Author: Ben Debski

Going it alone

Posted on by Ben Debski

The last year has been a busy one in Venezuela. Oilfields and utilities have been nationalist in an attempt to preserve ‘national interest’, pushing the country towards a fully fledged socialist state. Chavez, who labels capitalism an evil, has ordered firms to fall into line with his self-styled socialist revolution or face nationalisation for what he describes as ‘the benefit of the people’. This looks set to continue and spread, with aspirations to nationalise banks, a steelmaker and cement companies. However, with the effects of these moves stretching far beyond national boundaries, the implications look set to prove significant.

The steel industry has been that most recently facing the threat of nationalisation. Argentine-owned Ternium-Sidor has been threatened with an ultimatum, suggesting Venezuela’s largest steelmaker supply the local market before exports are made, or face nationalisation. Chavez complained that the company, which is majority-owned by Latin America’s largest steel-making group, Ternium, mainly exports its steel, leaving Venezuelans to import the product from as far away as China. Such a move will be ratified using the powers given to Chavez by Congress to rule by decree this year.

And such a move is hardly a surprise. Due to exchange controls, some companies put a priority on selling products abroad to ensure they are paid in a foreign currency rather than the local bolivar, which trades on the black market at almost half its official rate. Inevitably, at the detriment to national interest, it drew Chavez to instruct, prior to a recent meeting: “Before exporting a single ton abroad, first you have to guarantee me that all the (Venezuelan) companies are supplied”. Chavez told private banks and Ternium-Sidor, the country’s largest steelmaker, to adapt their businesses to what he called the ‘national interest’. Meanwhile, earlier this year, cement-makers were told they could be nationalised if they were found to be worsening a housing shortfall by favouring exports over domestic sales.

Popular among the majority of the poor for lavishing high oil revenues on them, Chavez does not engender enthusiasm among all. Indeed, many polls show that the people generally do not share his vision for turning the South American country into a socialist state. Recent protests took to the streets following the alleged censorship of national television content after the taking over of Venezuela’s largest media firm News agent Reuters. They recently published the comments of an annoymous government insider who insisted that Cavez’s nationalisation threats were more than mere bluster. Despite being in opposition to the nationalisation program, his remarks backed up the general consensus that Chavez has the drive to follow through on his rhetoric.

The rhetoric can seem very convincing. Improvements in the country’s previously impoverished social services have given opportunity to many, while enforcing the importance of the ‘national interest’ has appealed to those in other countries, including neighbouring Colombia, who have seen assets decimated with profits seeping out to multinationals, who re-invest little back into the country. Oil means much more to the country than just cash. The oil industry had integrated the whole country’s infrastructure and development, and boosted its thin population as immigrants arrived in search of work. Government policy-makers insist that they are fully backed by a population adamant it is they who should fully benefit from Venezuela’s considerable riches.

Yet some of the moves taken to safeguard such resources have looked, on the outside, extremely dubious. Before Venezuela’s largest telecommunications firm, CANTV, was nationalised, Chavez talked for months about a takeover if it did not adjust its pension payments. In December, CANTV said in response to a court ruling it would make retroactive payments to more than 4,000 employees, but Chavez ordered its takeover a month later anyway.

He is also making some powerful enemies. The country’s last privately run oilfields that he has taken over, were previously owned by some of the world’s largest companies. This will undoubtedly play a great influence in all private sector decisions, both inside the country and outside. With Chavez vowing to leave the International Monetary Fund, he risks closing the door on an economic community which may come to haunt the country later on. Up until now, the majority of the firms upset have had leading shareholdings owned by US-owned companies. Although this is politically easier, Ternium-Sidor is owned by a company from Chavez’s leftist ally Argentina. Chavez, had said he was reluctant to nationalise the company because its main investors were Latin American. Still, the parent company’s share price fell to an almost two-month low immediately after the move became imminent.
Meanwhile, the banking sector is equally controversial. There is considerable Spanish involvement in Venezuelan banks, with Banco Provincial being a unit of Banco Bilbao Vizcaya Argentaria and Banco de Venezuela a subsidiary of Banco Santander Central Hispano. By threatening such a globally established structure, Chavez risks further alienation from the economic system as well as jeopardising political relations with Spain, with the most important socialist government in Europe. Yet Venezuela is not the only Latin American nation which has accelerated its bid to reclaim resources. Just over a year ago, Bolivian President Evo Morales, a leftist ally of Chavez, ordered troops to seize gas fields in his country.

Venezuela’s new policies have given the nation a new self-image, according to those who styled Chavez’ new-look nation including Venezuelan Deputy Energy Minister Bernard Mommer. This meant, among other things, that it no longer offered the option of international arbitration in deals as its legal system offered sufficient security.

With a new-found confidence, Venezuela is flying the flag for all those countries unwilling to accept the policies of a few super-powerful governing nations. By re-investing the country’s oil profits in its people, and standing up the multinational, Chavez has reinvented socialism in his own image. The extent to which this is possible within the economic structures so intrinsically adhered to by most of the rest of the world remains to be seen. A collision course with the US, as well as major institutions such as the World Trade Organisation, appear likely and there are those who fear that Hugo Chavez will follow the route of many self-styled ‘dictators’, placing his own legacy above the good of the nation. Yet the romantic notion of freeing his people from under the wheels of capitalism is certainly causing the world to sit up and take notice.

Move over gasoline, here come biofuels

Posted on by Ben Debski

Americans love cars. They love the freedom of movement they provide, love cruising down the open highway. But today, it’s beyond argument that their gasoline habit is a road to ruin. Voices from across the political spectrum say oil dependence is bad for America’s national security, economy and environment.

But what if there were a viable alternative to petroleum? What if there were a cost-competitive, clean-burning, global-warming-busting fuel that could be produced from plants grown on American soil? It may sound too good to be true, but it’s not. Scientists, farmers and auto experts agree that biofuels – fuels made from plant materials – can help free America from their oil dependence.
Aggressive action to develop biofuels between now and 2015 would position America to produce, by 2050, the equivalent of more than three times as much oil as we currently import from the Persian Gulf. And if combined with better vehicle efficiency and smart-growth urban planning, biofuels could virtually eliminate our demand for gasoline by 2050.
This is not the stuff of science fiction. The biofuels industry relies on real world technologies that are improving by leaps and bounds. With technological advances that we could deploy over the next 10 years, biofuels would bring staggering economic and environmental benefits:
Biofuels can slash global warming pollution. By 2050, biofuels – especially those known as cellulosic biofuels – could reduce our greenhouse gas emissions by 1.7 billion tonnes per year. That’s equal to more than 80 percent of current transportation-related emissions.
Biofuels can be cost competitive with gasoline and diesel. By 2015, we could produce biofuels at costs equal to between $0.59 and $0.91 per gallon of gasoline, and $0.86 per gallon of diesel. These prices are competitive with average wholesale prices over the last four years – $0.91 per gallon for gasoline and $0.85 per gallon for diesel.
Biofuels will provide a major new source of revenue for farmers. At $40 per dry ton, farmers growing 200 million tonnes of biomass in 2025 would make a profit of $5.1bn per year. And that’s just the beginning. Experts believe that farmers could produce six times that amount by 2050.
Biofuels can provide major air quality benefits. Biofuels contain no sulphur and produce low carbon monoxide, particulate and toxic emissions. Using biofuels should make it easier to reach air pollution reduction targets than using petroleum-based fuels.
Biofuels offer major land-use benefits. Switchgrass, a promising source of cellulosic biofuel, is a native, perennial prairie grass that has low nitrogen runoff, very low erosion and increased soil carbon, and also provides good wildlife habitat.

Making biofuels happen
It may seem like gassing up with fuel that’s been grown by an Iowa farmer is a long way off. But it isn’t. American farmers and refiners are already producing billions of gallons of ethanol from corn. But to make enough biofuels to slash our oil use, the industry will need to evolve to making cellulosic biofuels – fuels made from whole plants, not just the corn kernel. To make this next leap, we need to put the right national policies in place.
The federal government should invest in a package of research, development and demonstration. Producing a cheap and reliable alternative to oil will be lucrative business, but the industry alone will take too long to develop the new technologies needed. The government can spur the development along – and ensure that biofuels are affordable for American consumers – by investing about $1.1bn between 2006 and 2015 in biofuels development.
They could also offer incentives for deploying the first billion gallons of cellulosic biofuels. With oil prices skyrocketing and greenhouse gas emissions piling up, we need to shift to biofuels today, not in the distant future. To make sure that at least one billion gallons of cellulosic biofuels are produced by 2015, the government should offer $1bn in incentives to production facilities.

Give consumers a meaningful choice at the pump
Today, drivers have a choice between oil and oil when they wheel up to the gas pump. To change that – to provide a choice between oil and biofuels – will take robust markets and infrastructure. And to that end, the government should require that all vehicles sold by 2015 be able to use both traditional fuels and biofuels, and that at least one-quarter of gasoline stations have at least one pump dedicated to selling biofuels.

What might be your drug of choice, sir?

Posted on by Ben Debski

The business of drug production, for years the domain of a few big players protected by swathes of patent protecting legislation, has been put in turmoil this year. In January, it was revealed that Thailand had issued licences for production of cheaper generic versions of globally used drugs for AIDS and anti-clotting, thus undermining the trade practices of the larger patent-holding firms. Such moves have been justified by trade laws for public health needs, which is something that experts feel could set a global precedent.

Generic versions of Abbott Laboratories’ Kaletra, for HIV and Sanofi-Aventis’s and Bristol-Myers Squibb’s Plavix anti-clotting medicine, were those drugs in question, and the moves have seen others look to the rulebook for further opportunities. The breakthrough ruling is backed under laws drafted by the World Trade Organisation adopted by WTO members in November 2001 under the Doha declaration, which in special circumstances, give a degree of flexibility in international trade laws. Developing nations can issue compulsory licences in cases of ‘national emergency’ to ensure their populations have access to life-saving medicines. In such cases, countries can license production or sale without the permission of the patent holder.
And according to the Washington College of Law at American University, who issued a recent report concluding Thailand’s actions complied with patent law: “Arguments to the contrary…should be dismissed as political posturing,” claims Sean Flynn of the law school’s Justice and Intellectual Property program. And indeed, it is difficult to dispute the existence of a national AIDS or heart disease ‘crisis’ in Thailand. Despite that, certain stakeholders have argued that there was not a sudden change in health conditions and as such, the move was without justification.
The US has also criticised the Thai Government for a lack of transparency throughout the decision process. Thailand has been added to the so-called priority watch list, which could be interpreted as a first step toward sanctions. The list pertains to the US Trade Representatives report on the effectiveness of other countries’ protection of US intellectual property rights. Free-market advocates had lobbied the USTR to put Thailand on the list, which includes China, but stopped short of threatening action at the World Trade Organisation. The elevation of Thailand to this ‘priority watch list’ stems from what the USTR sees as an “overall deterioration in the protection and enforcement” of intellectual property rights there.

According to the report: “In late 2006 and early 2007, there were further indications of a weakening of respect for patents, as the Thai Government announced decisions to issue compulsory licenses for several patented pharmaceutical products.” The USTR acknowledged the presence of WTO rules, yet made it clear that the lack of transparency and due process exhibited in Thailand was a serious cause for concern. The country represented just one in which it was felt that copyright enforcement and trademark rules needed to be enforced.

Perhaps of greater concern to the US government is the fact that many commentators feel that the ruling could spread to other nations. Rohit Malpani, Trade Policy Adviser for Oxfam International asserts that anywhere, “where there is political ownership of the issue,” including Kenya, South Africa or even India could look to emulate what the Thai government has done. Indeed, at the time of writing, Brazil were considering a similar measure with Merck & Co’s Efavirenz AIDS drug. “If one country makes a decision, it can embolden others,” said Lawrence Kogan, Chief Executive of the Institute for Trade, Standard and Sustainable Development, a free market group. Encouraged by the World Health Organisation and other aid groups, developing countries have seen the link between disease and poverty, and are spending more of their income on health care, he said. “They are increasingly trying to expand access to more people,” Malpani said.
There is also a risk of a backlash from the large pharmaceutical companies. In response to the Thai government’s decision, the producer of Kaletra – Abbott – initially said it would stop launching new drugs in Thailand in protest. This standpoint has since been rescinded, most likely with corporate reputation in mind. As Chad Bown, Economics Professor at Brandeis University asserts: “you don’t want to be seen out there in the world picking on poor countries whose populations may be sick or dying.”
The ruling has seen celebration amongst some of the world’s poorest communities. Pharmaceutical firms have long been criticised for maintaining high prices of drugs in developing countries. Some say that allowing generics in Thailand could open a can of worms, and as soon as one firm begins production, there can be a leakage effect,” which can lead to cheaper versions becoming available outside that country, he said.
The license that Thailand issued for Plavix is especially groundbreaking because these disputes have centred in the past on drugs for AIDS, a more publicised but less prevalent killer than heart disease. Heart disease kills about 17.5 million people a year, according to the World Heart Federation. In 2005, AIDS killed 2.8 million people, according to the United Nations. As the leading cause of death in the world, heart disease affects both developed and developing countries in equal measures. The decision to produce cheaper versions of drugs to combat this has been welcomed by patient rights groups.
And a slight change in attitude has resulted from the ruling. Abbott recently offered to sell a new heat-stable form of an AIDS drug in Thailand for $1,000 per patient per year, matching an offer it made earlier in the month to about 40 low- and middle-income countries. Emerging markets generate no more than eight percent of sales by major pharmaceutical companies, but are growing more rapidly than the United States and Europe, according to Gustav Ando, Health-care Analyst at Global Insight. Research firm IMS Health said it expected pharmaceutical sales in emerging markets to rise to 17.4 percent of a total $687bn market this year, up from 13 percent in 2000. Thailand accounts for less than one percent of drug makers’ annual sales, Ando said, but emerging markets are where the growth is as business in Europe and the US slows dramatically. And that is where the fear for the large companies stems from as these challenges emerge to threaten their profit margins.

So, this potential milestone in the production and distribution of pharmaceuticals is of great significance to humankind and great worry to multinational pharmaceutical directors. Whether an epidemic of similar rulings breaks out remains to be seen, but the increased availability of life-saving drugs at lower prices will bring benefits far more valuable than any boardroom bonus.

Telepresence: A better way to do business

Posted on by Ben Debski

Using Telepresence as a better way to do business is the trend in 2007 and 2008. Over the next few years, every sizeable dispersed company will adopt Telepresence technology that enables them to interact with people, no matter how far away, as if they were in the same room. CEOs all over the world are pleasantly surprised by the benefits that Telepresence brings them and are finding that the technology can change how they run their business.

Cisco’s Chairman and CEO, John Chambers, finds the new technology is so lifelike that it can replace much corporate travel. Cisco has planned to install 110 Cisco TelePresence systems in Cisco offices around the world between October 2006 (their launch date) and July 2007. In October 2006 Cisco said that the company aimed to cut $100m in expenses by reducing travel by 20 percent in the next 12 months. That is a huge return on the investment.
A Telepresence studio or dedicated room is set up for six people and consists of three 50-inch (127cm) plasma display screens and studio-quality audio and lighting equipment. Three cameras capture images of the left, middle, and right sides of the room and the image is transmitted as a High Definition (HD) video image in three parts to the far site which also has three large screens. A fourth part carries the date to display on the data screen.
The Cisco TelePresence System is so well designed that you feel as if you are physically present in the same room as your colleagues at the distant location. For me, it was so realistic that it was an emotional experience to use it to talk from London with Cisco staff in San Jose, California. Business Week gave it a Best Product of 2006 Award and called it ‘spectacular’. That is some praise.
Ed Leonard, Chief Technology Officer of DreamWorks Animation SKG, observed about telepresence: “This technology has profoundly impacted our ability to collaborate across geography, enabling us to bring people together without the cost and burden of travel. It has fundamentally changed how we run our business.”
Sometimes a person-to-person meeting is the only way to do business or make things happen. But Telepresence is a wonderful substitute because it helps your company bring people together – without travel – in a meeting with all the necessary emotional and other nonverbal cues and eye contact. With Telepresence, much more time is spent being there and no time is spent on going there. A Telepresence or video meeting can be set up in seconds.
AMD, the semiconductor manufacturer and Intel rival, installed HP Halo studios in Austin, Texas and Sunnyvale, California. Hector Ruiz, AMD chairman, president and CEO, said: “We’ve been able to cut down on executive travel and we are able to have impromptu meetings with colleagues located miles away…. Our next step is to put a Halo room in Dresden, Germany. So now we are talking about continent to continent.”
So far, almost 90 HP Halo studios have been deployed around the world, including those in HP’s own sites. The HP Halo customer base includes: AIG Financial Products Corp, AMD, BHP Billiton, General Electric Commercial Finance, Novartis AG and PepsiCo. HP told us that 85 percent of its customers have already returned for additional systems.
Steve Reinemund, Chairman of the Board, PepsiCo said: “Halo is the single biggest investment we’ve made to improve the effectiveness of our business and the quality of life of our people.”
Why is Cisco so successful? Because the design team asked 250 customers what they wanted; because it uses the highest form of HD video – 1080 lines progressively scanned, known as 1080p (other companies use 720p); because the audio reproduction is of natural, high fidelity quality; and because, for the first time ever, the studio in which videoconferencing takes place is designed with proper broadcast studio lighting and acoustics.
Videoconferencing is now in high definition, is high quality, easy to use and easy to manage. It is also very convenient. Both Cisco and HP have made their Telepresence systems capable of ‘talking’ with single HD videoconferencing systems of other manufacturers. So you can invite into a meeting persons at other sites who do not have a Telepresence system. But this and multi-site conferencing is a refinement.
Telepresence was designed primarily for connecting two sites and their CEOs and senior management teams. That is what Telepresence will be used for in the main.
Telepresence will mean less travel, less associated hassle and a much improved lifestyle for the CEO of the future. Both the CEO’s company and the CEO’s family will benefit.

Richard Line is Editor of Videoconferencing Insight Newsletter.

Aviation emissions

Posted on by Ben Debski

Aviation is now the fastest-growing transport mode of all. In the UK alone, passenger numbers have increased by 310 percent in 25 years, and the number of flights by 166 percent.

The Department of Transport forecasts that, by 2020, the number of passengers using the UK airports will be around 400 million, compared to 200 million today, and worldwide, passenger traffic is expected to grow by about 5 percent per annum and air freight by over 6 percent per annum. Overall, the world fleet of aircraft is expected to double by 2020.

Meeting this insatiable demand for air travel will have a massive environmental impact, especially with regards to climate change. The demand for air travel is growing rapidly. If all this growth is met without question, or without strict limits on the impacts, the effects will be devastating.

One reason why there is such fast growth is that air travel is under-priced. Unlike most other sectors of the economy, it pays virtually no tax; nor does it compensate society for the huge environmental impacts. This means that air travel competes unfairly with other sectors of the economy for resources and for the disposable income of travellers.


Pollution
Air pollution is a major issue for those who live in the vicinity of large airports. Emissions from aircraft, air-side support vehicles and airport-related traffic, all contribute to a build up of potentially harmful gases such as oxides of nitrogen, carbon monoxide, volatile organic compounds, and ozone.

The main constituent of the fuel used in aircrafts is Kerosene. In the combustion of this fuel, large amounts of vapour, carbon dioxide and carbon monoxides are created. Although the amount of sulphur emitted is reduced in the refining process, there is still some small amount that is released in the combustion process, creating sulphur oxides. Subsonic aviation currently contributes between 2-3 percent of the carbon dioxide emitted from all fossil-fuel combustion. The emissions of nitrogen oxides lead to the production of ozone in the upper troposphere.
Dr Piers Foster, from the School of Earth and Environment at the University of Leeds, made headlines around the world last year as he discovered a way of reducing the UK’s annual carbon dioxide emissions by 2.5 percent by shifting all flights to the daytime.
According to Foster, aircraft contrails contribute to the greenhouse effect as they act like clouds and help trap heat close to the earth’s surface. He discovered that they’re responsible for as much as half of the negative impact that the aviation industry has on our planet.
If flights are carried out, Foster contends, during the hours of sunlight, the contrails will not trap as much heat because they act as mirrors reflecting the heat back into space.

To fly, or not to fly
In March this year, talks began to incorporate the aviation industry in the European Union’s Emissions Scheme (EU ETS). Aviation is the fastest growing source of emissions in the UK, and it is argued that the time has come for the industry to take responsibility.

The scheme places a cap on the amount of carbon dioxide produced. Allowances of a certain level of emissions have been allocated, and there has been a call to include airline companies in this quota.

Aviation Minister, Gillian Merron, stated that he has ‘led the debate in Europe, calling for aviation to be brought into the EU Emissions Trading Scheme. Aviation plays an important role in our economy and a balance needs to be struck and maintained between environmental, economic and social considerations.’
Another route to reducing emissions has been the formation of organisations like Responsible Travel, set up with the intention of creating a forum for tourists to find and book holidays from companies that are committed to preserving the environment.
The co-founders, Justin Francis and Harold Goodwin, launched the site in 2001, with only a small collection of packages available. Today, the site offers over 2000 holidays from hundreds of companies.
In 2006, Responsible Travel began a campaign to create awareness of the amount of CO2 emissions created by the aviation industry. The company believes there is a balance between the impact of travelling and the benefits sustainable tourism can offer. If people were to stop travelling altogether, many natural and cultural attractions would be lost as the tourism often injects much-needed cash into the local economy.
Developing countries that rely on tourism from all areas of the world have been alarmed by the new suggestions that aviation is a sin.
The potential economic damage of a reduction in air travel could be catastrophic to newly formed eco-friendly holiday destinations in developing countries. After spending years convincing these parts of the world that protecting their local ecologies is important and will ultimately result in attracting more tourism, would it be right to neglect them altogether?

Porini camps – Kenya
Local Masai people have been employed to build and manage some of the tented campsites alongside the national parks. This encourages the local tribes to conserve wildlife and helps to provide them with a stable economy.
Jake Grieves Cook, the mastermind behind this project, has opened several camps and prices compare favourably to other accommodation options.

Grootbos – SA
This five star eco resort on the Western Cape has it all covered. From lecturing visitors on seaweed to training the locals to garden, the owners of this remarkable establishment are eco-warriors in every sense.
The hotel concentrates on living in harmony with the eco-system as well as stabilising the local economy by employing workers from surrounding villages.

Shinta Mani – Cambodia
This particular hotel does all it can to provide for the local economy. It was set up with the sole purpose to employ local people living in poverty. Giving twenty disadvantaged young people a solid grounding in the hospitality industry each year.
With the opportunity to sponsor a child during your stay, and take in the sights at Angkor Wat- this option offers the best of both worlds.

Zeavola – Ko Phi Phi Island – Thailand
Devastated by one of the most horrific natural disasters ever, this beautiful Thai island was forced to virtually say goodbye to visitors. This was not to be the case however, Zeavola has thrived under the circumstances. This good fortune has been passed around; for every guest that stays at the lodge, a donation is made to the repair of the local school.

Kapawi – Ecuador
Make the trip to one of the worlds most bio diverse areas left on the planet, this eco-lodge boasts an unbelievable 10,000 plant and 540 bird species.
Perhaps most importantly though, the area supported by Kapawi has profited and managed to stave off attacks from oil and logging companies intent on damaging the beautiful surroundings to access the bounty of raw materials.

Guludo Beach Lodge – Mozambique
Conventional holidaying, this is not. The owners of this beach lodge have installed the virtues of fair trade anywhere possible, and have benefited from incorporating the local economy.

Tiamo – Bahamas
This tiny eco resort makes sure absolutely no pollution is created. Running solely from solar, filtering water and creating organic compost. This hotel misses out on some home comforts like TV and air-conditioning, but makes up for it in eco-friendly satisfaction.

How to holiday without hurting the environment

  1. Best booking Pass on those glossy brochures at your local travel agent- for every 10,000 brochures printed, 14 mature trees are felled.

  2. The right direction As the majority of emissions are created during take off and landing, it is important to try to find alternative transport for short flights. And look out for direct flights where possible.

  3. Home alone Don’t leave home without cancelling deliveries and unplugging electrical appliances.

  4. Travel light Every last gram of weight has an impact on the fuel consumption of any form of transport, so it is very important to take only what you need.

  5. The young ones When travelling with young children, disposable nappies are a must. But be sure to pick a brand that are biodegradable so the environment is not adversely affected.

  6. Dream destination Be sure to respect the environment during your stay by conserving water, turning off the air conditioning and lights when they aren’t needed, and let the housekeeper take a break by re-using your towels.

  7. Sunning yourself Make sure you choose sun cream carefully, always try and buy natural and organic products. Some mass produced options can actually be poisonous to the skin.

  8. Take a break Avoid driving a car on your holiday- why not rent a bike and enjoy the sights. It is also a great way to meet the locals.

  9. Recycling remains It takes a plastic bottle 450 years to break down in a beach environment. Take your recycling habits on tour with you.

  10. Local culture Invest your holiday cash in local produce, it will help the local economy to remain stable. Think about the food miles before odering you home favourites.

Banking in China

Posted on by Ben Debski

When China joined the World Trade Organisation in 2001, it pledged to open up the country’s banking sector to foreign investors by the end of this year, a process that is requiring extraordinary levels of change. If it goes well, an influx of foreign banking skills into the domestic scene will aid the country’s rapid development. If it goes wrong, the results could be catastrophic – both for China and for its new foreign banking friends.

Early signs are promising. In 2003 foreign institutions owned just $500m of shares in Chinese banks, and held only about 1 per cent of China’s total banking assets, while China’s four largest state-run banks controlled over 60 per cent of the country’s loans and deposits. But official statistics now show that by the end of June, 26 overseas financial institutions held $18bn of shares in 18 Chinese banks and 71 foreign banks had set up 214 operations in China.

When the Bank of Communications made an IPO in Hong Kong it was oversubscribed 200-fold by retail investors and 20-fold by financial institutions. In July, the Initial Public Offering (IPO) of Bank of China, one of the big four state-owned banks, raised a record $2.5bn. And the China Securities Regulatory Commission (CSRC) is currently working on the flotation of other banking behemoths, including the Industrial and Commercial Bank of China – the country’s largest commercial bank and – Agricultural Bank of China, another of the big four. Other recent IPOs to get away successfully include China Merchants Bank, the sixth largest lender on the Chinese mainland.

International investors have been quick to buy strategic stakes. Early movers included British-based Hong Kong and Shanghai Banking Corporation, which bought 19.9 per cent of the Bank of Communications for $2.25bn, and Bank of America, which picked up a 10 per cent stake in the China Construction Bank for $3bn. Meanwhile, the US-investment house Goldman Sachs paid $3bn for a 10 per cent stake in the Industrial & Commercial Bank of China. As such investments continue, it is estimated that by next year foreign financial groups will control one sixth of China’s banking system.

Foreign banks are positioning themselves to benefit from the tumultuous changes that will transform the Chinese banking sector over the next ten years. The Chinese banking sector faces a dramatic transformation over the next ten years. Its overall profits are likely to grow at an annual rate of about 10 per cent, according to a recent report from consultants McKinsey, but the source of its earnings will change significantly. The firm estimates that corporate banking’s overwhelming share of the sector’s profits will decline to little more than half as profits from retail banking increase more quickly. Three main forces will drive that change. First, says the firm, is the strong and increasingly consumption-driven growth in GDP, which has ranged between 7 and 9 percent in recent years. Prosperity will boost demand for retail-lending products such as car loans, credit cards, and mortgages.

Second, demand for traditional corporate-banking products, particularly deposits and loans, will fall. As Chinese companies centralise their cash management, the “stocks” of deposits held by each of their provincial operations will be greatly reduced. And Chinese companies that now rely almost entirely on bank debt for financing will use the developing capital markets to find alternative forms of finance, predict McKinsey. Finally, over the next five to seven years the Chinese government will gradually deregulate interest rates – a move that will significantly reduce margins on both deposits and corporate lending. “The shift in the profit mix from corporate to retail gives foreign banks a golden opportunity to tap into the Chinese banking market by targeting affluent,” says the firm. “Their financial needs are diverse, and they account for the vast majority of auto, mortgage, and personal-lending balances.”

McKinsey reckons that although they make up a mere 2 per cent of the retail customers of Chinese banks, these customers account for as much as 55 to 65 per cent of retail-banking profits. The larger “mass-affluent” segment – about 18 per cent of all customers – provides around 40 to 50 per cent of retail-banking profits. The majority of customers – the 80 per cent representing the mass-market – are “largely unprofitable,” the firm reckons.

The opportunity for foreign banks to cream off the most profitable customers is enormous. “Domestic banks can’t serve this segment effectively, because they lack risk-assessment skills in retail lending and a sales-and-service culture in their operations, which focus primarily on processing deposit account transactions,” says McKinsey. “Some of the large institutions don’t even know who their affluent customers are, since they have little integrated information about the people who bank with them.”

McKinsey predicts that affluent Chinese customers will switch to banks providing better service, even at the cost of higher fees or interest rates. “Foreign banks, with their greater experience of serving the affluent market, are thus well positioned to capture this opportunity,” the firm says.Importantly, foreign banks can serve the affluent market with a relatively small number of branches. That’s because the most affluent customers are highly concentrated geographically. Three-quarters of them live in Beijing and in major coastal cities such as Shanghai and Guangzhou.

Consequently, McKinsey predicts that a critical component of a winning strategy in China will be the creation of wholly owned branch networks. Leading foreign banking groups such as Citibank and HSBC are doing this already, building their own branch networks in central locations and luring top customers. These branches are still limited by regulation to foreign-currency deposits and loans, mainly to expatriates and affluent locals. But McKinsey notes that deregulation scheduled for 2007 will leave them free to take local-currency deposits and to offer credit cards, mortgages, and other personal-lending products in local currency — a market whose profits it says are likely to grow by 30 per cent a year.

To compete, foreign banks will have to form partnerships with Chinese institutions because most product markets are now closed to them. “An alliance is the only way to get in early, become acclimated, and master the skills needed for success,” says McKinsey. “What’s more, if market conditions change and the government alters its regulatory agenda with a view to limiting the expansion of foreign banks, partnerships are less likely to be affected. With them in place, the foreigners can pounce if opportunities arise early and stay ahead of the curve if the markets develop according to script.”

International financial firms may be shovelling money into the Chinese banking sector, yet, paradoxically, the institutions they are seeking to partner with are weighed down by huge bad debts and many of them are technically insolvent. The capital adequacy ratio of the four largest state-controlled banks was only 4.6 per cent in 2003, compared to the 8 per cent international standard. In fact, China’s recent banking history is riddled with instability.

China only had one bank up until 1978 – the People’s Bank of China – and didn’t create many others until the first wave of “market reform” in the 1980s. These new banks were technically “commercial,” but they still financed state-owned enterprises and social infrastructure, and they had to prop up the rural peasant class by making subsidised loans. Not surprisingly, they ran up huge bad debts, most of which were unrecoverable. The situation worsened in the mid-1990s, when a speculative property investment bubble burst. The state intervened, turned the People’s Bank of China into the equivalent of the country’s central bank, and introduced measures preventing banks from providing direct subsidies to the state or making loans to government that did not meet commercial standards.

The Asian economic crisis of 1997 and 1998 brought matters to a head. Fearing instability, the government halted banking reform and liquidated many of the bad debts owed by state-owned enterprises. It also issues bonds worth $33bn to prop up the capital bases of the country’s four largest state banks. There were also industrial privatisations and closures on a massive scale, and in the seven years up to 2005 some 60 per cent of the workforce of state-owned enterprises – a total 30 million workers – lost their jobs.

After joining the WTO in 2001, Beijing’s policy has been that the state banks would “grow their way out of the problem”. Their financial position, however, remains precarious. Pressure from the US and European powers to revalue the Yuan has led to a wave of speculative lending to Yuan-based real estate and industrial projects. Investors hoped to make a killing if the value of the Yuan increased.

According to the International Monetary Fund, high saving rates and cheap credit has contributed to speculative investment in China amounting to 40 to 45 percent of GDP. “In short, one basic problem in China is that the high degree of thrift that fuels such rapid investment growth has a low payoff because of the fragile threads holding the economic picture together,” said the IMF. “Providing cheap capital to enterprises, especially state-owned firms, requires low interests rates. Sustaining bank profits then requires correspondingly lower rates of return on deposits. Thus, maintaining economically unviable state enterprises and supporting them through the banking system results in large implicit costs.”

And the threat of bad debts is still there. Official statistics put non-performing loans of four largest state-controlled banks at the 15 per cent of total loans – the equivalent of $193bn. Unofficial estimates are much higher.

US Treasury Secretary Henry Paulson is lobbying for more foreign competition against China’s cosseted banks. The US Treasury is pressing for foreign banks, insurers and brokers to be allowed to open up multiple branches in China, and for caps on foreign ownership of Chinese financial institutions to be scrapped. “Longer term, we all want the Yuan to be traded in a more competitive, open marketplace,” Paulson said over the summer. “To get there we need their financial system to be open and open to competition and then of course longer term, China needs to make the transition from an export-driven economy to one that consumes more,” he said.

Clearly, the sheer scale of the Chinese economy and populace present extraordinary opportunities for foreign banks, but they will need to tread carefully.

Outsourcing meets corporate governance

Posted on by Ben Debski

These are challenging times for the outsourcing industry. The mega-deals of the 1990s seem to be gone forever. And while companies are outsourcing like never before, they are giving out smaller contracts, for shorter time periods. That means service providers are having to fight tooth and claw for business, while developing new strategies to ensure that they have business models that will carry them successfully into the future.

The back end of 2006 was the worst fourth quarter for new outsourcing business in the last five years. True, there was a record number of contracts agreed in the year as a total – 350 compared to 341 the year before – according to the regular index produced by outsourcing advisory firm TPI. But the value of new contracts on the market fell by eight percent in the fourth quarter.

That is, in part, due to an underlying trend highlighted by the index. Companies are assigning shorter and smaller contracts, combined with more specialist and single process deals. “Outsourcing providers are obliged to compete more often in order to secure the same level of business,” says Duncan Aitchison, Managing Director of TPI in the EMEA and Asia-Pacific region.

At the same time, competition has been heightened, with more providers competing for market share. The number of providers winning contracts has increased by 64 percent in the last four years, from 55 in 2002 to 90 in 2006. The Big Six of outsourcing (Accenture, ACS, CSC, EDS, HP and IBM) are winning a decreasing proportion of those deals valued at over $50m and their share of market globally by total contract value has fallen from 71 percent in 2002 to 46 percent in 2006.

“In general terms, this increased competition is clearly good for buyers,” says Aitchison. “However, greater diversity and specialisation amongst suppliers, combined with more frequent tendering, does mean more complexity in both the procurement process and the management of outsourcing contracts.”

Specialist deals
Those service providers head-quartered in India, such as Wipro, Tata, and Infosys, are reaping the benefits of the trend towards single-process and specialist deals. These providers, alongside the Big Five in Europe as well as other smaller and niche providers, are encroaching upon the Big Six’s market share. In 2006, the India-based providers achieved seven percent of the total market share. This is a massive increase compared with their 2002 market share of less than half a percentage point.

The India-based service providers are particularly successful in the Applications Development and Maintenance (ADM) sector, having grown their market share from 8 percent in 2003 to 36 percent in 2006.

n contrast, the Big Six have seen a decline from 76 percent of the ADM market in 2003 to just 38 percent in 2006.

“The figures clearly show a maturing of the India-based service providers as they challenge the established players by taking an incremental approach and signing a large number of small, specialist contracts,” says Aitchison. “In the ADM space, for example, the difference between the market shares of these groups is now marginal. India-based providers are clearly considered an attractive and credible alternative to traditional players and over the next few years we expect to see them competing directly with the Big Six for larger value contracts.”

Despite the overall decline in new outsourcing contracts, demand in a number of individual industries is going from strength to strength. In Europe, the financial services sector represents an increasing proportion of the overall market, with both the volume and value of contracts let in 2006 up 26 percent and 20 percent respectively on 2005 levels. The European telecoms industry is also experiencing significant growth, with its share of the total European market increasing from 14 percent in 2005 to 21 percent in 2006.

These figures support the argument in a new book from management consultants Booz Allen Hamilton that the outsourcing industry is entering a transitional period.

The most sophisticated suppliers and customers are shaping the structure of the business-to-business service environment worldwide, according to ‘Managing Business Without Borders’. The book highlights the speed at which the outsourcing industry has evolved and makes some forecasts about future corporate outsourcing strategies and service provider solutions.

“Every business will eventually be plugged into a network of interoperable, interwoven processes, and tapping this network will be an absolute requirement for success,” the consultants say.

Leading outsourcing players are globalising their operations, which is, in turn, eroding the distinctions between Western and offshore vendors, such as capabilities and pricing, the argument runs. Like their clients, providers have expanded beyond India China and the Philippines to make the most of international diversity, balancing the capabilities, languages, cultural affinities and cost structures of a variety of regions. And just as multinational companies are developing standardised processes and systems globally, outsourcing leaders are adapting to meet these emerging needs.

In place of the mega deals of the 1990s, today’s service providers are building robust, highly tailored offerings that deliver economic, strategic, operational and human resource benefits,” says Booz Allen. “The menu of sophisticated end-to-end services continues to expand in human resources, finance, and procurement, along with clinical trials, research and analytics, advanced customer care, product development and innovation.”

Custom-built
Many providers are also differentiating their offerings by standardising business processes within industries to meet customer demands for cost savings, as they will no longer pay a premium for custom-built processes. The consultants say that the firms most likely to prevail are the large, full-service vendors that work on a global scale with multinational clients and immense resources, as well as the specialist firms that serve niche markets, like animation production houses for media companies.

Even so, there are a number of challenges that will continue to inhibit the industry.

Among them are the need to demonstrate credibility and reliability, particularly for knowledge-centric work, ample security safeguards and a clear labour sourcing strategy, along with global training and workforce management programmes.

Outsourcing any business activity is still not a guaranteed safe choice, but companies that do it right can capture significant value,” says Vinay Couto, Vice President of Booz Allen Hamilton and leader of the firm’s work in outsourcing advisory services.

We have seen the industry’s growth attract new entrants with exciting new business models, forcing established suppliers to revitalise the strategies that made them so successful. Corporate customers are more enthusiastic and aggressive in expanding their outsourcing strategies, as they navigate this constantly evolving landscape,” he adds.

The book suggests that an evolving set of skills is coalescing into a body of best practices as the industry matures. It argues that certain key trends will shape the future of successful service delivery.

The globalisation of operations, for example, will erode distinctions between Western and offshore vendors, such as capabilities and pricing. The increasing sophistication of the contracts that companies are assigning will lead more service providers to differentiate their offerings by standardising business processes within industries to meet customer demands for cost savings, as they will no longer pay a premium for custom-built processes.

The need for interoperable, commoditised services will drive further standardisation, which, in turn, will give rise to a more accessible market. In the future, instead of committing to a five- or ten-year agreement, companies will be able to plug into services for short-term needs. But, for this to happen, vendors will need to build capabilities around a common set of standards.

As for the companies buying outsourced service, the book identifies five key factors that help firms to get outsourcing right.

First, they should commit from the top and move quickly: outsourcing requires explicit resolve from senior management, and the most successful programs are enacted quickly. “Aside from the operational and cost virtues, executing swiftly and deliberately sends an unmistakable message of resolve,” say the consultants. As one executive quoted in the book argues: “The biggest risk of all is indecision. Know what your strategy is as an organisation, align with it, know what you’re accountable for delivering, and then make some decisions and move forward.”

Compelling rationale
Second is to have a clear understanding of why you’re engaging in outsourcing and to articulate those reasons clearly. The decision to outsource must have a compelling business rationale, be it cost reductions, optimised processes, better service levels or innovation, and those priorities must be kept in mind in evaluating options. Equally critical, outsourcing decisions should be based on a business case that is built on hard analysis. “Getting that baseline straight was a very intense and very important effort,” says Kris Hillstrand, Chief Information Officer and Senior Vice President of business operations, at energy company, who is quoted in the book.

Third is to be a partner, not just a customer. Executives who reap the most benefits from their outsourcing arrangements have built relationships of mutual trust with their vendors. “Enlightened companies have figured out the right balance between rigor and flexibility so that they don’t micromanage and at the same time they don’t ‘turn over the keys’ to the outsourcer,” says Ashok Divakaran, principal at Booz Allen.

He added that these companies rely on clearly defined decision rights from the executive level down to day-to-day users of the service.

Fourth is to embrace complexity and to learn to manage it. Outsourcing used to represent a fairly limited menu of options, but complexity has crept in, in terms of the number of vendors, the number of countries from which they can deliver services, delivery models (onshore, nearshore, offshore), scope of offerings and variety of contractual models. “You have significantly less control than you would have with people reporting directly to you, and salary management control, performance reviews, and other tools at your disposal,” according to Filippo Passerini, Chief Information and Global Services Officer at Procter & Gamble, where he oversees $4.1bn in outsourced services.

“This new model is more challenging, and more demanding to manage, but it is significantly better for our business.”

The final factor identified by Booz Hamilton is to be a visionary. “As outsourcing becomes more strategic, so too must the role of business leaders who control IT and business process outsourcing,” they argue. “The new generation of outsourcing leaders is always thinking beyond the boundaries of their own function, and in some cases, even beyond the boundaries of existing market capabilities.”

One consequence of this transition is that companies need to work harder than ever before to ensure their outsourcing arrangements are debated at board level: this is now a strategic governance issue. Smart companies have risen to this challenge.

“They are looking beyond service levels or generic guidelines and want details on the best ways to achieve and demonstrate value to their business,” says Shawn McCray, Partner and Practice Leader for service management and governance at TPI. “If client organisations get outsourcing governance ‘right,’ they exponentially increase the value they realise through outsourcing,” says McCray. “If organisations get it ‘wrong,’ the risks are high and there is a downward spiral of poor results.” Ultimately, he says, the costs of poor performance in governance are significantly higher.

Tough on corruption?

Posted on by Ben Debski

The UK’s reputation for cracking down on bribery and corruption has taken a battering in recent months. The decision to halt a police investigation into allegations that defence company BAE Systems bribed officials in Saudi Arabia to secure a lucrative contract provoked international outrage. Now the government has reneged on a promise to introduce new anti-corruption laws this year.

The Serious Fraud Office (SFO) stopped the Saudi part of its BAE investigation in December after the Attorney General, Lord Goldsmith, advised that, if continued, it would threaten national and international security. The SFO is still investigating other allegations against BAE involving South Africa, Tanzania and the Czech Republic. The company denies any wrongdoing.

Lord Goldsmith didn’t elaborate on the nature of the security threats created by the Saudi probe, but stressed that commercial or national economic interests had nothing to do with the decision.

If such factors had been taken into account, the government would have fallen foul of section five of the OECD Convention on Combating Bribery of Foreign Public Officials. The convention, introduced in 1997, is part of an effort to get countries around the world to enact anti-bribery and corruption legislation similar to the US Foreign Corrupt Practices Act. The United Nations has produced a similar Convention Against Corruption for countries not in the OECD.


Bribes

Laurence Cockroft, UK head of anti-corruption lobby group Transparency International, describes the BAE decision as ‘a huge setback’ in efforts to get governments to tackle bribe-paying companies. Despite what the government says, the block on the enquiry has been seen around the world as an act of political expediency, he says, creating the impression that “the guys with the big bucks, in this case the Saudis, can call the shots.”

In a letter to the head of the OECD, the group said the decision to stop the Saudi investigation “poses the most serious threat to the success of the OECD Convention since it was adopted. The credibility of the UK Government commitment to prohibit foreign bribery must be rebuilt, in order to restore the collective commitment on which the success of OECD Convention depends.”

Transparency International now wants the government to make BAE publish a statement, clarifying the business practices it has in place to prevent bribery and corruption, and what steps it takes to ensure compliance is independently verified. “It is essential to clear the air for future international transactions,” the group said.

Like many other countries around the world, the UK has done little to enforce the OECD convention. According to a Transparency International monitoring report, the UK has not brought a single prosecution for bribery of overseas officials. The group’s latest report – for 2006 – found no prosecutions in Australia or Japan and only one in Canada. But other countries are starting to become more active. France prosecuted eight cases in 2005, with three in Germany and three in Belgium.

Annoyed at the BAE decision, the OECD has decided to launch an inquiry into the UK’s efforts to fight bribery. Its working group on bribery and corruption, which brings together all 36 countries that have signed and ratified its convention, said in a recent statement that the UK had made some progress, but not enough. The government has made efforts to raise awareness of the issue, but has repeatedly failed to enact modern foreign bribery legislation. The Working Group said it was ‘seriously concerned’ that the UK hadn’t implemented legal changes requested by the OECD. In addition, UK law on the liability of legal persons remains deficient and the Working Group reaffirmed that it should be modified. In 2005, the Working Group recommended that the UK monitor decisions not to open or close foreign bribery investigations.


Remaining vigilant

Ironically, before the Al Yamamah decision caused such a furore, the UK had shown signs of raising its game. In December 2005, the Home Office set out proposals to reform the law on bribery, at home and abroad. “Although the crime of bribery remains relatively rare in the UK, it is vital that we, through our actions and principles, remain vigilant and promote high standards of propriety at home and abroad,” Home Office Minister Fiona Mactaggart said at the time.

Ms Mactaggart noted that in 2001 the government gave courts the power to investigate overseas, but said the existing criminal offences stem from the common law and the Prevention of Corruption Acts 1889-1916 which are widely considered to be fragmented, outdated and unclear. They are not used often and a lack of clarity in legal definition can lead to acquittals on technicalities. The government wants to ensure that UK nationals and companies do not contribute to bribery in other countries, and clarifying the law will make investigating corrupt activity easier, she said, adding: “The existing law is complex and outdated, and can be difficult for law enforcers to use. I want to make the law clearer for all concerned.”

There were further positive steps six months later when Prime Minister Tony Blair unveiled new measures to tackle international corruption. He appointed Hilary Benn, the International Development Secretary, to be the ‘ministerial champion for addressing international corruption.’ This new role would see him “working with other Ministers across government to tackle corruption wherever it threatens to undermine the fight against poverty.”

At the same time, Blair said the government would establish a new team to investigate international corruption, including money laundering in the UK by corrupt politicians from developing countries, and bribery by UK businesses overseas. This would include members from the City of London Police and the Metropolitan Police Service, funded by the Department for International Development. “The UK has a responsibility to tackle money laundering and bribery where it stems from our own shores, and to support developing countries in fighting corruption,” said Blair. “We have to recognise that where there are bribe takers, there are also bribe givers. The new taskforce for investigating corruption will help to put the UK at the forefront of efforts to tackle international corruption in all its forms.”

But in March this year, a vital part of these efforts – the legal reforms led by the Home Office – was postponed. After at least three years of consultation, the government said there was broad support for reform of the Prevention of Corruption Acts and that it was committed to a fundamental reform of our bribery laws, but it would not push ahead with the draft Bill it published in 2003.

Home Secretary John Reid told the House of Commons there was ‘significant and influential opposition’ to the Bill and it was unsuitable for presentation to Parliament. The problem, he said, was a lack of agreement about what the new offences should look like. Instead, he asked the Law Commission to undertake a thorough review of the UK’s bribery laws “with a view to fundamental reform.” The Commission has already considered the issue at length, but Reid said that “the context of reform has moved on.” In particular, the Commission will take into account “the issues and views that have emerged” since the Bill was published, including “additional practical experience of UK law enforcers in operating the existing law, and other countries’ experience of implementing international conventions in this area.”

Cockroft says the referral back to the Commission was ‘very bad news’ and ‘absolutely ridiculous.’ There is unlikely to be a new draft bill before the end of 2008. “They are going to be at least two years behind their own deadline, and this creates a lot of uncertainty.” Transparency International has contributed to a Private Member’s Bill on corruption that Lord Chidgey has introduced to Parliament. This defines the necessary offences perfectly well, says Cockroft. And while some countries might be slack to prosecute overseas bribery and corruption, the US has prosecuted over 100 cases over the last two years. Cockroft, and other campaigners, say the UK needs to show that it is still committed to fighting overseas corruption. He wants so see accelerated legal reform but, more importantly, some prosecutions. Otherwise, the UK risks not only damaging its own anti-corruption goals, but also undermining the efforts of countries that are starting to take the issue more seriously.


High-profile

The halting of the Saudi probe is frustrating for anti-bribery campaigners because it comes at a time when other EU countries have started to pursue high-profile investigations. In Germany, engineering giant Siemens is embroiled in claims that staff paid bribes to win contracts. In France, the authorities have become much more active, encouraged by the successful prosecution of two senior employees from oil company Elf Aquitaine, including its CEO, who were sent to prison for paying bribes to win overseas contracts.

Such activity seems long overdue. It’s now been 10 years since the OECD published its Convention, and all of its member nations are committed to implementing its measures. But, to date, most have done very little. Since 2005, Transparency International has published a progress report on enforcement of the Convention. Last year, it had little activity to report. France had prosecuted eight cases, with three in Germany and three in Belgium. But Italy only had one, and the UK had none at all. The situation was worse in the Czech Republic, where the authorities had brought no prosecutions and hadn’t even started any investigations.

Other countries have shown what can be done. A week after it chastised the UK for its inaction, the OECD praised Norway for the progress it has made towards implementing the convention. It published a report commending the country’s ‘impressive effort’ and said Norway had satisfactorily implemented all of the OECDs recommendations.

The country has raised awareness and improved corruption detection measures. It has also brought two successful prosecutions involving the bribery of foreign public officials. In the first case, the defendant company and an executive of the company were fined €2.4m and €24,000 respectively. In the second case, three defendants were convicted of violating bribery laws and sentenced to imprisonment for periods of between ninety days conditional and 14 months (of which four months were conditional).


Corruption team

Norway has also taken significant steps to enhance the institutional framework for investigating and prosecuting cases of corruption. For instance, the Corruption Team at the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime has been permanently assigned a police solicitor, and all local police districts have established multi-disciplinary economic crime sections, which will be closely monitored by the Ministry of Justice, Police Directorate and Prosecution Service.

Other measures include the production of a manual by the corruption team, for publication in 2007, on the detection, investigation and prosecution of corruption cases. There has also been a heightened focus on the confiscation of the proceeds of crime, reflected in a significant increase in the number of confiscation orders. If international efforts to tackle bribery and corruption are to succeed, more countries need to show the same kind of enthusiasm as Norway. The UK’s lame performance is so troubling to the OECD because it gives other laggard countries a further excuse to do nothing.

User generated networks: Is this Web 3.0?

Posted on by Ben Debski

What’s the next generation of the internet going to look like? The man who thought of the whole idea in the first place – Tim Berners–Lee – says Web 3.0 will be all about the Semantic Web. A lot of tech gurus – and heavyweight investors – agree.

But perhaps they are wrong.

Berners–Lee says that on the Semantic Web computers will be able to read web pages just as well as humans. That means we’ll have software agents doing our browsing for us. Some big companies are investing heavily in the success of this simple yet radical idea.

But a group of research organisations and companies backed by the European Commission say they have come up with something much better: Web 3.0 will be the all–wireless internet.

The group known as the WIP Project includes the Université Pierre et Marie Curie and hi–tech companies such as Thomson and Siemens. They claim to have taken the concepts of Web 2.0, such as user–generated content and social networking, and brought them into the “real world”.

Their aim is to create user–generated physical networks so internets can be set up by anyone, anytime. Wireless networking might not sound like a big deal, but the WIP project entails creating a whole new internet, where users can spontaneously create their own networks, in minutes, and with any kind of data device – mobile or fixed, handheld or deskbound.

Many of the fundamental assumptions of the original internet have been superseded and many other pillars of the web are ad hoc fixes to discrete problems, the researchers say. Their project would change all that, completely reinventing the internet and its underlying methods – creating new operating principles and communications protocols.

“We’re not looking to replace the internet with the flick of a switch,” says Marcelo Dias de Amorim, a researcher on the project. “What we’re proposing is a robust, flexible, optimised and above all user–friendly set of technologies and standards that will mean any user, anywhere, can identify and network with any nearby devices. Without any technical expertise whatsoever.”

People who go to the same gig could build a network among themselves and communicate with each other all day, for example. It would only take a few clicks, according to Dias de Amorim.There are big technical barriers in the way of that kind of networking just now. But the researchers say they are successfully solving them. The aim isn’t specifically to replace the current internet, says Dias de Amorim.

The WIP project would change the basis of networking and the current web would be one of the many networks people could plug into. “That said, if everybody, or even the majority, is using WIP to create internets, then WIP is the internet,” he added.

Telling a story

Posted on by Ben Debski

If you want to find out how well a company is performing, you could look at its published financial statements. But the spectacular collapse of Enron was a reminder that the numbers companies put in their accounts tell only half the story, if they tell anything at all.

To get a better picture of what’s going on, you’d have to read the narrative sections of the statements, the parts where the senior executives offer their take on how the year has gone, and what the future holds in store. The problem here is that as these sections are usually unaudite, the report writers can say almost whatever they like. Small successes are made to sound like major triumphs; uncomfortable facts are glossed over. Spin is rife.

Common markets
Further difficulties are created by the so-called disclosure paradigm. This is the regulatory approach – common in market economies – whereby companies are required to disclose vast amounts of information, which investors then have to try to make sense of. Experience shows they tend to fail, and end up making educated guesses about important aspects of a business, or just overlook the significance of details buried in the small print. But if they get the wrong take on the published stats, ‘that’s their fault, not the companies’, according to this model.

The problem is, that helps nobody. A lack of clarity about how an individual company is performing is bad for its share price. When applied across a whole raft of companies, it’s bad for stock markets, which require quality information if they are to function effectively.

To add another layer of difficulty to the problem, those companies that do want to tell investors more about what’s going on, often fear litigation. For example, they might want to give an update on how the Russian pipeline project is going; they report that all seems to be going well, and the project should complete on time, but to be honest there are so many uncertainties that it’s hard to be sure. Taking comfort from this, the shares rise. But the following year, the project runs into a major setback. The shares plummet. Investors are up in arms: the company said it was going well, they complain. Were the board’s comments negligent, or was it just telling investors what it knew at the time?

Encouragement
In an effort to resolve some of these problems, regulators around the world are producing standards and guidelines aimed at encouraging companies to improve their narrative reporting, and sometimes offering them legal protection to speak more freely about their uncertainties and concerns, without the risk of being attacked later. The UK has led the way here, or at least tried to. The country’s Accounting Standards Board (ASB) did pioneering work when, in 1993, it published an official statement on the Operating and Financial Review (OFR), the part of UK company accounts that includes narrative reporting. The statement built on the foundations of existing best practice by providing a framework within which directors could discuss the main factors underlying the company’s performance and its financial position. This was updated in 2003.

The OFR remained voluntary and a lot of companies simply ignored its recommendations. So, after a long review exercise, the government decided in 2002 to make publication of an OFR compulsory for listed companies. Two years later it came out with detailed rules and guidance explaining how this would work.

Initially, many in the business community complained about the extra compliance burden, but over time they came to appreciate two things. First, open, narrative communication with investors and the wider world was a good idea. Second, it was useful to have a framework within which this communication could take place: most people agreed that the OFR provided such a framework.

Inevitable
And, in any case, there were legal changes underway at a European Union level that made a stricter narrative reporting regime inevitable. The EU Accounts Modernisation Directive was going to require an enhanced review of a company’s business (the Business Review) in the directors’ report. Under this Directive, for company financial years starting on or after January 1, 2005, large and medium-sized (but not small) companies are required to provide “a balanced and comprehensive analysis of the development and performance of the company’s business…[which] shall include both financial and, where appropriate, non-financial key performance indicators … including information relating to environmental and employee matters.”

Eventually, the government’s rules became law and company boards started getting ready to write their OFRs. But then, bizarrely, the Chancellor of the Exchequer, Gordon Brown, announced an eleventh hour decision to scrap the OFR, or at least to remove the legal requirement for one. Nobody really knows why he did this. The best guess is that it was intended as a sop to the business community, which, Brown mistakenly believed, did not want the OFR.

However, by that time, most companies were so close to finishing their first OFRs that there was an outcry. They had invested huge amounts of money in preparing the information systems needed to provide the base data for the review and, having got stuck into the project, many had decided it was a good idea after all. They didn’t appreciate it being cancelled. Brown’s move left a basic legal requirement for companies to provide a business review in the directors’ report. This is much more limited in scope than the OFR. It has to include a “fair review of the business of the company” and a description of the principal risks and uncertainties it faces. There also has to be a “balanced and comprehensive” analysis of the development and performance of the business during the financial year and the position of the company at the end of that year.

The detail of this analysis depends on the size and complexity of the business, but should include key performance indicators (KPIs), relating to both financial and non-financial performance, such as environmental and employee issues. There should also be a forward-looking indication of how the business is likely to develop in future. The Chancellor, it seems, stopped the UK’s great narrative reporting revolution in its tracks. However, several large companies said they would comply with the OFR guidance regardless of whether they had to or not, simply because it was a good idea.


Narrative reporting
To determine how well they have done, and how closely companies are complying with their more limited statutory requirements, the ASB recently published a review of narrative reporting. It was also a way, it said, of encouraging improvements and keeping the issues in the spotlight. Its review was based on an analysis of annual reports from several listed companies, and also included findings from other similar research exercises. It found that most companies were good at describing their strategy and current performance, but were weaker on providing forward looking information and identifying their principal risks and how they are managed.

The ASB report identified several areas where, in its view, companies were doing a good job. They were good at providing descriptions of their business and markets, together with their strategies and objectives, although some improvements could be made in providing information on their external environment. They were also good at describing the current development and performance of their business. More companies were covering environmental, employee and social issues, although very few of them discussed their contractual arrangements and relationships in any depth.

All well and good, but the ASB also identified several areas for improvement. The greatest difficulty companies had related to their disclosure of forward-looking information. The standard-setter said the companies should make more information available. They should also, it said, think carefully about how they describe the resources available to the business, in particular on those intangible items not reflected in the balance sheet.

Managing risk
Another problem area is that companies need to think more carefully about what their principal risks and uncertainties are, and focus on reporting those, rather than listing off reams of risks. With that, they should tell readers what they are doing to manage and mitigate those big risks. The ASB found that the number of risks and uncertainties reported by the companies it looked at ranged from four to 33. “We question whether a company can really have 33 principal risks and uncertainties,” it said.

The ASB review found that companies were, in general, complying with the legal requirements for the Business Review. However, many companies are finding the disclosure of key performance indicators (KPIs), both financial and non-financial, challenging. It noted that what to include was a matter of judgment for directors, but issued a reminder that companies that skip KPIs in future risk being investigated by the Financial Reporting Review Panel, an ASB sister-body that polices company reporting.

The overall conclusion of the review, it said, was that companies should think carefully about the structure and placement of their narrative reporting to ensure that cross-referencing is kept as simple as possible and does not adversely affect the flow of the narrative. Also, there is a legal requirement for a “balanced” analysis and in considering balance companies need to assess what the prominence should be of reporting bad news: the implication is that some have been trying to bury it.

“Narrative reporting is an increasingly important feature of corporate reports, providing an opportunity for directors to set out a clear and balanced analysis of the strategic position and direction of their business,” said ASB chairman Ian Mackintosh. “It is pleasing to see that many companies are reporting beyond simple compliance with the law and moving towards best practice.”

Improvement
Mr Mackintosh said the ASB would try to support this trend. “We hope that more and more companies will regard good narrative reporting as a means by which they can achieve transparent and open communication with their shareholders.” But he added that there was “room for improvement.”

Would the quality of company reporting be any better if the government had stuck to its guns and legally obliged them to produce an OFR? It is impossible to say, but one thing is certain: to make narrative reporting work, investors and other stakeholders will have to pay close attention to the stories that companies tell, and hold them to account if they turn out to be pure fiction.

The ASB analysed the annual reports of 23 listed companies, with a year-end of March 2006 or later – and so required to comply with the current legal provisions to prepare a Business Review. It also drew on surveys by a number of other organisations and the work of other parties with an interest in narrative reporting. Together, these reviews of annual reports cover a significant number of the FTSE 350 leading quoted companies.

For more information, please visit www.frc.org.uk/asb/press/pub1228.html

Climate for change

Posted on by Ben Debski

Only two years ago, Canada’s business environment was rated the best in the world. Now it sits in third place, behind Denmark and Singapore. True, third is still good – and two places ahead of the US in fifth pace, but Canadians hoping to reclaim the number one spot anytime soon are likely to be disappointed.

According to a report from the Economist Intelligence Unit, Canada’s decline is a result of other countries catching up, rather than the Canadians doing anything wrong. Even so, its position among the premier locations risks being eroded, unless the country engages with some big challenges.
Top among these, according to the report – “Not left behind: How Canada can compete” ­– are its political effectiveness (particularly the ability to implement policy), taxation and the labour market.
On the first of these, Canada slipped to 15th among the 60 countries surveyed in terms of political effectiveness – better only than Japan and Italy among the G7 nations. Many governments, especially in smaller European countries, are expected to become more efficient.

Snap election
Why the sudden fall? The quality of government in Canada has been under scrutiny lately. A long running corruption scandal led to a vote of no-confidence in the federal government last year, which, in turn, prompted a snap election. The Liberal Party of Canada was defeated after 12 years in power and the Conservatives formed a new government in February 2006. The scandal was particularly damaging because it was deeply mired in the bête noire of Canadian politics: rivalry between the country’s ten provinces. It is this kind of internecinebattling that has helped to create a bureaucratic environment for business.
The provinces have a constitutionally mandated responsibility for public services and are the main check on the federal government. But the federal government in Ottawa uses its stronger fiscal position and role as redistributor of tax revenue to meddle in provincial areas, according to the EIU report. “The resulting turf battles and arguments over money make for inefficient government and lack of accountability, as politicians would rather finger-point than push through the needed reforms. And taxpayers remain confused as to where their dollars are being spent,” it says.
In Canada’s case, federalism also means barriers to internal trade and the movement of people, “which prove vexing to the business community.” The barriers take numerous forms, including product standards and container sizes unique to a particular province and restrictive government procurement practices. According to the World Bank, the monetary costs of negotiating the bureaucracy in Canada are much higher than the Organisation for Economic Co-operation and Development’s (OECD) average and rate only better than Italy among the G7.
Companies in Canada also face a significant tax burden, shouldering a higher share of government tax revenue than in most other countries, says the EIU report. And they pay the highest marginal effective tax rate on capital in the developed world. The complex fiscal relationship between the federal government and the provinces hampers.
The tax system itself is also in need of reform, says the EIU, because it is too complex. Although Canada scores no worse than many of its peers in the G7 and OECD, and in many cases better, its score is not expected to improve. The OECD has recommended refunding provincial sales taxes levied on capital goods and abolishing provincial capital taxes. “Few countries levy such taxes, which discourage expansion and do not reflect the underlying profitability of the firms being taxed,” says the EIU.
The final area in need of attention, according to the EIU report, is the labour environment. This is the category where Canada scores worst, and its performance is expected to deteriorate in future. The labour force is highly educated and skilled. But Canada’s employer-unfriendly labour laws, lack of market flexibility and costs dent its rankings. “Controls exacerbate some short-term shortages of skilled and specialised labour, especially in the booming western provinces of Alberta and British Columbia,” says the report. “These are expected to worsen in the short to medium term.” And Canada’s employment insurance system reduces labour flexibility, as it gives weak incentives to the unemployed to actively seek relocation.

Sustained productivity
The need to improve the business environment in Canada was also highlighted in a recent report on the country from the International Monetary Fund (IMF). The organisation’s economists said sustained productivity growth was essential if living standards are to rise at a time when the population is ageing.
The IMF said the tax system could be made friendlier for saving and investment, noting that Canada’s effective marginal tax rates on investment are among the highest in the world, partly reflecting provincial sales and capital taxes. While the IMF welcomed a recent decision to end the tax advantage for income trusts, other aspects of the tax system, including the differential between rates applying to large and small firms, could distort capital allocations. There was also scope to support personal saving through lowering taxes on dividends and capital gains and also by raising contribution limits on tax-advantaged retirement plans, it said.
While Canada’s federal regulatory system is generally given high marksinternationally, according to the IMF, specific reforms could encourage product market efficiency. “In particular, regulations on foreign direct investment—especially for network industries such as airlines, communications, and the media—as well as public ownership in the electricity sector appeared outmoded,” it said.
The regulatory impediments to bank entry and consolidation should also be lowered, the IMF said, as a way of increasing the efficiency and dynamism of the financial sector. Under the existing system, it was not clear how or why the government approved bank mergers, said the IMF, and the liberalising of bank ownership rules would “lower uncertainty, increase contestability in the banking system, and help stimulate innovation.”
The IMF also called for employers to have better access to skilled workers. A booming economy in Alberta, for example, was creating skill shortages in other provinces, but barriers to free movement remain in place, such as limited recognition of professional qualifications across provinces.
The new federal government has published a strategic plan, called Advantage Canada: Building a Strong Economy for Canadians, aimed at addressing many of these concerns. Finance minister Jim Flaherty calls it “a long-term, national economic plan designed to make Canada a true world economic leader.” The plan features a new national objective to eliminate Canada’s total government net debt in less than a generation and further reduce taxes for all Canadians.

Economic forefront
“The Canadian economy as a whole is performing extremely well and is among the fastest growing in the G7,” said Flaherty when he unveiled the plan in November. “If we are to remain at the economic forefront, we need a long-term plan that will shape Canada’s future, and improve the quality of life for families, students, workers and seniors.”

Advantage Canada builds on what the government says are Canada’s strengths, and seeks to gain a global competitive advantage in five key areas. These are: to reduce taxes for all Canadians and establish the lowest tax rate on new business investment in the G7, while eliminating Canada’s total government net debt in less than a generation; to reduce unnecessary regulation and red tape and increase competition in the Canadian marketplace; and to create the best educated, most skilled and most flexible workforce in the world, while investing in a modernisation of the country’s infrastructure.
Those goals are all backed up by a set of ‘core principles’ that the government says will guide all its future policy decisions. The principles are: Focusing government effort on what it does best – which means being responsible in its spending, efficient in its operations, effective in its results and accountable to taxpayers; Creating new opportunities and choices for people – which entails creating incentives for people to excel – “right here at home” – while reducing taxes and investing in education, training and transition to work opportunities; Investing for sustainable growth – which means investing and seeking partnerships with the provinces and the private sector in strategic areas that contribute to strong economies, including primary scientific research, a clean environment and modern infrastructure; and “Freeing businesses to grow and succeed” – which will see the government creating “the right economic conditions to encourage firms to invest and flourish.”
Fine goals, if somewhat vague. But, fundamentally, the government needs to do something about the growing economic divide between Canada’s provinces. This economic disparity reached a new high last year, says Sébastien Lavoie, economist at Laurentian Bank Securities. His recent Provincial Economic Outlook for this year and next noted that a run-up in commodity prices provided an economic boost for the resource-based provinces of Saskatchewan, British Columbia, Alberta, and Newfoundland & Labrador during the last four years, while over the same time the manufacturing-based economies of Ontario and Quebec suffered. “They lost their mojo, hit by the unprecedented run-up in the Canadian dollar and most recently, the US mid-cycle slowdown,” he says.
The Central Canada province has borne the brunt of the weakening in US demand. Lavoie estimates that Ontario and Quebec’s real GDP advanced at a pace lower than two percent in 2006, amid a contraction in the key manufacturing sector. The continued ascent in commodity prices added fuel to the fire in Alberta and British Columbia, where the economy rolled at a pace two to three times faster than other provinces last year. The diversified economies of Manitoba and Saskatchewan performed better than Central Canada, but not as well as Alberta and British Columbia. Lastly, the performance of Atlantic provinces was in the middle of the pack, with real GDP growth surrounding two percent.

Exceptions to the rule
His forecast is that real output growth in seven out of ten provinces will be the same or a tad weaker in 2007 compared to last year. The only exceptions to the rule will be Nova Scotia, Saskatchewan and Newfoundland & Labrador. Saskatchewan will benefit from a rebound in mining activity, whereas a surge in oil production will fuel growth in Newfoundland & Labrador. He expects economic growth to stay moderate in the rest of Atlantic Canada. In Central Canada, Quebec and Ontario the economies are forecast to advance below the two percent mark for a second consecutive year, as the restructuring in export-oriented forestry and automotive sectors continues. On the fiscal side, Lavoie says the provinces are on track to meet objectives set during the previous 2006 budget season for the current fiscal year 2006-07, although the moderate slowdown in the North American economy could translate into softer than expected revenues in coffers.
So, the economic outlook is mixed: things are looking good for the country as a whole, but there are pockets where people will suffer. That’s the same in any countries; growth and depression are always unequally distributed. But the problem for Canada – or maybe even the problem of Canada – is whether there is political will among the winners to do anything to help the losers. In the meantime, if the climate for business continues to worsen, then the climate for all things Canadian will go that way eventually.