Author: Max Tomlin

The visionary reform transforming Saudi Arabia’s business landscape

Posted on by Max Tomlin

The Kingdom of Saudi Arabia is currently undergoing a series of significant reforms that will transform the country over the coming years. Vision 2030, which was first unveiled in 2016, has several major goals, including decreasing the country’s reliance on fossil fuels for economic growth and increasing the private sector’s participation in the economy. The kingdom is also in the process of driving foreign direct investment.

Vision 2030 also involves increasing small and medium-sized enterprises’ (SMEs’) contributions to the economy, and privatising government companies in sectors such as utilities, transportation, and religious and archaeological tourism.

Other areas that are currently being focused on include the development of the country’s education, healthcare and infrastructure sectors. This said, the two most important economic reforms at present involve ensuring that public equity markets are aligned with international standards, and enhancing women’s participation in key industries.

Reaching up 

With respect to public equity markets, the Capital Market Authority of Saudi Arabia has made several changes to align our local markets with international ones. In particular, these adjustments were focused on the area of settlement activity and on an independent custodian model that allows foreigners to own public equity shares. These changes will help attract foreign capital, which can subsequently lead to a rise in the percentage of public equity shares owned by foreigners. Currently, this stands at two percent, compared with a figure of around 50 percent in other emerging markets of a similar size to Saudi Arabia.

Furthermore, the MSCI’s decision to add Saudi Arabia to its watch list for inclusion in the MSCI Emerging Markets Index reflects the success of governmental efforts to attract foreign capital. With regards to the second target, the Saudi Arabian Government wishes to increase the share of women in the labour force extensively over the coming years; a figure that currently stands at only 22 percent. However, the government’s recent decision to end the ban on women driving will help this increase. According to McKinsey & Company, 25 percent of the US’ current GDP is due to more women entering the workforce since the 1970s – consequently, Saudi Arabia’s economic growth should benefit immensely in the coming decades due to measures adopted today.

Driving change 

Economic reforms are benefitting both debt and equity capital markets. In 2017, the government announced its intentions to raise debt in local and international markets to mitigate the impact of budget deficits as a result of falling oil prices. In Q3 2017, Saudi Arabia raised SAR 37bn ($9.87bn) in domestic debt sales and, in April the same year, $9bn from the sales of Islamic bonds. These debt offerings have stimulated demand for local investment banking services.

In equity capital markets, the Capital Market Authority has permitted the listing of real estate investment trusts (REITs). This has stimulated investment banking activity, as many institutions monetise illiquid real estate assets. In addition, the creation of a parallel market – the Nomu-Parallel Market, for the listing of smaller companies with fewer requirements than those listed on the main market – has provided an additional exit option for private equity firms and family offices in the country.

The biggest factor affecting growth at present is the fact that government spending is still driven by energy prices and crude oil production. Oil prices represented approximately 85 percent of government revenue and 70 percent of government spending in 2017. Since January that year, Brent crude prices have remained largely unchanged, though they fell in the first and second quarters before rebounding in the third. Saudi Arabia has also reduced production in compliance with OPEC cuts, which has had a negative effect on growth.

Later that year, the government announced it would be making additional cuts starting in November. This move will undoubtedly have a greater effect on production and market diversity in the months to come; these additional cuts are a major reason why second quarter real GDP growth was minus one percent.

However, in the wider investment landscape, there are many misconceptions that wrongly deter investors from operating in the region. For one, some think the currency is unstable. In reality, Saudi Arabia’s riyal is pegged to the US dollar, and the exchange rate has been fixed at 3.75 riyals to the dollar since 1986. This peg has provided an anchor for local and international investors, while also reducing transaction costs and simplifying macroeconomic policy.

Others question Saudi Arabia’s readiness for investment, when the truth is that the country opened its economy to foreign investment several years ago. Foreigners can now directly own shares in public equity companies, while the ease of owning shares in private companies is increasing. Furthermore, the recent establishment of an official anti-corruption committee has improved fiscal security within the country, providing a more transparent business environment for investors and removing potential hindrances to Saudi Arabia’s economic performance moving forward.

Moving away from oil

Saudi Arabia is keen to diversify its economy away from a dependence on oil, but the speed with which this can happen depends on many factors. For example: its success in attracting foreign investment; its success in encouraging the establishment of SMEs; and the adoption of alternative, renewable energy. It is difficult to predict how quickly this will happen.

I would expect a meaningful reduction in Saudi’s dependence on oil by the Vision 2030 deadline. Oil will remain a significant driver of the economy, but if the kingdom has reduced its reliance by 25 to 50 percent from present-day levels (as a percentage of revenue and expenditure), it would be an astounding success. The government is also expanding its revenue base with measures such as a value-added tax initiative, which is set to take effect in 2018, and new fees for expats. However, a material decline in oil dependence will only come when longer-term initiatives begin to bear fruit.

An example of this is NEOM, a $500bn megacity that the Saudi Government intends to construct on the country’s Red Sea coast. The aim of this project, which was announced in October 2017, is to further diversify the economy away from its reliance on oil. The city will be powered by clean energy, and will provide a high quality of living for Saudi citizens in the post-oil years.

The largest share of economic growth is typically generated from the SME sector. Therefore, the best approach to move away from an oil-based economy is to reduce regulation and make it easier for new businesses to form. In fact, Saudi Arabia could soon lead the Arab and Muslim worlds in technological development – but to do so, an ecosystem must be developed, which requires participation from the government, private sector and education system. I would open several ‘free zones’ in the kingdom, where foreign investors could own 100 percent of a company with little start-up capital required.

Furthermore, the court system in Saudi Arabia is currently undergoing improvements. These changes will lead to more efficient resolutions in disputes in private sector contracts.

Diversification efforts

The private sector in general – and investment firms in particular – have a large role to play in the country’s drive to diversify its revenue base. Banks are financing the government in its efforts to reduce the drawdown of foreign reserves, which currently stand at around $500bn. They’re also key to the National Transformation Plan – the five-year plan ending in 2020 – which calls for the share of residential financing to increase from eight percent of non-oil GDP to 15 percent by 2020.

Investment banks are also participating in the debt and equity capital markets. What’s more, the increased borrowing by the government has translated into more mandates for investment banks’ debt capital market teams. The initiatives set up by the Capital Market Authority, such as permitting the listing of REITs or the development of the Nomu-Parallel Market, have created opportunities for investment banks to list companies and REITs. Additionally, the Capital Market Authority’s development of the independent custodian model has created new demand for custody services that segregate client assets from investment companies’ assets.

It’s remarkable to reflect on the pace of change in the kingdom over the past year; development is happening at a breathtaking speed. Consequently, the Saudi landscape will likely be significantly different in 10 years’ time. With more competition in industries, less reliance on oil, more foreign ownership and additional women in the workplace, the possibilities for Saudi Arabia are endless.

Eurozone growth hits highest figure in a decade

Posted on by Max Tomlin

Economic recovery in the eurozone appears to have reached a turning point, with the latest Eurostat figures showing that the GDP of the 19-state bloc increased by 2.5 percent over the course of 2017. Growth was up by a substantial margin from the previous year, when the economy grew 1.8 percent, which in turn was up from the 1.5 percent growth rate of 2015.

The new momentum seen in the eurozone has been underscored by improvements in investment levels as business confidence continues to grow

While the US was on a par with the eurozone in 2016, also expanding by 1.8 percent, the eurozone expanded slightly faster this year. Notably, President Trump’s ambitious growth target of three percent was not achieved, with US growth ultimately coming in at 2.3 percent. The wider 28-state grouping of the EU matched the rates seen in the eurozone, with growth also coming in at 2.5 percent.

After years of tepid growth, the new momentum seen in the eurozone has been underscored by improvements in investment levels as business confidence continues to grow. It has also been put down to a revival in the French economy, which is ordinarily a drag on the bloc’s growth, but last year expanded at its fastest rate for seven years. The stimulus programme from the European Central Bank continues to play a supportive role in heating up economic activity, though officials have signalled that a wind-down is in sight for the next year.

Unemployment in the bloc has also been heading downwards, coming in at 8.7 percent in December of last year, which is down a full percentage point from the previous year. Another reflection of the strengthening economy is the gradually decreasing debt-to-GDP ratio in the area, which has moved from 89.7 percent in the third quarter of 2016 to 88.1 percent in the third quarter of 2017.

US IPO market enjoys its strongest January in three decades

Posted on by Max Tomlin

The US initial public offering (IPO) market has had its strongest start to the year on record. According to data from Dealogic, which began tracking IPOs in 1995, new listings have raised a total of almost $8bn in January alone. 17 companies went public, representing the highest number of deals this early in the year since 1996. The previous $5.3bn record was set when 12 deals were signed in January 2014.

Although January is often a slow month for IPOs, the record-breaking total is expected to rise even further, as investors anticipate Hudson taking its $788m airline retail business public by the end of the month. Continuing the aviation trend, Argentinian Corporación América Airports’ $600m airport-operation offering is expected imminently.

This flurry of public offerings has partly assuaged concerns over the future of companies going public on the American stock exchange

That being said, January’s IPOs delivered a mixed performance. ADT, a home security company, saw its shares plummet by 15 percent in the first week of trading. However, PagSeguro Digital, a Brazilian fintech company, rocketed 36 percent on going public; the most impressive one-day surge for an IPO valued over $1bn since Snap took its Snapchat photo sharing app public last year.

The dynamic month for the IPO market follows a healthy year for US equities. The stock market has enjoyed a bull run, averaging gains of 20 percent for investments in 2017, and the S&P 500 also achieved 12 consecutive months of overall gains for the first time. The continuity of this buoyant trend has encouraged many companies to list in January. It is also likely that companies intending to go public in the last quarter of 2017 awaited confirmation of the US corporate tax reforms at the end of the year.

This flurry of public offerings has partly assuaged concerns over the future of companies going public on the American stock exchange, following a dramatic decline in deals. During the 1980s, around 200 initial public offerings were made in the US annually, and by 1997 the US had 7,500 public companies listed. However, this dwindled to 3,600 by the end of last year.

Prosperous technology companies have been particularly successful in gaining private investment, causing something of a dilemma as the stock exchange struggles to tempt such ‘unicorn’ enterprises to go public. For a $69bn tech giant like Uber, the prospect has seemed even less attractive after Snap’s shares dropped 20 percent since its listing. The tendency of unicorns such as Airbnb and SpaceX to remain private has also caused growing concern over the control of start-ups by an elite of inside investors.

With PagSeguro being the only tech company listed last month, concerns over the overall IPO market have not been resolved in spite of the lucrative January deals.

Housing Development Corporation brings city of Hulhumalé to life

Posted on by Max Tomlin

Hulhumalé is the culmination of recent efforts by the Maldives to reimagine its focus towards being both economically and environmentally resilient, as one of the lowest-lying nations in the world, Maldives is exceptionally vulnerable to climate change and its effects.

That being said, the Maldives is blessed with natural wonders. It is clear the country has effectively capitalised on its beauty, as the tourism sector has been the Maldivian economy’s backbone since the 1970s. A positive shift in the country’s development focus was observed during the past few years when not only tourists but also investors, entrepreneurs and digital nomads were witness to the emergence of a global city in the making: the city of Hulhumalé.

Hulhumalé is expected to accommodate two thirds of the entire populace of the Maldives. This will also help to centralise the country’s residents, who are currently spread across more than 185 islands

Hulhumalé is a reclaimed island located 8km off the northeast coast of Malé, the capital of the Maldives, and 6.5km away from Velana International Airport, the main aviation hub of the country. Phase one of Hulhumalé’s reclamation, consisting of 188 hectares, began in 1997 and was completed in 2002. The true birth of this city was celebrated in mid-2004, however, when it welcomed its very first settlement. With a broader vision initiated in early 2015, an additional 244 hectares were reclaimed in just nine weeks. The city lives to tell the tales of people who have found a new home in Hulhumalé, many of whom are originally from the outer islands.

Initially established in 2001, Housing Development Corporation (HDC) is a state-owned enterprise formed by presidential decree. As the official body appointed for the development of Hulhumalé, HDC undertakes and manages the overall planning and building of the city. HDC is currently working towards making Hulhumalé the first sustainable conurbation in the Maldives.

Under the current government’s bold and ambitious plans, HDC is focusing on four key areas. In terms of housing, we have initiated a number of government-supported projects, including social, mid-range and luxury residential developments. We are also targeting commercial builds with the aim of creating many new jobs on the island. Recreational areas, including green spaces, parks and sports facilities, are also in the pipeline. Collectively, these unique projects promise to introduce transformative new opportunities on a scale that has not previously been experienced in the Maldives.

From beneath the waves

The Hulhumalé development project initially began in the mid-1990s to alleviate congestion in the capital city and provide housing solutions for the growing population. With more than 130,000 residents crammed into just 5.8sq km, Malé remains one the most densely populated cities in the world. As a solution, Hulhumalé has been intelligently designed to accommodate the growing population with a layout that incorporates modern architecture, engineering and infrastructure. With the increasing social and economic challenges faced in Malé, many of which are caused by space constraints, the city of Hulhumalé has given profound hope to this island nation.

With a target population of approximately 240,000 residents, Hulhumalé is expected to accommodate two thirds of the entire populace of the Maldives. This will also help to centralise the country’s residents, who are currently spread across more than 185 islands. Initially, the city’s development had a sole focus on residential projects, but has now grown to incorporate large-scale developments concentrating on sectors including tourism, IT, telecommunications, finance, industry and education.

Hulhumalé is currently open for investment. The city presents a variety of development opportunities including a business park, an IT park, a cruise terminal, a marina, tourism zones and a water theme park, as well as major hotels, shopping malls and office buildings. The many distinct projects planned for the city are expected to provide good returns to investors, developers and locals. Promising rapid economic growth, the city is expected to provide approximately 85,000 jobs for the local population.

The city of Hulhumalé has been celebrated as a place of hope and one that promises much for the country’s youth. With a vibrant, well-educated and English-speaking population, the city provides opportunities for homegrown entrepreneurs and external investors alike. Today, Hulhumalé boasts canopies, interactive art and 3D paintings by local artists, students and creatives. The city has become synonymous with events, festivals and a variety of socially responsible initiatives.

Environmental ethics

As part of a number of green initiative projects in Hulhumalé, HDC is looking into more environmentally viable forms of transportation. These include the use of electric buses, high-speed public transportation systems and the implementation of bicycle lanes. HDC envisions aligning the strategies for Hulhumalé’s development with green architecture to create carbon-neutral buildings.

Plans to reduce the Maldives’ carbon footprint are a core focus of Hulhumalé’s development, and strong emphasis is being placed on encouraging developers to take an environmentally ethical approach in all stages of their building practices. For the development of Hulhumalé, HDC takes inspiration from the most liveable countries in the world. Most of the cities that are renowned for their excellent living conditions incorporate green and open spaces extensively.

With Hulhumalé, we have chosen to adopt a similar ethos and have provided increased public access to parks where people can walk, cycle, participate in active recreation and interact with other members of the community. One such planned objective is to have 2.5sq m of open space per person. HDC is also working on the implementation of solar photovoltaic systems to be placed in Hulhumalé, following a nationwide commitment to implementing greener technologies in the country.

As part of its corporate social responsibility, Hulhumalé has also opened its very first community centre, called Fahiveni. This centre will serve as an educational, recreational and cultural centre with a cinema, a gym, game rooms, sports facilities and counselling areas. Fahiveni is expected to be a public recreational space as well as a place to host youth awareness programmes, lectures and counselling. HDC also renovates and maintains the existing sports facilities in all neighbourhoods within Hulhumalé.

Channelling the energy and passion of the Maldivian youth into productive activities and providing a safe and supportive environment for them to learn is part of HDC’s strategy. Our special photography competition, Urban Art Reaction, encourages the residents of Hulhumalé to capture images of urban life and the natural world co-existing together on the island. Similarly, HDC also runs various community engagement programmes, including blood camps and tree plantation programmes, to support its vision for a close-knit community contributing towards a sustainable future. The aim is not to create a green space that stifles economic growth – rather, we believe that Hulhumalé can become a shining example of how the rural and urban landscapes can sustainably develop alongside one another.

More to come

Strategically located and promising great accessibility, Hulhumalé is directly connected to the Velana International Airport by land and remains within a twenty minute ferry ride of Malé Furthermore, in alignment with the government’s plan to create a liveable city for future generations, a special economic zone, featuring an IT park, financial district and knowledge park, is set to become an integral part of Hulhumalé. The Maldives boasts a favourable investment climate, with business profit tax maintained at 15 percent and possible residential benefits for investors. Hulhumalé also has readily available utility connections and allows for extended lease periods and longer grace periods for investment recovery.

Today, Hulhumalé is the most sought-after destination in the greater Malé region. Housing around 100 guesthouses, the city has become a haven for budget travellers, backpackers and family groups. The city has plans to explore further tourism opportunities such as the MICE market, medical tourism market, sports and adventure tourism, as well as the luxury markets. Upcoming projects include many firsts for the country. The construction of a multispecialist hospital, world-class sports facilities, yacht marina, cruise terminal and a water theme park aligns with HDC’s plan to introduce urban tourism to Hulhumalé. It is strongly believed that Hulhumalé has the potential to take the Maldivian tourism industry to the next level.

Much more than a smart city, Hulhumalé aims to address the social concerns of the community while simultaneously delivering economic solutions. The city is designed to cater to the country’s dominant youth population, but will provide opportunities for all age groups. The mega-projects and developments are expected to boost job prospects significantly, with multinational companies benefitting from a young and talented workforce. The local youth will also be able to contribute to the global tech scene and involve themselves in a variety of unique and promising projects.

At the moment, HDC is working to a very ambitious timeline. The aim is to commence development on all available spaces within the next five years and complete them in another five. This billion-dollar development makes it possible for the Maldives to become a global contender as a developed, sustainable and resilient nation.

Beyond paradise: where does offshore money come from?

Posted on by Max Tomlin

The equivalent of approximately 10 percent of the world’s GDP is stashed in tax havens across the globe, comprising bank deposits or financial assets like stocks, bonds and equities. Some of this wealth is declared to the authorities, but the majority escapes taxation altogether, hiding behind shell corporations and the like.

In November, the release of the Paradise Papers revealed a scattering of new information about the dynamics of this famously secretive industry. The leak, which held 13.4 million confidential documents originating from offshore law firm Appleby, was second only to the Panama Papers as the biggest ever data leak. The papers exposed a lengthy list of ultra-wealthy individuals who have turned to the offshore wealth management industry to conceal their riches. We learned that the Queen of England keeps millions of pounds in a Cayman Islands fund, rock star Bono used a Malta-based firm to invest in Lithuania, and several of Donald Trump’s cabinet ministers are adept players in the world of offshore finance.

Previous leaks, too, have yielded fresh and important insights into the secret wealth holdings of individuals and corporations. With the Panama Papers, Icelandic citizens discovered their prime minister’s family had attempted to hide millions in an offshore account, while LuxLeaks revealed the details of a series of sweetheart tax deals that various high-profile companies had struck with the Luxembourg Government.

Researchers have produced the first ever snapshot of country-by-country volumes of offshore wealth, making it possible to home in on the countries that are stashing the most away in tax havens

And yet, even the Paradise Papers, Panama Papers and LuxLeaks cannot provide a comprehensive picture of the multibillion-dollar offshore wealth management industry. Meanwhile, the secrecy surrounding tax havens means that there is only a patchwork of data in the public domain that can be used to establish answers to the questions surrounding the activities of tax havens, such as: who is shifting their money offshore? How does the volume of wealth held offshore differ between countries? What is the market share of different tax havens?

Who, where, when
Despite the difficulty of gleaning information about tax havens, in August 2017 – just three months before the Paradise Papers hit the press – a new dataset became available, shining some light on the ‘who’, ‘when’ and ‘where’ of tax havens. The data wasn’t accompanied by the drama of a leak, or the splash of individual names, but it revealed a lot of previously unknown information about the general shape of the offshore market.

This newly disclosed data, which comes from the Bank of International Settlements, consists of over a decade of information detailing the volume of bank deposits being held by foreigners in some of the world’s biggest financial centres, including Switzerland, Luxembourg, the Channel Islands and Hong Kong. It enabled researchers to estimate the amount of offshore wealth that originated from each country, as well as country-to-country flows, such as the amount of bank deposits belonging to Indian residents in Hong Kong, or the volume of deposits held by Russians in Luxembourg.

There are some notable holes in the data. For instance, certain jurisdictions are missing, including the Bahamas and the Cayman Islands. Furthermore, only deposits, rather than full portfolios of equities, bonds and mutual fund shares, are detailed. However, by making a few assumptions and incorporating data from previous data leaks and other sources, researchers have produced the first ever snapshot of country-by-country volumes of offshore wealth, making it possible to hone in on the countries that are stashing the most away in tax havens.

The data shows that, while the average country has approximately 10 percent of its GDP invested in tax havens, this percentage varies widely from one country to the next. Russia is at the extreme end, with the equivalent of approximately 60 percent of its GDP stored offshore. Meanwhile, Gulf countries and several Latin American countries held a similarly high percentage abroad. Across continental Europe, the figure dips to 15 percent. Scandinavian countries, meanwhile, hold only a few percent of their wealth abroad.

The researchers also dug into the logic driving people to shift their wealth offshore. Some of their observations led to relatively predictable conclusions, such as the fact that the amount of wealth held offshore tends to be higher in countries where there are natural resources, or where there has been political and economic instability in recent decades. Others were less predictable. Talking to World Finance, Gabriel Zucman, an assistant professor in economics at the University of California, Berkeley and one of the researchers behind the analysis, said: “What I found surprising is that the amount of wealth held offshore does not appear to be correlated with tax rates. Among the countries with the lowest stock of offshore assets, you find both relatively low-tax countries like Korea and Poland, and the world’s highest tax countries like Norway and Denmark.” This goes against the oft-held assumption that high tax rates prompt the wealthy to shift their money offshore. Indeed, Scandinavian countries, which have some of the highest tax rates in the world, also hold some of the lowest proportions of wealth offshore.

Another interesting dynamic is that institutional factors have no substantial impact – it does not seem to matter whether a country is a democracy or autocracy. While the data links certain autocracies such as Saudi Arabia and Russia to very large stocks of offshore assets, it equally finds that old democracies like the UK are overrepresented.

Time for transparency
As with previous leaks, the Paradise Papers provoked shock at how secretive and extensive the offshore wealth management industry is; calls for greater transparency and regulation have intensified. Notably, the globalised nature of capital means that the work of regulating the industry continually runs into incentive problems. Efforts to improve transparency can easily wind up punishing those that comply and encouraging evaders to respond by shifting their money elsewhere.

This is shown by the data: Switzerland was once by far and away the dominant player in the offshore market, but has recently experienced greater international pressure than other tax havens. As a result, its share of the industry has gradually been on the decline since the crash in 2008, while newer tax havens – most notably those in Asia – have been growing rapidly. Over the course of just eight years, Hong Kong’s assets under management grew by a factor of six.

The current approach to tackling the problem is the creation of a tax haven blacklist that acts to call out those jurisdictions that don’t adhere to agreed-upon standards. After the release of the Panama Papers, the G20 asked the OECD to draw up a blacklist of “uncooperative tax havens”. World Finance spoke to Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration, who said that the Paradise Papers leaks have come at a time when countries are in the process of implementing important changes. She argued that the list itself is a powerful incentive mechanism: “Most jurisdictions don’t want to suffer the reputational and economic consequences of being labelled non-compliant, so the peer review processes currently underway in the Global Forum [on Transparency and Exchange of Information for Tax Purposes] provide a strong incentive to most countries to improve.”

Data exchange
Another effort from the OECD has been the push for the automatic exchange of banking information across borders, which works by confronting customers with the possibility that their bank details could wind up with their home authorities. This generates an incentive to keep banking activities within the law and disclose any hidden assets. The system relies on a huge web of bilateral agreements to automatically share bank data across borders, but can be undermined by any missing links between tax havens, which is why it matters that only 49 early adopters are making exchanges. However, by September 2018, all financial centres have committed to engage in the scheme. According to Perez-Navarro, more than 2,000 bilateral exchange relationships for automatic exchange have already been activated: “This is a huge achievement. These efforts have delivered results even before the automatic exchanges started as some 500,000 people have disclosed previously undisclosed offshore assets, and almost €85bn ($100.7bn) of additional tax revenue has been identified as a result of voluntary compliance mechanisms and offshore investigations.”

It is Zucman’s stance, however, that these efforts do not go far enough. So far, he said, data leaks have “mostly resulted in a greater awareness of the issue among the public, not to significant policy changes”. He advocates more severe sanctions for tax havens to ensure they have incentives to change. But most importantly, he calls for a world financial registry to enable authorities to see beneath shell corporations and identify the true owners of financial capital. While this would necessitate an unprecedented level of international cooperation, it is an interesting example of a more serious measure that has started to appear in policy discussions. Ultimately, it will be a test of political will to maintain momentum beyond the immediate aftermath of the Paradise Papers.

Top 5 frontier markets to invest in

Posted on by Max Tomlin

Emerging markets offer investors greater rewards if they are willing to put up with a heightened level of risk, but for some, this is not enough. Instead, aggressive investors often turn to frontier markets – countries that are not developed enough to enter the ’emerging’ stage, but are certainly growing rapidly.

With frontier markets representing 19 of the top 25 fastest-growing economies, it is hardly surprising that investors are starting to take notice. It is, however, important to carefully assess the risks surrounding businesses in these countries, particularly with regards to economic or political volatility. The being said, if investors are willing to conduct due diligence, frontier markets can provide significant returns. Here, we take a look at the top five frontier markets that are worth investing in.

frontier markets are countries that are not developed enough to enter the ’emerging’ stage, but are growing rapidly

Bangladesh
The economy of Bangladesh has grown by an average of more than six percent over the past decade, making it an attractive investment destination. Infrastructure firms in particular are providing significant returns and have benefitted from sustained public sector support. Under the premiership of Sheikh Hasina, the country is experiencing a period of relative political stability, and the economic success stories of its neighbours, India and China, are having a beneficial knock-on effect.

Vietnam
With stable GDP growth, a young and rapidly growing population and a strategic location, Vietnam’s economic situation has improved markedly in recent times. The country has also made huge strides in terms of accessing credit and contract enforcement, meaning that doing business in the country is easier than ever. Vietnam’s increasing openness towards foreign investment, which reached record levels last year, provides further encouragement to investors.

Sri Lanka
The Sri Lankan Civil War may have ended less than 10 years ago, but the country has transformed significantly since, particularly in terms of its economic situation. The tourism industry is now booming, while efforts to improve the country’s port facilities could turn Sri Lanka into a regional hub for maritime trade. There is also an expectation that Sri Lanka will become a middle-income country within the next few years, significantly increasing the purchasing power of its people.

Kenya
As the largest and most advanced economy in East and Central Africa, Kenya is proving increasingly popular with investors. The technology sector is growing quickly, with the domestic IT market now estimated to be worth approximately $500m. There is also a thriving start-up scene, boosted by the fact that 67 percent of the population now has internet access. The country is quickly cementing itself as a growth centre for the region, and investors are unsurprisingly keen to play a role in future developments. 

Romania
The announcement that Romania was the EU’s fastest-growing economy last year may have come as a shock to some, but not to the well-informed investor. With 72 industrial parks spread across the country, a talented workforce and a competitive tax policy, the country has boasted a favourable business climate for a number of years now. With strong growth also being shown across the EU as a whole, Romania’s upward momentum looks set to continue for the foreseeable future.

PetroRio is flourishing in the face of adversity

Posted on by Max Tomlin

In 2014, the largest ever corruption scandal in Brazilian history engulfed the state-owned oil company Petrobras. Major cuts were suddenly seen across the industry, impacting huge projects with substantial amounts invested in them. It was the oil and gas companies, together with other key suppliers, that suffered the most due to a sudden pause in activity.

Fortunately, however, PetroRio is among the players in the industry that have taken some positives from the crisis. In terms of a countrywide perspective, the scandal caused not only Petrobras, but all its major suppliers, to embrace stronger governance and compliance measures.

The National Petroleum Agency has evolved from a historically bureaucratic regulator to a fast-paced and business-friendly agent

This shift created new opportunities for PetroRio, since its strong balance sheet puts it in a leading position with regards to buying assets in distress – such as those owned by Petrobras – in a market that also saw oil prices slide as Petrobras underwent all forms of public scrutiny.

The experience led Petrobras to adjust its strategy, rationalise its asset portfolio and seek a divestment agenda. This was seen by all to be very positive, considering Petrobras alone made up 94 percent of market share, and had to be able to cope with the necessary capital expenditure for all new bids undertaken by the government. The divestment programme plans to raise $21bn by the end of 2018, but some divestment processes still face challenges. Legal actions by oil workers’ trade unions attempt to keep state-owned assets from being sold to private corporations. Nonetheless, we do believe this will be overcome and give way to a new competitive landscape.

Divestment programmes

The Arctic Project is part of Petrobras’ $21bn divestment programme. Assets are packaged in clusters to make projects more attractive in terms of scale and logistics. The list of shallow-water assets which are of interest to us amount to approximately 50,000 barrels of BOE per day. PetroRio plans to adopt an aggressive strategy in its effort to acquire multiple assets from Petrobras’ divestment initiative.

Many international oil companies and financial institutions have already approached us, looking to carve partnerships for the bidding process, given our expertise in purchasing and redeveloping the Polvo oil field, which is located in the Campos basin. Regardless of any business partners, PetroRio is capable of buying several of these assets on its own due to its solid balance sheet.

Since most of these assets have been left aside by the operator in the past five to 10 years, we believe there are significant upsides for those that buy these assets. PetroRio was invited to all the tender procedures and is heading the field. Indeed, most other players either have other significant exploratory commitments on larger assets, or are already too leveraged to buy assets that demand significant investments to deliver the necessary upsides.

Some of these assets are located near PetroRio’s Polvo field, therefore there are some valuable operational synergies. There are of course several other M&A opportunities in Brazil being analysed and discussed with PetroRio at present, but few assets have such clear upsides as those from mature producing fields offered by the Arctic Project.

Growth strategy

PetroRio’s business plan is based on growth through the acquisition of oil and gas-producing fields. The company sees great opportunities in Brazil and also in other regions, such as South America and the Gulf of Mexico. These opportunities come not only from divestment plans from major oil players, but also from other smaller players reviewing their strategies since oil prices dropped in 2014. PetroRio has been maintaining regular discussions with local and international financial institutions that have shown interest in investing in the sector. Our strong balance sheet is free of debt and enjoys a solid cash position of close to $250m; this allows for productive negotiations, since banks and the companies selling the assets know we can close deals in a very short period of time.

As for organic growth opportunities, soon after Polvo was bought from BP and Maersk, PetroRio initiated the first stage of a comprehensive revitalisation plan to extend the useful life of the asset. During the first half of 2016, Polvo conducted well intervention and increased production by 20 percent. At that stage, the company’s goal was to increase production by revitalising its producing wells through workovers.

In the latter stages of 2017, investments were made in revamping the platform’s rig to prepare it for drilling activity, which will take place in early 2018. This will trigger the second stage of the investment programme. A two-well project is expected, with investments estimated between $40m and $60m, which will target up to 19.1 million barrels of undeveloped proved reserves and probable reserves, and test its certified possible reserves.

We expect to undergo further drilling during 2018 and 2019, and interventions in producing wells, such as enhanced oil recovery techniques, including other advanced technologies used in areas such as the North Sea.

To enable these investments, the company filed for a reduction in Polvo’s royalty rates, from the current 10 percent to the lower limit of five percent. The request, if granted, will extend the lifecycle of the field and increase its recovery factor and avoid premature decommissioning. It will also allow us to access and test undeveloped reserves and new geological horizons.

At present, the company’s operational efficiency rate averages 98 percent, much higher than the countrywide average of 85 percent. This high efficiency rating places PetroRio as a top-ranking player and a genuine benchmark for the industry. This was achieved after we underwent a strong switch in company culture between 2014 and 2016, a move led by the new management. Furthermore, through the active measurement of indicators provided by world-class systems, and a strong sense of urgency, we helped implement the changes that were needed to decrease the number of shutdowns and enable investments through a maintenance programme. A lot of hours were also put into innovation and training for our people, while a new health and safety programme was also successfully introduced. As a result, PetroRio achieved the incredible mark of 2,000 days without lost-time injuries, and is now part of the select group of companies with the Great Place To Work certification.

Acquisition of Brasoil

The acquisition of Brasoil was aligned with the company’s business model, which is driven by acquisitions, and represents a diversification of  PetroRio’s portfolio of revenue-generating assets, adding a natural gas field to reduce reliance in Oil-only assets.

Brasoil has a 10 percent stake in the Manati field concession contract, which currently produces 4.8 million net cubic metres of natural gas per day (approximately 30,000 BOE per day), placing it among the largest producing natural gas fields in Brazil. The concession also enjoys a take-or-pay contract with Petrobras, making it a strong cash-generating asset, with a 70 percent EBITDA margin.

PetroRio managed to acquire the asset at a low price. There are some significant tax benefits with the incorporation of Brasoil and we have identified some operational upsides which we are currently working on. With a low debt position and strong cash flow, we are also able to leverage Brasoil at an asset level for future investments and M&A opportunities.

Other Brasoil assets include a stake in the concessions of the Pirapema field – a natural gas asset currently in development – and an oil asset in Block FZA-M-254, both of which are located in the north of the country.

Now, and tomorrow

PetroRio went through a transformational programme when the controlling stake of Polvo was purchased in late 2013. Output had once peaked at 26,000 barrels of oil per day (BPD) in late 2010, but has been naturally declining ever since. Investments in Polvo’s redevelopment programme cost $13m, and saw an estimated increase of 1.7 million barrels in proven reserves and over 20 percent increase in production. With the incorporation of Brasoil, the Company now has the equivalent of an additional 3,000 BPD added to its production bringing it to 11,000 BPD in total.

PetroRio also carried out intervention with the use of advanced technologies, such as polymer injection tests in a producing well in order to reduce water and increase oil production volume. The result of these tests should help us in the next rounds of enhanced oil recovery techniques, which are estimated to take place between 2018 and 2019.

Investments in Polvo’s redevelopment programme cost $13m, and will see an estimated increase of 1.7 million barrels in proven reserves and a 20 percent increase in production. At the time, PetroRio increased its daily production, from 7,100 BPD (Q1 2016) to 9,000 BPD after completing these interventions. With the incorporation of Brasoil, we now have the equivalent of an additional 3,000 BPD added to our total production.

Brazil is living a fantastic moment in the oil and gas sector, with opportunities arising on many fronts. The National Petroleum Agency is playing its part in stimulating these opportunities. The agency has evolved from a historically bureaucratic regulator to a fast-paced and business-friendly agent. It has fuelled deals in the sector and ensured all rounds of bids are carried out within the original timeframe.

It is worth noting that opportunities are still arising in other regions of the world, not only from divestment plans already announced by oil majors, but from other smaller players who are reviewing their operations in multiple fields and focusing on large assets, as opposed to several smaller, more mature producing assets.

We expect to have some good news on the M&A front in the coming months, since the deal flow is high in the country and in other regions of interest. We also believe PetroRio will be the fastest-growing independent oil company in Brazil, being the best positioned company from a financial standpoint, while also targeting strong growth in the near future with our current investment programme.

6 basic principles of angel investing

Posted on by Max Tomlin

Governments around the world agree that angel investment is an important factor in boosting economies, and many have incentivised this kind of investment. In 2017, G20 leaders announced a focus on angel investment as a necessary measure to stabilise economies, pointing out that there is still a shortage of investors. Baybars Altuntas, an experienced investor and chairman of World Business Angel Investment Forum, spoke to World Finance about his six key principles of angel investment.

1. Understand what and who you are investing in
It is common for angel investors to ‘choose the jockey, not the horse’ when deciding who and what they will invest in. There is much more to this process than a quick binary choice of yes or no, and there are several approaches to considering teams that have been tried and tested in real-life business situations by experienced investors. Investors should consider the proposal from different angles: how much importance does the entrepreneur place on the investor’s background and character? How much due diligence should go into evaluating the start-up’s team? Should third-party collaboration be sought, and how much?

2. Understand the difference between start-ups and scale-ups
Statistics from the OECD reveal that a mere 1.2 percent of start-up businesses manage to attain angel investment, and that only one in 10 scale-up projects that gain investment actually make a successful business out of it. Therefore, what can prospective investors take away from these facts to apply in their own careers? Would it be wiser to deal only with start-ups that achieve lower success rates, by investing small amounts, or to take the risk of putting up more money for scale-ups which have a higher chance of success? It can often be a case of deciding between investing less with more attached risk, or investing more with less attached risk.

Having a thorough understanding of the principles of investment, and how exactly they are relevant to businesses of different kinds and ages, is crucial for a strong investment partnerships

3. What do you bring to the table?
Angels often consider themselves ‘value-added investors’, which means that they find helping to get a new business off the ground just as satisfying as they do helping it financially. The majority of angel investors were previously business owners and have a good understanding of what goes into making a company work. Angels contribute value-added advantages such as industry experience and knowhow, creative thinking, mentoring and industry contacts. When entrepreneurs value investors for more than the finances they bring to the table, they are more likely to get support across every facet of the company.

4. Don’t underestimate the value of mentoring
While a significant part of the job that an investor does for entrepreneurs is mentoring, it is common for investors to neglect to find their own mentor. Having a thorough understanding of the principles of investment, and how exactly they are relevant to businesses of different kinds and ages, is crucial for a strong investment partnership. Becoming familiar with the experiences of investors who aren’t new to the game is a great way of honing this understanding. Placing an experienced investor at the top of the mentorship chain that angel investment inevitably involves is a wise move for investing newcomers.

5. Be aware of exit expectations
Many start-ups expect the involvement of an angel investor to speed up the exit process, but the impact of an investor on exit – and exits in general – tends to be misunderstood. Much emphasis is placed on the start of business relationships, and growing them, and often business exit strategies are aimed at those approaching retirement. Awareness and training on exit transactions for venture capitalists (VCs) has become more common in recent times, which is very worthwhile as the majority of venture capital agreements give VCs full discretion over the outcome – if any – received by shareholders. However, exit strategies have transformed a lot in recent times: more companies than ever are being sold without ever having received investment from an angel, and this is happening sooner in a company’s lifetime than it used to. Many modern exit transactions are worth less than $30 million, and these usually take place a mere two or three years after the business’s start-up.

6. See the bigger picture
A former CEO who went on to be an experienced angel investor explained: “It turns out to be much easier than I expected, and also more interesting. The part I thought was hard, the mechanics of investing, really isn’t. You give a start-up money and they give you stock. But it really doesn’t matter: don’t spend much time worrying about the details of deal terms, especially when you first start angel investing. That’s not how you win at this game. When you hear people talking about a successful angel investor, they’re not saying ‘he got a 4x liquidation preference’, they’re saying ‘he invested in Google’. That is how you win: by investing in the right start-ups. That is so much more important than anything else.”

BAF Capital delivers impressive direct lending services across Latin America

Posted on by Max Tomlin

For more than 400 years, the banking sector dominated the international market for lending. Together with governments and mandated lead arrangers, these three groups have traditionally been responsible for the vast majority of issued loans. However, over time, their ability to meet changing market needs has gradually deteriorated. Between greater demands on banks to maintain their capital structure and governments being placed under increasing financial stress, issuing loans has become significantly more difficult.

As long as the default rate remains low, the volatility of the returns are extremely low, thus adding appeal for long-term investors

To counter this, other forms of lending are beginning to take prevalence in the market, offering the financial resources many businesses have recently been unable to access. Ernesto Lienhard, CIO of BAF Capital, said direct lending is one of the financial services that have emerged to fill this void.

Based in Switzerland, BAF Capital provides a broad range of financial services, specialising in the Latin America region. Primarily, the company provides working capital solutions to South American companies that mainly operate within the agribusiness, food and energy sectors. With a team of 120 professionals across five offices (Switzerland, Argentina, Uruguay, Brazil and Paraguay) and a management team with more than 30 years’ experience in corporate finance, the company has become one of the most active players in direct lending within the region.

“What we now call direct lending is lending provided by non-bank private entities,” Lienhard told World Finance. “The regulations and limitations to increase the leverage on a bank’s balance sheets opened an opportunity for non-banking independent private lenders to fulfil gaps in the global credit market.” Now, direct lending is set to continue to grow in both size and scope, gradually making up a far bigger proportion of the market. While the model presents some unique challenges, experienced direct lenders are now seeing significant opportunities in the years ahead.

Regulated growth

The lending market changed significantly during the aftermath of the 2008 global financial crisis. Many of the world’s banks have been forced to restructure their balance sheets to accommodate the significant write-offs that were necessary. Changes to regulations, such as increased capital requirements, have also weighed on banks worldwide. Coupled together, this has reduced banks’ capacity to offer loans, cutting off much-needed sources of credit to many small and medium-sized businesses.

Lienhard added that while stricter regulations have been responsible for much of the impact on the industry, there have also been additional factors at work: “Although tougher regulations for banks played a role in the reduction of their activities, we should not forget that weak capital structures forced them to drastically reduce their capacity to hold all loans in their books.”

There are yet more factors at work behind the rise of direct lending. Global trade and the nominal value of the world economy have been expanding very quickly, mainly due to the increase in commodity prices over the past 20 years, as well as China’s ongoing growth. Lienhard explained: “Banks did not have enough capital to follow the pace at which the world economy was growing, which allowed other players to fill that space. Today’s environment of historically low interest rates and excess liquidity is driving investors to search for new sources of yield.” These many factors have combined to produce a surge in interest for direct lending.

Finding a niche

BAF Capital has been in the market long enough to see how much this has changed the industry. “BAF Capital started its activity in 1996 as an alternative independent lender,” Lienhard said. “At that time, we were seen as a marginal and exotic player within the financial services industry.” Now, BAF Capital maintains a larger and more important role within the market.

For the businesses that partner with BAF Capital, numerous opportunities can arise. According to Lienhard, reliability, flexibility and quick responses are among the most important: “By having an in-depth knowledge of the business that these companies are involved in, we are able to provide them with liquidity even during difficult times, which is very valuable for any company. In many cases, banks are more reluctant to lend during such periods, which allows BAF to build relationships with a broader range of companies, and with even better yields.”

Lienhard added that BAF Capital can also provide funding to a company operating in different jurisdictions at the same time, giving the company another significant advantage when compared with other lenders.

The benefits are not limited to the businesses seeking credit. Lienhard explained that BAF Capital also provides an excellent opportunity for investors to access a well-diversified, self-originated portfolio of private collateralised loans in South America. “We do not use leverage and all risks are in our books, therefore our interest is fully aligned with our investors.”

As with any loan portfolio, the key is to keep the default ratio well below the interest rate of the portfolio. “As long as the default rate remains low, the volatility of the returns are extremely low, thus adding appeal for long-term investors, such as insurance companies or pension funds.”

Despite these benefits, Lienhard agreed that so-called extra leverage from shadow banks can be a risky venture, but that by no means suggests the asset class is worth avoiding completely. “I do not recommend having more than a 1:1 ratio of leverage in a credit portfolio. Keep in mind that a bank’s leverage ratio is 10:1 on average.”

While risks do exist, the agribusiness sector presents a more stable market than others. “Within the markets in which we operate, the financial sector does not cover all the financial needs of companies, thereby creating a space for alternative sources of funding,” Lienhard explained. “Trading companies, suppliers and non-bank lenders are there to fill the gap. Here at BAF, we are part of the financial structure of the companies we are involved in.”

Lienhard added that low correlation with traditional fixed income and equity investments is another upside for an investor’s portfolio: “Regarding diversification in any investor’s portfolio, private debt provides superior protection against traditional bonds and equity-like return.”

Varied marketplaces

Considering all of these factors, the direct lending sector is currently looking forward to a promising future. Lienhard said BAF Capital has already seen the direct lending industry generate significant momentum, with more growth on the horizon. “Nowadays almost all asset managers have a strong direct lending division, including KKR, Blackstone and Goldman Sachs. It will take a long time before the banking industry can increase its capital requirements in order to satisfy the increased demand.”

Direct lending may also be immune to some of the other forces currently rocking the financial market. Lienhard explained that the disruptions that have been caused by the rise of fintech are unlikely to have the same effect on the direct lending market: “The world is certainly evolving, and I don’t see fintech companies as a threat. I believe that both can benefit from each other, but the view of regulators will be important for this.”

According to Lienhard, banks are particularly vulnerable to fintech challengers, since their nature requires them to offer a generalised product: “Banks own the bulk of customer relationships, both personal and business. Fintech players can provide them with better technology to improve customer service, serve small businesses in a much more cost-effective way, and get them access to other customers as well. In addition, I believe that fintech platforms might even help increase direct lending. They will need financing to grow their business, and that’s where we can find synergies.”

Neither are tax barriers an immediate difficulty for direct lending. “You can’t stop globalisation. With a growing world population, countries with competitive advantages in terms of land and water will definitely benefit against others,” Lienhard said. BAF Capital also operates within a sector that is not particularly vulnerable to international restrictions, especially in the long term. “South America, especially Argentina and Brazil, will always be a food supplier to the world,” Lienhard said. “There are times in which countries can impose barriers on certain products to protect their industry, but in the long run, South America will always be a net exporter of agricultural products.”

Latin America is also a region with strong growth prospects in terms of direct lending, Lienhard said. “The demand is strong for bonds by the private banking sector, as it is a plain, vanilla investment for customers. On the other hand, big and sophisticated investors like insurance companies and pension funds are looking to invest in private debt because of their low volatility vis-à-vis bonds, and better returns.”

Considered as a whole, the direct lending sector is set for significant growth during a future that has the potential to be filled with consistent returns. As investors are looking for new solutions, investing in direct lending will soon be a must when it comes to constructing a balanced portfolio. Lienhard concluded: “For me, diversification is still the key word for any portfolio.”

PMI acclaiming the benefits of an agile project management approach

Posted on by Max Tomlin

Project Management Institute (PMI) is urging organisations to continue to embrace project management as critical to their success. The results of PMI’s 2017 Pulse of the Profession: Success Rates Rise: Transforming the High Cost of Low Performance, suggest that organisations are listening. The survey found that in 2016, for the first time in five years, more projects met their original business goals while being completed within budget.

In today’s accelerated market, a culture of organisational agility that enables flexible use of the right approach for the right project is an essential strategy

Compared with the previous year, there was a 20 percent decline in money wasted due to poor project performance. Organisations are now wasting an average of 9.7 percent, or €97m, of every €1bn invested in projects; figures for the previous year were an average of €122m wasted for every €1bn invested. Furthermore, organisations that invest in project management practices successfully complete more of their strategic initiatives, wasting 28 times less money due to poor project performance.

It is encouraging that organisations around the globe are making significant progress in successfully implementing projects – after all, these are the strategic initiatives that drive change. Recent improvements can be attributed to a number of factors, including greater organisational agility. Organisations now recognise the value of agility as a strategic competence, rather than a set of tools and templates.

Establishing a common language
Agility is the ability to quickly sense and adapt to external and internal changes to deliver relevant results in a productive and cost-effective manner. Being agile is a mindset based on a set of key values and principles designed to enable collaborative work and deliver value through a people-first approach. Agile transformation is an ongoing, dynamic effort to develop an organisation’s ability to adapt rapidly within a fast-changing environment and achieve maximum value by engaging people, improving processes and enhancing culture.

In today’s accelerated market, a culture of organisational agility that enables flexible use of the right approach for the right project is an essential strategy. As the leading association for more than three million project, programme and portfolio management professionals around the world, PMI has long been an advocate for organisational agility. PMI believes practitioners should consider the full range of project management approaches, from predictive to agile, in determining which method will deliver the best project outcomes.

Varied approach
Being agile is a topic of growing importance in project management. The most forward-thinking organisations are embracing a continuum of practices that range from predictive to agile, well defined to iterative, and more to less controlled. Approximately a quarter of organisations use hybrid or customised approaches that match techniques to the needs of the project and stakeholder group. Another approach to project delivery is to take a hybrid approach. Hybrid approaches use a combination of agile and predictive elements, such as a gate review process for continued funding decisions and Scrum for development work.

PMI believes that agile and predictive approaches, as well as other methods, are effective in specific scenarios and situations, a belief that is supported by the company’s research. Organisations with higher agility reported more projects successfully meeting their original goals and business intent – whether they use hybrid (72 percent), predictive (71 percent) or agile (68 percent) approaches – than those with low agility using the same methods. Higher organisational agility supports more projects in meeting their original goals and business intent – one of the key measures of project success.

Project management is the application of knowledge, skills, tools and techniques to projects to meet their requirements. Agile approaches allow teams to deliver projects piece by piece and make rapid adjustments as needed. Predictive approaches call for most of the planning to be done upfront, before following a sequential process. However, it’s not necessary to use only one approach for a project. Often, projects will combine elements of predictive, iterative, incremental and agile approaches to take a hybrid approach. It’s important to note that an agile approach is not practised in place of managing a project: rather, it is introduced as a way to speed up the phases of a project.

Practitioners are most successful when managing activities based on the characteristics of each project. With this in mind, PMI recommends evaluating which approach will yield the most successful business outcomes. That was the rationale for offering the Agile Practice Guide, together with A Guide to the Project Management Body of Knowledge (PMBOK Guide) – Sixth Edition. In doing so, PMI has brought a broad spectrum of approaches to the forefront of project management that will enable managers to select the method that is ideal for their project.

Fundamental practices
Since its release in 1996, the PMBOK Guide has provided project professionals with the fundamental practices needed to achieve positive organisational results and outcomes, and identifies the practices that are applicable to most projects, most of the time. Additionally, specific and detailed agile approaches to project management appear in the PMBOK Guide. The Agile Practice Guide, created in partnership with Agile Alliance, is a companion to the PMBOK Guide and is intended to serve as a bridge to connect waterfall and agile approaches.

Together, the publications provide critical information spanning many approaches to ensure practitioners can select the method that is best suited to each individual project. PMI’s goal is to help project managers accustomed to a more traditional environment adapt and make use of other project management approaches that may be more suitable to their project. This aligns with increased recognition by practitioners worldwide that there is no one-size-fits-all approach to delivering successful projects.

While the agile movement accelerated after the creation of the Manifesto for Agile Software Development in 2001, it has been part of project management since its early days. With the publication of the Agile Manifesto, agile practices became more formalised, particularly when used to manage software projects. However, over time, being agile has become the mainstay of quick, responsive and flexible work – all of which are desirable organisational traits in the era of constant disruption.

More and more organisations are applying iterative practices to their work, and we now see agile approaches used for some projects in manufacturing, education and healthcare industries, among others. As agility continues to emerge as a response to fleeting competitive advantage, we see more organisations incorporating agile practices – and practitioners who are trained in specific approaches – into their project management portfolios.

Competitive advantage
Disruptive technologies are rapidly changing the playing field by decreasing the barriers to entry. More mature organisations are increasingly prone to being highly complex and potentially slow to innovate, which can leave them lagging behind when delivering new solutions to their customers. These organisations find themselves competing with small businesses and start-ups that are able to rapidly produce products that fit customer needs. This speed of change will continue to drive large organisations to adopt an agile mindset in order to stay competitive and keep their existing market share.

Staunch support exists for both predictive and agile approaches, but there is growing recognition that practitioners can be most successful if they manage activities with the approach that suits them best. PMI recognises that there are significant differences between traditional project managers and agilists: each group may have certain biases but, despite real or perceived differences, both have a shared interest in successful project outcomes. With increasing competition and accelerating disruptions from new technologies, market shifts and social change, the need to demonstrate agility is greater than ever.

PMI’s expansion to represent the full spectrum of project management practices has not led the organisation to endorse one approach in particular. Rather, both agile and waterfall approaches, as well as others, are effective in specific scenarios and situations. PMI encourages organisations and practitioners to explore all methods, practices and approaches to drive success and begin to consider what’s on the horizon for project delivery.

Jerome Powell confirmed as the Fed’s next chairman

Posted on by Max Tomlin

The US Senate has voted with a sizable majority of 84-13 to confirm Jerome Powell as the next chairman of the Federal Reserve. Powell, who has held a position on the board of governors since 2012, will take over from his predecessor, Janet Yellen, in early February.

In contrast to some more radical frontrunners for the job, Powell is a centrist with a record of adhering to his predecessor’s dovish approach

Powell will inherit an economy exhibiting strong economic growth, which currently stands at three percent, coupled with low inflation and a labour market where the number of jobless claims has recently reached a nearly 45-year low. However, he will face the delicate task of slowly unwinding the Fed’s $4.5trn balance sheet and deciding on the pace of rate rises as the economy heats up.

Powell’s nomination for the job by President Trump broke with a long-standing tradition of presidents sticking with the chairperson who was in place when they took office. In this sense, Powell’s appointment has been controversial, but in many ways the decision is a vote of continuity.

In contrast to some more radical frontrunners for the job, Powell is a centrist with a record of adhering to his predecessor’s dovish approach. With respect to rate rises over the coming years, he has signalled that he will continue to pursue the gradualist approach advocated by Yellen.

One issue where he may tread closer to the Trump line, however, is on banking regulation, given his recent expression of an appetite for picking apart aspects of the Fed’s supervision.

Trump’s desire to steer the central bank towards a more regulation-averse slant has also been reflected in his recent appointments and has been boosted by the resignation of Daniel Tarullo, who was a staunch defender of regulatory safeguards.

Fintech start-ups continue to disrupt the established order

Posted on by Max Tomlin

Banks have been the dominant force in the financial sector for decades, but it is very possible that this is about to change. Emerging financial technology start-ups are challenging this authority, demonstrating levels of commitment to innovation and agility that long-established financial institutions cannot compete with.

According to a recent report by PwC, more than 80 percent of existing fintech firms believe they are losing revenue to more innovative rivals. Much of the fintech-related discussion concerns how banks can compete with the new kids on the block, and it is true that incumbent financial institutions have increased internal efforts to innovate in response to this threat. However, there may be another way for banks to navigate the rapid changes being experienced in the finance industry.

Established financial institutions are beginning to realise that partnering with new industry players could prove mutually beneficial

Established financial institutions are beginning to realise that partnering with new industry players could prove mutually beneficial. Instead of concentrating on the ways that fintech start-ups are able to eat into their market share, banks are exploring what resources they have to offer the financial newcomers.

At Mash, we understand the importance of partnerships, whether we are signing local agreements with retail partners or negotiating a deal with a global investment firm. As in many other industries, the financial sector is starting to learn that collaboration may turn out to be a more successful approach than competition.

Standing out

There are 4,200 fintech start-ups in Europe alone. This has created a rich source of talent for companies to draw from, but it has also resulted in a fiercely competitive business environment. As a business operating in the financial sector today, it is more important than ever to have a unique offering – something distinct that allows you to stand out in a crowded market.

One of the ways that Mash is distinguishing itself from other fintech companies is by enabling consumers to make purchases, either online or in store, and pay for them later by invoice or monthly instalment. This gives shoppers much greater flexibility than they would receive when using traditional payment methods. In addition, it has also helped foster the development of innovative new business models. Through our work with Finnish manufacturer Finlayson, for instance, we have helped create the first circular economy solution for home textiles.

Our distribution is another key differentiator for us at Mash. We were the first company in Europe to offer a scalable ‘pay-later’ solution at point of sale. Furthermore, we remain one of only two solutions in Europe that can help merchants with both an online and in-store presence. Through our pay-later solution, consumers input their identity number into the Mash terminal, which will instantly check their credit score as part of the onboarding process, before receiving the option of paying by invoice. The merchant gets paid instantly and then 14 days later the customer receives an invoice, which can either be paid in full or converted into a finance plan across 12, 24 or 36 months.

The partnerships that we’ve been developing with our clients – whether they are a car dealership or a furniture retailer – are a great example of how collaboration boosts results for everyone involved. With added flexibility, merchants are witnessing an increase in customer spending, while Mash benefits from the publicity we receive at the point of sale.

Mash also boasts a unique mix of experience and innovation. Ours is not the story of a brand new fintech company feeling its way into the industry. Mash has been serving customers for 10 years and, during that time, has created a solid technological foundation as a result of multiple rounds of iteration. We’ve received large-scale financial backing from our pioneering deal with Fortress – the largest of its kind for an unlisted company in Finland. We are young enough to innovate, but old enough to know the market.

Fresh ideas

With banks previously facing little in the way of genuine competition, the finance industry had become stagnant and was devoid of original ideas. In other words, it was ripe for disruption. Fintech companies are now ripping up the rulebook, delivering innovative solutions that benefit customers and other businesses alike. For instance: blockchain applications are bringing greater efficiency, security and transparency to financial transactions; cryptocurrencies are providing businesses with a new way of raising investment; and payment systems, like Mash, are giving consumers more flexibility at the point of sale. Although banks are exploring ways they can innovate, they face a set of difficult challenges that must be overcome first. Many financial institutions are held back by legacy infrastructure that would prove difficult and costly to change. They can also suffer from a risk-averse culture, partially as a result of stringent regulatory constraints. Banks traditionally focus on keeping existing services running as smoothly as possible, rather than looking for new ways of working.

As fintech companies came to be seen as the true innovators in the financial services space, it became more difficult for traditional banks to attract talented personnel. This, in turn, meant banks struggled to introduce new ideas, trapping them in a vicious cycle. Attempts by multinational tech firms, like Facebook and Google, to enter the finance industry have made the recruitment process even more competitive.

From a personal point of view, the innovation being explored by fintech firms played a significant role in convincing me to move from Morgan Stanley to Mash. I wanted to have a hands-on role in building a business and delivering better services to customers. We achieve this, not only through our technological solutions, but also through our team of committed employees.

We employ more than 100 members of staff representing 19 different nationalities. Our staff come from different backgrounds and bring unique ideas to the company, but they are united by one common trait: a commitment to disruptive innovation. We also foster a close and equal working community, where the CEO sits in the same space as everyone else. We cultivate an agile environment where ideas can be shared freely, tested quickly and promoted widely.

The right model

With all the talk about the challenge being posed by fintech firms, it is important to remember that banks still have something to offer. Whether it’s in terms of reach, capital or expertise, these long-established financial institutions have a number of advantages over new fintech organisations. With the start-up success rate languishing around 0.2 percent and corporate success standing between 12 and 20 percent, it’s clear that fintech businesses are sometimes in need of assistance.

Given that banks and finance start-ups both have distinct advantages, it makes sense that many of them are forming partnerships.  However, there are multiple different collaborative models that banks and their fintech partners must choose from, each with their particular strengths and weaknesses.

The first collaboration model simply involves the bank acquiring a fintech start-up. This gives banks access to a start-up’s technology and employees, creating a fast route to market. This type of collaboration, however, also requires the greatest level of investment. On the other hand, the ‘investment collaboration’ model involves banks providing financial support without committing to a full acquisition, in exchange for the power to influence emerging technologies.

The ‘partnership collaborative’ model sees banks and fintech firms sharing costs and other resources to co-develop new solutions. The ‘pollinate and co-create’ model occurs when banks take on the role of a fintech incubator or accelerator. This lets banks shape a company’s roadmap to address specific problems and allows employees prototype new services themselves.

The final collaboration model, and the one that requires the least investment, is the ‘scout and share’ model. This is where banks explore any developing technology trends in the finance sector before deciding to meet with innovative companies to discuss future opportunities. Knowledge share sessions with venture capitalists and other investors will also help determine what innovations are worth pursuing. This can be a great way of ensuring that banks are using the best technologies, regardless of whether they are developed in-house or by external firms. Essentially, it means that they can make better-informed architectural decisions.

Choosing the right collaboration model is hugely important, not only for banks, but for fintech start-ups too. While banks will have to decide how much investment they are willing to commit to the collaborative process and how much control they need, fintech firms will need to consider how much investment they require and how much control they are willing to surrender.

At Mash, we want to be true partners and solve shared problems. We are not interested in simply being a service provider – it is much more compelling to sit with a senior leadership team and talk through the ‘ugly truths’ that a partner needs to solve and then develop a shared plan that creates accretive value for both parties. This approach has seen us continue to win industry-defining partnerships that help us to shake up the finance sector and deliver better services for our customers.

Rönesans Healthcare Investment is modernising infrastructure in Turkey

Posted on by Max Tomlin

Many of the world’s governments face a long backlog of much-needed infrastructure and development projects. Debates surrounding the priority of these projects dominate election campaigns, and very few nations have the resources to complete everything they would like to achieve. Often, the only feasible solution is to delay plans over and over again, much to the detriment of the communities that rely on them.

To make these projects possible, governments are increasingly pursuing public-private partnerships (PPPs) to source additional funds, while also minimising risk. Such opportunities give private investors the chance to profit from the sector, while also providing a vital contribution to an often under-funded part of society.

Rönesans Healthcare Investment has invested in a number of PPP deals in Turkey, including the Ikitelli Hospital and Elazig Hospital. Rönesans Holding has also acquired Dutch-based constructor Ballast Nedam, along with other European companies, including: Hergiswil of Switzerland; Heitkamp of Germany; and a minority share purchase of Porr of Austria.

Kamil Yanıkomeroglu, Chairman of Rönesans Healthcare Investment, spoke to World Finance about how these deals represent an innovative new way of doing business.

The healthcare industry in Turkey has progressed a lot in recent years. Could you tell us about its development?
The beginning of the PPP story in Turkey dates back to 2003, when the Ministry of Health (MoH) launched its Health Transformation Programme. Being the main government body responsible for healthcare sector policymaking and the provision of healthcare services, the MoH recognised the need for renewed facilities and improved healthcare technology. Consequently, it started searching for a new scheme of financing these within a very short time frame. The target was big, so the transformation of old methods had to be fundamental.

PPS give private investors the opportunity to profit from the sector, while also providing a vital contribution to a sometimes under-funded facet of society

After an in-depth assessment of models in the world, the MoH decided to follow the PPP route, which has proven very efficient in terms of value for money for many other states. Since Turkey had sufficient private initiative to realise these investments, PPP schemes would give the Turkish Government a lot of leverage in terms of financing many new hospitals, while at the same time being able to extend its tenor of payment of these investments. Therefore, the government decided this would be the best scheme, and the MoH announced tenders. This was actually the beginning of a difficult process.

The project agreement in its initial form was not considered robust enough, and non-recourse project financing seemed to be a difficult target. After much hard work, amendments to the legislation to clarify grey areas and line-by-line assessment of the agreements with the MoH, we finally achieved the agreements in their current form in 2014. Today, this has proven a very robust structure, banked various times by international financing institutions.

All in all, I believe that the government’s decision to proceed with a PPP scheme was the correct decision. Since it was first implemented in Turkey, despite some bumps on the road at the very beginning, Turkey’s PPP adventure has become an example to many other countries aiming to adopt similar infrastructure development schemes.

What are the most important things to consider before making an investment in a PPP project in Turkey?

In general terms, the forex protection, termination regime and payment guarantee provided by the MoH are the strengths of the PPP scheme in Turkey. The scheme and our projects have already been banked several times by international lenders and international financial institutions, including the European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), European Investment Bank, SMBC, Bank of Tokyo-Mitsubishi (BTMU), Siemens, Japan Bank for International Cooperation (JBIC), Nissay and Daiichi, as well as NEXI as a principles for responsible investment provider, and many others. We partnered with Meridiam in four of the projects, and with Sojitz in the Ikitelli Hospital project. At this stage, we have opened Yozgat PPP Hospital (475 beds) in January 2017 and Adana PPP Hospital (1,550 beds) in September 2017, with both doing very well operationally. We finished these hospitals comfortably on time and in budget.

We have a great cooperation with the MoH, and the transition from construction to operation worked very well. Although we did experience the difficulty of being the first investor to open a PPP hospital in Turkey, with support from the MoH, Ministry of Finance and other stakeholders, every problem was solved. We have been receiving payments in accordance with the agreements, without any delay, and operations have been going smoothly. As a result, we have now successfully entered phase two (operations) of these investments.

At Rönesans, we have many hats. We are the investor at the special purpose vehicles, the engineering, procurement and construction contractor, and the facility management contractor. If I put on my investor hat for this question, I would observe that the scheme has repeatedly proven itself to be robust – not only in Europe through our partnership with Meridiam and European banks, but also in the Far East, thanks to our partnership with Sojitz and our friends at JBIC, NEXI and other Japanese financing institutions. As such, a new foreign investor should certainly seize this opportunity in Turkey and catch the train.

It is also important to underline that when you get comfortable with the product or project itself, local partners are always crucial when you enter new regions.

Are there ever any conflicts of interest between the public and private sectors concerning PPP deals?
The primary concerns for the public sector are having the hospital built and constructed to a certain level of specification, while providing good quality service at the lowest possible cost within a sustainable scheme. Of course, this has to allow some margin for the private investors to ensure that it is a sustainable business model throughout the life of the concession. The private sector has a concern of making that margin in return for the services provided and, at Rönesans, we are always concerned with preserving our reputation in the eyes of the public. Indeed, that angle is always a consideration for us while undertaking all these roles in hospital projects.

With the PPP scheme, the private sector is required to procure a high set of standards for design, construction and equipment, and then to provide services in accordance with well-defined standards. Without these, the revenues become subject to penalties defined under the project agreement, so protection for standards is already written into the agreements.

When you look at these projects from a general public benefit perspective, we value the social impact and, as a responsible organisation, we act next to the public sector and work together with it to bring out the best possible results for the whole community. Since the rules are clear in the agreement from day one, I would not say that we have material conflicts of interest with the public sector in any of these projects.

How significant are financial institutions when it comes to new construction projects, like the recent Elazı˘g Hospital deal, or your more recent Ikitelli deal?
Financial institutions are part of the foundation of a long-term PPP investment. At Rönesans, when we make decisions about new investments, we always assess the bankability of the project, across all sectors. We have a very large investment arm including our real estate and PPP business, and we have always leveraged our equity with external financing and in the real estate business, also with refinancing. This has also helped us reinvest our capital to new projects, helping us grow our investments and the company.

In the PPP projects, we have tried different schemes. For our Elazı˘g project, following our partner Meridiam’s experience in bond financing in other projects, we decided to do a bond financing. This was a first-ever in Turkey in many senses and included very innovative components and new products from EBRD. We had the support of EBRD, the Multilateral Investment Guarantee Agency and IFC. Without them, the Elazıg bond would not have been possible. Together they set a very good example and pioneered an excellent scheme of financing other future projects.

Turkey’s PPP adventure has become an example to many other countries aiming to adopt similar infrastructure development schemes

Ikitelli was another adventure in itself. Being one of the largest PPP hospitals in Turkey, with a debt requirement of $1.5bn, we had to find new resources to finance this project. After collaborating with Sojitz, we were able to tap Japanese financing resources. Furthermore, JBIC and NEXI have provided great support for this huge deal and have made it possible. Our trusted banks SMBC and BTMU, who we now consider reliable business partners, have also provided a great deal of support. This deal also had some interesting and first-ever aspects, with newcomers including Standard Chartered, Nissay and Daiichi coming to the pipeline. The deal was the largest infrastructure deal in Turkey for JBIC with 18 years tenor, and it was the first in Japanese currency in the pipeline.

From our point of view, financial institutions and their support to all new projects are fundamental, and we believe in building trust and long-term relationships with financial institutions.

What are some of the main responsibilities involved in the creation of what will become one of the world’s largest hospitals?
Constructing the biggest hospital in the area brings several responsibilities, both in technical and operational terms. In technical terms, since it is a large project with a gross building area of over one million sq m, the main challenge is to design a project that can both be operated efficiently and be navigated across easily. You need to think of various ways to provide efficiency for the MoH staff delivering these healthcare services, and also comfort and convenience for the patients who will benefit from these services. The second challenge concerning the design is the seismic base-isolator component. Ikitelli, like our Adana, Elazı˘g and Bursa hospitals, has seismic isolators and will be the largest building in the world with seismic isolators, dethroning our Adana hospital. Adana had previosuly been selected as the world’s second largest building to have isolators, according to ENR’s recent listing (with Apple’s new headquarters in California being the largest).

 

The second most important responsibility is to operate the hospital professionally. Thousands of people will be using the hospital on a daily basis, and this could create a chaotic environment if not managed efficiently; an advanced level of facility management is required. By the time we open the Ikitelli PPP hospital, our facility management company will have gained wide experience running large-scale operations across other projects. We had already started training our staff before we opened Yozgat and those trainees have grown to become trainers in Adana. Our organisation is, therefore, able to transfer experience and expertise from site to site, improving its processes and capability each time a new hospital is opened.

What are some of the most important aspects of your recent international partnerships?
We believe in trust in business life, and we build trust with our partners. I would say this is the underlying element of each of our partnerships. We have a partnership with American AGP in some of our real estate projects, with GIC of Singapore in the real estate platform, with French infrastructure fund Meridiam in PPPs, and with Japanese trading house Sojitz in our heavy industry projects in Turkmenistan and in PPP projects in Turkey. We have also been acquiring large European construction companies and, when doing this, you have to make efforts to integrate your own culture with the culture of those organisations. We believe these partnerships reflect our organisation’s ability to build trust with many different international players and also demonstrate our ability to reach a common ground with our mutual organisations. Indeed, our capabilities have always allowed us to create synergies in many areas, which have led to strong and sustainable partnerships. In any case, if there is no trust, then there is no reliability and then there is no partnership. The basis for any successful partnership is trust and good will.

The construction industry appears ripe for disruption. Why did you recently choose to acquire Ballast Nedam?
At Rönesans we work tirelessly to maintain our pace of growth, no matter what the global and local circumstances may be. A few years ago, if you asked others, they would have told you that the health PPPs in Turkey are a big risk and will probably never happen, but now it has become a very attractive investment, supported by the global financing community and international investors. We analyse our potential investments thoroughly and we do not refrain from challenges, otherwise we would not be able to grow, and we always consider future opportunities for growth. Ballast Nedam fit perfectly into our long-term strategy to grow in Europe, so we seized the opportunity to acquire this large, deep-rooted company, so we could achieve our goal of growing in Europe earlier than planned. We will now utilise Ballast’s infrastructure expertise to expand our business in Europe.

Having been at the company for 15 years now, how does your experience influence the decisions you make?

Having been more than 25 years in business life, I have always worked in environments where the balance can shift very fast and circumstances are perpetually changing. In business, you have to think and act fast to seize critical opportunities and I learned from experience to do exactly that, while also making sensible decisions in high-pressure situations.

Working for more than 25 years in the private sector, building partnerships with various international partners and developing various projects alongside international companies, has given me a strong global insight. Looking at things from different perspectives always helps innovative thinking and progression. For long-term decisions, I think the thorough consideration of political and economic circumstances are necessary in order to distinguish the right investments from the wrong ones.

Environmental and social impacts can be significant in any construction project. How does Rönesans Holding keep sustainability at the forefront of its work?
Part of the success of our investments and construction business comes down to the importance we attach to meeting global environmental and social (E&S) standards. All of our projects are subject to very strict E&S principles and health and safety guidelines, as we always allocate a significant budget for monitoring these issues. There are periodic requirements for each project that need to be satisfied and reported. This comes from our dedication to build trust with all stakeholders that are involved in our projects.

What can we expect for the future?
We are planning to export our PPP scheme to some target countries that aim to improve their social infrastructure through this scheme. We will continue to grow in Europe, mainly with new infrastructure projects. We will definitely be interested in new tenders in Turkey, with PPP hospitals and other large infrastructure projects expected to be launched by the government in the near future. We are also developing some new real estate projects and plan to open others in 2018. In summary, we intend to expand our infrastructure arm with more projects in Turkey and Europe in the near future.