Navigating Turkey’s project finance industry

Turkey is a key market for global investors, and continues to offer growth and investment opportunities. Erdem&Erdem is a full service independent law firm with offices in both Istanbul and Îzmir, Turkey. The company’s project finance team regularly advises clients on developing innovative financial structures that support infrastructure investment, and can address the specialised needs of lenders and developers in financing both public and private infrastructure projects, including acquisition finance, project finance and debt capital markets.

The highly skilled cross-disciplinary team of lawyers at Erdem&Erdem is one of the company’s major strengths. Each member provides integrated legal advice required for the development and financing of successful infrastructure projects. These include the negotiation and preparation of concession agreements, leases, direct agreements, construction contracts, operation and maintenance agreements, joint bidding agreements, joint venture arrangements, letters of intent, term sheets and other financing documentation.

Over the last 20 years, Erdem&Erdem has been involved in a large number of transactions that represent developers, sponsors, investors and financial institutions seeking to develop, acquire, bid on or sell infrastructure assets privately, under government privatisation, or as part of public-private partnership (PPP) programmes.

The team has developed a significant presence across many sectors with a strong insight into how to structure these transactions, as well as how to conduct efficient, in-depth and useful due diligence on the underlying assets and relevant documents. This is done by offering services across a full breadth of financial infrastructure techniques, and the financial engineering that improves asset value from structured finance within the infrastructure, energy, construction and engineering industries. This should also occur within the corporate, securities and real estate sectors, transportation, ports, airports, hospitals and power plants.

Recognised practice
A number of Erdem&Erdem projects have been recognised as landmark transactions. In Turkey, the company represented YDA Group on the construction and financing of Dalaman Airport’s domestic terminal, and assisted on the Kayseri Integrated Health Campus. Dalaman Airport received the first prize in Bonds & Loans’ Transportation Finance Agreement of the Year category, and second price in the Syndicated Loan of the Year category. The financing of the Kayseri Integrated Health Campus received third prize in Project Finance of the Year, Syndicated Loan of the Year and Structured Finance of the Year categories by Bonds & Loans in 2015.

In Kazakhstan, Erdem&Erdem advised the Yıldırım Group on financing Voskhod Chromium, with $245m of the term loan facility raised through UniCredit and the European Bank of Research and Development (EBRD), as the first chromium mining project financing in the history of EBRD. Voskhod Chromium financing won the Best Project Finance Deal award and the Best Natural Resources Deal award from the EMEA Finance Institution in 2016.

Legal enforcement, compliance and sustainability all play key roles in achieving reliable outcomes for infrastructure financing

In Ecuador last year, Erdem&Erdem represented Yılport Holding for the operating rights transfer of Port Bolívar in Machala for a period of 50 years, conditional for a return investment of $750m by Yılport Holding, sealed in an agreement with Ecuador’s government.

Dalaman Airport’s investment comprised EBRD financing from a senior A/B-loan to YDA Havalimanı Yatırım ve Îs˛letme, a special purpose vehicle company of YDA Construction, part of the YDA Group of Turkey. The financing by EBRD consisted of an A-loan portion of up to €87.5m ($92.3m) and a B-loan portion of up to €87.7m ($92.5m), syndicated to UniCredit Bank Austria. The funds were provided to support the construction of a new domestic terminal at Dalaman Airport, together with auxiliary structures.

Due to its proximity to major tourist resorts in the southern Turkish Riviera, Dalaman Airport is one of the key airports in Turkey. The deal is a benchmark one in the private sector and of airport infrastructure across Turkey. Dalaman Airport’s financing is historic, as it is the first regional airport financed by EBRD, one of the most respected players of infrastructure financing projects.

Erdem&Erdem’s approach has always focused on minimising the subjectivity across financing agreements and planning a development strategy through to procurement. The firm aims to create contracts and the management and operational phases permitted for future investments under the main contractual framework, tailored specifically for airport construction financing.

Prior to the negotiation of financing agreements, Erdem&Erdem’s focus was first and foremost on identifying unique issues facing the public authority, and the sensitivities of commercial considerations of private institutions as developers and operators, which may be particularly complex across different levels (with respect to individual infrastructure projects implemented for the first time), as in the case of Dalaman Airport.

A healthcare focus
PPP projects are officially introduced by an explicit reference to the term itself under the Building and Renewal of Facilities and Procurement of Services law through the PPP model. Historically, Turkey’s first and foremost implementation of PPP projects was targeted at the construction and rehabilitation of hospitals in a structured legal framework introduced by the PPP law in healthcare. However, it opened up the path to future PPP growth in infrastructure investments – particularly transportation – with toll roads, railroads, toll bridges and educational facilities.

Erdem&Erdem advised the YDA Group on project financing that was worth €330m ($347m), which included design, construction and management of the Kayseri Integrated Health Campus project – the first PPP project in Turkey implemented under the requirements of PPP law. The company adopted a coordinated and multidisciplinary approach, with sensitivity to the special issues related to critical infrastructure assets.

One of the main challenges in attracting private sector investment is the difficulty the public institutions encounter arranging a sustainable delivery framework to prepare PPPs effectively. Setting benchmarks for socio-economic and environmental impact, affordability, risk identification, bankability and similar comparative assessments requires project-specific methodologies.

Clearly a greater number of PPPs are structured to be bankable for different levels of investment with comprehensive technical, financial, business and legal assistance. Therefore experts such as Erdem&Erdem are able to advise and present well-structured projects that are indispensable for the effectiveness of projects such as the Kayseri Integrated Health Campus.

Voskhod Chromium, a major chromium mining facility in Aktobe Oblast, north-western Kazakhstan, is an example of a landmark cross-border transaction that includes six different jurisdictions involving both A and B-loans, each making two separate tranches that equal $260m in aggregate. EBRD’s financing as the lender in Voskhod is significant as the company’s first transaction in chromium mining.

Yıldırım Group’s financing provided Turkey with an industrial conglomerate of mining and port operations, which will be used to restructure and rehabilitate the operation of Voskhod Chromium and improve its efficiency and competitiveness, while reinforcing its overall environmental and operational health and safety standards. Voskhod Chromium is expected to have a transformational effect on the mine operations by introducing new technologies into Kazakhstan for the first time.

In contrast to a typical project finance contract based on the assumption that the lenders will have step-in rights, granting security in Voskhod Chromium’s financing was challenging due to a restriction of securities given over minerals in Kazakhstan. From an early stage, Erdem&Erdem’s advisory planning on the securities has been instrumental to the success of Voskhod Chromium’s financing.

PPP opportunities in Turkey
The most significant obstacle to financing infrastructure projects is the difficulty in delivering financial demands through tax revenues. Taking into account Turkey’s past, which is similar to other high-growth markets, the country has strong potential to generate landmark PPP projects with high-level support from its government with an extensive PPP agenda.

Legal enforcement, compliance and sustainability all play key roles in achieving reliable outcomes for infrastructure financing

With a successful track record across other industries, PPP will certainly generate exciting opportunities for both Turkish and foreign investors and lenders – particularly across mega-infrastructure projects where there are great incentives from the Turkish Government. Roads and railways have not yet been revitalised, but there are a number of projects currently underway.

So far, healthcare is the most recent and successful industry where the PPP model has been implemented. The Turkish Government has planned to develop 18 integrated healthcare facilities using the PPP model, with the purpose of promoting a diversified network of medical services and raising standards in healthcare in line with the technological innovations and new trends in medicine.

Regardless of the financing model selected, there are basic considerations required for successful infrastructure investment with project financing. The project finance team’s ability to prepare the project cycle – including preparation, concessions, procurement, contract management and an efficient dispute resolution mechanism – is instrumental in providing strong development, leading to a positive economic return.

Legal enforcement, compliance and sustainability all play key roles in achieving reliable outcomes for infrastructure financing, either from private institutions as lenders or through public sector support. This will also ensure the credibility of public institutions by selecting sustainable PPPs. Another key issue is the concern over handling renegotiations and disputes over the financing agreements. The determination to prevent disputes needs to be coupled with appropriate dispute and renegotiation mechanisms. If credible and effective dispute settlement mechanisms such as arbitration and mediation are introduced with clarity, this will serve to safeguard potential ramifications and deter opportunists targeting project – regardless of PPPs or traditional project financing.

Stock markets run on ‘gut feeling’

On the trading floor, every top professional knows the value of a strong hunch. While stock trading strategies focus on conscious reasoning as the key to success, traders themselves place great importance on ‘gut feeling’ to guide them towards lucrative deals.

In the wake of the 2008 banking crisis, this financial sixth-sense has often been dismissed as an industry excuse for reckless stock market gambling. Yet, according to a new study led by the University of Cambridge, such gut feelings do indeed play a very real role in the world of trading.

“I set up this study to answer a simple question: are gut feelings merely the stuff of trading mythology, or are they real physiological signals?” said former Cambridge University research fellow and Wall Street trader Dr John Coates. “I suspected from my days of trading that hunches were real and valuable, that when I scrolled through the range of possible features, one just felt right.”

Sensitivity equals success
In order to test this theory, researchers at Cambridge University recruited 18 male traders involved in high-stress trading in a volatile period towards the end of Europe’s sovereign debt crisis. These test subjects then underwent a series of experiments to measure their awareness of the subtle physical changes happening to their bodies during a high-pressure work day.

Collectively, the traders performed significantly better in the heart rate test than the control group, demonstrating a heightened awareness of their body’s sensations

“Within physiology, the term ‘gut feeling’ is a colloquial synonym for interoception – the branch of our sensory system that monitors our internal, homeostatic condition”, explained Coates. Sensations such as breathlessness, body temperature, heart rate and fullness of the gut and bladder are continuously passed to the brain from the body’s tissues by interoceptive signals. Although most people are unaware of this transmission of information, sensitivity to such sensations can vary greatly, with some experiencing stronger physical reactions to certain
stimuli than their peers.

As the most common test for interoceptive sensitivity is heart rate awareness, the traders participating in the study were asked to count their own heartbeats while at rest, without feeling their pulse or touching any other part of their body. Collectively, the traders performed significantly better in the heart rate test than the control group, demonstrating a heightened awareness of their body’s sensations. What’s more, within the group of traders, those who more accurately counted their heartbeat also performed better on the trading floor.

Not only did traders with a better heart rate score generate more profits than their peers, they also survived longer in high-pressure financial careers. The findings suggest successful traders have a heightened awareness of the body’s stress responses, and are thus able to unconsciously read the physiological signals that steer them away from high-risk, dangerous decisions.

Disproving theories
As well as deterring traders from making reckless financial decisions, these subtle interoceptive sensations can lead to success. With their brains and bodies acting as one in moments of high stress, traders can feel drawn towards a profitable stock, without even being able to articulate the reasons for the hunch.

The scientific confirmation of a trading gut feeling may well have implications for economic theory and, in particular, the controversial ‘efficient markets’ hypothesis. The hypothesis, similar to the ‘random walk’ theory (which says past movements or trends in stock prices cannot be used to predict the future movement of the same stock), suggests the market is entirely random, making it impossible for traders to improve or even control their performance through skill, knowledge or experience. This would make it impossible for traders to ‘beat the market’ and earn excess profits from stocks.

The scientifically proven importance of gut feeling in financial risk-taking may give human traders the edge over their emerging
digital competitors

Conversely, the newly discovered link between gut feeling and trading success suggests an instinct for anticipating price movements does indeed exist, and comes into play every day on the trading floor.

According to Coates: “Academic economics and finance is so focused on conscious reasoning that they completely miss the real action, which is taking place in the dialogue between the brain and the body.”

Man versus machine
The results of the study may also have a significant impact on the very structure of what is a rapidly digitalising industry. Bolstered by the aforementioned efficient markets hypothesis, which also argues machines are better than humans at trading, digital trading systems have come to dominate stock exchanges the world over. Today, openly shouted trading is largely a thing of the past, with the rise in electronic trading limiting face-to-face bidding between professionals. However, the scientifically proven importance of gut feeling in financial risk-taking may just give human traders the edge over their emerging digital competitors.

Unlike machines, successful traders appear to have an innate physical predisposition for effective risk taking. While digital systems rely entirely on hard data, humans have unconscious access to a world beyond numbers. Where computers fail to beat the system through an automatic analysis of available information, traders are able to do so thanks to the physiological clues provided by their bodies.

In highlighting the role of the human experience in financial trading, the study reignites the debate between classical and behavioural economists. Followers of the classical school tend to believe psychology and neuroscience are irrelevant to economics, whereas behavioural economists see these elements as essential to financial decision-making. Both theories, however, have failed to consider the role of the body.

Until now, physiology has been largely ignored in economic academia, which widely regards trading as a purely intellectual activity. This new evidence undermines the established belief, potentially prompting a profound reassessment of our understanding of financial markets and the decisions that govern them.

According to Coates, the landmark study shows just “how exquisitely we are constructed for rapid pattern recognition”. Armed with this new evidence, the Wall Street veteran now believes “humans can indeed compete against the machines”. For many finance professionals, the results confirm what they have long suspected: that trading skill cannot be taught and, more importantly, cannot be programmed.

YDA Construction builds investor confidence

This year marks the 42nd anniversary of the creation of AKSA Construction, YDA Group’s first construction and contracting company, and the 22nd anniversary of YDA Construction Industry and Trade. The flagship of the group, YDA Construction carries out a wide range of works, including turnkey projects, build-operate-transfer (BOT) airports, hospitals, schools, shopping malls, hi-tech business centres, industrial plants, highways, railway lines, bridges, intersections and mass housing projects. With subsidiaries operating across a wide range of sectors and completed projects amounting to $6.8bn by the end of 2016, YDA Group is one of the most influential private companies in Turkey.

Although the Turkish corporate sector is well versed in bank financing, longer tenor bond financing is relatively scarce

While continuing its operations in the construction (contracting and property development) sector to meet ever-changing market expectations, YDA Group has branched out into a range of periphery sectors, such as airport management, energy, PPP healthcare, agriculture, mining, insurance and even outdoor digital advertising.

Since extending its operations to international markets in the 2000s, YDA Group has carried out various projects in countries such as Kazakhstan, Ukraine, the UAE, Russia, Saudi Arabia, Afghanistan and Moldova. Along this vein, it continues to spearhead in BOT and PPP infrastructure projects, particularly for city hospitals, both in Turkey and abroad.

A pioneering bond issuance
Although locally issued corporate bonds are not a market norm in Turkey, YDA’s banks and lawyers have structured highly comprehensive documentation, which includes financial and non-financial covenants in order to maximise investor confidence.

One of the major constraints to the long-term development of the Turkish corporate bond markets has been the limited floating rate issuance that is priced from a market-relevant benchmark index. Consequently, the market is dominated by floating issuances that are based on a two-year government bond index, which is impossible to hedge and thus introduces basis risk for investors.

The issuance was YDA’s first bond issue and only the third in the Turkish market to be based on TRLibor as a reference rate. Hence, the issuance represented an important step that demonstrated the successful use of a different index in the market, while also eliminating non-hedgeable interest rate exposure.

Although the Turkish corporate sector is well versed in bank financing, longer tenor bond financing is relatively scarce compared to the size and potential of the market. As a consequence, the ongoing development of a functional and hedgeable floating rate index, the TRLibor, has great appeal for international investors.

Since 2010, the tenors offered are mostly two years in length, with limited issues of three years. Moreover, there is also very limited liquidity in the market. As such, the local currency corporate bond market has substantial potential for further improvement, which could include longer maturities and could be based on floating rate indices. At 1,457 days – or almost four years – the YDA transaction was the longest tenor in the TRL corporate bonds market. Before this issue, the maximum tenor in the market was 1,154 days.

42 years

YDA Group’s experience in the construction sector


The group’s overall completed business volume


Its ongoing and planned business volume

The YDA issuance thus demonstrated the viability of longer tenor issuances and increased the maturities available in the market. Naturally, this will attract more issuers and investors, which in turn will potentially increase liquidity as well.

In 2015, 51 local currency bond issues – amounting to TRY 3.1bn ($971m) – were placed with only one issue size of more than TRY 200m ($62.5m). The YDA issue size, on the other hand, is currently TRY 250m ($78m), which almost triples the average corporate bond issue size in Turkey. As the transaction was the biggest issuance of 2016 – and the third biggest in the last six years – it is considered to be a remarkable achievement and a real game changer by the Turkish authorities. Furthermore, the timing was especially significant: the issuance created a positive impact on Turkish markets shortly after the failed coup attempt of July 2016, and the subsequent state of emergency declaration.

These events caused a significant S&P rating downgrade and, as a result, an outflow of foreign capital, which witnessed numerous defaults and increased tension in the local private bond market. In response to this fragile environment, all possible shock scenarios were tested before the completion of the YDA deal. Thanks to its sustainable cash flow stream and its close dialogue with all major stakeholders, YDA’s corporate bond was oversubscribed.

Our new plan of action is to further improve the company’s disclosure standards, thereby raising business practices well beyond Turkey’s current regulations to the best possible international principles. Indeed, YDA has agreed to higher disclosure requirements in comparison to those that are applicable for issues to qualified investors in Turkey. These practices target disclosure in a similar manner to public issuances: they include the preparation of a company’s detailed information; obtaining a rating from a well-renowned rating agency, which will be updated and published periodically; and publishing semi-annual financial statements.

Unique factors
The issuer is a holding company operational in multiple sectors and is headquartered in Ankara. Although construction firms are not usually the first option when it comes to investing in Turkey’s private bond market, YDA Ìn˛saat’s corporate bond was oversubscribed thanks to the sustainable cash flow stream of the company and the company’s strong track record and close dialogue with all major stakeholders in the local bond market.

There were many unique features of the deal, including the strong, steady and easily predictable cash flow generation capability of the issuer. As mentioned, it also had the longest maturity on record and even attracted institutional investors. To sum up, the deal has unique qualities in terms of its four-year maturity, its spread, the size of the deal, the deal’s distribution, and the market conditions as well.

Consequently, international institutional investors invested in the second tranche, which has the longest tenor so far among real sector bonds. This tranche’s benchmark is TRLibor, which indicates the market will soon evolve into longer tenor bonds. Besides tenor, diversified benchmarks also attracted the attention of local and foreign investors. Due to the government securities’ low roll-over rates and spread with bank deposit rates, TRLibor was chosen for the benchmark of this deal to boost investor appetite.

In order to present the deal, we conducted a one-week roadshow along with 21 different institutional investors. In addition to one-on-one meetings, teleconferences were conducted as an opportunity for investors to ask questions. We found investors really appreciated the firm’s publicity and responsiveness, even before the deal was closed.

It is also notable that the transaction was realised in a highly volatile market environment, at a time when issuers were hesitant to issue. The successful issuance has proved Turkey’s corporate bond market is becoming a stable funding market for issuers, despite its relatively short history. While investors appreciated the firm’s sound financial structure, the bond yields in question were particularly attractive.
The high number of investors who were contacted prior to the book building is also an important aspect of this successful bidding. Other factors in this success included the company’s strong track record in the capital markets, its transparency with potential investors, and the close communication it kept with all the major stakeholders of the local bond market over the last three years.

Finally, YDA’s debut issuance was paid off on June 16 last year, thus marking another significant step. Essentially, YDA was able to demonstrate its financial soundness by paying off its debut issuance with its own resources, rather than relying on capital markets to play a crucial role in the successful bidding process.

Cyber-insurance providers can’t hack it

In October 2015, UK telecommunications company TalkTalk reported a cyber-attack on its website. Nearly 157,000 customers were affected. The data accessed included bank account numbers, sort codes and even some credit card details. While the compromised information was not substantial enough to allow serious fraud to be committed, the costs to TalkTalk were significant. Figures released by the company in February 2016 indicated the incident had cost it £60m ($76.5m) and prompted the departure of 95,000 customers. To add insult to injury, the heist had been pulled off by a teenager.

By the very nature of online systems, there will always be the potential for similar attacks to occur in the future. While companies have a number of defensive tools at their disposal, no security measure will ever be bulletproof. In fear of suffering a similar attack, businesses have done what they always do in the face of an unavoidable risk: they have taken out insurance. Established insurers have subsequently developed products to cover this risk, mitigating the potential costs of a hack or breach.

 The benefits insurance typically provides to motorists and property owners are yet to fully translate to cyber-policies

While fundamentally a sound idea, there are a number of questions surrounding cyber-insurance; principally how insurers treat it, its effectiveness in reducing cyber-attacks, and its breadth of coverage. These are questions that need to be answered. For a risk that is evolving as quickly as cybercrime is, a company’s requirements of their cyber-infrastructure are shifting faster than their insurers are. Additionally, insurers are currently underutilising data that could entirely change the face of cybersecurity. As digital infrastructure becomes ever more important, these changes
cannot happen fast enough.

Leaky ships
The large-scale attacks on companies like TalkTalk and Sony have fuelled CEOs’ fears that their businesses could be next; making cyber-insurance seem like the next logical step when protecting their investments. Generally, cyber-insurance policies cover a mixture of first and third-party losses that stem from a cyber-attack. First-party coverage accounts for the direct cost to the business: cleaning up in the immediate aftermath of a cyber-attack by replacing damaged systems and compensating for the loss of productivity while the breach is examined in greater detail. Third-party coverage then deals with the claims of those individuals who have suffered at the hands of the cyber-attack – through the leak of personal information, for example. Defining a cyber-attack can be a little less straightforward, however. These events can range from an employee losing a USB stick containing critical data, to a full-scale breach on an international level.

Although the market has recently slowed, the cyber-insurance sector has proven to be one of the biggest growth areas for insurers in recent years. A report compiled by PwC in September 2015 estimated the global cyber-insurance industry could grow to $7.5bn in premiums by the year 2020 – suggesting companies will continue to attribute greater value to both their data and digital infrastructure. Traditionally, security measures were thought to be enough to protect against intrusions, but, with the seeming inevitability of a breach, insurance has become a necessary supplement. However, the benefits insurance typically provides to motorists and property owners are yet to fully translate to cyber-policies.

Fast food
In 2014, PF Chang’s – a casual dining restaurant chain with over 200 locations in the US – fell victim to a data breach. The breach affected 33 branches and compromised the credit card information of 60,000 customers. The company was covered by a Chubb cyber-insurance policy taken out with the Federal Insurance Company. The policy covered the costs associated with investigating the breach, legal advice and the management of its obligation to notify both customers and the authorities.


Predicted value of cyber insurance premiums by 2020


of cybersecurity professionals think their coverage is adequate

Despite this, in May 2016, an Arizona court rejected PF Chang’s efforts to recover the additional $2m it required to reimburse the issuing companies whose credit cards had been used to make fraudulent transactions. The policy stated it was designed “to address the full breadth of risks associated with doing business in today’s technology-dependent world”, and, as a result, PF Chang’s believed this cost would be covered. Chubb, however, successfully argued the policy was not liable for any external contract or agreement the company held. By extension, PF Chang’s dispute with the company was its own to manage.

The case of PF Chang’s is one that should have any business pouring over the wording in its own cyber-policy, ensuring it has a comprehensive understanding of exactly what it is, and what it isn’t, covered for. However, the complexity of these policies, and the number of parties involved in a cyber-breach, make cases like this inevitable.

Risky business
Sasha Romanosky, a policy researcher at the RAND Corporation, is investigating the way cyber-insurers assess risk and calculate their policy fees. Speaking to Mrassociates, Romanosky said policies often include or exclude certain events based upon the insurer’s past experience of a product – cyber-insurance has inherited a lot of these conditions. “Say we’re talking about kinetic warfare and a government or country is bombing a whole city, the insurance company isn’t going to be able to pay out all of those losses on all of those claims”, Romanosky said.

Cyber-insurance – now almost 15 years old – is far younger than the majority of insurance markets, meaning laws and coverage are still being tested. Romanosky believes that as more cases emerge, policies will evolve. Unfortunately for PF Chang’s, the company acted as the proverbial canary in the coalmine of cybersecurity litigation.

Romanosky said: “I suspect this will reach an equilibrium, where people will kind of understand what the playing field is. The early companies that try to file these claims under the policies and were denied, that will change. There’s a self-correcting mechanism going on where companies should be informed, either by their brokers, insurance companies or their peers, to clarify these rules and help them figure out what’s covered and what’s not.”

But this lack of clarity isn’t exclusive to companies; insurers are still coming to grips with their cyber-policies, too. A recent survey conducted by PivotPoint Risk Analytics, SANS Institute and Advisen found a number of major gaps exist between the cyber-insurance market and cybersecurity professionals. One problem is the terminology different professionals use, particularly when discussing the concept of ‘risk’. Security experts see the term as meaning vulnerabilities to a security system, while insurers interpret it as the monetary cost of a breach. Another problem is the varying standards attributed to the most important cybersecurity measures, and the amount of money that should be invested in cybersecurity in comparison to cyber-insurance. All these issues have culminated in a lack of confidence. According to the study, only 48 percent of chief information security officers and other security professionals find cyber-insurance ‘adequate’ when recovering from a breach.

With the figures cyber-insurance companies have access to, they have the potential to provide unrivalled insight into cyber-attacks and why they happen

Given most companies are now highly dependent on their cyber-infrastructure, its easy to wonder why cyber-insurance is a separate product to general liability insurance. Romanosky said that, while he did not know for certain, there was a chance this was because policy limits on cyber-products are much lower. Romanosky said: “So they have an interest in creating a separate book of business that is cyber-policies, where the limits are a lot lower, to manage their costs. I’m guessing because of uncertainty in any kind of claims that might be filed. That’s a speculation of strategy, I don’t know if that’s actually true, but it’s an interesting story that I heard.”

Many will be hoping the research conducted by Romanosky will provide more clarity and transparency within the industry.

Missed opportunity
It’s unfortunate cyber-insurance is deficient in all these areas. With the figures cyber-insurance companies have access to, they have the potential to provide unrivalled insight into cyber-attacks and why they happen. By analysing this information, they should be able to determine the biggest risk factors and ultimately encourage better general cybersecurity as a result. Despite this, Romanosky says insurers are yet to address this issue: “I don’t know why they don’t do it. It seems crazy to me because you’d think they have floors of actuaries who would do this kind of thing, but in my conversations no one has really gotten there.”

While still offering clear benefits to organisations around the world, the cyber-insurance market is still relatively immature. Substantial redevelopment is required before companies can be confident in their decisions and feel fully protected by their policies. Insurers have already achieved this feat in the automotive and property sectors, so there seems little reason the same can’t be accomplished in the cyber domain. Cyber-attacks don’t just harm companies, but individuals as well, so the sooner insurers make the effort the better. Enforcing greater protection standards through well-formulated policies could greatly reduce the exposure of personal details, breeding confidence and providing clarity in a sector riddled with uncertainty.

World leaders have a mountain to climb at Davos

This January, the world’s richest and best connected will descend on a sleepy village in the Swiss Alps for the annual meeting of the World Economic Forum (WEF). Since 1971, the global elite has gathered at the small mountain resort of Davos to discuss the world’s most pressing issues. This time round, more than 2,500 guests are expected, with attendees paying upwards of $20,000 for the privilege.

2017’s gathering will focus on a number of global events that have caused great concern, particularly in terms of the world economy

Founded by Klaus Schwab in 1971, the WEF operates under the motto “committed to improving the state of the world”. From Canadian Prime Minister Justin Trudeau and the IMF’s Christine Lagarde to leading business minds such as Bill Gates, the wide array of speakers always makes for an impressive showing.

The range of issues is broad too, with recent discussions ranging from the impact of 3D printing to global gender equality. However, there is usually some sort of overarching theme to the discussions. The 2016 edition focused on the world’s ‘fourth industrial revolution’, a concept first put forward by Schwab himself. In his most recent book on the topic, Schwab argued we are once again undergoing a revolution in economic production techniques, one that will have profound consequences for our world. Whether it is mobile supercomputing, artificial intelligence and cognitive computing, self-driving cars, or neuro-technological brain enhancements, the way society and economies are organised is set for a huge shake-up. How world leaders should approach this seismic shift was the central theme for 2016.

This year’s meeting, it appears, will take a slightly more political turn. The headline theme will be ‘responsive and responsible leadership’. Indeed, 2017’s gathering will focus on a number of growing trends and global events that have caused great concern, particularly in terms of the future direction of the world economy. According to the overview: “The weakening of multiple systems has eroded confidence at national, regional and global levels. In the absence of innovative and credible steps towards their renewal, the likelihood increases of a downward spiral of the global economy, fuelled by protectionism, populism and nativism.” How to stem this tide will be the primary concern of this year’s meeting.

The rise in anti-globalisation
Davos 2016 focused partly on the then-upcoming referendum concerning the UK’s membership of the EU. Since then, the UK electorate voted narrowly to leave the bloc, surprising most observers. Of immediate concern for WEF attendees this year will be how this decision is handled.

UK Prime Minister Theresa May has said the formal exit process will begin no later than March, with the activation of Article 50 of the Lisbon Treaty. The UK will then have two years to negotiate the terms of its exit. The direction of the UK’s departure and what terms it should both seek and receive will be a hot topic for all involved.

Questions will be raised about the precise nature of the separation; specifically, whether or not the UK will remain in the single market. The answer to this question will have serious implications for firms around the world that currently use the UK as the base of their European operations. Financial institutions based in the City of London, for instance, will be keen to maintain passporting rights in order to operate in the EU. However, these may be lost should the UK go for a ‘hard Brexit’ and leave the single market altogether.

Economic implications aside, the sentiment behind the vote will also be up for discussion at the WEF meeting. For many commentators, the Brexit vote was indicative of a rising populism across the continent, which the WEF has identified as one of the key threats facing the future of the global economy. Panellists are likely to discuss the recent surge in populist and anti-EU groups, including Germany’s Alternative für Deutschland and France’s Front National.

Davos in numbers:


people attended the original meeting in 1971


The cost of attending


Fall in local CO2 levels during the annual meeting


delegates travel to the summit every year


The amount the World Economic Forum contributes to Davos each year

For many attendees, this ideological shift will raise the spectre of a growing sentiment against globalisation, chiefly in its forms of international governance and increased mobility of labour. Speakers and panels will explore why growing numbers of people are becoming disenchanted with, and hostile towards, globalisation – with many now sceptical of its outcomes and processes. The focus will be on how leaders around the world can maintain a global and open economy, while also placating the fears and concerns of their electorates.

This will involve finding solutions to some of the most pressing issues faced by Europe today. Top of the agenda in this respect will be Europe’s migration crisis. Since the last WEF gathering, millions of migrants have entered Europe from war-torn countries, including Syria and Afghanistan, in order to claim asylum. Europe was woefully underprepared for this mass movement, and rifts quickly emerged within countries and even within political parties as to whether to welcome or turn away those in need. With migrants still making their way into Europe, how the continent can coordinate a coherent and unified strategy will be of vital importance.

Likewise, other perceptions of the EU are likely to be addressed. While the southern European debt crisis was largely out of the news during the latter half of 2016, questions over the currency union’s viability and Greece’s financial health persist. Other threats to the fiscal health of the continent are also likely to be on the agenda, including Italy’s weakening financial position, the effect of the European Central Bank’s negative interest rate policy, depressed profitability for European banks, Hungary’s own referendum vote to reject EU migrant quotas, and Deutsche Bank’s increasing volatility. On an existential level, attendees will have to grapple over whether European integration should continue, and how it could continue in a way that is acceptable to the citizens of Europe.

Talking about trade
After years of ever-greater advances in global trade, voters in many countries have started to assert their dissatisfaction with the direction of the trend. In the US, both of last year’s presidential candidates opposed the Trans-Pacific Partnership (TPP). Donald Trump called it a “bad deal”, while Hillary Clinton – once a TPP advocate – reversed her policy to oppose it on the campaign trail. This rare point of agreement between the two figures was reflective of a rising anti-trade sentiment within the US.

Now, with the victory of Donald Trump, the US’ commitment to free trade seems very much in doubt. Even without the consent of Congress, as president, Trump will be able to impose tariffs on other states. The extent to which he will pull the US away from its commitment to free trade – and, indeed, globalisation in general – is yet to be seen. But, with his campaign for office staked on the promise of ending the US’ reliance on other nations – and the backbone of his support coming from Americans who ranged from disillusioned about to openly hostile towards global collaboration – the US’ long commitment to free trade appears to be coming to an end.

Indeed, after decades of growing trade, momentum appears to be slowing worldwide. In September, the World Trade Organisation announced it was revising its estimates for global trade growth in 2016 to just 1.7 percent, from an earlier estimate of 2.8 percent. This new figure is the slowest predicted rate of trade growth since the start of the 2008 financial crisis.

Economic implications aside, the sentiment behind the Brexit vote will also be up for discussion at the meeting

Trade growth, relative to GDP, has been weak since the end of the global recession. As an analysis by the Peterson Institute for International Economics noted: “Following the recession of 2008-9, global trade and FDI performance did not resume their accustomed growth rates, unlike in the aftermath of previous recessions.” Since 2008, the world has seen “the longest post-war period of relative trade stagnation”.

It will be of vital importance then for the bigwigs at Davos to discuss the future of international trade. Generally a pro-trade crowd, top on the agenda for meeting participants will be how to reverse this slowdown.

Economic inequality
In addition to worries over trade and growing protectionist sentiment, as well as populist sentiment within in the EU and beyond, another topic is of increasing concern among the global elite today: economic inequality. The subject is rife in today’s political and social discussion: Thomas Piketty’s book Capital in the Twenty-First Century is one of the most popular economic tomes of recent years; think tanks and charities regularly publish reports measuring inequality around the world; and indeed, Barack Obama himself labelled economic inequality as the “defining issue of our age”.

Many economic commentators see the issue as holding back growth through lowering aggregate demand, and much of the anti-trade sentiment in the US stems from growing inequality. Trade has, it is argued in some quarters, damaged the US’ middle class through offshoring and reduced wages. A hot topic at last year’s WEF gathering, attendees will once again hold counsel on how to address the growing gap between top-end wealth and average incomes.

On the surface, the focus on responding to the threats facing the world economy seems overtly political. However, embedded in these political challenges are deeper social, economic, financial and existential ones. At the heart of the WEF discussion will be how leaders can make the global economy and its integration more palatable and more inclusive for the world’s citizens. Political trends reflect a growing malaise with the globalised economy and world at large, and the meeting at Davos will provide a forum for the sharpest minds to work out the cause of this sentiment, and how best to address it.

Teva Pharmaceuticals has acquired success with Actavis Generics

The best deals are not always the quickest to close, as Teva Pharmaceuticals learned in 2016 after its much-lauded acquisition of Allergan’s generic business, Actavis Generics. In its acquisition of the firm, Teva’s dealmakers coupled two leading generics businesses with complementary strengths, research and development capabilities, product pipelines and portfolios while matching their geographical footprints, operational networks and cultures.

Although regulatory reviews lengthened the deal, those timeline delays ensured a smooth and seamless transition between companies, resulting in improved operational capabilities and efficiencies and a harmonious ‘day one’ transition that transformed Teva into the largest global generic pharmaceutical company in the world.

Generics drugs are low-cost copies of expensive, branded drugs. Today, Teva’s generics division is a $14-15bn pro forma revenue company, with nearly 16,500 employees operating in 80 markets. It utilises the most advanced research and development capabilities in the generics industry.

Following its acquisition of Actavis, Teva now has around 340 product registrations pending FDA approval and holds the leading position in first-to-file opportunities, with approximately 115 abbreviated new drug applications pending in the US. In Europe, after divestitures, Teva will have a pipeline capable of sustaining over 5,000 launches. In Teva’s growth markets, including Asia, Africa, Latin America, the Middle East, Russia and the Commonwealth of Independent States, there are now approximately 600 pending product approvals. Overall, Teva is planning 1,500 generic launches globally in 2017.

Behind the deal
The story of the deal began in July 2015, when Teva announced the acquisition of Allergan’s generic business for a total consideration of $40.5bn, consisting of $33.75bn in cash and approximately 100 million Teva shares. The $33.75bn cash component was to be funded through a combination of equity and debt financing, and was backstopped by a $33.75bn bridge loan facility.

In late November 2015, Teva announced a public equity offering of approximately $6.75bn, consisting of $3.375bn of its American Depositary Shares (ADSs), each representing one ordinary Teva share, and $3.375bn of its Mandatory Convertible Preferred Shares (MCPSs).

Teva sells approximately 120 billion dosages per year, or nearly 20 tablets for every person in the world

The outcome was an additional 54 million ADSs priced at $62.50 each, significantly above the 30-day average price, and 3.375 million seven percent MCPSs at $1,000 per share. Significant demand led to a three-times oversubscribed common equity order book and 1.8-times oversubscribed mandatory convertible preferred shares order book. Shortly thereafter, the offering’s underwriters exercised in full their option to purchase an additional 5.4 million ADSs and 337,500 MCPSs. As a result, approximately $7.4bn was raised from this public equity offering.

The decision to split the offering between common and preferred shares was driven by a desire to deepen demand and offer investors an additional and unique investment vehicle.

In July 2016, Teva issued a multi-currency bond offering in the US and Europe for a total notional amount of $20.4bn at a blended rate of 2.17 percent. The combined bond financing represented the second largest debt offering ever in the healthcare sector, and the fifth-largest corporate debt issuance ever.

The decision to split into two road show teams – one led by CEO Erez Vigodman, and the other by CFO Eyal Desheh – was instrumental in the company’s success in meeting with over 260 global investors, and driving 4.3-times and 6.4-times oversubscribed order books in the US and Europe respectively. While one team marketed and priced the US deal, the other began marketing in Europe. The US team then flew overnight to join the marketing effort, before meeting up to price the euro and Swiss franc offerings in the following days.

The $20.4bn that was raised in combined capital across three currencies in three days is evidence of credit investors’ commitment to Teva’s long-term strategy. To complete the financing, Teva also put in place a $5bn term loan with a group of global relationship banks.

Teva’s strong credit rating and disciplined financial policy were key to providing the financial flexibility and wherewithal to access capital markets across a range of financial instruments, in both jumbo size and at historically attractive terms.

The acquisition’s close was delayed due to an extensive antitrust review and requested divestitures. The deal was then approved just over a year later in August 2016. The resulting firm positions Teva as a top three generic pharmaceutical company in over 40 markets, offering more than 16,000 different products to patients around the world. Teva sells approximately 120 billion dosages per year, or nearly 20 tablets for every person in the world.

Savings strategy
Throughout the Actavis deal, Teva focused on building a strong financial foundation, while also examining new ways to introduce increased efficiencies from existing assets. Recent network optimisation and efficiency improvements have delivered tremendous value across Teva’s global generics business, which has proven to be a key strength. Additionally, a strategic decision to focus on larger markets, coupled with the larger scale of delivery offered by Actavis, has significantly improved the efficiency of the overall business.

Cost synergies and an intelligent acquisition, while important, are not the whole story. The generics industry remains one of the most attractive in the world in terms of profitability and investor returns (see Fig 1), but its contribution to healthcare systems and societies across the globe represents its key mission.

Worldwide, governments – as well as other public and private players – are struggling with increased healthcare costs. Generic medicines are a crucial part of the solution. With an older population, increasing instances of chronic disease and the changing landscape of the middle class has meant that, for billions of patients, their healthcare must be delivered at the highest quality standards while presenting an ever-improving value proposition.

The transaction between Teva and Actavis Generics transformed the playing field by combining two of the industry’s best generic companies in a way that brings tremendous healthcare savings for patients globally.

According to the 2016 Generic Drug Savings report produced by the Generic Pharmaceutical Association (GPhA), nearly 3.9 billion of the 4.4 billion prescription drugs distributed in the US during 2015 were not brand name drugs, but instead the FDA-approved generic equivalent. In a recent report, GPhA noted that generic drugs represent 89 percent of prescriptions dispensed in the US, but make up only 27 percent of total drug costs. This presented more than $227bn in 2015 savings to the US healthcare system, and more than $1.46trn of savings between 2006 and 2015.

What’s next?
Teva’s recent Actavis acquisition proves there is strategic power in smart mergers. A thoughtful acquisition that introduces new capabilities and global efficiencies can create the foundation for positive growth for a pharmaceutical company, while also benefiting the patients it serves. Teva’s acquisition of Actavis will improve speed to market, introduce new market capabilities and create innovative platforms for growth, all of which will prove to be essential tools as Teva works to serve unmet medical needs in the therapeutic areas of respiratory problems, movement disorders, pain and neuro-degeneration.

This deal positions Teva to compete aggressively on commodity products while simultaneously contending with some of the most complex products in the world, thanks in large part to the firm’s extensive manufacturing network and the high standards it meets. That commercial breadth, coupled with a strong market scale and operational network, will consistently deliver high-quality products on time.

Every day, Teva serves 200 million patients through the largest portfolio of drugs in the world, with one of the largest, most competitive, fully integrated, operational networks in the industry. This portfolio enables Teva to maintain its role as a transformative healthcare company that delivers ever-improving value to our shareholders, healthcare systems and patients around the world.

The need for speed

At the Royal Calcutta Golf Club in India, there is a ‘monkey rule’. This states: “Play the ball where the monkey dropped it.”

Monkeys randomly pick up and drop the golf balls, meaning a player’s position may sometimes be advantaged, sometimes disadvantaged. Club officials tried everything to control the monkeys, from high fences to loud noises to chemical repellents. Nothing ever worked so, in the end, the monkey rule was added.

Like the exasperated golf rangers in Kolkata, regulators, venues and participants in finance have already attempted a long list of measures to counteract the effects of speed in the markets. We’ve seen rules for equal length cables in co-location facilities, Reg. 603(a) for price distribution, and everything in between. The introduction of IEX’s speed bump is the latest attempt to control the ‘speed monkey’.

Slow, not steady
IEX’s recent approval has reignited the debate about speed and its role in today’s financial markets. This debate polarises people into two camps: speed is good for markets, and speed is bad for markets. The polarised nature of the debate is evidence of a fundamental misunderstanding of the nature of speed in finance and its role in market structure.

Regulating speed is futile, and it is impossible to eliminate the effects of speed from the equation unless computers are banned completely. All attempts to regulate and control speed will ultimately prove ineffective, just as the fences and klaxons were useless in controlling the monkeys.

Speed’s impact on market price is like the weather: a complex natural phenomenon that changes constantly

The IEX speed bump may, in all likelihood, have a negative effect on markets. Blocking off a speed play at one venue typically creates multiple new speed plays across interacting venues. It is this speed asymmetry that creates the opportunity for speed arbitrage. And with a mix of fast venues and slow venues, it is harder to figure out the likely execution outcome. This results in a proliferation of new order types, rules and infrastructure enhancements to exploit or prevent the exploitation of this effect. Thus, the speed bumps can add complexity – and therefore more possible failure points – to the market.

Markets acclimatising
The approval of IEX shows that even the US Securities and Exchange Commission (SEC) harbours misunderstandings about speed in markets. Evidencing this is the recent declaration that one millisecond be considered de minimis for events in US equities markets.

Unfortunately, the SEC declaration is off by a factor of 1,000. A decision to trade can be made in 10 microseconds or less, so it would be more accurate to name one microsecond as de minimis.

If we were to attempt to handicap the markets to this scale, all participants and venues would need to be co-located on the same computer chip. Clearly this is not a practical solution, so we have to live with the realities of speed, and we have to be able to deal with the impact of co-location, speed bumps, direct data feeds, consolidated data feeds, random delay gateways, random traffic congestion and venues at distant locations.

So, what is a realistic solution to speed problems in the market?

The nature of speed and its impact on market price is like the weather: a complex and highly interdependent natural phenomenon that changes constantly. If we decided that it was unfair for all humans to experience different climates, the only way to standardise humanity’s weather experience would be to move all mankind to the same location, or to build some system that precisely controlled the weather everywhere. Most would recognise these ideas as ridiculous and futile.

Instead, we have learned to adapt to the weather. We attempt to gain better insight into weather patterns to make better forecasts. Our ability to predict major storms and quickly take appropriate measures has arisen from the necessity of dealing with something that is effectively random and impossible to control.

I propose a similar approach to markets. Understanding appropriate granularity and having visibility is key in understanding and regulating for speed. The root challenge, therefore, is not speed: it is time. The lack of precision-synchronised time is the real, urgent problem that must be solved by regulators.

If we can’t see what’s going on and what order it happened in, we lack the ability to properly explain events and we will never have a market structure that everyone accepts to be transparent, fair and robust.

Becoming weathermen
There are signs that this understanding is happening. MiFID II in Europe mandates that all business clocks involved in high-speed trading must be synchronised to within 100 microseconds of Coordinated Universal Time with a timestamp granularity of one microsecond or better – although 100 microseconds might still not be detailed enough to reliably catch market abuses.

With this granular transparency, we can reasonably judge the validity of the information and make an informed decision to trade or not trade based on our prior experiences and knowledge of the environment. This approach is agnostic of speed – in fact, a strong market structure must be able to handle diversity and unforeseen actions. Our market structure should allow for any expression of speed, or variability in speed, whether they arise naturally or are employed purposefully.

We cannot try to control the weather, nor the monkeys. Instead, we have to be the best weathermen we can be, ready to play the ball where it lands. That is how we have always approached the markets: we deal with the speed environment that exists, and make informed decisions to trade that make the best of the situation.

If regulators, venues and participants don’t address the fundamental need for an accurate understanding of time, we will continue to pursue ineffective agendas and ultimately fail to build trust and confidence in the operation of our electronic financial markets.

Delaware: the home of business

Whether it was Abraham Lincoln’s talk of the US being the world’s “last best hope”, Jackson Turner’s celebration of the American frontier and its role in the creation of democracy, or Ronald Reagan’s portrayal of the country as a shining city atop a hill, there is a tendency to view the US as being exceptional. Every state within the country would no doubt also like to imagine itself as being unique, possessing some kind of distinctive feature for which it is known around the world.

Delaware’s courts are known for their expertise on handling complex business disputes without a jury

Some states are more successful in this than others. That Texas is an exceptional state – be it for good or bad reasons – is beyond doubt. Massachusetts and Virginia both played a defining role in the history of the US, while California has such a strong identity it is often spoken of as if it were an entirely different country. Other states, however, are not so lucky.

The first state Delaware holds the distinction of being the first state in the country to have signed the US Constitution. This, officially, makes it the first state in the country – and Delawareans are proud of that fact. The state slogan is “it’s good being first”, yet this distinction is easily overshadowed by the role other states played in the long saga of the War of Independence and founding of the US. Much more attention and praise is given to the pivotal role played by other, surrounding states during this era: from Pennsylvania, being the birthplace of the constitution, to Virginia, for supplying its most important framers.

The primary reason Delaware holds the title of being the first constitutional signee is due to its size: the small state was eager to sign the document that conferred equal senate representation to all states, regardless of population or area. Size, then, is also something Delaware has tried to leverage to make it stand out from the other states.

Delaware officials have attempted to use its status as a small state to craft a unique image, labelling it the ‘small wonder’ on highway signs. Vice President Joe Biden, who previously served as a senator for the state, affectionately refers to it as “my little state of Delaware”. Yet the state cannot lay claim to being the smallest state in the country – while not the most desirable title, this would at least afford Delaware some additional charm. Rhode Island, however, has snatched that honour from Delaware’s grasp.

Delaware, however, is unique in another way: businesses seem to really like the state. Disproportionate to its size, it is the home of more than one million companies. In total, a staggering 64 percent of Fortune 500 companies based in the US – including heavyweight brands such as Coca-Cola and Apple – are incorporated there. Coke’s official home may be in Atlanta, but it has still chosen to reside in Delaware.

delaware-fig-1According to a joint report by the state’s Division of Corporations and the Delaware Department of State, Delaware “has become almost a brand name for the ‘business’ of serving as the official home for corporations”. It may seem odd how such a small state – seemingly inconsequential, other than for its constitutional eagerness more than 250 years ago – should be such a favoured destination for businesses (see Fig 1). But there could be a logical explanation.

Courts of chancery
Delaware has made a conscious effort to foster a pro-corporate and business-friendly regulatory environment and tax regime. One of the unique features of business law in the state is the continued existence of the Delaware Court of Chancery, which is a huge attraction to corporations looking for a new place to base their operations. Courts of chancery are institutions with history stretching back to the Middle Ages; they first appeared in 14th-century England, and were intended to arbitrate on commercial affairs. Many were incorporated into general courts in the 19th century, but Delaware’s was not. Instead, it continued to stand alone as a separate body. As Delaware’s Division of Corporations noted in its report, one major attraction for businesses incorporating in Delaware is its courts, and “in particular, Delaware’s highly respected corporations court, the Court of Chancery”.

These courts are known for their expertise on handling complex business disputes without a jury. Experts in corporate law decide the case according to Delaware’s own unique laws, which have often been structured to offer an even more accommodating environment for business to operate in.

“Delaware law requires, and the Court of Chancery enforces, that a company’s directors must always be trying to maximise profits for shareholders”, said Lawrence Hamermesh, a professor at Delaware Law School at Widener University, as reported by The Atlantic. Delaware often pushes for even more corporate friendly laws. “In 2009, for instance, concerned that it was losing ‘pre-eminence’ in corporate litigation, Delaware passed a law allowing litigants with more than $1m at stake to try cases in the Court of Chancery in closed arbitration proceedings, meaning that the public would never know what had happened.”

However, even when challenged, the institutions of the state remained steadfast: “The Court of Chancery took a public stance on the matter, arguing that there was no reason the public should have access to all hearings”, according to The Atlantic.

Added to this is the low tax rate enjoyed by those domiciled in the state: there is no state tax, nor is there any income tax. If a business is located
in Delaware – even if it is operating across state lines – it is not subject to tax on in-state purchases. The state also has no property tax, no taxes on inheritance, stock or share transfers, or even value-added tax. Specifically for corporations, however, the state has a small franchise and limited liability company (LLC) tax. As Investopedia noted: “Most states require annual franchise and LLC taxes based on earned income. Delaware, however, offers a flat fee franchise tax of $100 and a flat fee LLC tax of $250. Compared to other states, Delaware offers exponentially lower franchise taxes and LLC taxes.”

State vs national interest
According to some, Delaware’s unique laws and consequent appeal to corporations is undermining other states. As one article in The Atlantic put it, Delaware “profits from this race to the bottom today. The rest of the country, however, isn’t making out quite as well”. Yet at the same time, from Delaware’s perspective, such policies are necessary. Compared to many other states, such as Texas and other oil states, Delaware has little in the way of natural resources. Nor does it have a large and sprawling university complex producing top-level graduates, as California and Massachusetts do, which in turn allows these states to become top centres for health and technology innovation. Furthermore, Delaware, being such a small state, did not benefit from military production investment in the way many Sun Belt states did.

According to some, Delaware’s unique laws and subsequent appeal to corporations is undermining other states

Manufacturing, as in many other northeastern states, has declined in recent years, and Delaware also lacks the ability to attract large numbers of tourists: its climate is not much different to those of other states in the surrounding area, which often have more developed tourism industries, as in the beach towns of New Jersey. While far from being an ugly state, neither does Delaware boast any natural wonders on a par with those that can be found in many other parts of the country: nor does it have any man-made attractions that might draw tourists in the same way Mount Rushmore does to otherwise inoffensive South Dakota.

States often use specific legislation and craft certain laws to make them stand out from the crowd, with the express hope of attracting investment, revenue, visitors and residents. Nevada’s gambling legislation, many could and did argue, gave it an unfair advantage with regards to tourism. Likewise, those states now legalising recreational marijuana could be accused of the same charge: Colorado is cultivating a tourism industry solely based around its liberal attitude to the drug. Other, more conservative Rocky Mountain states could be asking themselves how on earth they could compete.

When New York City appeared to be in terminal decline in the late-20th century, plagued by social decay and violence, its neighbour state New Jersey openly courted businesses to hop across the Hudson River. Inter-state competition is nothing new.

Distinct entities
Part of the cause for concern over Delaware promoting its own interests supposedly at the expense of other states is down to a perceived weakening of the idea of states being distinct polities with their own unique interests. This was shown in the recent furore surrounding the US presidential election, where Donald Trump won enough states to win the overall presidency by electoral college votes, but fell over 2.5 million votes behind Hillary Clinton in the popular contest.

Many have railed against the result on the basis that the overall popular vote should matter more than the electoral college tally. But whatever the correct decision on this is, the fact that such a system – where states poll their own residents and return their results as one unified vote – suggests a specific understanding of how the states within the US should be viewed.


of US-based Fortune 500 companies are incorporated in Delaware


companies were registered in Delaware as of 2015


Delaware’s flat fee franchise tax

States, according to this system, have their own distinct interests: a majority of Pennsylvanians voted for Donald Trump, supposedly as a result of Pennsylvania’s specific interests. But those who would favour the national popular vote as the decider of presidential outcomes have a different – and indeed, increasingly popular – view of how states operate. US states, in this view, are not distinct polities with their own discernable interests – rather, they are simply administrative districts of the federal government.

This latter view, of course, would condemn Delaware’s enticing of corporations away from other states as unjust or at the very least unfair. On the other hand, the former view – that states have their own interests and they are expected to exert them – would hold Delaware’s policies as being entirely legitimate. However, it is important to note there are certain areas in which states already cannot compete, such as those where it is specifically banned by the US Constitution. This includes, for instance, the levying of tariffs on other states or efforts to disrupt commerce flowing through one state to another.

Place in history
Any union of states often faces such trouble. The EU is overcome with intrastate rivalry on issues from different tax regimes to attitudes towards trade with China. Northern EU states are, typically, more open to Chinese trade, while southern states, such as Italy and Portugal – which still hope to preserve their struggling textile industries – generally take a harder stance. The EU often tries to standardise regulations across states, but this is usually met with much resentment.

The EU also specifically restricts the ability of states to lend public assistance to private industry – for instance, ‘bailing out’ banks is now proscribed, with banks in financial folly needing to be ‘bailed in’ – much to the chagrin of Italy.

Delaware is a small state with little in the way of natural assets, hubs of innovation or other drivers of economic growth. To this end, it is using its unique history to carve out an economic model that allows it to ensure revenue, jobs and growth. This may be at the expense of other states, but that is not uncommon within the US.

Delaware is making the most of what it has. The US states are, at least for now, distinct entities and all pursue certain economic policies at the expense of others. Delaware is just doing what states in the country have always done, and indeed are assumed to continue to do, according to the design of the United States of America.

Building the future with electronic invoicing

In the past few years, the pace of change in the electronic invoicing industry has seen steady, unequivocal growth, which has been driven mainly by the development of new technologies. Adoption of digital automation has led to year-on-year growth of between 10 and 20 percent, while Billentis’ Market Report 2016 estimated the total volume of electronic invoices worldwide would reach 30 billion in 2016. By digitising business processes such as invoicing, companies will benefit from cost savings, increased control and fraud reduction, in addition to improving the customer experience.

As noted in Capita’s 2016 Trends vs Technologies report, there is a clear disconnect between businesses recognising the benefits of technology to increase efficiencies, and businesses actually taking advantage of and implementing that technology. This slow adoption sees many businesses fail to operate as efficiently as possible.
Where investment in innovation has been made, it has typically been in the customer-facing ‘shop window’ of the business, like in marketing automation. Meanwhile, the back office has often been neglected. Herein lies the opportunity.

At , we have focused on close collaboration with our customers and, in particular, have helped them communicate the benefits of e-invoicing to their suppliers. This partnership approach, rather than positioning ourselves as simply a service provider, has seen us working with buyers and even meeting up face-to-face with their suppliers to ensure everything we do is easy to access and understand. We also offer ‘how to’ guides and films on our online portal.

These strategies have led to real growth, as one by one suppliers have been inspired by our vision and joined the network. Our business proposition is only as strong as our network, and therefore it is critical to get our customers on board with the demonstrable benefits from e-invoicing, which in turn reduces business friction. On top of this, we constantly consider which new value-added applications we can offer to our 200,000 customers, and how to leverage Tungsten’s network effect. Recently, when focusing on the difficulties vendors face when their customers pay them in foreign currencies, we created a new partnership with Payoneer, an international currency conversion platform. In so doing, we reduced the cost, time and paperwork associated with conversions to local currency.

Industry challenges
Today’s borderless, digital world presents a number of challenges to our industry. Guaranteeing data security and ensuring virtual attackers can’t exploit loopholes, break into servers and steal sensitive financial information or funds is vital for all companies – particularly in the invoicing industry, where we encourage companies to trust us with critical data on their trading activity.

Complex buying organisations are able to make payments on time, every time, as well as identify fraud or duplication

Keeping data safe from outside threats is one thing, but invoice fraud is another growing issue faced by businesses of all shapes, sizes and sectors. Fraudsters are finding increasingly sophisticated ways to intercept business processes: according to Tungsten Network’s own research, in the UK this is costing SMEs more than £9bn ($11.4bn) every year, or £1,658 ($2,095) per SME.

In the last year alone, nearly half of all businesses (around 47 percent) have received a fraudulent or suspicious invoice. Tactics being employed by fraudsters can include viruses embedded in attachments, unknown invoices attached to an email or sent by post, false changes to bank details, or sending duplicate invoices. Worryingly, the scale of the fraud is accelerating, with 54 percent of businesses now concerned about its rise and viewing it as their single biggest threat – more so than losing a major contract or a member of staff, or competitor activities.

The issue of late payment continues to pose an ongoing problem. In November, the Federation of Small Businesses launched a report into the effect of late payments on smaller businesses in the UK. It found 30 percent of payments to SMEs are made late, with 37 percent of businesses reporting that this causes significant cash flow problems in their day-to-day operations. The report suggested that in 2014, if such payments had been made on time and as promised, around 50,000 business would not have closed down, which would have in turn contributed £2.5bn ($3.2bn) to the UK economy. Furthermore, according to a survey by Atradius, around 40 percent of invoices in Europe are paid late or defaulted on. Clearly this trend is having a massive impact on the global economy.

It is critical for our industry to respond and show how it can support companies as they expand, and remove some of the hassle surrounding operating globally and making payments in different jurisdictions.

Trusted connections
Headquartered in the heart of London with offices in North America and Asia, Tungsten Corporation is a leading global supply chain enabler. We are a team of technologists, B2B commerce experts, process mavens and digital evangelists that is dedicated to accelerating global trade through the intelligent use of data and the death of paper. We have built the world’s most trusted, compliant business transaction network, Tungsten Network, and a suite of services designed to improve business outcomes for our networked firms. These include real-time spend analysis through Tungsten Network Analytics and access to disruptive supply chain financing through Tungsten Network Finance.

For more than 16 years, we have been connecting buyers to their suppliers in order to enable tax-compliant electronic invoicing. This platform currently processes $200bn of invoices in 200 countries for more than 200 complex buyers. At Tungsten Network, we aim to revolutionise the payment process through the use of unique technology that brings buyers and suppliers closer together, maximises efficiency and
improves cash flow management.

It’s strange that, while the digital revolution has touched upon the front end of most businesses, many companies have not incorporated new technology into their back office. Instead of adopting automation – which seems like a no-brainer in this digital age – fewer than 10 percent of invoices are digitised. Too many companies are still receiving invoices in numerous different formats – paper documents, PDF scans of a hard copy, or totally electronic – via post, email, web portal or uploaded directly to an accounting system.

It can even be a confusing combination of several different options. Each invoice requires a person to open, scan, and send it to the correct department, before it is filed and archived. Against this backdrop, it is not surprising mistakes and inefficiencies creep in.

In contrast, Tungsten enables businesses to fully digitalise the process by creating an electronic invoice that helps them adopt faster, smoother business practices, saving valuable time and resources (see Fig 1), as well as completely eliminating paper from the process of paying suppliers. Instead of relying on a paper-based system, e-invoicing streamlines the process and reduces the opportunity for errors and inefficiencies, which cause friction and delays in the payment process.

Complex buying organisations are able to make payments on time, every time, as well as identify fraud or duplication. They also have greater visibility of the current status of every single invoice in the system and can connect with their global supply chain in a much more transparent and immediate way. These benefits are vital in our increasingly borderless world, as companies continue to adapt to the complexities of trading internationally.

E-invoicing is becoming the norm for many of the world’s brands; around 70 percent of FTSE 100 and Fortune 500 companies have already taken their procurement, invoicing and payment procedures to Tungsten’s electronic network. This is timely, as a growing number of countries are moving towards recognising electronic invoices as legal documents, and even mandating their use over paper counterparts (see Fig 2).

Smart procurement
Businesses, organisations and governments that use the Tungsten Network benefit from unprecedented access to a wealth of data at the touch of a button. Using innovative spend analytics technology, management teams can analyse their invoice data, offering them comparisons against past spending patterns. These can then be used to uncover significant opportunities for savings, as well as optimising the procurement process. The technology can also provide useful insights into which suppliers they are spending the most money with, and where duplications may be occurring.

Smarter procurement is particularly important for public sector organisations as the taxpayer expects the government to be financially responsible. As a consequence, any foolish spending decisions can make news headlines. A recent example of this happened in the UK, when an analysis of National Health Service spending reported that, while some trusts paid less than £4 ($5) for a box of needles, others were paying £31.68 ($40).

Clearly, if this mistake had been spotted sooner, huge sums of money could have been saved. But when teams are based across multiple locations and in different departments, it is easy for duplications to occur. Essentially, this means procurement departments can miss crucial opportunities to negotiate on consistent pricing and economies of scale, which could add up to hundreds of thousands of dollars. Tungsten Network’s spend analysis technology can reduce the likelihood of these situations arising in the first place.

Given an accounts payable department of a large organisation – whether in the public or private sector – may handle thousands of invoices per month, the sums that can be saved are considerable. These computer-led systems open up a huge amount of data that can help improve future business, but this data is so vast it is impossible to analyse manually. We believe artificial intelligence offers a much more efficient solution. With machine learning, we can train computers to crosscheck items so that when a pen appears at 100 times its normal price, flags are raised and the mistake is then rectified by a real person. Currently, this process can take days.

For example, using our current spend analysis capabilities, we have helped one pharmaceutical company analyse its spending patterns on 475,000 products – a process that has found $80m worth of potential savings.

E-invoicing has the potential to greatly improve buyer-supplier relationships. As both parties can keep track of their invoice status at the touch of a button, it makes it easier to monitor what stage in the approval process an invoice has reached at any given time, without having to chase for updates. Suppliers feel reassured their invoice is being handled effectively, while this greater transparency aids the critical and sensitive working relationship between both parties.

Easing overseas payments
While our borderless world has thrown the floodgates for trade wide open, it has also presented businesses with various new challenges. Research by the Economist Intelligence Unit found the biggest pain point for companies surrounding global trade was in relation to payments: of the 500 companies surveyed worldwide, 32 percent cited making payments as a top challenge, pointing to issues arising from currency fluctuation, process inefficiency, limited payment visibility and bank fees.

Companies can easily come unstuck when valuable working capital is tied up in elongated payment processes and lost through unfavourable currency conversion rates. This is why Tungsten Network has recently teamed up with international money-transfer platform Payoneer to enable businesses to receive cross-border payments quickly, securely and at low cost, saving up to 90 percent on bank transfers. Through the Tungsten Network platform, businesses can now receive bank transfers from their international clients and customers as if they had a local bank account – meaning, if a client pays in dollars, a supplier in the eurozone will receive each payment in euros. This removes much of the stress and complexity from making payments across different markets.

Companies can easily come unstuck when valuable working capital is tied up in elongated payment processes

Another issue can be ensuring invoices are compliant in different countries and are meeting the relevant legal requirements. Nowadays compliance is a moving target as governments are constantly changing the rules and countries or regions each tend to have their own set of criteria. Again, this is where Tungsten Network is uniquely positioned to help: its business transaction network is tax compliant in 47 countries, and our teams are constantly abreast of changes in legislation.

Necessary security
Guaranteeing data security and ensuring virtual attackers cannot exploit loopholes, break into servers or steal sensitive financial information or funds is vital for all companies. The amount of highly sensitive customer information on business transaction networks means this is a particularly critical issue within this sector.

Earning our customers’ trust and ensuring the security of their data is one of our top priorities and at the heart of everything we do. Every day, Tungsten Network deals with highly sensitive customer information, and takes its responsibility to keep it safe very seriously. The success of our network relies on its confidentiality, availability and integrity. To guarantee these, Tungsten Network advocates and is certified to ISO 27001, an internationally recognised minimum standard on data security. This means those businesses that transact through the network can be confident their data is safe and they have not been exposed to any additional risk by using the platform. Tungsten Network also requires any data centre it uses to have the same certification.

E-invoicing can also eliminate the possibility of invoice fraud, thus shifting the responsibility for checking an invoice from your finance team to a highly sophisticated, automated-service provider. Tungsten Network’s technology doesn’t just check the invoice, it creates it – and only after ensuring that all the data inputs are compliant with a given country’s regulations, and the buyer’s own requirements. Only when our system validates all of this can a payment be made, thereby spelling the end of the fraudulent duplications.

In addition to automated rules, the move to electronic also makes the invoicing process much more efficient. This therefore makes it easier for your business to react to fraudulent activity once it is detected.


of businesses received a fraudulent invoice in 2016


The annual cost of fraudulent activity to the UK’s SMEs


of European invoices are defaulted on or paid late


of invoices are currently digitised


of FTSE 100 and Fortune 500 companies are in Tungsten’s electronic network

The growth of invoice financing
Supply chain finance (SCF) is a set of solutions that optimises cash flow by allowing businesses to lengthen their payment terms to their suppliers, while providing the option for their large and SME suppliers to get paid early. This results in a win-win situation for both the buyer and supplier; the buyer optimises working capital, and the supplier generates additional operating cash flow, thus minimising risk across the supply chain.

It generally involves the use of a technology platform in order to automate transactions and track the invoice approval and settlement process from initiation to completion. The growing popularity of SCF has been largely driven by the increasing globalisation and complexity of the supply chain. SCF places Tungsten Network at the heart of the supply chain, enabling the cash to keep flowing and businesses to keep growing and thriving.

Invoice finance gives businesses access to finance by unlocking vital working capital that can otherwise be tied up in unpaid invoices. For companies looking to grow, the lengthy administration or set-up processes of traditional lending can act as a barrier to funding. In addition, tighter lending criteria are resulting in more and more businesses looking to alternative finance models. Unlocking working capital is the key to growth and to maintaining a healthy financial supply chain, which benefits everyone involved.

Originally launched in 2015, Tungsten Network Early Payment has been offering flexible, transparent funding to many SMEs at the touch of a button. The mechanism is simple: submit an invoice electronically via Tungsten Network’s digital platform and get paid immediately, rather than wait until the end of the agreed payment terms for that job. There are no credit checks or administrative delays.

The system enables suppliers to get paid upfront for invoices by simply selecting an individual invoice for immediate payment. It is a low-cost and easy way to access alternative to bank finance and factoring solutions, and is offered exclusively to suppliers in the Tungsten Network. In addition, it allows suppliers to accelerate payment when they want, giving them much more control over their cash flow.

Tungsten Network Early Payment offers fully transparent funding with an advance rate of 100 percent, minus a small discount, which is significantly more favourable than the 90 percent or lower offered by similar schemes elsewhere. Furthermore, by taking advantage of early payments and through access to funding from the same platform as they transact with their clients, SMEs can introduce more control to their cash flow, choosing when to have a cash injection depending on their day-to-day circumstances.

As well as Early Payment, Tungsten is broadening its network solutions to include receivables financing and payables financing. More suited to larger enterprises in the SME bracket, this will support businesses looking to scale up their operations further.

Thousands of businesses now use Tungsten Network Early Payment to access the cash they need at the press of a button, eradicating the perennial SME bugbear of being kept waiting for weeks, or even months, for the payment of invoices. Alonso Jose da Silva, an International Technical Manager, explained: “Tungsten Network Early Payment is easy to use and understand. We do not take advantage of it on a regular basis, but on a particular occasion when we needed to pay a supplier, we took early payment on an outstanding invoice and received the credit sooner. This provided us with a lot of flexibility and reassured us that our suppliers will always be paid on time, even if our clients may be late in processing their invoices.” Similarly, Michelle Burnage of Abacus Industrial Flooring said: “We would recommend Tungsten Network Early Payment system to other companies because we know how much it’s helped our situation. It’s helped us as a company to move on to bigger projects.”

Procurement efficiency
Over the next few years, Tungsten Network expects its spend analytics technology to evolve even further to achieve even greater levels of trend monitoring, using financial modelling to predict future pricing patterns and assess supply chain risks. Software and artificial intelligence will be able to assist with the buying decision process by checking prices online against existing deals with suppliers. They will also be able to offer a risk analysis of suppliers. All of these components could transform the procurement industry.

Recovering from the international financial crisis has been a slow process, and continues to worry companies across the world. In fact, much of the eurozone and many developing countries are stagnating: 2017 is surrounded by further economic uncertainty, with policymakers refering to this economic performance as the ‘new mediocre’. As a result, businesses need to be careful and look for efficiency benefits wherever they can find them.

Ever tighter margins, volatile currencies and fluctuating global commodity prices
mean no organisation can afford to waste time chasing for payment

Ever-tighter margins, volatile currencies and fluctuating global commodity prices mean no organisation can afford to waste time or money chasing for payment or clarifying information on invoices. Neither can they afford to waste money through overpaying on products. Smarter procurement is an easy way to make cost savings that can multiply through an organisation.

While the digital revolution continues to embed itself in more businesses processes, the importance of building and maintaining trust is vital and remains one of the biggest challenges facing our industry. Cybercrime is growing apace and any company that operates in the digital space will need to constantly reassure its customers their information is safe. Our network is totally reliant on customers buying into the model and trusting it implicitly. In the coming years, we must continue to guarantee to our customers that our digital processes and the valuable information that passes through the network are properly administered, and that we are agile and responsive to any security threat.

In addition, trading globally and ensuring invoices are compliant is only going to get more complex, especially when non-compliance is regarded as tax evasion. Keeping abreast of developments across the world will be critical for our industry. We are committed to being at the forefront of the industry and, in some cases, even intervening to encourage the take-up of e-invoicing. For example, several Indian states have changed legislation to allow invoices to be signed off digitally – this has been the result of Tungsten Network’s extensive negotiations with the relevant authorities. India’s entry into the world of e-invoicing reflects its rising position in global business and the importance of providing access to the latest technology in emerging markets in order to drive economic growth. Tungsten Network’s focus on achieving compliance in India is a direct response to customer demand, as increasing numbers of businesses are seeing opportunities in this fast-developing market.

The issue of late payment never seems to go away as companies continue to use payment as a means of managing their working capital. For this reason we foresee invoice financing will continue to grow as companies rely on it to keep their cash flow healthy. According to Nesta, the alternative finance market grew to £3.2bn ($4.04bn) in 2015. It currently makes up 12 percent of the market for lending to small businesses in the UK, and we would expect invoice finance to continue to gain ground.

In the future, technology will only become more engrained in business processes, reducing friction around the globe. E-invoicing is already helping businesses to seamlessly manage the accounts payable process, improving relationships between buyers and suppliers. By improving cash flow in the supply chain, financial technology such as ours is also increasing confidence and enabling growth. Tungsten Network’s approach to digitising business is about constantly reviewing what customers need, so our technology is always changing and developing to reflect our reason for doing business: to be the world’s most trusted business transaction network.

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Cashing in on blockchain technology

The technology behind bitcoin, known as ‘blockchain’, has been touted as revolutionary, holding the potential to transform anything from the insurance industry to international aid. However, it is in the hands of central bankers that the technology could reach its true potential.

Central banks around the world are currently devoting their resources to research the concept of a central bank digital currency – a kind of ‘digital cash’. The reason for its potential power: it gets to the heart of the function of a central bank, and, indeed, the very nature of money. “Prospectively, it offers an entirely new way of exchanging and holding assets, including money. It’s an irony, therefore, that some of the economic questions it raises have actually been around for a long time, for as long as economics itself”, said Ben Broadbent, Deputy Governor of the Bank of England, in a earlier this year about the possibility of a central bank issued digital currency.

The nature of money
Of course, electronic money is nothing new– in fact, the majority of money in our system exists in electronic form. However, a key difference between electronic money and a possible digital currency is the latter would allow people to transfer money to one another without the need for a commercial bank. People could have a digital wallet, of kind, and move money in a secure way without commercial banks acting as the middleman – much like ordinary cash.

This is a crucial difference, because commercial bank money and currency are different types of capital. Mrassociates spoke to David Clarke from Positive Money, an organisation campaigning for monetary reform that supports the idea of a central bank issued digital currency. Clarke explained how commercial bank money differs from cash: “The money in your bank account is just an IOU from the bank, created from thin air when the bank issues a loan. It doesn’t correspond with any physical currency or commodity, and it’s technically the property of the bank.” A central bank issued digital currency, on the other hand, would be an extension of cash – a direct claim on the central bank. It would, by definition, be fully protected from default.

Individuals have been excluded from… hold[ing] such a digital currency, but this could change thanks to blockchain technology

Not only is currency a different type of asset, it enters the economy in a different way. While central banks have control over the creation of physical currency, the amount of commercial bank money in the economy is by decisions made by the commercial banks. Banks inject fresh money into the economy each time they extend a new line of credit, and thus the quantity of commercial bank money in the economy depends on the willingness of banks to lend. Central banks, however, can only influence money supply indirectly, through monetary policy and regulation.

In a sense, a central bank currency in digital form already exists, as commercial banks can already hold accounts with ‘central bank reserves’. These reserves are the currency deposits that form the basis of a banks’ payments system. When a customer withdraws cash, commercial banks must be able to provide real currency on request, so they need to hold enough in reserve to meet the demand of withdrawals. Similarly, when someone makes a transfer, banks settle payments using reserves.

Individuals, however, have so far been excluded from the ability to hold such a digital currency, but this could change thanks to blockchain technology. If central banks issued a digital currency that was open to all, people could hold their money as digital currency rather than in a commercial bank – with potentially radical implications. For example, if everyone banked with the central bank, “in principle, it would… make for a safer banking system. Backed by liquid assets, rather than risky lending, deposits would become inherently more secure. They wouldn’t be vulnerable to ‘runs’ and we would no longer need to insure them”, said Broadbent.

Set for takeoff
Digital currency could pave the way for ‘helicopter money’ being used as a viable tool by central banks. According to Clarke: “The idea of helicopter money has got a considerable intellectual pedigree – the term was actually popularised by Milton Friedman, who imagined the central bank dropping dollar bills from the sky as a way of boosting spending. But technological innovation has given the idea new relevance.” The concept of helicopter money has most recently been brought into the spotlight after being by Ben Bernanke as a possible addition to central bankers’ tool kits.

In economic terms, helicopter money is a tax cut financed by a permanent increase in the money stock – an action that could be administered in order to combat deflation. It would technically be possible without a digital currency, but given a scenario where each person held a digital cash account, the central bank could easily dispense a newly created digital currency to every citizen. Each person’s account would simply be credited with fresh electronic money in a move akin to ‘helicopter drops’ spreading newly printed money.

Helicopter money is, of course, an unconventional monetary policy, and administering it would come with a host of complications (Mrassociates, however, has argued that it could be useful if administered in a disciplined and moderate form). It has similar economic underpinnings to quantitative easing, but Clarke argues it can avoid one of the key failings attributed to asset purchase programmes: “Compare it to how the government injects money into the economy through quantitative easing ­– one of the main effects of which is to inflate the wealth of those who own pre-existing assets.” It may sound drastic, but there was a time when quantitative easing was entirely off the cards, so helicopter money should certainly not be dismissed along the same lines. Moreover, with the emergence of blockchain technology, the discussion is gaining momentum.

A brand new tool
The nature of the change created by issuing a digital currency would depend on many factors. For example, if digital cash did not acquire interest, it is unlikely that many people would convert their deposits. However, in a scenario in which it did acquire interest, the macroeconomic effects could be huge.

The digital currency revolution could… eliminate commercial bank money altogether; leaving only paper cash and digital currency issued by the central bank

The Bank of England released a working paper earlier this year investigating the idea of introducing an interest-bearing, digital currency. The authors, John Barrdear and Michael Kumhof, note that there is “very little historical or empirical material that could help us to understand the costs and benefits of transitioning to such a regime, or to evaluate the different ways in which monetary policy could be conducted under it”. In short, it has never been done before.

To forecast such a scenario, the pair created a model based on the US economy, envisaging a world in which digital currency makes up 30 percent of the GDP, but ordinary commercial bank money continues to exist. Under such a set-up, the dynamics of the financial sector would see a dramatic change. Ordinary banks would have to compete with the central bank for deposits in order to maintain cash flow; offering relatively higher interest rates as a result. Their modelled scenario comes out with many notable implications, including the economy gaining a three percent boost to GDP. Perhaps most interestingly, the central bank would acquire an entirely new monetary tool.

Because the digital currency would be held directly by households and businesses, changes in interest rates would have a direct effect, meaning when central banks changed rates it would affect the real economy directly. This contrasts to policy rates as they are currently administered, which only work by indirectly influencing the banking system. The new tool would complement the policy rate, as both would exist simultaneously. Control over the digital currency could help central banks respond to deviations from target inflation. For instance, during an economic expansion they could increase the spread between the policy rate and the (lower) digital currency rate in order to hold back inflation.

Going all in
The digital currency revolution could go even further and eliminate commercial bank money altogether; leaving only paper cash and digital currency issued by the central bank. This could occur if there was a full shift in deposits from commercial banks to the central bank and electronic commercial bank money was no longer used to make payments. This would move the system towards what is known as ‘narrow banking’ – a concept that has a long intellectual history, and notably, was favoured by David Ricardo and Adam Smith. The concept gained ground during the Great Depression of the 1930s, when a group of economists at the University of Chicago proposed the ‘Chicago Plan’. The famous plan, supported by Irving Fisher, envisioned an end to the destructive boom and bust cycle. Under the plan, only the central bank would be able to issue new money, reducing the role of banks to pure intermediaries. The idea has experienced a resurgence following the global economic crisis of 2008, with economists exploring it as an opportunity to bring about an end to the financial instability that shook the global economy.

A by the International Monetary Fund published in 2012, named The Chicago Plan Revisited, lent further support to the concept, claiming: “The Chicago Plan would indeed represent a highly desirable policy.” The paper further explains how an economy would look under such a plan: “Credit, especially socially useful credit that supports real physical investment activity, would continue to exist. What would cease to exist however is the proliferation of credit created, at the almost exclusive initiative of private institutions, for the sole purpose of creating an adequate money supply that can easily be created debt-free.”

Positive money argues such a scenario – in which central banks have control over money supply – could have far-reaching benefits, and be achieved through the means of a central bank digital currency. That said, Clarke explained they do not advocate implementing digital cash all at once: “We think the starting point is for the Bank of England to introduce a certain amount of digital cash. It could offset this over time by reducing the amount of bank-created money by raising reserve ratios. Under the system we propose, decisions about how much money is created – and when it is created – will be a matter for the monetary policy committee.”

Never say never
The potential implications of a central bank digital currency are certainly radical. However, the concept is quickly gaining momentum, with research taking place in Germany, England and China. In Sweden, the central bank has initiated a debate over the issuance of a digital currency with the stated aim of making a decision within the next two years. Meanwhile, Switzerland is set to hold a referendum regarding a potential ban on commercial banks creating new money after a petition reached 100,000 signatures. Iceland has also issued similar

Furthermore, private banks themselves have taken an interest in harnessing blockchain technology, which has the potential to undermine the central bank’s role as a trusted third party through which transfers can be made. Moreover, a decline in the use of ordinary cash is rendering the power of central banks to issue cash progressively less relevant. As Clarke said: “It is a radical idea, but we are living through a time where the nature of money and the nature of cash is changing rapidly. In our lifetimes, we will probably see the demise of physical cash as we know it, and central banks will have to respond to that. We have to ask ourselves the question – are we prepared to completely give up control of our money and means of payment to the private sector?”

Bank of Japan releases optimistic outlook

On December 20, the Bank of Japan announced that policy rates would stay put, in addition to releasing forecasts for a rosier future for the economy. The bank’s statement a “moderate expansion” of the economy and that domestic demand would continue its positive trend, with “a virtuous cycle from income to spending being maintained in both the corporate and household sectors”.

While an improved outlook could signal an end to Japan’s era of expansive monetary policy, commentators
remain hesitant

Despite administering a large-scale monetary stimulus, the bank continues to grapple with extremely low inflation, which is currently around zero percent. This struggle appears to be coming to an end, however, with new forecasts predicting that inflation will reach its target of two percent in the medium to long term.

The bank will continue to apply its negative policy rate of -0.1 percent, with long-term interest rates remaining at “around zero” percent. Furthermore, the scale of monetary stimulus is to remain steady, with government purchases of government bonds, equities and corporate bonds to continue at a yearly pace of JPY 80trn ($679bn), JPY 6trn ($50m) and JPY 3.2trn ($30m) respectively.

The improved outlook has been attributed in part to expectations that exports will increase in response to healthy overseas economies. Domestic demand is also expected to receive a further boost due to the continued effects of the government’s fiscal stimulus, as well as positive financial conditions. The bank appeared optimistic about the nation’s business outlook, noting that business fixed investment is on an upward trend due to high corporate profits and improved business sentiment.

While this improved outlook could signal an end to Japan’s era of expansive monetary policy, commentators remain hesitant. , Bill Adams, Senior International Economist at PNC in Pittsburgh, said: “Until Japan shows signs of a sustained and self-reinforcing cycle of rising wages and consumer prices, the Bank of Japan will leave policy in its current, highly expansionary stance.”

It is therefore unsurprising that the bank did not hint at any future tightening of policy, with its statement that the monetary stimulus would continue “as long as it is necessary for maintaining that target in a stable manner”.

Ukraine nationalises largest bank

PrivatBank, Ukraine’s largest deposit holder, has been nationalised in full after being declared insolvent by the National Bank of Ukraine. On December 18, the Cabinet of Ministers of Ukraine approved the takeover, leading the government to acquire 100 percent of the bank’s shares.

The state is to contribute to the recapitalisation of Privatbank and take on full control of its operations, with Ukraine’s former finance minister Oleksandr Shlapak taking over as president of the bank.

Privatbank currently holds the deposits of 20 million Ukrainian citizens, making up almost half of the Ukrainian population

A by the Ministry of Finance of Ukraine and the National Bank of Ukraine claimed: “This move will ensure the security of funds and savings deposits placed with this bank, help avert systemic risks to the banking system, and will pave the way for preserving financial stability in the country.”

The bank currently holds the deposits of 20 million Ukrainian citizens, making up almost half of the Ukrainian population. Notably, this includes the deposits of 3.2 million pensioners, all of which will remain fully protected. “They all will have unrestricted access to their accounts”, the statement explained.

Privatbank is the most systemically important bank in Ukraine, and has been widely regarded as being too big to fail. Ukraine has experienced ongoing struggles relating to the health of its banking sector, which threaten to further exacerbate the nation’s fragile economic state. The Ukrainian economy remains unstable amid the nation’s ongoing conflict, and was recently hit by a sharp recession, wiping out 17 percent of GDP over the course of just two years.

The decision to nationalise PrivatBank was made in response to a worsening in the state of its balance sheet, which has seen ongoing solvency issues. The bank’s precarious position was brought on by irresponsible lending and related capital losses. It is struggling under the weight of billions of dollars of unpaid insider loans, which have burned a $3.39bn hole in its finances.

Addressing the fragility of the nation’s financial sector has been a key target of a $17.5bn loan programme from the International Monetary Fund. Over the past two years, the Ukrainian Government has been undergoing a major cleanup operation, and has shut down more than 80 banks that were allegedly involved in illegal activities.

Ukrainian Finance Minister Oleksandr Danyliuk : “The government will allocate funds to stabilise the bank, and the required amount of financing for the recapitalisation of the bank have been earmarked in the budget… The budget parameters will remain within the targets set by the IMF programme.”

The takeover of the nation’s largest bank marks a crucial move in ensuring stability for the country’s future, as a crisis in PrivatBank would have had far-reaching implications to Ukraine’s already struggling economy.

US launches trade complaint against China

On December 15, the office of the United States Trade Representative (USTR) filed a new complaint with the World Trade Organisation (WTO), claiming Chinese trade management of rice, wheat and corn is creating an uneven playing field for US exporters.

This marks the 15th time in seven years that the Obama administration has filed a challenge against China to the WTO, and comes at a time when trade relations between the two countries are fraught with tension and trepidation for the future.

According to a , US Agriculture Secretary, Tom Vilsack, said: “When China joined the WTO, it committed to implementing an agriculture regime that would facilitate market access consistent with international obligations. However, China has frustrated exporters through generous price support and unjustified market restrictions.”

The US claims that Chinese management of its tariff rate quotas (TRQ), is “opaque and unpredictable”, thus limiting access to Chinese markets for exporters.

TRQs are a type of trade measure that, if properly enforced, should provide lower duties on a certain volume of imported grains every year. However, according to the same USTR press release: “China’s application criteria and procedures are unclear, and China does not provide meaningful information on how it actually administers the tariff-rate quotas.”

According to the US, this unreliable method of administration has resulted in an unfair trade barrier, without which China would have imported an extra $3.5bn-worth of crops during 2015 alone.

United States Trade Representative Michael Froman said: “Today’s new challenge… demonstrates again the Obama administration’s strong and continued commitment to enforcing the rules of global trade, and protecting the interests and livelihoods of American farmers.”

Also on December 15, the US put extra pressure on a previous challenge against China. This complaint, which was launched in September, accused China of creating artificial incentives for Chinese farmers to increase production of wheat, rice and corn. The US requested that the WTO establish a dispute settlement panel, in a move that will take the challenge to the next stage after initial consultations failed to resolve the issue.

The USTR has so far won every trade dispute it has raised with the WTO, implying that this latest claim is likely to succeed. Nevertheless, what remains uncertain is how the trade landscape will unfold in the future as US President-elect Donald Trump takes the reins. Such disputes such may rise in frequency, particularly after Trump’s campaign rhetoric hit out at China for allegedly creating an unfair advantage in trade.

Amid speculation about an impending trade war between the US and China, the WTO will be forced to mediate between the two countries, putting its role further into the global spotlight.

HSBC Retirement Monitor helps bridge Hong Kong’s protection gap

Hong Kong’s mortality protection gap is now more than $500bn, according to reinsurer Swiss Re. How can this gap be closed? The issue isn’t just life cover, explains HSBC Insurance’s Candy Yuen. It’s also about coverage for critical illness, and making sure you don’t outlive your retirement savings. It requires thinking about protection in a holistic manner. She discusses the latest research HSBC has conducted on this issue in Asia, and the online tool the company has launched to help people save more. Based on real retirees’ spending patterns and your personal expectations, the HSBC Retirement Monitor can help Hong Kongers understand how much they need to be saving – and how soon they need to start.

Mrassociates: Hong Kong’s mortality protection gap is now more than $500bn, according to reinsurer Swiss Re. How can this gap be closed? Joining me is Candy Yuen from HSBC Insurance Hong Kong.

Candy, it’s a big question, but what can be done?

Candy Yuen: Yes indeed. The mortality gap in Hong Kong per working person with dependents is ranked the second highest in Asia.

According to our own study, more than three in five people with self-paid cover do not know the actual pay-out from the policies, or they don’t think that it’s enough.

The coverage is not only about protecting your loved ones when you die; we also need to consider coverage for critical illness, or outliving your savings at retirement. So we also have to think about protection in a holistic manner.

At HSBC, we’re committed to address this mortality gap issue, by creating the awareness and also offering the right products. We launched the HSBC Retirement Monitor last year, to help people plan for retirement, and we also launched, for example, a comprehensive critical illness plan, and a term online product – what we call the HSBC Term Protector. A very simple term online that you can buy within five minutes, without any need for medical underwriting.

Mrassociates: As you say, you have launched this retirement planning tool – an award winning retirement planning tool – tell me more; how does it work?

Candy Yuen: So it’s basically to answer the fundamental question: how much do I need, when I retire in Hong Kong? And we try to give how much you need for basic retirement life, comfortable, and affluent retirement life. Based on real data, statistics, and analytics on retirees’ consumption behaviours.

So a single person retiring needs about $3,000 per month, as their expenditure for a comfortable retirement. So: think about that. The average woman’s life expectancy is about 86 years. So if you want to retire at 60 years old, you have 26 years needing $3,000 per month: even if you exclude inflation you’re talking about a million US dollars that you have to plan.

When you start having these conversations, then you start to understand: wow, you know, I do need to start planning, perhaps now in my 30s, rather than in my 50s.

So having this awareness, to start planning – or at least having the conversation earlier – definitely helps.

Mrassociates: But is consumer behaviour changing? Are people saving more?

Candy Yuen: I think people start to at least be aware that this is a problem, or a challenge that they can’t just hide from. Because people in Hong Kong do care deeply about savings for retirement. The last thing they want is to create a financial burden for their kids or their loved ones.

However, not every one of us knows exactly how to prepare for retirement, and exactly how much we need to save for retirement and starting from when. So those are the questions that people are struggling with.

Because you either start saving earlier, and more disciplined. Or you have to adjust your realistic assumption, what kind of retirement lifestyle you’ll be having.

Mrassociates: What particular challenges do you face understanding and communicating with modern consumers?

Candy Yuen: Nowadays I think digital becomes an integral part of our daily lives. Absolute relevance is the only entry point. Because if you think about it, how many irrelevant messages do you get every day?

So, getting a better understanding in terms of how people behave, and how people think. What clicks with them. It’s absolutely critical.

At HSBC we invest heavily in customer analytics, big data, customer insight. We regularly commission a study on understanding online behaviours of our target segments, and also the broader market segments as well.

Because through this we can actually develop products that are most relevant, and also create and add value to our customers. And in this way we aim to develop the right products, and provide them at the right time, and via the right channel, as well. Because nowadays with digital technology advancement we have new media, new platforms to interact with our customers. And so that’s why we are crazy and passionate about this customer-centricity approach. Because only then we can win the hearts and the minds of our customers.

Mrassociates: Candy; thank you.

Candy Yuen: Thank you.

Fed interest rate rises amid ‘vote of confidence’

Following a unanimous decision by the Federal Open Market Committee on December 14, the Federal Reserve announced an increase of 0.25 percent in the US federal funds’ interest rate – rising to 0.75 percent. The rate increase was broadly anticipated by commentators and reflects positive momentum in the US economy – with rising inflation and an improving job market. Janet Yellen, Chair of the Federal Reserve, said the increase was in recognition of “the considerable progress the economy has made toward [the federal reserve’s] dual objectives of maximum employment and price stability”. Yellen added that it marked a “vote of confidence” in the economy.

The Fed also signalled hikes in 2017 would be more frequent than previously projected. While only two rate rises of 0.25 percent had originally been touted, the Fed announced they now expected three. Projections for the economy were also adjusted – upward from those in September – with a slight rise in the GDP forecast accompanying lower rates of unemployment. When questioned on the change in projected interest rate decisions, Yellen downplayed the shifts: “I want to emphasise that the shifts that you see here are really very tiny.”

The US job market appears to be in better shape than ever, with unemployment reaching… the lowest rate since before the global financial crisis

Some are speculating that this could mark the end of the low-rate era. Nigel Green, Founder and Chief Executive of deVere Group, said: “It is significant because it gives further weight to the considered argument that the era of very low inflation and interest rates may be ending.

“And despite the Fed appearing to want to proceed cautiously, and not threaten a constant rise in rates during 2017, many investors believe there are more hikes to come due to the strength of the U.S. economy and the likely policies of a Trump presidency.”

Yellen, however, hinted future rate increases were unlikely to pick up further pace: “We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives.”

The Fed’s statement presented a growth forecast of 2.1 percent for 2017, 2 percent for 2018 and 1.9 percent for 2019. Inflation is on an upward trend and is expected to reach the Fed’s target rate of two percent within the next two years. The 12-month change in the price index for personal consumption expenditures was almost 1.5 percent in October – up more than a percentage point from a year earlier.

Expectations of future inflation are based on the belief that the job market will strengthen further, as well as an expected wane in the effect of lower energy and import prices. The US job market appears to be in better shape than ever, with the unemployment rate reaching 4.6 percent in November – the lowest rate since before the global financial crisis.

The market response was fairly muted due to the fact rate increases were broadly expected. However, the announcement saw a five-year high in yields on shorter-dated treasuries. The dollar also rose to its highest level against the yen in 10 months, with the dollar index jumping by 0.8 percent. Furthermore, oil prices dipped, reflecting the dollar’s gain.