempting to buy at a low price, it is too early to tell what regulatory changes will be put in place, how they will affect Facebook’s profit and how the company will adjust its business model. It is clear, however, that Facebook will not be able to operate in the same way that attracted so many advertisers.

The battle to be top of the stocks

Posted on by Max Tomlin

Hong Kong’s position as a global financial heavyweight has long been secure. The city-state’s commitment to free market principles has seen it evolve from a mercantile shipping hub into a thriving, service-orientated economy. The adoption of the ‘one country, two systems’ principle in 1997 has allowed Hong Kong to retain its economic freedom while also acting as a gateway to the rapidly growing Chinese market.

The international success of its stock exchange is even more impressive: as of the end of 2017, Hong Kong had more than 2,000 listed companies, a total market capitalisation (see Fig 1) of HKD 34trn ($4.34trn) and had been named as the number one global IPO venue for five of the previous nine years. Last year, however, that coveted top spot was taken by New York, while Hong Kong had to settle for third place, behind Asian rival Shanghai.

In fact, the total funds raised on the Stock Exchange of Hong Kong (SEHK) in 2017 amounted to just $35bn, a 15 percent fall when compared with the previous year. This can be partly explained by competition between stock exchanges being fiercer than ever; globalisation and technological development have encouraged businesses to seek public capital in international exchanges instead of their domestic markets.

Costs, access to a particular investor community and increased liquidity are all factors that determine a company’s decision to list on a particular exchange but, increasingly, regulatory issues also play a part. Late last year, Hong Kong Exchanges and Clearing (HKEX), the official operator of the city’s stock exchange, announced it had begun drafting rule changes that would allow for dual-class share listings, bringing the exchange in line with New York.

While international competition makes it more difficult than ever for one market to hold more stringent rules than another, the loosening of regulations around dual-class shares has raised concerns among corporate governance advocates. The move may encourage business owners to choose Hong Kong over New York, but minority investors could be the ones losing out.

Falling behind
The root of Hong Kong’s decision can be traced back to September 19, 2014, when Chinese e-commerce giant Alibaba decided to host its IPO on the New York Stock Exchange (NYSE). By the time the IPO had concluded, the company had raised a staggering $25bn – still, to this day, the largest IPO ever conducted. As cheers rang out in Alibaba’s business headquarters in Hangzhou and across the New York trading floor, the reaction in Hong Kong was very different.

The loosening of regulations around dual-class shares has raised concerns among corporate governance advocates

HKEX CEO Charles Li had already faced criticism for focusing on commodity firms rather than technology-orientated ones, and now he stood accused of letting New York waltz in and steal the most valuable listing of all time. What’s more, Alibaba made it clear that, although the IPO was a runaway success, in different circumstances it would have preferred to be listed in Hong Kong.

The reason New York eventually came out on top was Alibaba’s insistence on a dual-class listing, which would allow its 28 partners to retain majority control of the board despite only owning around 13 percent of the company. Although this practice has been allowed on the NYSE since the 1980s, Hong Kong has stuck rigidly to the ‘one share, one vote’ principle. Aurelio Gurrea-Martínez, a fellow in Corporate Governance and Capital Markets at Harvard Law School, believes dual-class shares, while not necessarily harmful, are open to abuse.

“Through the use of dual-class share structures, some shareholders (usually the company’s founder and its top executives) are able to pursue their vision and enjoy the full benefits of control without paying for this privilege,” Gurrea-Martínez explained. “They become what many authors call ‘controlling minority shareholders’. This means that not only will they run the company as they see fit (sometimes for their own interest or portfolio, and not for the interests of the shareholders as a whole), they will also enjoy the private benefits of control.”

Hong Kong may have resisted the pressure to match New York’s more relaxed approach to stock market regulations until now, but it wasn’t for want of trying. At the time of the Alibaba IPO, a committee that had been formed to review SEHK rules was split on whether to make an exception for the e-commerce giant. Ultimately, it decided waiving the regulations to accommodate a single company would damage the exchange’s reputation. Further, formalising a rule change to allow dual-class shares is not a quick process and, as Hong Kong deliberated, New York stepped in.

Playing catch-up
“The question Hong Kong must address is whether it is ready to look forward as the rest of the world passes it by,” Alibaba Executive Vice Chairman Joseph Tsai wrote in a blog post in 2013, ahead of the company’s record-breaking IPO. “As a company with most of our business in China, it was natural for Hong Kong to be our first choice.”

$35bn

Total value of funds raised by SEHK (2017)

$1.1bn

Value of China Literature’s IPO on SEHK (2017)

$25bn

Value of Alibaba’s record-breaking IPO

Following Alibaba’s decision, a number of other Chinese technology firms have looked elsewhere for their IPO listing. Just three percent of listings by market value on the SEHK have been ‘new economy’ companies in the last 10 years, compared with 47 percent on the NYSE. Similarly, nine of the 10 largest IPOs conducted by Chinese digital firms have been in the US.

Although dual-class shares – or weighted voting rights, as they are sometimes known – have been around for decades, they have experienced a surge in popularity as the digital economy has taken off. Dual-class shares are particularly popular with technology firms, as they give entrepreneurs the freedom to pursue their unique, singular vision without having to seek approval from other investors. What’s more, many digital companies decide to go public before they have become profitable. In this case, the kind of long-term strategy likely to be implemented by a company founder is preferable to investors seeking short-term returns.

“On average, the founders of young tech companies are more likely to add value than their peers in mature companies with a more traditional business,” Gurrea-Martínez explained. “That’s why most companies with dual-class shares are tech companies or start-ups with a novel product or idea.”

In order to attract this new breed of company, the SEHK has finally decided to join the likes of the US, Brazil and Canada in relaxing its rules on dual-class shares. Hong Kong’s decision will not have been taken lightly, with Gurrea-Martínez noting that “many institutional investors have already shown their concerns about the reform”, but the move has been welcomed in some quarters. Speaking earlier this year, Alibaba founder Jack Ma revealed the e-commerce firm would now consider listing its subsidiaries in Hong Kong as a direct result of the rule change.

Getting back in front
When deciding whether to change the regulations surrounding dual-class shares, the SEHK had to carefully weigh up the pros and cons. The loosening of rules could help to attract the new digital firms that make up an increasingly large proportion of the global economy, but could also damage overall trust in the exchange, making it more difficult to attract IPOs from other industries. Further, there are other issues – beyond weighted voting rights – that tech companies consider when deciding where to list. “The liquidity and depth of the stock exchange are crucial factors,” Gurrea-Martínez said. “As is the reputation, qualification and independence of the regulator.”

Even as Hong Kong moves to lift the ban on dual-class shares, the city-state knows better than to get involved in a regulatory race to the bottom

The fact Hong Kong was able to become one of the world’s leading financial hubs, despite banning dual-class shares for more than three decades, suggests it already had a great deal of IPO pulling power. And it seems this pulling power was beginning to have a slow but steady effect on new economy businesses. In fact, the fourth quarter of 2017 saw a surge in tech listings on the SEHK, with China Literature’s $1.1bn IPO the largest recorded.

Despite recent successes, those in charge of the Hong Kong exchange know that competition will be fiercer than ever this year. Some of the leading lights of the Chinese tech scene – including Didi Chuxing, Tencent Music and Xiaomi – are all rumoured to be planning an IPO at some point in 2018. After missing out on Alibaba’s record-breaking IPO four years ago, it is understandable if Hong Kong feels the need to align its regulations with its competitors.

Even as Hong Kong moves to lift the ban on dual-class shares, the city-state knows better than to get involved in a regulatory race to the bottom. Gurrea-Martínez believes the SEHK is sophisticated enough to punish value-destroying founders going public with dual-class shares, but “could still implement new rules to enhance the protection of minority investors”.

These new rules are on the way: there will be restrictions on the type of companies that can issue dual-class shares, for example, and the Hong Kong Government is launching a much-needed overhaul of its auditing regulations. More safeguards may be needed as the stock exchange gets accustomed to its newfound acceptance of weighted voting rights.
If Hong Kong wants to get ahead of New York, Shanghai and the rest of the world’s top exchanges, it cannot simply follow the lead of others. It must create a regulatory framework that is right for its particular market and, crucially, one that is attractive to both billionaire tech entrepreneurs and public investors alike.

Top 5 takeover targets for the rest of 2018

Posted on by Max Tomlin

Acquiring another company is a risky move. When it goes badly, businesses can end up saddled with mountains of debt and in possession of unprofitable assets. Nonetheless, many companies continue to utilise corporate takeovers as part of their business strategy because the rewards on offer – increased revenue, a larger product base and access to new markets – are so great. World Finance takes a look at five potential takeover targets that industry heavyweights should be keeping an eye on in 2018.

Many companies continue to utilise corporate takeovers as part of their business strategy because the rewards on offer are so great

1 – Bristol-Myers Squibb
The healthcare sector has experienced a ramping-up of mergers and acquisitions in recent years, and the consolidation looks set to continue throughout 2018. One company in particular that looks ripe for takeover is Bristol-Myers Squibb. The recent success of the company’s immuno-oncology drugs has raised prospects of a buyout by rival firm Pfizer.

2 – Hortonworks
Data management firm Hortonworks has seen its share price steadily decline over the first few months of 2018, despite posting revenue growth of more than 40 percent in the fourth quarter of last year. This could make the company an attractive prospect for other tech businesses looking to gain access to Hortonworks’ data analytics expertise.

3 – Jagged Peak Energy
Geological concerns may have put off other oil producers from investing in the Southern Delaware Basin, but Jagged Peak Energy decided to take a chance. Now, with 2,000 drilling locations and more than 75,000 acres to explore, that chance looks likely to pay off, making the Colorado-based energy firm an attractive takeover prospect.

4 – Allergan
Although shares in Allergan are well below their 2015 peak, the Irish pharmaceutical firm has a number of new drugs in the pipeline that make the company a more appealing proposition than it may first appear. Potential buyers will be rightly concerned over heightened competition to Allergan’s key product, Botox, but that might not be enough to completely quell takeover rumours.

5 – Pinnacle West
Large-scale mergers in the utility sector can fall foul of national regulators, leaving major players looking at smaller firms for acquisitions. Not only does Arizona-based Pinnacle West boast strong long-term growth prospects, the fact that it is a single-state operator means that achieving regulatory approval for a potential takeover shouldn’t prove too much of a challenge.