Author: Max Tomlin

The benefits (and risks) of investing in Myanmar

Posted on by Max Tomlin

Not all publicity is good publicity. In late 2016, Myanmar made international headlines following reports that the country’s government was engaged in the widespread persecution of its Muslim Rohingya minority. Over the following months, stories of police detention, arson, gang rape and state-authorised murder emerged. Hundreds of thousands fled from Rakhine State in the country’s west to refugee camps over the border in Bangladesh. Since then, the UN has said the Myanmar Army should be investigated for genocide. Although the world’s media have largely moved on, the crisis remains unresolved.

According to the UN Office for the Coordination of Humanitarian Affairs, some 900,000 Rohingya refugees remained in Cox’s Bazar, Bangladesh, as of March 2019. In addition to the considerable social challenges that have emerged in Myanmar over the past few years, the economic toll of the crisis has been considerable.

At an investment forum held in Singapore in 2018, then Director General of Myanmar’s Directorate of Investment and Company Administration (DICA) U Aung Naing Oo admitted that he “totally underestimated” the economic impact of the Rohingya displacement, citing sharp declines in foreign direct investment (FDI). At the same time, the country has had to cope with diminished growth and sharp currency depreciation.

In addition to the considerable social challenges that have emerged in Myanmar over the past few years, the economic toll of the Rohingya refugee crisis has been considerable

While it may not be possible to state with certainty that Myanmar’s investment shortfall results from the plight of the Rohingya, it is not implausible that the reputational damage it caused is keeping businesses away. The refugee crisis is undoubtedly already a humanitarian disaster; it is now up to political and corporate leaders to ensure that it does not become an economic one as well.

A bad reputation
On the surface, many things might encourage a foreign investor to place their money in Myanmar. The country has English heritage and a strong legal system similar to those found in the UK and Singapore – a remnant of the country’s time as a British colony. As a developing market, it also regularly posts strong growth: even considering the economic damage caused by the Rohingya crisis, the Myanmar economy is expected to expand by 6.5 percent across the 2018/19 financial year (see Fig 1).

“Myanmar is not far into the democratic process following the country’s landmark 2015 elections, but already you can see things happening that are improving the business climate,” Enrico Cesenni, CEO of Myanmar Strategic Holdings, told World Finance. “Now, four or five years into the process, industry leaders are emerging that can really contribute to the country. Over the next five to 10 years, we will witness the rise of more accountability and more expertise that will accelerate the pace of investment in the country.”

But the investment world is no longer solely concerned with immediate returns. Companies – both large and small – rarely miss an opportunity to flaunt their progressive values, regularly boasting of the importance they place on issues relating to the environment, political governance and wider society. Unsurprisingly, as the persecution of Myanmar’s Rohingya minority began to amass attention abroad, businesses started pulling out of the country.

Luxury jewellery house Cartier, Belgian satellite communications firm Newtec and French energy company ENGIE are among the organisations to have severed ties, with many others publicly criticising the Myanmar Government for human rights abuses. Companies that have any connection to the military, which is usually held responsible for the crisis’ worst atrocities, have found themselves placed on Burma Campaign UK’s Dirty List. Facebook, in particular, has been singled out for criticism for allowing its platform to spread misinformation about the Rohingya Muslim community.

Given Myanmar’s economy was ranked as the 73rd-largest in the world by the IMF in 2019, the reputational damage accrued by continuing to operate there simply isn’t worth the risk for most firms. This has been particularly notable among businesses based in the West: according to the latest data from the Myanmar Government, Asia invested five times more in Myanmar than the EU and US combined in the 2017/18 financial year.

“To the West, Rakhine equals Myanmar and Myanmar equals Rakhine, and there doesn’t seem to be anything else,” Serge Pun, a local business tycoon and chair of Serge Pun and Associates, told The ASEAN Post. “Whereas the East has another lens, and that is Rakhine is a problem, but Rakhine is a small part of Myanmar, and there is still Myanmar left, [so] we should engage and not isolate. We should help and not punish.”

Pun’s views are echoed by Cesenni, who believes that wrenching investment away from Myanmar does little to help Rohingya refugees or Myanmar citizens more generally: “I personally think that the way Asian countries are engaging with Myanmar is a little bit more productive in terms of their willingness to move forward and drive development. Greater engagement is required if we are to solve some of these issues, instead of just pointing fingers.

“Myanmar is a country in transition. Every month across the country, there are multiple conflicts, not just in Rakhine. I think it is naive to think that a country that has been closed for 50-plus years will sort everything immediately. Myanmar needs time and support if it is to move forward socially and economically.”

It may well be that outside investment starts to return to Myanmar naturally as the outcry surrounding the Rohingya crisis subsides. After all, this is far from the first time that businesses have been put under pressure for operating in the country. Burma Campaign UK published its first Dirty List in 2002; since then, some companies have ceased operating in the country, while others have moved in. Where there is money to be made, ethical concerns are often transitory.

Not so noisy neighbour
The economic challenges currently facing Myanmar are in stark contrast to some of the positive rhetoric emanating from the country. That’s understandable when you consider that this should be the time when Myanmar makes its mark on the investment stage, showing off its newly democratic, rapidly growing economy.

Many firms are currently looking to reallocate their production from China in response to its ongoing trade war with the US – Myanmar should be jostling with the likes of Vietnam and other South-East Asian states for the attention of these businesses. In the country’s defence, though, its failure to boost FDI is not for want of trying.

At the first ever Invest Myanmar Summit in January 2019, State Counsellor Aung San Suu Kyi spoke at length about the advantages her country offers to investors, including several recently enacted financial reforms, such as the Myanmar Investment Law and the Myanmar Companies Act.

“To understand Myanmar’s contemporary investment landscape, we must also seek to understand the broader forces at work,” Suu Kyi said. “The pursuit of market-friendly economic policies, together with rapidly increasing regional cooperation and integration, has been highly beneficial for the Asia-Pacific region, allowing many of us to make a successful transition from low-income, low-growth [economies] to middle-to-high-income, high-growth [economies]. Myanmar seeks to do the same.”

Following the National League for Democracy’s landslide victory in 2015, there was genuine optimism that the Myanmar economy could thrive, finally free from the shackles of military rule. Some of this optimism has since been extinguished, with FDI inflows proving largely disappointing after an initial upsurge in 2016 (see Fig 2).

This is perhaps because investing in the country is not as simple as it would appear on the surface. Although Myanmar did move up six places in the World Bank’s Doing Business 2020 report, it still ranks a disappointing 165th out of 190 countries. The positive movement suggests that business reforms are working – it should be remembered that the country was only added to the index in 2014 – but Myanmar still compares poorly with its regional neighbours. Currently, investors don’t seem to be in any rush to make inroads in the country once branded ‘Asia’s final frontier’.

East or famine
While the expected post-dictatorship boom in investment hasn’t arrived, there are still areas of the Myanmar economy that are drawing attention. In terms of real estate, the hotel chain Hilton continues to work with local development firm Eden Group, hoping to take advantage of rising tourist numbers. The consumer business sector has also witnessed some landmark deals of late, with the Philippines’ Ayala Corporation recently committing to a multimillion-dollar investment in First Myanmar Investment.

Further, the regulatory climate is becoming more favourable. Myanmar’s Yangon Stock Exchange (YSX) is currently in the process of changing its rules to allow foreign individuals and entities to own up to 35 percent of its listed companies. A more liberal approach would not only be good for investors looking to enter Myanmar, it could also spark some much-needed life into the country’s limp trading market. Today, there are just five listed companies on the YSX.

The raw materials for a thriving investment climate are all present in Myanmar if businesses are willing to enter the market

The lack of development in Myanmar’s investment market – certainly when compared to other countries in the Association of South-East Asian Nations – can be viewed either negatively or positively. On the one hand, it suggests that businesses may have to deal with a corporate ecosystem that is not as supportive as those found elsewhere; on the other, it means there is plenty of space to operate in and, more importantly, grow.

“One of the negative things that is affecting the success of… investors is the fact that there are not many companies that are already of size… have the right teams and the right governance in place,” Cesenni said. “You can view these factors as either an opportunity or a potential challenge. Clearly, the market is not as developed as, say, Vietnam, where you have proper brokers, fully fledged institutions and a market in which deals are, in a sense, pre-cooked. In Myanmar, you need to be fully prepared before conducting any deals. There is value to be found, but it will take some time and a lot of operational involvement to extract it.”

If investors do want to capture a slice of the Myanmar market before it gets too crowded, it’s worth acting quickly. According to DICA, foreign investment is already starting to show signs of recovery, rising 79 percent year-on-year across the first six months of 2019. Investment from Singapore almost tripled in that time, while funds originating from Hong Kong and mainland China rose 150 percent.

“In general, what has happened over the past two or three years is you’ve seen a real acceleration of investment from Asia,” Cesenni continued. “A lot more investment from Japan, Thailand, South Korea – I guess Singapore is a bit of a conduit for Asian investment in general – and then, of course, you have China. I think China is sometimes misrepresented as having underhand motives for its investments, but the country is really just taking a leading role in development when nobody else is stepping up. You don’t see the US coming and building highways in Myanmar, but I definitely see China and other Asian countries supporting that.”

Regardless of where businesses and individuals are based, there is no denying that Myanmar boasts some attractive qualities. Aside from its steady economic growth, the country has a population of around 55 million people and a median age of just 27, representing great potential for firms in the consumer sector. Its location, bordering the twin behemoths of China and India, is also favourable. The raw materials for a thriving investment climate are all present if businesses are willing to enter the market.

At the first ever Invest Myanmar Summit in January 2019, State Counsellor Aung San Suu Kyi spoke at length about the advantages her country offers to investors

Slow and steady
Even as investment opportunities in Myanmar pick up, businesses and individuals should exercise caution when deciding what assets to acquire. The Rohingya crisis and the corporate backlash that followed demonstrated the important role that international finance can play in supporting repressive political and military regimes, even if unintentionally.

Money can also be a force for good, though. According to 2017 data from Myanmar’s Central Statistical Organisation, roughly a quarter of the country’s population still lives in poverty, with rural inhabitants the most likely to be poor. Economic development is desperately needed in the country, and outside investment can help spur this on. What’s more, many jobs in Myanmar rely on FDI inflows; shutting them down abruptly could end up hurting ordinary civilians more than the military forces being blamed for the Rohingya persecution.

“It is extremely important that any investment coming into the country benefits the local people,” Cesenni told World Finance. “That’s why our business has been built alongside local people. At the end of the day, most foreign investors will operate in a country for two or three years – maybe five. But the people that will stay and help build a better future for their country are the locals. Our divisional CEOs… are still foreign because we are still encouraging knowledge transfer, but many of our other executives are now local. Our second line of management is already local and more than 50 percent of our staff is female.”

As individuals and corporate entities look for their next big opportunity, they could do a lot worse than investigating what Myanmar has to offer

In various nations, foreign investment has been criticised for crowding out domestic entrepreneurship. Suu Kyi’s government is well placed to avoid this, as long as it is careful to encourage a steady, rather than sudden, growth in FDI. Private businesses also have a role to play. As Cesenni noted, foreign investment can leave a country as quickly as it arrives, so organisations should support domestic talent as much as possible, employing locally and partnering with existing firms where relevant.

For Cesenni, one area the current government should be looking to target is the use of financial incentives. Not only could this help create a more favourable climate for foreign investment, it could also be deployed in a targeted fashion, driving businesses and individuals to focus on strategic industry sectors. Whether the government has the motivation to implement these business-friendly measures, however, is another matter.

In the 2015 elections, Suu Kyi’s party received 86 percent of seats in the national assembly; since that win, though, the once-feted leader has disappointed many observers. The 1991 Nobel Peace Prize winner failed to react swiftly to the Rohingya crisis, either because she is not the champion of human rights that many thought her to be or because she is simply unable to stand up to the Myanmar Army, which still holds considerable sway over the country’s political climate.

The coming national elections are scheduled for November and, should they go smoothly, they will help cement democracy as a normal part of life in the country. The potential for political change could also provide the impetus politicians need to boost an investment climate that has remained underutilised for far too long. As individuals and corporate entities look for their next big opportunity, they could do a lot worse than investigating what Myanmar has to offer. They’ll need to consider carefully, though, what parts of the existing political regime their money is helping to support.

How digital technology is helping Nigerians access better banking solutions

Posted on by Max Tomlin

Before the Nigerian financial sector underwent a significant transformation, banks were seen as exclusive spaces for a select portion of the population – places where high-earning individuals were the only ones entitled to world-class banking products and services. This misconception left a large part of the population unbanked and unable to benefit from essential financial services.

Digital technology has proven to be a highly effective tool in changing this narrative, driving a change in operating and business models, improving platforms for innovation and creating immense opportunities for monetisation. The technology landscape continues to change through the never-ending rollout of faster, more accessible networks, impacting every component of service delivery – especially in the banking industry.

Mobile money has been one of the most revolutionary technologies launched in Africa in recent years

The Nigerian Communications Commission reported that there were approximately 172 million phone subscribers in the country in 2018, which means that 90 percent of citizens can execute transactions on their phones. There is little excuse, then, for Nigeria’s low level of financial inclusion – just three in 10 Nigerian adults have a bank account, according to Kantar.

Access Bank has always found innovative ways of using mobile technology to reach the unbanked. For example, its popular Unstructured Supplementary Service Data code, *901#, makes it possible for anyone, anywhere, to access financial services using their mobile phone. If Nigeria is to achieve its targeted financial inclusion rate of 80 percent by the end of this year, more solutions like this will need to be launched.

Phone credit
Mobile money has been one of the most revolutionary technologies launched in Africa in recent years. M-Pesa, a mobile money transfer and financing service, went viral in Kenya following its launch in 2007 – due, in large part, to its customer-centric model – and there are hopes that similar solutions can prove popular elsewhere.

In Nigeria, government policies are now catching up with the consumer shift towards financial technology. This has broken down barriers for financial institutions and is enabling faster, more effective communications between customers and banks. Access Bank has launched Access Closa as a way of harnessing the digital revolution and forging stronger connections with clients.

The Access Closa initiative creates ‘micro branches’ across the country in the form of booths placed in local neighbourhoods. Like mobile money offerings, the initiative aims to make financial services accessible to all. The booths are more approachable than branches, meaning banking agents are more available to customers and can tailor their services to the specific needs of the community in which they operate.

Leading the way
The technology landscape is proving to be vast and beneficial for the Nigerian economy. Digital innovation helps find solutions to many issues and has a positive ripple effect across various sectors. Access Bank has invested heavily in leading this evolution, forming a partnership with the Africa Fintech Foundry (AFF) to nurture the next generation of cutting-edge financial firms.

As a pan-African accelerator, the AFF is designed to find and invest in start-ups that adopt a global outlook while still focusing on Africa. Earlier this year, it organised the AFF Disrupt Conference, bringing together more than 10,000 technology leaders, enthusiasts, innovators and investors in the hope of ‘building a sustainable tech economy’.

The event provided an opportunity for networking, knowledge sharing, presentations and pitches, with one start-up being awarded a cash prize of $10,000. Such conferences give technology start-ups a platform to connect with their peers and potential investors in both the financial and technology spaces.

Access Bank aims to harness the very best that Nigeria has to offer and shape the country into a leading nation

As a leader within the Nigerian banking industry, Access Bank has fully embraced digital technology, principally to propel its sustainability targets. An exciting initiative is the portal for CO2 management, which was developed to monitor the bank’s environmental footprint, especially its carbon emissions.

Furthermore, we have digitalised the bank’s back-office processes and functions through the deployment of a business process management solution and we have adopted enterprise resource planning software as part of our efforts to become a 100 percent paperless organisation. Currently, more than 89 processes have been automated, with more on track to be implemented in the coming years.

Changing the narrative
For many years, much of the reporting on Africa has been devoid of understanding, leading to widespread misinformation. Such conversations, which appeared almost malicious, became so loud and pervasive that both Africans and non-Africans nearly believed that Africa was indeed a dark and hopeless continent. The situation worsened until strong, influential African voices began speaking up, ending the vicious cycle and making others see the good in Africa and, more importantly, reminding us of our true identity.

Access Bank chooses to celebrate the many successes coming out of the continent, defying the negative stereotypes and nurturing the indomitable spirit of Africans. The aim is to harness the very best that Nigeria has to offer and shape the country into a leading nation that fills its citizens with pride. We all want to see improvement, so we must work together to change the narrative.

An exciting and useful field is the work to improve financial inclusion in Nigeria. As the digital landscape evolves, we believe that more Nigerians will be brought into the fold, gaining access to more financial services without limitations.

Public humiliation – the dangers of bringing a company to market too early

Posted on by Max Tomlin

When WeWork filed for a public listing last April, expectations were high. Although the New-York-based company had made its name as an office space rental company, it rebranded as the We Company in early 2019 to prepare the ground for its expansion beyond real estate. With a self-proclaimed valuation of $47bn and start-ups scrambling to rent its coworking offices, the firm aimed to tap into public markets to fund growth.

But it was not meant to be. Filing papers submitted to the US Securities and Exchange Commission (SEC) revealed ballooning losses and a host of controversial practices. Its co-founder and CEO, Adam Neumann, owned a large chunk of properties on lease – an unusual move in the real estate industry that sparked concerns over a conflict of interest. Neumann then cashed out over $700m in stock options before the listing, something that raised suspicions further. Following increased media scrutiny and reduced investor interest – the company was, by that point, being valued closer to $15bn – WeWork cancelled its initial public offering (IPO) and Neumann stepped down as CEO.

For technology firms, being in the black is less important than having a clear vision of how to get there

A fall from grace
WeWork might be an extreme example of an IPO that has gone wrong, but the phenomenon is far from rare these days. In September, Endeavor, a holding company for entertainment and talent agencies, pulled out of its IPO the day before it was expected to list on the New York Stock Exchange (NYSE). Although the company had lowered the offering price, it failed to attract investors.

Even some of the most celebrated IPOs of the past year have failed to produce success stories. Uber and Lyft, two giants of the sharing economy, went public last spring amid investor euphoria over their potential to disrupt the transport industry. Their performance in the stock market so far has been lacklustre, though, with shares trading around 30 percent below their IPO price, as of December 2019 (see Fig 1).

Lise Buyer, a partner at the IPO consultancy Class V Group who was involved in Google’s 2004 listing, told World Finance that regulatory concerns may have played a role: “Since [Uber and Lyft’s] public offerings, there has been a significant legislative change in California’s [Assembly Bill 5 – a law that makes it more difficult for sharing-economy companies to use independent contractors –] that could, if enacted as proposed, have a real negative impact on the [profit and loss] statements for those companies. That’s a fundamental new risk that is currently priced into the stocks, but did not exist at
the time of their offerings.”

According to Aswath Damodaran, an academic currently teaching at the New York University Stern School of Business, other factors might have played a role, too: “IPOs are a pricing game, driven by mood and momentum. The mood shifted for these companies mid-year, partly because of overreach on the part of the IPO companies, partly because of arrogance on the part of founders and venture capital firms, and partly due to just luck.”

Red flags
WeWork’s failings can serve as a cautionary tale for companies aiming to go public. Scott Galloway, a professor of marketing at the Stern School of Business, had been a vocal critic of the company long before its predicaments started. He told World Finance: “The We Company, specifically its prospectus, is littered with red flags, ‘yogababble’, invented metrics and bullshit. [Neumann] sold $700m in stock before the attempted IPO and was effectively saying… ‘get me the hell out of this stock, but you should buy some.’”

In Galloway’s eyes, the company lacked a clear vision for the future: “The company’s losses were scaling as fast as its revenue, with no clear path towards profitability. To make up for this, the We Company invented the metric ‘community-adjusted EBITDA’ in its S-1 to provide a false sense of financial stability.”

When it was revealed that Neumann owned properties that were being rented back to the company, the firm shrugged off concerns, responding that the board had approved the deals. That was a tipping point, according to Galloway: “It became clear that this board was failing to uphold their fiduciary duty to the company.” Damodaran believes firms on the verge of going public should acknowledge their shortcomings before it’s too late: “Be transparent about not just your financials, but open about your biggest vulnerabilities and risks and how you plan to deal with them, and talk about the business model that you hope to build on.”

Some of the most prominent backers of WeWork – notably, the Japanese conglomerate SoftBank and its flamboyant leader, Masayoshi Son – have not escaped criticism. SoftBank was forced to take control of the We Company to rescue the firm, reporting a $4.6bn hit. Another investor, Goldman Sachs, had valued the company between $61bn and $96bn, while the main IPO advisor, JPMorgan Chase, has seen its reputation as an investment bank suffer a heavy blow.

“Certainly, there were failures in WeWork and in the leadership, but the willingness to believe the story landed on the heads of the investors and bankers,” Jim Schleckser, a Washington-based consultant to fast-growth start-ups, told World Finance. “This suspension of disbelief was additionally responsible for the incredible destruction of wealth.”

False profits
Tech companies whose IPOs have gone awry tend to have one thing in common: an unclear path to profits. WeWork reported net losses of over $1.25bn in Q3 2019. Uber and Lyft, meanwhile, have never returned a profit, focusing their attention instead on grabbing market share – although both aim to be in the black by 2021. Galloway believes this is a new breed of company: “We have created a new term to classify WeWork, Uber and Lyft: incinerator. [In other words,] firms with low gross margins, [a] lack of operating margins and access to cheap capital.” Some tech powerhouses, including Snap and Uber, even warned investors in the run-up to their listings that they might never make a profit.

The rise of the tech sector has made profitability an afterthought when firms choose to go public. According to data compiled by Professor Jay Ritter, a leading authority on IPOs, three out of four companies that went public in the US in 2017 were making a loss the previous year, compared with an average of 38 percent over the past four decades. Being in the black, it seems, is less important than having a clear vision of how to get there.

Leslie Pfrang, a partner at Class V Group, told World Finance: “[Being profitable] is not important at all if the company can demonstrate convincingly that its model will generate cash somewhere down the line and that management has the ability to dial back spending if situations were to make that a necessity. Often, companies need to spend ‘now’ to effectively realise [the] potential ahead.” Schleckser believes the market has internalised this trend: “Many tech companies are valued on [their] potential for profit rather than [their] demonstrated profits. More material is the growth rate and underlying metrics that demonstrate potential, such as market size, customer acquisition costs and [the] lifetime value of [a] customer.”

Choosing the right time to go public is also paramount. Many tech companies delay their IPO to grow at breakneck speed and achieve a high valuation. “This only works if venture capital firms keep pushing up the pricing as the companies scale up,” Damodaran explained to World Finance. “If they do that, and there is enough venture capital… available, companies will scale up more before they [launch an] IPO.”

Venture capital firms such as SoftBank’s Vision Fund have also been accused of artificially inflating valuations, but this strategy can backfire. As Buyer explained to World Finance: “Private investors and board members appear to have assumed that the public markets would pay any price for certain brand names regardless of changing growth trajectories. In fact, public investors have noticed that, in some cases, they are being offered shares as the slope of the growth curve is flattening, but at prices that suggest otherwise.”

Once the youngest female self-made billionaire, Elizabeth Holmes currently faces 11 criminal charges and will stand trial later this year in relation to her defunct start-up Theranos

Apple of my eye
One of the lessons the market is learning the hard way is that the era of charismatic founders is over. Since Steve Jobs’ passing in 2011, the tech industry has witnessed a series of false dawns, with several prominent entrepreneurs getting mired in controversy and blunders. For a few years, Tesla CEO Elon Musk seemed to be the most likely candidate to take Jobs’ mantle as the omniscient tech prophet. His reputation received a heavy blow, however, when he announced last summer that Tesla would be going private, only to change tack after the SEC launched a securities fraud investigation into his conduct. A few weeks later, Musk was forced to step down as the company’s chairman. Another prominent founder, Uber’s Travis Kalanick, resigned from his post as CEO in 2017 following pressure from investors over several scandals.

For companies on the verge of going public, the dangers of relying on a charismatic founder can be fatal

For fast-growing companies on the verge of going public, the dangers of relying on a charismatic founder can be fatal. WeWork’s Neumann is a case in point. According to a profile of the entrepreneur by Vanity Fair, Neumann believed that the company was “capable of solving the world’s thorniest problems” and became personally involved in a US Government initiative – led by US President Donald Trump’s son-in-law, Jared Kushner – to resolve the conflict between Israel and Palestine. Over time, it seems, visionary founders can lose the ability to accept criticism. “Arrogance is the most dangerous character defect in investing,” Damodaran said. “When a CEO makes it all about [themselves] and acquires a God complex along the way, my advice is that you stay away from the firm [they] are leading.”

Companies whose governance structures are obscure, complex or grant unlimited control to founders are particularly prone to failure. Many founders own shares that offer them extra voting powers and maintain control after the IPO. Take WeWork, for example: prior to its planned listing, the company created Class C shares through a corporate restructure, effectively reducing Neumann’s tax liability on future profits at the expense of public investors. Neumann’s stock was also worth 20 votes per share, double what other CEOs usually get.

For Damodaran, unscrutinised leadership is a recipe for disaster: “Stop the founder worship and all it entails… [such as] different voting share classes and, in the case of WeWork, dynastic rule, with… Neumann’s wife picking his successor if he became incapacitated.”

Another example of a false prophet is Elizabeth Holmes, founder of defunct biotech start-up Theranos, whose claims of holding groundbreaking blood-testing technology proved to be false. Once the youngest female self-made billionaire, Holmes currently faces 11 criminal charges and will stand trial later this year. According to media reports, she was obsessed with Jobs and tried to imitate him, going as far as recruiting Jobs’ personal friend and chief technologist, Avie Tevanian, as a member of her company’s board.

“Visionary and charismatic CEOs are fun to watch, but the ones that last have a balance of communication skills, strategy and humility to learn and grow,” Schleckser said. “We have to be careful of the Svengali-like leader that brings us all on the journey and causes us to miss some basic questions.”

On thin ice: thawing permafrost dampens Russia’s economic growth prospects

Posted on by Max Tomlin

There are many reasons why one might decide against buying a house in the Siberian city of Norilsk: the Sun doesn’t rise for three months each year; the name of the neighbouring town translates as either ‘forbidden place’ or ‘death valley’; and it’s so cold that the bodies of the Gulag prisoners who built it are said to be perfectly preserved beneath a memorial at the foot of Mount Schmidtikha.

It’s fair to say that it’s no place for the faint-hearted. At the very least, buying a house in such a dark, icy wasteland should be good value for money, but even this is no longer the case. “The population of the city used to be 300,000, give or take,” Nikolay Shiklomanov, Associate Professor of Geography and International Affairs at the George Washington University, told World Finance. “Nowadays, it’s 180,000… so you would expect that the housing market should be pretty light – that there should be lots of empty spaces – but now they’re experiencing some acute housing shortages because so many of the buildings there are critically deformed.”

Norilsk is the largest city in the world to be built on permafrost – ground with a temperature that remains at or below freezing point for more than two years. Now, as the Earth’s climate warms, that permafrost is melting. In fact, approximately 60 percent of the city’s buildings have been damaged by thaw and 10 percent have been abandoned. The foundations of Norilsk – which was built in the 1930s during Russia’s push for industrialisation in the Siberian and Yakutia regions – are sinking and eroding, causing walls to crack, roofs to crumble and pipes to burst. As Shiklomanov explained: “The city was built cheaply and quickly. Obviously, nobody considered climatic changes.”

While GDP and employment in petrostates such as Saudi Arabia revolve around oil and gas revenue, Russia has a relatively diversified economy

Warming to the idea
The unenviable situation Norilsk finds itself in is not a unique one within Russia. More than half of Russia’s entire territory is covered by permafrost. As this ground thaws, it’s not just buildings that are in danger, but also pipelines and other oil and gas infrastructure vital to Russia’s economy.

Alexander Krutikov, Deputy Minister for the Development of the Russian Far East and Arctic, predicts that the economic loss resulting from the thawing of permafrost could be as high as RUB 150bn ($2.34bn) a year. It’s difficult news to swallow for a nation with climate commitments deemed “critically insufficient” by the Climate Action Tracker, and whose leader has consistently denied the existence of global warming.

Until recently, President Vladimir Putin argued that global warming was good news for Russia. At the 2017 Arctic: Territory of Dialogue international forum, he claimed it would result in “more favourable conditions for economic activity” in the northernmost reaches of the country. This idea isn’t as far-fetched as it might seem. In his bestselling book 21 Lessons for the 21st Century, historian and philosopher Yuval Noah Harari explained how Russia could stand to benefit from climate change: “Whereas higher temperatures are likely to turn Chad into a desert, they might simultaneously turn Siberia into the breadbasket of the world.”

But this year, the leader of the world’s fourth-largest greenhouse gas emitter changed his tune on climate change. Although Putin continues to insist the phenomenon can’t be confidently attributed to human activity, he admitted in June 2019 that Russia was warming 2.5 times faster than the global average. “This is a major challenge for us,” he said. “This is the reason for the floods and for permafrost thawing in the areas where we have fairly big cities. We must be able to understand how to react.”

According to Shiklomanov, global warming could affect as much as a fifth of infrastructure across the permafrost area by 2050, costing Russia approximately $84bn, or 7.5 percent of its GDP. As the tundra melts, underground methane is released, causing gas pipelines to explode. At the same time, Russia’s shoreline is eroding by an estimated four metres annually, increasing the risk of damage to offshore infrastructure. “All that coastal infrastructure is extremely important and exceedingly vulnerable,” Shiklomanov told World Finance.

Russia’s coast currently witnesses an accident involving power stations, nuclear-powered icebreakers, chemical facilities or communications installations every three months. Needless to say, Putin’s new stance on global warming is a huge paradox: by curbing greenhouse gas emissions, he hopes to keep feeding and expanding an emissions-producing oil and gas industry. As the leader of the world’s second-largest oil exporter (see Fig 1), though, this position makes a certain amount of sense – arguably, the sector is simply too important for Russia to lose.

Greasing the wheels
Russia is sometimes referred to as a petrostate, but as analysts like Michael Bradshaw – a professor of global energy at Warwick Business School – point out, this obscures the specific and complex role that oil plays in the Russian economy: “Russia has a fairly substantial economy that is not resource-based. However, it’s increasingly clear that large sectors of the industrial economy are tied one way or another to the resource economy.”

While GDP and employment in petrostates such as Saudi Arabia revolve around oil and gas revenue, Russia has a relatively diversified economy. For example, the services sector makes up a larger share of Russia’s GDP than oil and gas (see Fig 2). Nonetheless, oil and gas revenues are still crucially linked to the non-oil economy in Russia, accounting for 40 percent of government income, according to the International Renewable Energy Agency (IRENA).

The wealth generated by oil and gas – known as oil and gas rents – is extracted by the state and channelled into strategically important sectors or the economy more broadly, either in the form of taxes paid to the government or as subsidies for other goods and services. This system, however, means Russia can only prosper so long as oil prices are high.

As such, its economy is extremely vulnerable to sudden changes in oil demand and supply. “If you go back to the 1980s, one of the factors that led to the eventual collapse of the Soviet economy was the fall in oil and gas prices and the loss of substantial rent to the economy,” Bradshaw told World Finance. “That volatility, of course, continued through the 1990s and 2000s, at times supporting the Russian economy and at times punishing it.”

One obvious way of reducing Russia’s exposure to oil shocks is through economic diversification, but such reform is made difficult by the fact that non-oil sectors are so heavily reliant on oil and gas rents. Moreover, beneficiaries of this system are reluctant to change the status quo. “Russia has been spectacularly unsuccessful in seeking to diversify its economy,” Bradshaw explained. “There’s been an awful lot of rhetoric, particularly under [Dmitry] Medvedev’s presidency, but very little change.”

To maintain government income in the short term, Russia has to keep expanding oil and gas production. Currently, the need to do so is urgent. Russia’s main oil and gas fields are depleting: according to the Financial Times, West Siberia, a critical oil-and-gas-producing region, has seen a 10 percent decline in output over the past decade. What’s more, a 2016 report by the Wilson Centre showed that Russia is increasingly dependent on production from its more remote East Siberian and Arctic offshore fields. Covered almost entirely by permafrost, these are some of the most inhospitable regions on the planet.

A pipe dream
As the Arctic sea ice retreats, the Northern Sea Route becomes more navigable to the world’s superpowers. With a fifth of its territory inside the Arctic Circle, Russia has long envisioned itself as the gatekeeper of this sea lane. Although the Northern Sea Route will never be as integral to global trade as the Suez Canal, it could nonetheless become an important passageway between Europe and Asia, saving freight companies millions of dollars and weeks in travel time.

Russia is convinced that its economic future depends on Arctic exploration. As well as opening up a globally important shipping route, the melting sea ice makes it easier to access rich supplies of fossil fuels. The US Geological Survey estimates that the Arctic may be home to as much as 20 percent of the remaining oil and gas reserves on Earth. On the surface, Russia would seem to be making great progress towards seizing these resources: in late 2018, energy giant Novatek finished building Yamal LNG, a $27bn liquefied natural gas (LNG) plant. By 2030, Moscow expects it to produce 60 million tons of LNG each year.

But extracting oil and gas in such a hostile environment with limited infrastructure is far from easy. “These are very capital-intensive areas where returns are not expected before 10 to 20 years of development,” Pami Aalto, a Jean Monnet professor at the University of Tampere, told World Finance. Consequently, oil and gas companies have to make large investments up front to carry out production, meaning they are often dependent on both government subsidies and foreign technology.

In this regard, Russia has faced some major setbacks. EU and US sanctions – imposed after Russia’s annexation of Crimea – limit the country’s ability to secure funding for new oil projects and import the hi-tech equipment needed for Arctic exploration. As Aalto points out, this presents a significant hurdle to Russia’s Arctic oil ambitions: “It is not feasible to explore, extract and develop much without international partners. In the Arctic, 80 to 90 percent of technology has been foreign, compared to 40 to 50 percent elsewhere in Russia before import substitution policies started big-time in 2014… Russian actors have been forced to [borrow] old equipment from Asia, and it is not in plentiful supply.”

At the same time, Moscow is struggling to provide the necessary subsidies as a result of budgetary constraints. According to the Kremlin, Russia needs to invest over $200bn in Arctic infrastructure between now and 2050 to make its ambitions a reality; so far, it has stumped up just $14bn. The thawing permafrost will only add to the required expenditure, as companies are forced to adapt their infrastructure and account for soaring repair costs.

Frozen in time
Economic activity in Russia’s Arctic territory accelerated under former Soviet Union General Secretary Joseph Stalin, who believed that Russia could achieve economic independence from the West by industrialising the resource-rich North. As these settlements grew, Siberia became the crowning glory of Soviet Russia – the communist state had tamed the frozen wastelands, creating economic powerhouses in a region where free marketeers would never have dared venture.

Infrastructure can be adapted to help reduce thawing, but this is expensive, particularly when done at scale

Putin is eager not to see the region’s economic prowess diminished. According to The Wilson Quarterly, Russia’s industrial base in the Arctic Circle currently accounts for up to 20 percent of the country’s GDP and nearly a quarter of its export revenues. And Putin is piling on the incentives to boost investment in the region: in addition to setting up the FPV, a special economic zone along its eastern coastline that offers tax and customs privileges, Russia awards 2.5 acres of free land in the Russian Far East to any citizen or foreigner willing to live there for at least five years.

However, the thawing permafrost raises questions over the viability of economic investment in the region. Infrastructure can be adapted to help reduce thawing, but this is expensive, particularly when done at scale. Moreover, it doesn’t stop the permafrost from thawing. With this in mind, Putin’s attempt to relocate citizens to these areas is not dissimilar to Indonesia or the Philippines encouraging migration to their shrinking coastlines.

“Nobody in their right mind in Russia will ever even consider building something like Norilsk again,” Shiklomanov said. “Now the question is, how do they maintain it? And should they maintain it or not?” Some analysts would argue not. Over the past few decades, there has been a steady exodus of people from the Far North and Far East to the bright lights of Moscow and St Petersburg. The small mining town of Vorkuta in the Komi Republic, for example, has a dwindling population of about 60,000 residents, down from 217,000 in the late 1980s.

One of the most basic reasons people are shunning these Arctic cities is the severe conditions. The coldest temperature ever measured outside Antarctica was recorded in the Yakutia region of Siberia. The other problem is that these cities are extremely remote – it takes 40 hours by train to get from Vorkuta to Moscow.

In their book The Siberian Curse: How Communist Planners Left Russia Out in the Cold, Fiona Hill and Clifford Gaddy argued that cities in the Far North and Far East are a hangover from the Soviet Union, and that Russia must abandon them for the sake of economic progress: “People and factories languish in places communist planners put them – not where market forces would have attracted them. Russia cannot build a competitive market economy and a normal democratic society on this basis.”

In many ways, these cities are frozen in time – snapshots of a Soviet past. Few people moved there by choice; most were driven there by fear and ideology. Under Stalin, hundreds of thousands of people – many of whom came from Baltic countries – were deported to this remote and hostile territory. As Gulag prisoners, they built Norilsk and other cities like it. Repopulating these areas feels like a step into the past – one last desperate attempt to relive the days of Soviet industrialisation.

Until recently, Russian President Vladimir Putin argued that global warming was good news for the country

The cold, hard facts
If Russia’s ambition to repopulate the Far North and Far East is backwards-looking, then so is its drive to exploit the fossil fuel resources there. Over the past decade, the cost of renewable energy has fallen drastically; assuming this trend continues and nations remain committed to decarbonisation, then it’s highly probable that the world will soon phase out fossil fuels. Consequently, the reserves of oil and gas that Russia is so desperately trying to retrieve from beneath the permafrost will decline in value.

“We are looking at a future of constrained demand and continuing supply,” Bradshaw told World Finance. “In that world, where oil prices are lower… new production in Russia outside of the established regions – be it in East Siberia or offshore – could be more expensive. In other words, you’re ploughing a lot of money into supporting an oil and gas industry that’s delivering less and less income.”

In 2017, Royal Dutch Shell CEO Ben van Beurden predicted that oil prices would peak in the late 2020s or early 2030s, after which point the industry should expect oil prices to be “lower forever”. In this future, the nations still economically dependent on oil and gas rents could see their power and influence on the geopolitical map wane. In its 2019 report, A New World: the Geopolitics of the Energy Transformation, IRENA described how the transition could “profoundly destabilise countries that have not prepared their economies sufficiently for the consequences”.

While Saudi Arabia is trying to curb its dependence on oil through its diversification plan, Vision 2030, Russia has no such strategy. In fact, Russia doesn’t seem to even acknowledge the importance of relinquishing fossil fuels. “They are, in true ostrich fashion, burying their heads in the ground – or firmly in the permafrost as it melts,” Bradshaw said. To demonstrate this, Bradshaw points to a case in 2014, when low oil prices – as well as US and EU sanctions – compelled Russia to develop its shipbuilding sector as a means of economic diversification. Even then, its diversification plan still benefitted the oil and gas sector, with ships being built to facilitate offshore production.

Russia has chosen to continue its resource dependence at the expense of long-term economic growth opportunities. Its plans to push industrialisation in its most inhospitable regions indicate that the country is yet to move beyond its Soviet past and set its sights on becoming a knowledge economy, rather than a resource-based one. In a world where oil and gas are no longer the arbitrators of global economic power, Russia could find itself falling further behind nations that prioritise alternative energy resources and technological progress.

Mission Zero: what Audi’s carbon reduction initiative means for the automotive industry

Posted on by Max Tomlin

We are living in times of fundamental, and often disruptive, change. Nevertheless, the need for individual mobility has stayed the same. Never before has individual mobility provided transport for so many people.

However, the growing trend for widespread car ownership, combined with a rapidly growing population, is causing unprecedented harm to the planet. Tackling this is a challenge faced by every major player in the automotive industry. At Audi, our job is to realise our vision for the future: mobility with a clear conscience. We are working hard to achieve this, placing sustainability at the core of our operations while maintaining a focus on trust and future viability, which have been key objectives of ours for a long time.

All over the world, people are changing their attitudes and behaviour, ranging from their daily shopping habits to major decisions such as building a house, buying a car or where they want to make financial investments. In terms of global finance, sustainable investing is now a market worth more than $30trn worldwide – a trend that is accelerating. Investors are continuing to value the mutual relationship between economic success and sustainable commitments; our mission is to attract these investors once we have brought sustainable automobile travel to the market.

Audi’s Brussels plant has been carbon neutral since 2018, making it the first large-scale premium automotive manufacturer to achieve this

Four a better future
Audi’s operations strictly adhere to environmental, social and governance (ESG) targets, which we achieve by integrating ESG criteria into our long-term management processes. We are also deeply committed to upholding high standards with regards to equal opportunities, human rights and environment protections. We demonstrate transparency by allowing ourselves to be assessed whenever asked, for example, by credit ratings agencies.

The board of management is strongly committed to meeting the Paris Agreement’s climate goals – especially the two-degrees target. By 2025, we want to reduce our environmental impact from what it was in 2010 by 35 percent per vehicle. We have taken steps to reach 23.7 percent so far, and we intend to remain on target.

Right now, we are on track to meet the objectives of Mission Zero, our initiative to reduce company-wide carbon emissions. Across the entire value chain, we are working with carbon-neutral production and supply chains, closed resource loops and sustainable products. We have also established Four Rings of Sustainability – reduce, reuse, recycle and rethink – which we use in the planning of every project.

The first ring of sustainability is to reduce. We want to consume fewer natural resources, particularly in terms of our energy use. This applies to all of us – those working in the automotive industry, retailers and private consumers. Almost half of all resources consumed are for energy production and are mainly sourced from coal, oil, gas and uranium – energy sources with well-known environmental risks. Making reductions here is particularly effective in improving overall sustainability. Audi has a clear agenda – to make all our production plants carbon neutral, on balance, by 2025.

We are expanding this goal to encompass the consumption of raw materials and our own employees’ personal transport needs. Our Brussels plant has been carbon neutral since 2018, making us the first large-scale premium automotive manufacturer to achieve this. Moving forward, our plan is for the whole company to be carbon neutral by 2050.

This makes production of the Audi e-tron and the e-tron Sportback, our latest electric cars, an important reminder of what we are striving for. Outside of Brussels, our other plants have also made great progress: in Györ, Hungary, for example, Audi utilises geothermal and solar energy to power our operations. In addition, Europe’s largest roof-mounted photovoltaic system has just gone into operation at our Hungarian production site. This alone will reduce CO2 emissions by approximately 6,000 tons each year.

As a result of these measures, we have reduced CO2 emissions by more than 23,000 tons at our four European plants each year since 2010. Similarly, our use of rail for transport between plants in Germany and North Sea ports has been powered by green electricity for an impressive amount of time. We became the first company in Germany with carbon-neutral rail logistics in 2017, avoiding 13,000 tons of CO2 emissions every year.

Everyone on board
To be truly sustainable, our efforts cannot stop at the factory gate. That’s why we also want to reduce CO2 emissions in our supply chain. We have developed a sustainability rating system for our suppliers, involving a dozen criteria concerning environmental and social factors. We have already checked and assessed more than 1,100 companies at their sites. Since these ratings were introduced earlier this year, they have proved decisive in how partner contracts are awarded.

Regarding the second ring of sustainability (reuse), many of the resources we need, such as water and air, remain in use for as long as possible. For example, our factory in Mexico now produces no excess wastewater. We have achieved this by cleaning the water we use so it can be consumed again in production. Other Audi plants are optimising their water consumption as well to meet this end goal and decrease the by-products of our plants. We are working hard to further develop the technology behind electric cars. For instance, we are currently testing concepts for how we can reuse lithium-ion batteries. These are extremely valuable as they can be used for storing electricity from renewable sources such as solar, wind or hydropower.

The third ring of sustainability involves recycling. More businesses need to grasp the notion that waste is not worthless, as recycling can actually bring many benefits. At Audi, we have regarded waste products as valuable raw materials for a long time. We sort and separate waste products by their type, reuse what we can, and recycle the waste while ensuring material quality is maintained. We are already developing new recycling processes for our electric car products, and in lab tests, we have managed to recycle 95 percent of the materials used in high-voltage batteries, such as cobalt, copper and nickel.

We are conscious of the negative impact that comes from the production of aluminium, which is why we act where we can to exert a direct influence on recycling the material. To minimise its impact, we separate it from any steel it may be welded to and press the waste metal to save space in transportation. It is then reused at in-house factories. We make sure none of our waste steel and aluminium is thrown away, as they are both recyclable materials. The recycling of aluminium alone prevented the release of more than 90,000 tons of CO2 emissions in 2018 – a 30 percent increase on the year before. A circular economy and efficient processes save resources, cut costs and reduce the environmental impact of production.

Last but not least
Rethink is our fourth ring of sustainability. Rethinking means reflecting beyond the company and considering how we can make a difference. At our plant in Mexico, for example, we have planted more than 100,000 trees in the immediate vicinity. At our production site in Münchsmünster in Germany, countless insects fly between our large flower meadows and help pollinate rare varieties of fruit trees. Regular monitoring demonstrates a clear increase in biodiversity. These cases are sustainability at its best, put into practice.

We are committed to the fact that the entire car industry needs to engage in sustainability, and rethinking has led to the conclusion that we need to do it together. Audi is now collaborating on sustainable solutions through its many alliances and partnerships.

To solve global challenges, we need worldwide cooperation, such as the Aluminium Stewardship Initiative (ASI). We have been strongly committed to working as a member of this group since 2013, which has resulted in a global sustainability standard with criteria set for environmental and social issues, as well as business ethics. Audi was the first car manufacturer to receive the ASI sustainability certificate, putting us ahead of others in the sector.

Managing your organisation according to ESG goals does not just involve risk management: it provides the basis for long-term economic success. It also includes activities that are not reflected in the bottom line on financial statements. Nevertheless, they contribute to our strength as a brand, our strategy and our path to achieve our vision.

Take the Audi Environmental Foundation, which celebrated its 10th anniversary in 2019. The foundation promotes innovative ideas for environmental protection, using ideas from the fields of science and education, as well as from the public and our own employees. This non-profit foundation is globally connected, helping innovative ideas become reality – for example, working out how we can remove plastic waste from rivers before it reaches the sea. The Audi Environmental Foundation empowers those who seek knowledge, resulting in projects that aim to create a better world – one in which all of us can live a good life with a clear conscience.

It is evident that Audi is changing rapidly. By 2025, our portfolio will include more than 30 electrified car models, with 20 of them expected to run solely on electric power. These cars will account for around 40 percent of our worldwide revenue, demonstrating that we are serious about a sustainable future, caring for the environment and building a future we can all share.

We truly believe that companies managed according to ESG principles are more successful and secure valuable market share. Sustainability has become a key element of corporate management, and thus a value driver instead of just a trend. That’s why we are working to create new Vorsprung durch Technik – advancement through technology – for our customers. The four rings of sustainability and Mission Zero are the key elements of our sustainable strategy, and they demonstrate that the entire company is moving in one direction. Our vision is to deliver sustainable mobility to preserve the planet and deliver state-of-the-art products to our customers.

The true cost of the EU’s border security boom

Posted on by Max Tomlin

Thirty years after celebrating the fall of the Berlin Wall, Europe has gone on a wall-building spree. In its next budget cycle (2021-27), the EU plans to spend €34.9bn ($38.4bn) on border security, to help manage the tens of thousands of migrants trying to enter the region every year.

As a result, business is booming for Europe’s border security industry. A 2019 report by the Transnational Institute has revealed that a small cohort of European arms companies profit handsomely from the huge growth in the EU’s border budgets. These large companies are increasingly influential in shaping EU policy and encouraging the bloc to boost security efforts, but migration experts warn that the heavy militarisation of Europe’s borders only puts already vulnerable migrants in greater peril.

Up in arms
According to the Transnational Institute, Thales, Airbus and Leonardo are among the companies benefitting most from border security spending. For these businesses, the refugee crisis represents something of a market opportunity. Thales, which produces radar and sensor equipment, is currently developing border surveillance infrastructure for EUROSUR, the European Border Surveillance System. Meanwhile, Italian arms firm Leonardo was awarded a €67.1m ($73.7m) contract in 2017 by the European Maritime Safety Agency to supply drones for EU coastguard agencies.

To keep the cash flowing, it’s in the interests of these companies that the EU treats border security as a priority. Through lobby groups such as the European Organisation for Security – which had a declared lobbying budget of €200,000 ($220,000) to €299,000 ($328,765) in 2016 – companies like Leonardo perpetuate the narrative that migration is a security threat first and foremost, and not a humanitarian crisis. On this premise, the heavy militarisation of Europe’s borders is a necessary course of action.

Supporters of border security in Europe would argue that the spending boost is seeing results. In 2018, there were fewer than 150,000 new arrivals to Europe, according to UN data, down from more than a million in 2015. However, while the number of people arriving in Europe has fallen, the number of migrant deaths has risen, as heightened security has compelled people to reach Europe’s shores through more dangerous means.

A perilous journey
One argument for border militarisation is that it deters people from making hazardous crossings. “Walls work,” said US President Donald Trump in January 2019. “They save good people from attempting a very dangerous journey from other countries.”

In contrast, many migration experts argue that increased border security does not act as a deterrent. Nick Vaughan-Williams, a professor of International Security at the University of Warwick, has found in his research that migrants are “largely unaware” of the EU’s border security measures. “Those fleeing violence, poverty and persecution will not be deterred from seeking entry to Europe if they have no prior knowledge of these measures and the forces provoking their flight leave them with no option but to seek safety,” he told World Finance.

As well as forcing migrants to take more perilous routes and put their lives in the hands of smugglers, increased security increases the risk of human rights abuses at the borders themselves. There is growing evidence of violence against refugees by border security guards along the Balkan Route in Croatia. Although the Balkan Route may be far from Paris or Berlin, Amnesty International has released a statement to say that the EU is nonetheless complicit in these human rights abuses.

A European fortress
Militarised borders are the most visible way for a government to show that it’s acting on the public’s migration concerns, but in reality, their effectiveness is questionable. If migrant numbers were to once again reach 2015 levels, it’s likely that heavily militarised borders would just push refugees to take less conventional routes into Europe and risk their lives in doing so.

This, coupled with the climate emergency the EU is currently facing and the global economic downturn, makes it hard to justify the EU’s €34.9bn expenditure on borders. Many analysts argue that border security measures pander to the desires of populists and the far right, and do not necessarily reflect wider public opinion. “There is growing evidence that many EU citizens want accurate and trusted sources of information about migration rather than increased spending on border security – particularly in times of austerity,” Vaughan-Williams said.

Border security firms only skew this narrative further. Through their powerful lobbying position, they use paranoia to push for greater militarisation at the edge of Europe’s territory. In doing so, they fuel a vicious cycle where fear justifies higher walls and an increased border guard presence.

Global leaders must do more at this year’s World Economic Forum Annual Meeting

Posted on by Max Tomlin

The World Economic Forum (WEF) Annual Meeting seems to have lost its mojo – particularly in the West, where globalisation is being rejected in favour of a more protectionist outlook. What’s more, most observers of the 2019 meeting found that it fell a little flat. Headline speakers were underwhelming and failed to live up to the box-office acts of previous years, which included the likes of US President Donald Trump and his Chinese counterpart, Xi Jinping. If future editions of the gathering are to prove their worth, they will need to consider the concerns of a world growing more antagonistic to the globetrotting elites who have become synonymous with the event.

For the business leaders and government figures assembled at Davos, resolving the US-China dispute will no doubt be a priority

Nevertheless, many of the chief talking points from previous years remain unresolved and are likely to dominate the agenda in 2020. Finding the right regulatory balance that can rein in the excesses of Silicon Valley’s tech giants without stifling innovation will undoubtedly be up for discussion once again. Trade tensions, meanwhile, don’t appear to be going anywhere, and climate change looks as difficult to solve today as ever.

But the WEF’s yearly showpiece has never claimed to be able to single-handedly solve the major issues facing our planet. Instead, the gathering of business elites, experts and heads of state in Davos, Switzerland, simply aims to better understand and engage with these challenges. Each year, even if the forum only manages to spark one idea that makes the world a better place, surely it must be deemed a success.

US against the world
In 2018, when Trump was in attendance at the WEF Annual Meeting, few would have predicted that the trade war wrangles between China and the US would still be plodding along today. Tariffs remain in place on billions of dollars’ worth of goods, forcing businesses in both countries to explore new markets, make cutbacks or simply shut up shop. In fact, the only thing that seems to be traded freely between the two superpowers these days is insults.

The IMF’s latest estimates indicate that the US-China trade conflict has wiped as much as $700bn off the global economy to date. It has reportedly already cost the technology industry $10bn and could end up setting back the average US household $460 a year, according to an analysis by London-based economists Kirill Borusyak and Xavier Jaravel. In China, meanwhile, the spat has contributed to an economic slowdown that has taken even the most pessimistic analysts by surprise. For the business leaders and government figures assembled at Davos, resolving the US-China dispute will no doubt be a priority.

Fortunately, the WEF has always been unashamedly pro-globalisation. Shortly after the Trump administration extended its tariffs on Chinese goods in 2018, the WEF’s Aditi Verghese and Sean Doherty criticised the decision in an article entitled Trade Wars Won’t Fix Globalisation. Here’s Why. They wrote: “Short-sighted, protectionist measures ignore and erode the opportunities that [global value chains] provide for driving inclusive and sustainable growth and do nothing to optimise outcomes.”

But while some parts of the world wait to see what these two global superpowers will do next, others are keen to get on with things. In Africa, for example, countries are refusing to pull down the shutters and are instead opening themselves up to more international trade. Plans are afoot to launch the African Continental Free Trade Area (AfCFTA), a tariff-free continental market for goods and services that, according to the WEF, would instantly become the world’s largest trade bloc.

The AfCFTA will be implemented gradually, but it already has the support of 54 members of the African Union (AU), with the only exception being Eritrea. It’s hoped that the free trade area will boost intracontinental trade, which remains far below that found in other parts of the world: according to the African Export-Import Bank’s African Trade Report 2019, intracontinental trade in Africa sits at just 16 percent, far below the figures seen in Asia (52 percent) and Europe (73 percent). Preliminary estimates cited in the report suggest the establishment of the AfCFTA could see cross-border trade rise by 52 percent within 20 years if exports in each subregion reach their full potential (see Fig 1).

“[The AfCFTA] will create jobs and contribute to technology transfer and the development of new skills; it will improve productive capacity and diversification; and it will increase African and foreign investment,” explained UN Deputy Secretary-General Amina Mohammed at the formal launch of the AfCFTA. “Perhaps most important of all, the [AfCFTA] demonstrates the common will of African countries to work together to achieve the vision of the [AU’s] Agenda 2063: the Africa We Want. It is a tool to unleash African innovation, drive growth, transform African economies and contribute to a prosperous, stable and peaceful African continent, as foreseen in both Agenda 2063 and the 2030 Agenda for Sustainable Development.”

At the WEF on Africa event held in August 2019, there was much discussion as to why Africa is choosing to integrate its economies at a time when other parts of the world are adopting a more isolationist approach. Crucially, the leaders of the AU are already discussing ways to ensure that the continent’s less developed economies – and, indeed, its poorest citizens – are not negatively affected by a more liberal approach to trade. It’s a topic that will undoubtedly be returned to in Davos at the end of January.

AI opener
Silicon Valley’s technology giants had their toughest year for a long time in 2018: Facebook CEO Mark Zuckerberg faced a grilling from US Congress; Google saw several employee walkouts over the firm’s inadequate response to sexual harassment claims; and Apple had to navigate reports that some of its products were susceptible to Spectre and Meltdown security vulnerabilities. Scrutiny of said tech firms continued into 2019, albeit not to the same degree. In June, Facebook decided that its dominance of the social media space was not enough and began eyeing the financial services market. Its unveiling of a new digital currency called Libra, however, was met with a less-than-enthusiastic response.

Companies in Europe and the US should be wary of pushing regulators to place technological progress ahead of ethical considerations

Reactions to Libra have ranged from the indifferent to the indignant. Some predict the currency will have little impact when it launches later this year, with detractors (such as The Week’s Jeff Spross) suggesting that it offers few points of difference from existing mobile payment apps. For others, the currency poses a threat to the monetary sovereignty of nation states. That’s certainly the view of the French Government, which has moved to block the development of Libra in Europe.

Regardless of whether Libra goes on to change the world or not, the conflict between Facebook and France touches upon a broader challenge presented by today’s rapidly advancing digital economy: how to legislate on new developments in a way that protects citizens without stifling innovation. In addition to Silicon Valley’s heavy hitters, a number of entrepreneurs and pioneering start-ups are busy trying to create the next big thing in areas like self-driving vehicles, the Internet of Things and quantum computing. It is becoming increasingly clear that regulators will need to grapple with these developments sooner rather than later.

Deciding just how obtrusive regulations should be is becoming more difficult. Not only is technology advancing rapidly, it is developing all over the world and in different regulatory climates. US institutions may determine that artificial intelligence (AI) needs another decade of research before it can be employed in, say, the medical field, but if China thinks such delays are unnecessary, the US risks falling behind. In today’s winner-takes-all economy, coming second is the same as not being in the race at all.

Already, China’s less stringent regulatory approach is paying off. The country has quickly become a world leader in genome editing, overtaking the likes of Japan and the US, where obtaining government approval for human trials is more difficult. Similarly, China is making impressive strides in terms of AI development. To function effectively, the technology requires reams of data that will allow it to ‘learn’ the correct way of acting, whether that concerns autonomous vehicles, natural language processing or facial recognition. China, which has a very different attitude to online privacy than countries found in the West, has an advantage here, too.

“Organisations should work on a responsible privacy programme,” Paul Breitbarth, Director of EU Operations and Strategy at Nymity, told World Finance. “That means looking at which requirements for privacy and data protection apply to you, in all the jurisdictions where you operate, and to implement policies and procedures to deal with them.”

In China, however, a responsible privacy programme places national interests above individual ones. According to a national intelligence law introduced in 2017, organisations must support and cooperate with government authorities when they request information that relates to national security issues. Critics believe the wording of the law is vague enough to permit widespread state surveillance. Businesses all over the world may be trying to win the tech race, but they are not all playing by the same rules.

Still, companies in Europe and the US should be wary of pushing regulators to place technological progress ahead of ethical considerations. Instead, markets need to clearly state that they will not use Chinese technology – regardless of how cheap or effective it is – if it has been developed using morally dubious means. That would send a clear message, while also giving firms a financial incentive to adopt sound principles.

If this approach works, then perhaps the future could see western and Chinese firms collaborating on new technology. This may seem unlikely at present, but this is the sort of long-term ambition that those present at Davos should be striving for – integrating China more closely with the global community.

Climate activist Greta Thunberg protests global warming at the 2019 WEF Annual Meeting

Keeping a cool head
As is the case every year, those gathered at the WEF Annual Meeting (many of whom arrive by private jet) will be set the unenviable task of trying to win the fight against global warming. While it is easy to sneer at the jet-set elite for not practising what they preach, finger-pointing will achieve little – the time for action is already long overdue.

Throughout 2019, a number of natural disasters provided a reminder of just how urgent the situation is. In September, Hurricane Dorian became the strongest storm to ever hit the Bahamas, resulting in billions of dollars’ worth of damage and leaving at least 67 dead. While rising global temperatures do not cause storms like Dorian, they can boost their intensity. For the strongest storms, climate scientists have found that the sustained wind speed increases by approximately eight percent for every one degree Celsius of warming. The surface sea temperatures measured in the area where Dorian formed were higher than usual (especially when compared with pre-industrial levels), but such figures – and the disasters they engender – are likely to become the new normal if humans fail to cut their carbon emissions drastically and without delay.

Although the Paris climate accord has been criticised for its ineffectiveness, all hope is not lost. Greta Thunberg, a speaker at the 2019 WEF Annual Meeting, continues to galvanise her supporters by preaching the importance of sustainability. It’s a message that national governments have increasingly been espousing themselves. In both the US and Europe, environmental policies are now firmly part of the political conversation: for instance, new European Commission President Ursula von der Leyen has made the European Green Deal a central part of her plans in office, which also include making Europe the world’s first carbon-neutral continent by 2050.

Although the Paris climate accord has been criticised for its ineffectiveness, all hope is not lost

“We must go further; we must strive for more,” von der Leyen said in a speech during her candidacy for the commission presidency. “A two-step approach is needed to reduce CO2 emissions by 2030 by 50 – if not 55 – percent. The EU will lead international negotiations to increase the level of ambition of other major economies by 2021. Because to achieve real impact, we do not only have to be ambitious at home – we have to do that, yes – but the world has to move together.”

On the other side of the Atlantic, figures on the political left, such as US Representative Alexandria Ocasio-Cortez, are pushing their own version of the European Green Deal that would reshape the US economy. The Green New Deal, as it is known, promises to decarbonise the manufacturing and agriculture industries, build a national energy-efficient smart grid and turn green technology into a major US export. These proposals are ambitious, but that’s because they have to be – according to the Carbon Brief website, even if the global temperature is limited to 1.5 degrees Celsius above pre-industrial levels, sea levels will rise some 40cm by 2100, freshwater availability in the Mediterranean will fall by nine percent and the intensity of heavy rainfall will go up by five percent. If temperatures increase to a greater extent, the outcomes are even worse.

Despite the efforts of politicians around the world, the most pessimistic estimates indicate that it will not be possible to reduce the planet’s CO2 emissions quickly enough to avoid catastrophe. Instead, states may need to deploy less conventional solutions to meet their environmental goals. One option would be to invest more heavily in carbon capture and storage technology. This can be used to greatly reduce the CO2 emissions produced by the burning of fossil fuels and, when combined with renewable biomass, can even lead to carbon-negative energy. Similarly, several organisations have developed methods to remove CO2 from ambient air using an absorption-desorption process.

It is depressing that humanity has treated the planet in such a way that simply reducing fossil fuel usage is unlikely to be enough to sidestep disaster. At this year’s WEF Annual Meeting, talks will once again focus on efforts to cut down global greenhouse gas emissions. Ultimately, though, new technology may have to come to the rescue.

A new course
Making things more difficult is the fact that these challenges must be tackled at a time when political and economic stability is far from guaranteed. More than 10 years have passed since the global financial crisis, but the world economy is still suffering a hangover. “Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential,” World Bank Group President David Malpass said in June 2019. “It’s urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”

The eurozone, for example, is expected to grow by just 1.2 percent across 2020 (see Fig 2), while US-China trade tensions threaten to dampen business and investor confidence in both markets for the foreseeable future. Political change may provide a path away from this stagnation: the US presidential election is scheduled for later this year, while the EU has recently appointed new heads of the European Commission and European Central Bank. However, as we are all well aware, politics is always rife with uncertainty. Change can be both positive and negative.

Attendees at the 2020 WEF Annual Meeting will be hopeful that fresh leadership can set the planet on a course for closer economic collaboration, stronger financial stability and longer-term environmental sustainability. If discussions at Davos can help in any of those areas – even in some small way – then perhaps the event can recapture some of its lost spark.

With great wealth comes great responsibility

Posted on by Max Tomlin

In 1971, the German business professor Klaus Schwab brought leading executives from Western Europe to a small town in the Swiss Alps. Schwab asked these corporate leaders to consider the impact of their businesses on all of their stakeholders – not just customers and investors, but the societies within their sphere of influence. This ethos of responsibility would form the foundations of a new non-governmental organisation committed to economic and social betterment: the World Economic Forum.

There is a growing understanding that wealthy individuals can meet their financial goals while also safeguarding the planet for future generations

Since that first meeting in Davos almost five decades ago, the need for corporations, governments and society at large to take responsibility has only grown. The World Bank estimates that $4trn worth of investment is needed every year to achieve the UN’s Sustainable Development Goals (SDGs) by 2030. With current annual funding from multilateral organisations amounting to just $1trn, the continued contribution of the world’s wealthiest people is more crucial than ever.

The urgency of global issues has challenged high-net-worth individuals (HNWIs) to consider how they can leave a legacy greater than just financial security to the next generation. It is the responsibility of their advisors to support them in doing so.

The new face of wealth
Finally, the misconception that responsible investments don’t bring high returns is being broken down. There is a growing understanding that wealthy individuals can meet their financial goals while also safeguarding the planet for future generations. August 2019 data from Morningstar showed that 73 percent of funds in its environmental, social and governance (ESG) index outperformed equivalent non-ESG funds over the past three years. This has led to HNWIs increasingly deploying capital to responsible investment opportunities – funds that preserve and grow their financial assets, and build a sustainable future.

This has contributed to the soaring popularity of sustainable investing in recent years. According to research carried out by UBS, 34 percent of family offices globally are already engaged in sustainable investing, and a further 25 percent are engaged in impact investing. Of the latter, 62 percent are focused on fighting climate change. Further, a Standard Chartered Private Bank survey showed that 84 percent of HNWIs were open to shifting their funds from philanthropy to sustainable investing.

Another major driver of ESG integration is the shifting high-net-worth demographic, with more women and Millennials joining the group than ever before. These groups are highly attuned to the broader social and environmental impact their investments have.

For example, research by Morgan Stanley found that 86 percent of Millennials and 84 percent of women are interested in sustainable investing, compared with 67 percent of men. This has contributed to an influx of sustainable and impact-focused investment funds and strategies, and the number of options available in this space is only growing. After increasing just one percent in 2018, assets in this sector rose 15 percent to $52bn during the first half of 2019, according to research by Fitch Ratings.

Global goals
Although interest in sustainability from HNWIs is driving the investment management industry to assess how it can meet financial goals and address global issues, the urgency of the situation requires more rapid action. Currently, three quarters of wealthy individuals knowingly hold shares in companies that are not aligned with their ethics.

This disconnect highlights the increasingly important role advisors play in mobilising the high-net-worth community to pursue sustainable investment opportunities. The first step in achieving this is improving communication and clarity around ESG funds. Advisors must explain the options that are available to their wealthy clients so as to capitalise on the growing interest in aligning investment portfolios with personal concerns.

The growing popularity of responsible investing presents an opportunity for advisors to fulfil their fiduciary duty to their clients by considering sustainable investments while understanding the unique nature of the footprint their clients wish to leave behind. Service providers must understand that wealthy individuals have a responsibility not just to their families, but also to their employees, the causes they support and the communities they live in.

The contribution of HNWIs is essential to achieving the UN’s SDGs and to creating a fairer, safer and healthier society for a sustainable future. Personal advisors must take the necessary steps to ensure that their clients’ financial and wider objectives are both met.

WSP’s Future Ready programme helps clients deliver ecologically sound solutions

Posted on by Max Tomlin

Across the globe, there is a growing awareness of the urgent need to restore and protect the natural environment. Mitigating climate change through the reduction of greenhouse gases is at the heart of discussions between businesses, regulators and communities. As a result, environmental consultants are now in high demand.

As one of the world’s leading professional services firms, WSP understands how important it is to deliver ecologically sound solutions to clients. This can be seen at each stage of every project we undertake: for example, the company cleans up environments and restores natural habitats that have been disturbed in the past, such as forests, streams and wetlands. We also improve our clients’ processes to minimise their carbon footprint and waste generation, as well as help them achieve a net positive impact on biodiversity.

On top of this, WSP advises on the design and construction of a future-proof world. Through our Future Ready programme, we account for coming trends in climate change, society, technology and resource use, and integrate these trends into our services. In this way, we provide solutions that prepare our clients for today and the years to come.

Meeting today’s challenges
With many clients adjusting their business strategies to include carbon neutrality as a top priority, global warming not only affects the way we operate, but also the types of services we offer. Through our environmental consultancy practice, Future Ready programme, company culture and purpose, we are positioned to become one of the leading firms supporting clients facing the huge climate challenge.

Our environmental consultancy services feed into our core role, which is to plan, design, manage and engineer our communities to thrive. We believe these services are as strategically important as our other engineering and professional services. At WSP, we place our environmental offering at the forefront of our strategy to ensure clients have access to high-quality, multidisciplinary advice.

Furthermore, we are committed to minimising our carbon footprint: we aim to achieve a 25 percent reduction in the market-based greenhouse gas emissions produced across our global operations by 2030.

Empowered by purpose
Environmental consultancy services are offered by large multidisciplinary firms, and by ‘pure-play’ consultancy firms of all sizes. Many consultants, however, position their environmental services as a support function for construction or as a commoditised service to secure permits and achieve compliance, rather than as a strategic benefit. At WSP, we stand out by offering an integrated strategic approach, leveraging the breadth of our services to take advantage of large multidisciplinary projects that pure-play consultants have difficulty accessing, while building the same renown for our environmental practice as said consultancies. We also offer those services on any scale, in any part of the world.

WSP’s environmental services have enjoyed very strong growth, expanding 22.5 percent annually over the past five years – including six percent organic growth. We have also welcomed many firms to the WSP family, strengthening our services in the sector through partnerships with the likes of Orbicon in Denmark and Lievense in the Netherlands.

Our rapid growth can be attributed to the innovative work being carried out by our teams, which continue to step outside their comfort zones, penetrate new markets and grow relationships with existing clients. There is a strong sense of enthusiasm, dynamism and energy among our employees, largely because they all believe in WSP’s key purpose: to future-proof our cities and environments.

Challenging the status quo
Our data shows that laws and regulatory frameworks have historically determined around 80 percent of market drivers in environmental consultancy services. Today, however, we are seeing a shift away from a highly regulation-driven market towards one where compliance alone is not enough. Businesses must go the extra mile – to stay competitive, we must show we can go beyond the minimum requirements.

At WSP, we are extremely excited about the future of the environmental consultancy services sector. We were named among the top 10 environmental consultancies by Environment Analyst and ranked in the top five of Engineering News-Record’s list of top 20 environmental firms working in non-US locations. In the future, we plan to become the world’s premier environmental consultancy. For us, success isn’t defined by the size of our workforce or revenue sheet, but by market recognition and the positive influence we have within the sector through our value proposition and the quality of projects we deliver.

Shining a regulatory light on shadow banks is key to preventing a decline in Indian growth

Posted on by Max Tomlin

India’s love of gold goes back centuries. The precious metal plays an important role in traditional ceremonies, such as weddings and festivals, and it is such an important asset that households typically pass down gold jewellery and trinkets from generation to generation. So when Indians begin pawning their gold, it is a sign that the country has fallen on hard times.

Many workers in India are selling off their family gold amid a credit crunch that has brought the country’s real estate and automotive sectors to a standstill and left hundreds of thousands without work. In a country that has been hailed as the world’s fastest-growing economy for decades, GDP growth is now at its lowest in six years (see Fig 1).

Analysts have blamed the liquidity crisis on a range of factors, including clumsy policy moves, an unforgiving business environment and a tepid global economic climate. But few could deny that the credit crunch predominantly stems from India’s $42bn shadow banking sector, where an ongoing crisis has left many individuals and businesses unable to secure loans.

As shadow banks are left unable to lend, some of India’s major sectors have found themselves strapped for cash

A moment in the sun
Since the 2008 financial crisis, the number of non-banking financial companies (NBFCs) – or ‘shadow banks’ – has grown rapidly around the world. The success of these entities, which include hedge funds, insurance companies and pension funds, was partly due to increasing regulatory pressure on traditional banks. Today, total lending to NBFCs stands at $7trn globally. Unlike normal banks, shadow banks can’t borrow from central banks and don’t insure customer deposits – they use short-term sources such as commercial paper to borrow from banks, mutual funds and insurance firms in order to fund long-term projects.

In India, where there are more than 11,000 shadow banks, this sector has come to play a vital role in the economy. The rise of these institutions can be traced back to the 2000s when there was a boom in large-scale infrastructure projects. Some developers struggled with repayments and left state-owned banks saddled with non-performing loans. As a result, these banks began shunning riskier borrowers. “For about five or six years, banks basically stopped lending to real estate,” said Harsh Vardhan, a senior advisor at Bain & Company.

Shadow banks moved to fill the void. These entities went on a lending binge in the 2010s, accounting for nearly a third of new loans in India between 2015 and 2018. Their lending allowed for the huge rise of small to medium-sized businesses during this period. “SMEs were able to draw money from NBFCs as they have traditionally had a good reach in the interiors of the country and have expertise in things like vehicle finance, machinery [and] service equipment,” said Madan Sabnavis, Chief Economist at CARE Ratings. In this way, shadow banks contributed significantly to India’s rapid economic growth.

Turn for the worse
This party came to an abrupt end when IL&FS, a major Indian infrastructure lender, ran into trouble. The institution, which until then was AAA-rated, defaulted on an INR 10bn ($140.14m) bond repayment to the Small Industries Development Bank of India in June 2018. Over the following months, the trouble came thick and fast: IL&FS defaulted on five bank loans, prompting the government to step in and take control of the firm.

The default rocked India’s financial markets. The Economist called it India’s “Lehman moment”. Amid the panic, investors shunned NBFCs, concerned about their hidden risks. “Even other entities [that] had no direct issues suddenly found that they could not raise funding very easily,” Vardhan told World Finance. “The cost of their borrowing had gone up.”

More than a year later, the crisis is far from over. In the financial year that ended in March 2019, credit by shadow banks fell 30 percent from the year before. Businesses that relied heavily on shadow banks have been left struggling to secure funding. Not only has this prompted a liquidity crunch among India’s real estate and automotive sectors, but it’s also created problems for the rest of the banking sector – after all, shadow banks are among India’s biggest borrowers.

“Roughly 50 percent of their financial funding comes from banks, which means that there is a solvency issue with this,” Vardhan said. “If they start defaulting, then obviously some banks will default.” On this basis, S&P Global Ratings has warned that India’s financial sector now faces “a rising risk of contagion”.

Feeling the pinch
As these financially important institutions are left unable to lend, some of India’s major sectors have found themselves strapped for cash. One of these is the real estate sector. When mutual funds and insurance firms stopped lending to shadow banks, many of the infrastructure projects that took off in the 2000s skidded to a halt. According to Anarock Property Consultants, there are currently $63bn worth of stalled residential projects across the country. Without sufficient financing, many developers are going bankrupt.

The credit crunch has also delivered a serious blow to the country’s automotive sector. Its current slowdown is one of the worst India has seen, with passenger vehicle sales experiencing their steepest fall in 18 years. The government has been reluctant to accept responsibility, with Finance Minister Nirmala Sitharaman blaming the slowdown on “the mindset of Millennials, who prefer to use ride-hailing services such as Ola and Uber”. However, the main reason car dealerships are going under is because they are struggling to secure finance. Since shadow banks lent to less creditworthy borrowers, banks are wary to take their place, which only adds to the woes of dealerships. Across the country, firms in the industry have laid off about 350,000 workers; as more people lose their jobs and see their income slashed, consumer spending drops, sending the economy into a vicious downward spiral.

As well as being an important source of credit for many industries, shadow banks are fully integrated into India’s financial services sector. Many shadow banks lent from state-owned banks, mutual funds and insurance firms, meaning a collapse could have a domino effect on the wider banking sector. A report by the Reserve Bank of India suggests that the failure of any one of the top five shadow finance companies could trigger defaults in up to two banks. If this happened, the government’s ability to support depositors would be limited, owing to the increasingly narrow leeway for dealing with any such collapse. This increases the risk of a full-blown financial crisis. It’s this threat that led ratings firm Moody’s to lower India’s outlook in early November from stable to negative, citing concerns about the country’s access to funding.

Vardhan is optimistic that such a financial crisis is far from inevitable, as long as the government takes appropriate action. “As of yet, nobody has had a solvency issue,” he told World Finance. “As long as that is the case, then we don’t have a contagion risk.” Meanwhile, Sabnavis points out that not all NBFCs are at risk of defaulting – it’s only those with a history of “incorrect practices” that have exacerbated the crisis. “There are several large NBFCs [that] have prudent and viable models, and have not been affected by this crisis,” he said.

As unlisted entities, shadow banks have so far come under less scrutiny than India’s state-owned banks. However, the current crisis has made it clear that these institutions need more regulatory oversight. “The lesson learned is that we need to have more supervision,” Sabnavis said. “Just as we have had an asset quality review for banks, so should it be for NBFCs, whose loan book is around 18-20 percent the size of banks and hence has an important position in the financial system.”

Under the spotlight: Indian Prime Minister Narendra Modi has been accused of making hasty decisions that have damaged the country’s economy

Into the light
India is taking steps to improve the supervision of these institutions and minimise the risk of contagion within the sector. The government recently amended its insolvency and bankruptcy rules to give the Reserve Bank of India the ability to refer shadow banks to insolvency courts. The first shadow bank to go into insolvency proceedings will be the real estate lender Dewan Housing Finance: after a series of defaults in 2019, it stopped taking deposits and delayed some of its debt payments. Like IL&FS, the lender was taken over by the Reserve Bank of India after it racked up debts of $14bn owed to banks and mutual funds. That it will now be moved into bankruptcy proceedings marks an important step forward for the sector as a whole.

“We have seen a major clean-up operation [that] will lead to the weaker firms being gradually moved out from the system,” Sabnavis said. “This will lead to greater prudence on the part of NBFCs in terms of re-evaluating their business models. Some of them may even pitch for banking licences, as this would be the right way to grow.”

The Indian Government is also determined to tackle the credit crunch brought about by the crisis: in November, Sitharaman announced that $1.4bn would be put towards restarting unfinished infrastructure projects. India will also sell stakes in five state-owned companies, including one of its largest public oil companies, in order to attract much-needed foreign investment to boost growth.

However, the shadow banking crisis and the shockwaves it sent through the wider economy have cast doubts over the government’s ability to salvage the situation. On the campaign trail, Prime Minister Narendra Modi claimed he would make India a $5trn economy by 2024, but since taking office in 2014, Modi has been accused of making hasty decisions that have damaged the country’s economy. The most high-profile example of this was when he abruptly pushed through demonetisation in 2016, wiping out 86 percent of the currency in India’s market and leaving many cash-reliant businesses struggling to stay afloat. It’s another reason why the real estate and automotive sectors are as vulnerable as they are today.

With that said, these economic issues – including the shadow banking crisis – cannot be blamed entirely on Modi. The crisis has exposed a number of systemic weaknesses in the financial sector, such as the lack of a legal framework around a financial institution’s insolvency. In this respect, Modi’s error was neglecting to prioritise reform of the financial system he inherited. Now, he desperately needs to push for change if he’s to get economic growth back on track. He’s promised to boost infrastructure spending and financial support for agriculture, but keeping the financial sector afloat may be his most urgent responsibility.

Once the fastest-growing economy in the world, India is now in the midst of a steep economic slowdown. As much as the government might want to blame its misfortunes on the uncertain global economic climate, the fact that it is not a major exporter of manufactured goods means the country is less exposed to the US-China trade war and global manufacturing slowdown than other export-reliant nations. The roots of India’s economic woes go much deeper. Modi must tackle the financial sector’s weaknesses and improve regulation of its shadow banks if he’s to kick-start growth, create jobs and fulfil his promise of modernising India’s economy.

Setting the wheels in motion: CSX’s new operating model brings sustainability benefits

Posted on by Max Tomlin

Since the introduction of a new operating model in 2017, CSX has become a leader in the US rail industry, offering top-quality efficiency, safety, fuel economy and customer service. CSX is better positioned than ever to transition freights from the highways of America to the railroad – the most fuel-efficient mode of land-based transportation.

In recent years, we have modernised our operations, all the while maintaining a commitment to our foundational principles. If we remain true to these, we will continue to deliver the best service to our customers.

Safe and sound
The security of the employees and communities supported by CSX is our top priority. In the first three quarters of 2019, CSX maintained the lowest personal injury rate of all major US railroads, while also reporting the fewest train accidents in company history. Through focused improvements, we have strengthened existing safety programmes, and the results have been undeniable. We educate staff before taking disciplinary action, using every opportunity to help our teams learn for the future and utilise advanced technological capabilities to enhance our safety programme.

CSX is raising the bar by providing a new level of service and transparency in the railroad industry

CSX has not only improved our safety protocols over the last two years, but also the way we approach our business and customers. A fundamental difference between traditional railroading and our new way of operating is that the former focused on meeting train schedules, whereas CSX has developed a trip plan for each car. The company provides intermodal customers with personal, real-time trip tracking, and has recently rolled out the service to merchandise customers. We are raising the bar by providing a new level of service and transparency in the railroad industry.

CSX was also a leader in terms of train speeds and dwell time in 2019, according to metrics reported to the US Surface Transportation Board. Quicker trains and reduced journey times resulted in a more reliable service for CSX customers. Not only does this allow us to achieve unprecedented efficiency, but it also makes us a more competitive option for freight shipments, which provide immense sustainability benefits.

Less is more
CSX President and CEO Jim M Foote has affirmed the company’s commitment to constant improvement, stating that CSX is “never done with creating efficiency in the organisation”. As such, we are always looking to remove any unnecessary aspects of our operations and change processes that could be conducted more effectively. As rail travel becomes more efficient, CSX is taking a leading role in the transport sector.

After years of lagging behind the rest of the industry as a result of high operating costs, over the past three years we have reduced our locomotive count by over 30 percent. On average, CSX can transport a ton of freight 492 miles on a single gallon of fuel. This is 228 percent more efficient than the average truck, which moves a ton of freight about 150 miles on a gallon of fuel.

Our CEO set out a goal of establishing CSX as the best-run railroad company in North America – the most efficient, safe, reliable and sustainable. Guided by Foote’s vision, CSX continues to set company and industry records in each of these areas, including recently being named as the only US Class I railroad on the Dow Jones North America Sustainability Index for the ninth consecutive year. It is clear that the employees of CSX have a unified drive for continuous improvement.

Beyond corporate goals, CSX operates a robust community engagement programme – Pride in Service – through which we are committed to having a positive impact on the lives of more than 100,000 US military service members, veterans, first responders and their families by the end of 2020. This dedication to sustainability, safety, operational performance and social responsibility is driving CSX towards a successful future.

HYCM: how to craft the right trading strategy

Posted on by Max Tomlin

It is impossible to predict what the future holds for financial markets – volatility is always lurking around the corner. Nevertheless, choosing the right broker can significantly help investors trying to make sense of the industry.

With more than 40 years of group experience, HYCM is able to deliver first-class trading services to its clients regardless of where they are based or which industries they wish to target. The company’s heritage has cemented it as one of the most trusted and transparent brokers in the forex space.

World Finance spoke to Giles Coghlan, a hedge fund trader and Chief Currency Analyst at HYCM, about his personal trading strategies and his expectations for the markets going forward.

The important news is the news that surprises the market and changes the status quo

What are your favourite markets to trade and why?
Some of my preferred markets to trade include the major currency pairs alongside gold and US oil. The major currency pairs (GBP/USD, USD/JPY, USD/CHF and EUR/USD) have competitive spreads and plenty of liquidity, which means orders are easily filled with minimal slippage.

Gold is a great risk asset at the moment and has been strongly bid all though 2019 on the US-China trade war negotiations and a low-interest-rate environment.

What is your trading style and what type of analysis are you using?
I am a fundamental trader who looks for fundamental news releases to drive markets. Ultimately, all markets are fundamentally driven, so when you know the news story driving prices, it gives you more conviction in your trades.

Having decided on the fundamental outlook of a currency pair and chosen a weak currency to trade against a strong currency, I apply technical analysis for my entries and exits. My main technical tools are the 100 and 200 exponential moving averages, the relative strength index, stochastics, price action and trend lines. My view is that traders should ideally have both aspects of technical and fundamental analysis in their trading.

There is a lot of news. How do you filter out the noise and figure out what’s important?
First, you need to find out what the baseline is for a currency. So, as a hypothetical, let’s say the market is expecting the Reserve Bank of Australia (RBA) to cut interest rates at its next rate meeting. This is the baseline – the RBA is expected to cut.

If the RBA then has the meeting and announces it is not going to cut rates but raise them instead, you would expect the Australian dollar to rally strongly. The important news is the news that surprises the market and changes the status quo.

What is your trading strategy? Do you use the same strategies over different asset classes, geographies and time frequencies?
No, I use a variety of different technical strategies across different asset classes. The one aspect that all my trades have in common is that there are fundamental reasons for taking them. My message to traders is that the technical system is not as important as having a fundamental reason for trading.

Do you have a trading plan and how important is it to have one?
Yes, I have a five-point trading plan that keeps me on track: look back, look forward, look at the charts, look at my risk and look at the outcome of my trade. There is obviously detail to each of those sub-headings, but those five simple questions form the core of my trading plan.

It is more convenient to trade multiple markets from one broker than to have different terminals for different brokers

Do you have a certain risk management strategy as well?
At present, I do not risk more than one percent of my account on any single trade and have a maximum of four positions open at any one time. However, I have rarely had more than two positions open at a time. I only use leverage at a rate of 1:2 and generally trade without any leverage.

What do you look for in a broker?
Regulation is very important to me as it reassures me that certain strict monetary procedures are being followed. Personally, I like a broker with a good range of markets across indices, currencies, commodities and shares. It is more convenient to trade multiple markets from one broker than to have different terminals for different brokers.

Finally, I want costs to be competitive across the instrument that I am going to trade. HYCM is a good example of a broker that fits these criteria; it is multi-regulated and possesses an excellent range of markets.

What sort of risk advice do you offer to clients?
There is an element of risk involved with any investment. With regards to contract for difference (CFD) trades, we provide a ‘high-risk investment warning’. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

Approximately 67 percent of retail investor accounts lose money when trading CFDs with HYCM. Each investor should consider whether they understand how CFDs work and whether they can afford to take the high risk of losing their money.