The “People’s Princess” as gold digger – lessons in the humanity of our hero(ine)s

Diana Spencer: Princess of Wales would have clocked 50 this year if her life had not been so ultimately cut short in Paris on an August night in 1997. So I found myself reflecting on the near apotheosis that was going on in the media about what a Princess Diana at 50 would have meant. So I asked myself: who was Princess Diana & what is the appropriate narrative for her life? Is it that of an intellectual lightweight, a lady who took her husband “to the cleaners” in a divorce receiving $28 million upfront & $600,000 annually and who seemed to have a less than ideal taste in men (some of whom were married). A possible “home wrecker” and a member – after her divorce – of the jet setting, hard partying crowd with the likes of Dodi Al Fayed (playboy extraordinaire still on an allowance from “daddy” at 42). Or is the proper narrative that of the “people’s princess”: who publicly hugged an AIDS sufferer, highlighted the horrors wrought by landmines and showed genuine interest in poor & oppressed people all over the world. A princess who brought people closer to royalty and demonstrated warmth often lacking in that institution. In reality, my question is sort of a “trick question” as she fit both of the above narratives. She was a good person but also an acknowledged adulteress (with James Hewitt) and I think this does not in any way remove or distract from all the great things she did for so many people.

This trend of us deifying our heroes: expecting them to be something other than human and subjecting them to unrealistic standards is disingenuous, naïve and unrealistic. George Washington was the father of his country, refusing to rule for life as a quasi-monarch when he could have done so. But he was also a man of limited military abilities & success and who was frankly not a very bright fellow. Martin Luther King was alleged to be an adulterer but he inspired a whole nation to seek change and justice in a non-violent way. These people – and many more of their stature – were giants among men and they all lifted the generations in which they lived. Their indiscretions or moral failings did not make them any less great but it demonstrated that even the noblest of humans is after all still human and that perfection is neither necessary nor sufficient for greatness.

I believe setting the records straight about great historical figures is not about “speaking ill of the dead” or even about striving for historical accuracy, it is rather to help us as citizens to have a more balanced and nuanced view of our leaders. Recognizing and discussing the flaws of people referred to as “founding fathers”, “queen of hearts” etc will enable us cut our less illustrious political leaders the required slack they deserve and need! Time after time, political candidates – especially in the United States – must continually bow at the altar of the false gods of piety and unrealistic expectations. Is it really important for us to know whether Bill Clinton smoked marijuana as a college student barely out of his teenage years? Did that have any bearing on his qualifications to lead wisely and make good decisions 30 years after? Adultery should not be condoned but isn’t there something weird in ascribing a consensual affair as “high crime & misdemeanor” (the criteria for impeachment)? Must everyone striving for political office have a wife, kids and dogs that look like images out of Christmas cards?

I think these are questions citizens and electorates need to ask themselves as they elect their leaders. The world is becoming increasingly complex with near intractable problems, so we need leaders willing to plunge headlong into discussing these problems and finding workable solutions. We don’t need them distracted by fears that someone will publish pictures of them at a fraternity party 30 years ago or unearth sordid details of amorous liaisons now confined to the dung heaps of history. We need to stop the deification of our leaders, accept their minor failings and concentrate on their abilities & passion for solving the great problems facing humanity. As the “great” political comedian: Bill Maher once said when comparing Presidents Bill Clinton & George Bush: “there is more to the presidency than not getting blown”.

The false security of state-sponsored “land grabs”

While the jury is still out regarding whether the recent IPO of the Swiss commodity trading giant: Glencore represents the end of the recent bull run in both soft and hard commodities, some trends are fairly settled. First, is that long-run demand for agricultural commodities outstrips current capacity with major capex investments needed in the coming decades to fix this imbalance. Secondly, food prices over the next half century will be broadly higher than they have been in the last half-century. Lastly, there will be increasing imbalance between where food can be effectively grown and where it is most needed. China, South Korea, the Gulf Cooperation Council (GCC) amongst other places are examples of places that will definitely experience increasing food import bills. This trend has started with the Saudis: as they have decided to phase out the growing of wheat and revert their policy of wheat self-sufficiency as a response to declining water tables in the country. While it may seem transparently absurd in the 1st instance to attempt to turn desert land into a wheat growing region. A better understanding of food and its role in politics will make the initial decision to grow wheat more understandable.

Over the years, governments have tended to fall when their citizens are unable to feed themselves. You can often get away with toying with people’s freedoms but you are best advised to make sure their bellies are filled! Moses in the biblical era faced a rebellion and may have been toppled in a “coup” if it were not for the miracle of manna (“heavenly food”) falling from the sky! The French revolution was as much a reaction to the rising cost of bread as it was a desire for greater political self determination. Given this history of food driven revolts it is therefore understandable that many governments with high food import dependence are fretting over their security and are seeking to acquire vast tracts of land across the world, especially in Africa.

There has been increasing reports of massive “land grabs” in various African countries (Ethiopia, Sudan etc) by various state-sponsored entities with a main aim of exporting the products of such farms to the countries sponsoring these land purchases. While a lot of people have written about the human and property rights issues involved with such purchases, my view on the topic has more to do with how secure this strategy will be for these food dependent countries.

While I completely respect the drive of these food import dependent countries to act to protect their interests, I think they may be falling into the fallacy of mistaking ownership with control. Import dependent countries can own millions of hectares of land in agricultural producing countries and it is unclear at best whether these assets will prove useful in a crisis. This is because while foreign governments or foreign entities may own farms overseas, it is the governments of host countries that determine if exports will be allowed or not. And history has shown over and over again (from the Biblical story of Pharaoh’s wheat storage during the “years of plenty” to the Russian wheat export ban of 2010) that governments will act primarily to first secure food for their own citizens. For example, ownership and export plans meant next to nothing in 2010 when the Russian government imposed an export ban on wheat following after droughts and fires. That means a government of X foreign country could have invested billions of dollars in farmland and export infrastructure and they would be of no value just at the time that they needed it the most. Generally, I struggle to see how continuous exports of food will be sustainable without domestic demand being fully met regardless of what ownership documents and supply contracts say.

In conclusion, while I do not have an answer for what the best strategies for food import dependent nations are. I am quite convinced that buying up huge swaths of land overseas will be of little value in ensuring their food security in times of crisis. Their energy, time and money are better spent in ensuring more efficient global agricultural markets

Feeding the world – The Next Big Thing?

Every now and then it seems the world develops some level of collective hysteria around an emerging or ever-present scare topic with these “scary issues” running the gamut. During the cold war, we had the threat of a nuclear Armageddon, the world fretted about fuel supplies during the Arab oil embargo of the 70s, the 90s brought with it the threat of a world where nothing works because of a nice little bug called “Y2K”. The 2000s was not about to be outdone as that decade brought a litany of worries including: escalated global terrorism, potential global financial ruin due to some folks deciding to buy houses they could not afford and a worry about “peak oil” that led to crude oil reaching highs of $140+ per barrel. It seems this decade may be one of genuine worry regarding the world’s ability to feed itself in the long run.

When a magazine with the gravitas of Foreign Policy decides to wade in the issue with no less than an entire edition tagged “the Food Issue”, I guess we all have to sit up and listen. The articles in the edition (click here) were particularly insightful as they brought to light – in a cohesive and succinct way – the myriad of interlocking factors that are contributing to make this a real threat and why the threat of a hungry world is not one to be ignored or sniffed at. The article illustrated various tell-tale signs of the world’s worsening food situation: ranging from land grabs in Sub-Saharan Africa to grain riots in Asia to export bans placed on food in producing countries (e.g. the wheat export ban initiated by the Russian government last year)

What I find most intriguing about the world’s food situation is the multi-faceted nature of the factors acting simultaneously on both the demand and supply sides of the “food equation”. The demand side for food is driven by many things among which include the steady growth in human population: the world is projected to be home to 9 Billion people by 2050. Accompanying this headline population growth is income growth. And there are few relationships that are more certain than that between calorie intakes and income as people transit from starvation to maintenance rations, to comfortable diets and almost surely to indulgent consumption (seriously, no one needs a McDonalds Triple-Decker Burger or fine cuts of prime steak to survive or maintain healthy growth). As China, India and other lower-income countries become middle and/or high income economies, their protein intakes are expected to rise and demand for livestock will spike. And due to the weird construct of the Agriculture-Industrial complex, it seems cows and poultry can’t seem to get enough corn in their bellies. So greater absolute and relative quantities of the world’s grain output will be diverted to feed animals.

If diverting vital grain to feed animals rankles you, then it may be interesting to know that cars have started and are likely to continue “eating” corn in increasingly greater volumes. Renewable energy standards will see more ethanol use in cars as countries across the world enact clean-fuel standards that mandate minimum ethanol levels. What this means is that: 1) there will be increased competition for the world’s grain by the world’s cars (which we will continue to buy more of!) and 2.) the price of crude oil – which is getting scarcer as well – will set some sort of floor for the price of corn. As at higher oil prices, farmers will be incentivized to divert more of their output to ethanol production until equilibrium is reached that takes this incentive away. So consumers, brace up for a period during which the price of what goes into your car’s tank may very well determine the cost of what goes into your belly!

If the demand picture seems somewhat dire, the supply picture does not seem to be cutting the world any slack. Probably the biggest challenge to the supply picture is the rearing ugly head of climate change: droughts are getting longer and more frequent while floods are becoming more commonplace and severe. Both of these scenarios do not bode well for the planting process. Drought in Russia in 2010 delayed the planting season, which led to sharply reduced output and disruptions across the world. An equivalent drought in the United States would have had the same impact. Worsening climate conditions are also happening at a time when the world may be hitting the ceiling on farm productivity that is the result of a natural drop-off after years of gains and possible “over farming” of land and nutrient loss in major planting regions of the world.

Although I am no expert in this area (or anything for that matter), I’d wager that given the expected tightness in supply and boost in demand it may be prudent to be long food and the infrastructure and support systems required to deliver it to our bellies!.

“You just got Taylorized” – Why the urge for efficiency may be ruining society

I was sitting in an Operations Management class last week and my really young and energetic professor kept on going on about ”Taylorism” and how complex processes in various sectors can be broken into smaller, repetitive steps and how this makes for more efficient processes. (for the “uninitiated”, “Taylorism” refers to the concept of scientific management of processes and is named in honor of Frederick Winslow Taylor: the father of the industrial engineering). He then proceeded to show a video documenting the implementation of this concept in fields ranging from automobile manufacturing to the preparation of hamburger. Frankly, I thought that breaking the manufacturing of a car into discrete, easily-repeatable processes was cool but I became slightly disturbed with its application in producing hamburgers (with the exact number of ketchup and mustard squeezes on each bun pre-programmed, you can’t make this stuff up!!). That was the highlight of the class as I soon “zoned out” afterwards and started to think about the broader societal impacts of Taylorism and this near-maniacal drive for standardization. While I agree that Taylorism and standardization has enabled mankind make remarkable progress, ensured greater consistency across units of the same product and made every product more affordable. I think the drive for standardized processes - with its chief attendant consequence of “de-skilling” the labor force - has a perverse effect on society, hence it should be viewed with the seriousness that it deserves by policy-makers and businessmen alike.

A key result of increased standardization is the “de-skilling” of the labor force. Starting with Henry Ford’s brilliant move to an assembly line system which ended the era of skilled craftsmen building cars piece by piece and made it affordable. The blue collar labor force has been on a steady march to “de-skilling” as each person on the line needs to only know a particular, simple repetitive process and stick with it. At some point the cook at the local deli needed to know how to make a hamburger and determine –often through trial and error – the exact mix of ingredients that made a good hamburger. Now the dude at McDonalds only needs to follow a detailed guideline that allows for little discretion, in fact he may be only responsible for adding a few squirts of ketchup to the bun as someone else adds the meat!! Its difficult to argue that someone who spends all his day only squeezing ketchup on a succession of buns has any tangible skill, even if he does it for ten years straight. He is probably as good as he was squeezing ketchup as he was on his first day at work, ten years back! This makes labor very replaceable and hence cheap, which works well for companies as they can continuously capture more of the surplus and hand same to shareholders and other providers of capital.

While this seems great at face value: increased standardization leads to greater efficiency and the economy benefits, right? It is however not that simple because the “de-skilling” of increasingly greater array of jobs will lead to stagnation in wages as workers will not be able to demand higher wages because they can easily be replaced with young, novice workers who can also read manuals and operating procedures. The effect is the stagnation in blue-collar wages that is evident in the United States in the last two decades, which has in turn placed pressure on the middle class and widened the inequality gap. While I am by no stretch of imagination a socialist, it is a little bit disturbing to see stagnation in real wages for the lowest income section of society in an era of rising food and energy costs. There is a risk of a “permanent underclass” being created from people whose jobs have been “de-skilled” and this may breed resentment, envy and a general disenchantment with the economic system. The last thing business people and policy makers need on their hands is some sort of class warfare, no one wants that and we all have to work to ensure that this does not happen.

While I have no concrete suggestions of ways of reversing or reducing this trend,, I still believe it is a threat that needs to be taken seriously by society. Efficiency and standardization are great but are we pushing it too far to an extent that it becomes too costly for society as a whole. At the very least, I am frankly disturbed to see that my food has become a sheet in the book of standard operating procedures issued by Hamburger University!!.

A match made in heaven – The case for a JPM-Standard Chartered merger

Sitting in my room reading news reports regarding the performance of JP Morgan and Citigroup, part of the triumvate (alongside Bank of America) that dominate banking in the United States (at least the commercial and retail variant of it). I started to think about which of the banks (i.e. Citi or JPM) is the dominant or better one. I don’t know why this is what I spend my free time thinking about, I guess you can blame the fact that I am a nerd, I spent ungodly hours playing monopoly as a kid or that I currently go to business school and we are encouraged to bask in delusions of grandeur. You are free to pick your favorite rationale!!

Anyways I was thinking about both banks’ and I couldn’t help but conclude that despite JPM’s great performance and Citigroup’s recent lackluster to mediocre performance, Citigroup is still better placed to thrive in the new global reality. My vote for Citi rests on its unparalleled global footprint and strength in major emerging markets (from Africa to Asia to Latin America etc). JP Morgan’s storied investment bank has a global presence but its private, retail and commercial banking franchises remain basically US operations and are also-rans in most emerging markets. Therefore, my opinion is that for JPM to match Citi it needs to bulk up its international operations to become a “network bank” for global corporates and boost its presence in fast-growing emerging markets. Building this footprint organically will be very difficult if not impossible (Citigroup already had a branch in China has far back as the turn of the 20th century). Therefore the best option may be an acquisition and I think the right “bride” will be Standard Chartered Bank Plc. So why buy Standard Chartered?

Firstly, it can be done and the bank seems like a decent sized target that JPM can swallow! (before you turn your noses up, a lot of “transformational deals” have been done in the past simple because it could be done!). JP Morgan currently has a market capitalization of US$175 Billion while Standard Chartered has a market cap of about US$60 Billion (i.e. Standard Chartered is only about a third of JPM’s size). JPM should therefore be in a position to finance and pull off some sort of hybrid cash & stock offer for the bank without necessarily “breaking the bank” or overly diluting shareholders!. In addition, Standard Chartered has a core investor: Temasek (the Government of Singapore’s direct investment company) that could be convinced to back a deal if it requires some liquidity.

Secondly, while bankers often tout the “synergies” of every deal , this tie-up will come with almost unparalleled geographic synergies. Standard Chartered – though nominally a British bank – derives almost all its revenues from Asia, Middle East & Africa (Regions of the world where JP Morgan still needs to do a GREAT JOB in advancing its on-the-ground presence). Buying Standard Chartered will instantly give JPM an on-the-ground network in these fast growing regions of the world. On the other hand, Standard Chartered has an almost non-existent America’s franchise and would thus be a nice geographic plug for JPM. A Standard Chartered acquisition will enable JPM benefit from trends such as increasing Indo-China, Sino-African and Indo-African trade and as an added bonus: the combined bank may purchase South Africa’s Nedbank to achieve a more complete African footprint!

Lastly, there would be room for JPM to build on Standard Chartered’s product offerings and this may be a source of “alpha” or upside for the bank’s shareholders. Despite a push towards more sophisticated product offerings, Standard Chartered bank still resmains a largely retail and commercial bank with strong transactional banking products aimed at corporates operating in emerging markets. JPM may deploy its strengths in trading and investment banking to boost Standard Chartered’s offerings in its core markets and increase the full earnings potential of the British bank’s franchise and footprint.

Obviously, life is a lot more complicated than the mental wanderings of a bored student and there are many reasons why such a deal will not materialize. However, I think this is a deal with a lot of merit and will be happy to see both banks “walk down the aisle”!

In pursuit of a non-zero sum world

Currently reading my favorite TV historian: Niall Ferguson’s seminal book on the rise of the West and a recurring theme through the pages was the role exploration (or exploitation in my book!) played in ensuring the dominance of European or European-inspired societies (such as the US). A key reason for the ascendance of Europe was the continent’s role as a colonialist that ensured cheap products to advance its own resource-constrained societies. For example at the middle of the last millennium, the average height of the Asian and European populations were about even but this situation changed in the later centuries as the Europeans typically had a much larger calorie-rich diet, which was in turn made possible by their colonial activities. Throughout human history - from the Persian civilization, to the Roman and the modern-day American & British empires – it seems that the rise of a people has almost always involved the subjugation or exploitation of another set of people or the environment. The rise of mining brought us useful metals but destroyed pristine lands, the rise of textile technology raised western standards of living but depended on slave-picked cotton from the antebellum southern United States and the list of zero-sum scenarios goes on.

It is therefore refreshing to see that many business executives and policy makers have begun to view business and development through a non-zero sum lens and have begun to put in place policies that ensure that all stakeholders can all benefit from growth. This movement has taken on two parts: 1) Shared Value and 2.) Social Impact Investing, which I believe are equally important concepts that should be embraced or at least considered by all.

The Shared Value concept is been popularized by no less an eminent figure than Harvard University Professor Michael Porter (of the 5-forces fame) and it is at its core a new framework for evaluating business decisions that gives due consideration to social and environmental issues. This is not some feel-good CSR department that sprinkles a few dollars on “noble causes” to obtain pictures that look nice and endearing enough to be published on corporate websites and annual reports. Michael Porter is advocating nothing short of a fundamental rethinking of the corporate business model and has highlighted various success stories such as GE’s launch of affordable, hand-held scanners that have proven effective in boosting healthcare delivery in India while delivering robust profits to GE. Closely related to the concept of Shared Value are concepts such as “greening of the Supply Chain” (i.e. reducing environmental impact of corporate supply chains while reducing costs and serving customers at the “Bottom of the Pyramid”. Central to all these concepts is the emerging thinking that doing good by society and also making money need not be diametrically opposed. Michael Porter’s insightful article about shared value can be found here.

The second related concept is that of Social Impact Investing and it involves a not-so- new concept that investors can strive to achieve a double bottom line of social prosperity and market-rate financial return. This concept isn’t new as organizations such as the IFC (the private sector lending and investing arm of the World Bank Group) have been incorporating social and environmental considerations in its activities for decades and it is yet to record an annual loss since its founding. In an attempt to make this more mainstream and adopted by many more investors, institutions such as the Rockefeller Foundation, Clinton Global Initiative, JP Morgan etc have come together to form the Global Impact Investment Network (GIIN) to agree on a set of common standards for the sector. This evolving field has great potential for growth as the funds in the global investment community is exponentially larger than the global philanthropy community can muster.

Although I fully support the growth of both of the above-mentioned sectors, I still have major doubts about their usefulness. These involve where the line will be drawn between “good works” and “filthy lucre”: at what point will investors sacrifice extra profit to achieve higher societal impact? Secondly, how much of the Shared Value initiatives will companies make anyways because they are financially compelling and are we just giving a fancy name to business as usual?. Anyways while there are legitimate doubts regarding the impact of these initiatives, one thing most people can agree with is that they are directionally correct in gradually moving the world into a non-zero sum state. And that I am happy about!

Book Review – “Our Last Best Chance”

I was walking down a street in a quaint little town with a couple of friends on Monday and saw a bookstore which I ducked into to basically window shop. I ended up seeing a book titled: “Our Last Best Chance” by King Abdullah II of the Hashemite Kingdom of Jordan. Although I ended up losing track of my friends and spent about 20 minutes searching for them, I consider my purchase of this book to be one of the best impulse purchases I’ve made in the recent past. So why do I think so highly of my purchase? Only because I think it’s one of the books I have most enjoyed reading in the last half-decade or so. And these are my reasons:

Unique position of the author. King Abdullah of Jordan is a leader in the Middle East and has actively been involved in brokering peace deals in the region. However, the source of his importance – and by extension that of his kingdom – is not due to military might or abundant mineral wealth. Jordan is not an oil producer like the Gulf states neither can anyone say that its armies are a match for the Egyptian, Iranian or Israeli armies (the military juggernauts of the region). However, King Abdullah has advanced the role of reformer and peace maker adopted by his late father: King Hussein. Due to Jordan’s position as one of only two Arab countries with a peace treaty with Israel and its cordial relationships in the Arab community, its kings have served as mediators in the region. An ailing King Hussein (battling cancer) made a trip from his deathbed to Camp David to encourage the late Yasser Arafat and Benjamin Netanyahu in talks brokered by President Clinton in 1998. His son: King Abdullah has also made great strides over his decade of ruling the kingdom, with GDP growth averaging 7% over the last decade. Jordan’s economy is regarded as the freest in the region, even ranking above good performers such as the UAE and Lebanon. It has more Free Trade Agreements than any other country in the region, it has a well developed services sector and it is emerging as a key financial center in the region with many leading companies such as Aramex (the leading logistics firm in the region) having their headquarters in Amman. To cap it all, his wife: Queen Rania has been involved in championing women and children rights globally while his younger sister is a Brigadier General in the Army and a Military Attaché with paratrooper wings!. King Abdullah has also established the first co-educational prep school in the region with full financial support for indigent students. I guess by now it should be obvious that the man is one of my favorite world leaders!

Good Layout. If I had to pick my favorite characteristic of the book, it will be its layout and organization. I think leaders who write autobiographies have to thread a fine line and exercise judgment regarding how personal their books should be. You don’t want it too personal or you may start to feel like a teenager’s diary and you don’t want it to be too high sounding or lofty, or else it may read like a position paper or (worse!) a United Nations resolution. I think with this book, King Abdullah got it just right like Goldilocks. The 1^st third of the book dealt with his family’s historical role as guardians of the holy places of the region, his family life growing up and the institutions - such as Deerfield Academy (a New England prep school in the US) and the Royal Military Academy, Sandhurst - that shaped his worldview and provided the basis for some of his most enduring friendships. The 2^nd third of the book provides a good ringside account of various events in the region through his lenses as a young army officer and a confidant of his father. He wrote about various clandestine trips with his father to broker peace between various warring parties and he provided insights into the character of many leading figures in the region (including Saddam Hussein, Yasser Arafat, Ariel Sharon and Benjamin Netanyahu). The last 3^rd of the book was more “macro” in nature and dealt with his big picture ideas of why the world should care greatly about the Israeli-Palestinian conflict, his views on radical Islamism and his vision for a more prosperous, harmonious and stable region. I really enjoyed this part of the book because it speaks a lot about his character and strength of conviction to offer bold recommendations for moving forward even if some powerful interests may disagree with him.

The author’s pragmatism. The final quality that really made me enjoy the book is the author’s clear-headed pragmatic view of the world and of the harsh realities that his kingdom and region faces. I view myself as a pragmatist and I have always harbored a slight distaste for really passionate “true believers” who adopt a “my way or the highway” attitude as I believe human progress is best assured by reasonable, pragmatic people making compromises in pursuit of their enlightened self-interests. The author writes about the fine balance that his father had to take during the 1^st Gulf War and how he struggled to seek grounds of agreement between Saddam and western powers. He also talked about his own efforts to prevent and lobby against the US invasion of Iraq in 2003 but detailed how he came to reconcile himself to the inevitability of President Bush’s decision to go to war and the need to ensure that Jordan maintained a degree of neutrality that will prevent its economy from taking a hit. I found his descriptions of his travels to Washington interesting, especially the way he convinced the US government to give up its request to stage combat troops out of Jordan. All through the book I detected a certain unwillingness to demonize people with differing opinions, always realizing that world leaders are only acting in their national interests and that in most human affairs there are few if any moral absolutes. Today’s terrorist may become tomorrow’s statesman, a foe today an ally tomorrow with alliances and allegiances as fleeting as shadows. I admit this is not the most flattering picture of humanity but human beings are only human and I appreciate the king’s candidness in acknowledging that in his book.

Overall, I thoroughly enjoyed reading the book and I think it will be great not only for people interested in the Middle East but also for everyone interested in deciphering international politics and the psychology of world leaders.

Going Green – The very pressing case for “Black Swans”

I go to graduate school at a university which can be described as “ground zero” for the environmental movement in North America, that’s if anywhere can be described as such. I was also fortunate to take a class on environmental policy these past few weeks and this exposed to some of the latest thinking in the fields of conservation, solar energy, windmills etc. Although I cannot in good faith describe myself as an environmentalist or activist of any sort, I am enough of a pragmatic business person that I realize the clear and present danger posed to the world by the warming climate and degrading environments.

However, a lot of what I have been hearing has been along the lines of why we should conserve more and consume less energy. I do not think waste is good and I think the energy-intensive lifestyle of the developed world is less than ideal but I also realize that the world cannot conserve its way out of the crisis that confronts it. One person I really respect in the environmental debate is the Silicon-Valley Billionaire: Vinod Khosla, co-founder of SUN Microsystems and former big-hitting partner at the VC firm: Kleiner Perkins. I have listened to some of his speeches and I am more than impressed by his pragmatic approach to the entire issue of climate change and conservation. The Economist recently ran a piece about him and some of the investments he has made in the “green” space. And they all seem to have something in common: a high probability of failure mixed with the potential to be significant game changers.

The first of Mr. Khosla’s assertions is that of the “Chindia price”: basically the price at which a product or service will become generally accepted by the poor and emerging middle classes of China and India. The mistake many people make in the environmental lobby is to think that because a product has gone mainstream in Northern California, Germany and Scandinavia then the world has a workable product. Consumers in these markets have shown a willingness and ability to pay a premium for environmentally conscious products. However, this works for them because they are typically well-heeled and educated. However for consumers in markets like China and India, paying extra for a “cleaner” or “greener” option just would not cut it. Given that these will be the fastest growing consumer markets in the world, they will ultimately be the test case for any new technologies that will replace current fossil-fuel based technologies. And for this people, price is key! Mr. Khosla illustrated this by saying that for electric cars to make a real dent they must approach the “Tata Nano price”. I could not agree more.

The 2nd and probably more important theme for the article is the need for the world to concentrate on finding game-changing “black swan” solutions to our problems. We are not going to “LED light” and “low-flow toilet” our way out of the challenges that face. We need to come up with solutions that ensure that consumers can continue with the lifestyles they’ve grown accustomed to and what’s more? we cannot deny the hundreds of millions of Chinese and Indians coming out of poverty the washing machines and machine dryers they’ve been waiting for. The world has got to find a way to do this cost-effectively.

This brings us to why “black swans” are the solution that the world’s business, political and scientific leaders should concentrate on. A lot of the technologies that are being discussed represent incremental progress that may move the needle a bit but will not ultimately provide the “oomph” that the world needs. The world is so bad at forecasts, imagine if someone had tried to forecast intercontinental travel at the turn of the 20th century. Their forecasts would have been way off because they would have based their forecast on the technologies available at the time: steam ships, railroads etc. They would have absolutely no idea that airplanes will be invented by the Wright Brothers in 1913 and the invention of the airplane totally changed intercontinental travel. Anyone in 1990 that was asked to forecast telecom penetration in developing countries would have grossly underestimated the future as no one knew of the technological innovations that dropped the cost of telecoms equipment and made the cellphone ubiquitous. Bill Gates once said in the 1980s that he saw no reason why anyone will need more than 64KB of computer memory and he is a really smart guy! To solve the world’s toughest environmental and social problems, everyone needs to be on the lookout for black swans and game changers. Incremental progress won’t cut it and that’s why my fingers are crossed for Mr. Khosla’s investments.

Before the world forgets…

The first two months and counting of 2011 has ushered in tremendous winds of change across the Arab world, in particular the Maghreb countries of North Africa. The young year of 2011 has witnessed the ouster of two long-standing leaders in the region – Ben Ali of Tunisia and Hosni Mubarak of Egypt. Furthermore, the United States is leading a coalition of western and Arab countries to bomb targets in Libya in a bid to force Qaddafi out of power and prevent the continued slaughter of civilians.

While the Maghreb has certainly deserved the attention of the world leaders due both to the scale of the protests and the wider Middle-East’s role as the world’s gas tank, it is also important for world leaders not to lose sight of trouble brewing is less conspicuous places. It has become easy for the world to forget the tragedy that is going on in the Ivory Coast, where a president who the world has acknowledged lost the general election still manages to cling on to power. This is despite the United Nations, United States and the African Union’s recognition of his opponent: Allasane Quattara as the legitimate president of the country.

Despite calls for him to step down, the incumbent “president” Gbagbo remains entrenched in power and the calls have become less stringent and fervent as the crisis in the Middle East as now become front-burner in the minds of world leaders. This ought not to be so as an incident that started off as a power struggle between two politicians is fast approaching the scale of sectarian clashes and civil war. With Gbabgo already encouraging civilian supporters to join in the “battle” against Quattara and the battle lines being drawn once again along North-South lines.

The country has in the meantime defaulted on its Eurobond interest payment, further putting pressure on potential issuances by African countries and raising the cost of issuance for those who manage to do so. The country’s famous cocoa industry has also come under a lot of strain as the fighting has caused disruptions in the supply chain and this has had a non-trivial effect on the global cocoa industry. Adding to the already bad situation is the contagious tendency of civil wars in Sub-Saharan Africa with fighters drifting off to cause trouble in nearby countries and refugees from war-torn countries placing strains on already stretched social services in neighboring countries. A full blown civil war is something the world has to prevent in Ivory Coast and the international community must find a way to diffuse the tension and restore calm! I salute the world’s courage in Libya but I think Ivory Coast should not be forgotten!!

Connected, cosmopolitan and high IQ’d – The rise of a new global elite

It’s that time of the year when high-powered executives, academics and government officials all over the world gauge their importance and place in the world with a simple metric. And that is where they rank in the Davos pecking order: were they invited at all?, did they receive only a general pass or were they asked to moderate, chair or participate in a panel? who shows for their cocktails etc. The yearly spectacle which is Davos can be described as a modern day temple devoted to the worship of high achievement, smarts and wealth. If Mt. Olympus was the gathering place of the gods of ancient Greece, Davos can probably be termed the gathering place of the gods of the modern era: high achieving businessmen and policy makers. Something must be said about the resourcefulness displayed by Klaus Schwab – the Swiss academic who founded the World Economic Forum – in transforming a sleepy ski resort in the middle of nowhere to probably the single greatest annual concentration of wealth, power and prestige in recent human history. However, Davos is in my opinion only a manifestation of larger trends occurring in the world.

The first is the rise of a global elite and the increasing similarity between people with great wealth and power, even if they are from different ends of the world. As noted recently by the Economist, the banker in New York may be more culturally similar to fellow bankers or moneymen (/women) in Mumbai , Shanghai or Johannesburg than they might be to their own neighbors in the Bronx or Brooklyn. The rise of a global marketplace in higher education has made many executives and government leaders from various countries to be alumni of a disproportionately small number of elite institutions, primarily in Europe and the United States. Many of them have further gone ahead to work for a smaller handful of firms – largely investment banks and consultancies – that are generally regarded as the biggest magnets for the “best and brightest”. They all share similar characteristics: an expensive education, an obsession with being regarded as the best and a high level of comfort with a global world. This phenomenon may have an impact of dampening the sometimes positive effects of national loyalties, cultural heritages and differing intellectual aptitude. A global firm may assemble executives from 20 different countries and not have a hint of intellectual, socio-economic or ideological diversity. This in itself may not be bad if it were not for the potential that it has for fostering “group think”: a pattern of thought which the recent financial crisis has shown to be potentially troubling.

The second point is the change in the nature of the new breed of wealthy people, especially in the United States. It was the case in 19th and early 20th century America that the wealthiest people were tough, roughhewn men such as Vanderbilt, Rockefeller and Carnegie with little formal education but lots of grit. They were simple men who joined gold rushes, went wildcatting for oil and built railroads. Many of them would definitely not have been admitted into the elite academic institutions of their day, although they did get some kicks from doling huge sums to such institutions after they made a pile of money. The 2nd half of the 20th century, turned this model on its head especially with the rise of the technology and finance sectors. A lot of the wealth that has been created – and many of the millionaires – have come from two sectors: finance and high technology, which demand a higher than average level of education and intelligence. The Hedge Fund and Private Equity sectors has been prodigious in minting a lot of multi-millionaires every year and these are not “plain-speaking townfolk” who raised themselves by the bootstraps with little education. No, these are high school valedictorians, chess champions, Ivy-League graduates with high-priced MBAs from top business schools. These are literally the “smartest guys in the room”. The same is true – to a possibly greater extent – in the high tech industry. It takes a level of mathematical aptitude that is not present in most of humanity to be accepted into Computer Science Phd programs in places like Stanford and MIT: places that have produced a lot of tech millionaires and billionaires. These guys are smarter than you and would like you to remember that!

This in itself is great but it has implications for class relations. The world has moved from medieval-era class relations predicated on the relations between the landed aristocracy and their serfs to Victorian-era relations between mill owners and the near-permanent underclass who toiled in such mills. The world has become far more meritocratic than at any point in its history and people have risen to great positions from diverse backgrounds. However, a new aristocracy has emerged and it’s the “aristocracy of the brainy”. Today’s aristocrats have attended the best universities across the world, worked for a handful of “brand name” companies and congregate at forums such as Davos and Bilderberg. It would be difficult to choose a point in human history when education and wealth has been so positively correlated. The difference in the lifetime earnings potential between people with high school diplomas and college degrees have widened significantly in the last couple of decades. Even within college graduates, those with degrees from a handful of colleges regarded as “top tier” will earn far more than those with degrees from places no one has ever heard of. Furthermore, the range of middle class occupations available to folks with high school diplomas continues to shrink daily.

This situation has socio-political implications with the most extreme being class warfare. People who sense they were trapped in a permanent underclass have taken out their frustrations on their better endowed neighbors in the past: the French Revolution was as much a revolt against monarchy as it was a backlash by the poor against the landed aristocracy. While this is very unlikely in the modern era, some of the “soak the rich” sloganeering and debates about corporate bonuses of the past 3 years (though somewhat justified) can be described as “distant cousins” of class warfare. This may also account for the poor performance of many business executives in recent election cycles, with some being resented for having made a lot of money in the corporate boardrooms while the rank and file felt pain. Carly Fiorina caught a lot of flak for cutting jobs and earning bonuses even though she was only doing her job to maximize value for shareholders! I think in the final analysis, governments and companies must come together to look out for the ordinary people who lack the degrees that have become so critical for success. Assembly-line workers who lose their jobs should be given aid in retraining, community colleges should be better funded to give people a hope of some form of tertiary education. And more importantly new growth sectors that will employ huge numbers of non-college graduates need to be created to sustain social harmony. I hope these issues find their way into the discourse in the snow-covered mountains of Davos!

Book Review – Overhaul

I just finished reading the book: Overhaul – An insider’s account of the Obama administration’s emergency rescue of the auto industry, written by President Obama’s Auto Czar: Steven Rattner. Mr. Rattner prior to his appointment had been an investment banker – at Lazard and Morgan Stanley – and founder of a private equity firm: Quadrangle. His appointment as the “auto czar” was met with considerable skepticism due to his lack of auto industry experience. However, by many accounts he and his team gave a good account of themselves with the recent IPO of “new GM” being a testament to their efforts.

I enjoyed reading the book largely because of the “no holds barred” approach the author adopted in writing the book. He was quite open in heaping praises on the people he felt added a lot of value to the process and with whom he was impressed. He was also quite brave enough – or vengeful depending on who you talk to – to call out the individuals and institutions whose work and/or abilities he found wanting. The book’s conversational, first-hand account makes for a fascinating read and helps the reader develop some sort of familiarity with the central characters involved in the auto bailout. I really enjoyed reading Overhaul and I drew a number of lessons.

Outside advisers can add value. Investment bankers and management consultants like to pride themselves on the value they are able to create by helping their clients think through hard decisions. While this may be true in many cases, there are also many instances where this claim seems tenuous, especially given the number of mergers that have not turned out great. However, the auto bailouts and restructuring episode was a poster child of the value bankers and other advisers can create for their clients. Mr. Rattner and his team – affectionately termed “Team Auto” – were basically acting as a small investment banking team with a very powerful but concerned client: Uncle Sam. The auto bailouts were not really about cars or manufacturing, if it was about these things then Team Auto would have failed quite spectacularly. It was at its core a restructuring problem: GM and Chrysler had debts and other liabilities that had clearly become unstable given their current operating liabilities. Both companies’ debt burdens had to be reduced, some employee and retiree liabilities jettisoned and their operations and brands scaled down significantly. The author wrote of marathon negotiation sessions with lenders to strike debt restructuring deals and with the unions to secure concessions to ensure viability.

The US political system still works. While a lot has been said about political gridlock in the US congress with pundits constantly reminding TV audiences about how the US congress can’t seem to get things done. It was quite instructive to see that in times of deep crisis – such as the auto bailout episode – politicians find a way of working together. A politician with a free market philosophy as fervent as President Bush was basically responsible for authorizing billions of dollars of federal aid for the auto companies, a move many legislators in his own party vehemently opposed. The book even describes a scene in which Vice-President Cheney (whom no one can accuse of being a big government liberal) went up to Capitol Hill to lobby republican lawmakers on the auto bailout. It was also interesting to find out that despite some initial outcries, congressman largely allowed the rescued companies to go ahead with dealer closures even though many of their prominent constituents and campaign contributors were affected.

Sacrifice has to be broadly shared. Reading the book, it was really clear that various stakeholders had to make sacrifices and settle for outcomes that were less than ideal for them. The companies had to close some struggling brands and close some plants, lenders had to take significant haircuts on their loans while workers and retirees took a big hit on benefits. Anecdotes abound in the book about marathon negotiation sessions with labor, the bitter pills that the unions had to swallow and the personal toll that these decisions had on the president of the United Auto Workers (UAW). While some commentators have (rightfully) questioned the move to place employee and retiree benefits (unsecured creditors) above lenders who are senior creditors and explained it as a political move by the Obama administration to favor its union supporters. The book suggests that this may have been due to just plain operating reality, as the author said: “I need workers to make cars but I don’t need lenders”. So while lenders had seniority above employee liabilities in the priority structure, operating realities favored the workers. While this makes sense, I can’t help but wonder what impact this would have on future restructurings.

Success can lead to insularity and lethargy. General Motors in its heyday represented the finest of American industry, overtaking Ford Motors and its iconic Model T and instituting routines under famed CEO: Alfred Sloan that came to define management best practice. However, the picture the author painted of GM in the pre-bailout days was very far from flattering. The book was replete with anecdotes of GM management missing multiple deadlines, being unable to accurately estimate cash holdings & requirements, holding bureaucratic review meetings and even being unable to provide Team Auto with its financial model (the bankers had to improvise by building one).

In conclusion, while I agree with a lot of what has been said about the ineptitude, arrogance and lack of responsiveness of the auto companies’ managements to changing conditions. I can’t help but wonder whether the companies ended up being “punished” for their role in building America’s middle class through the very benefits and perks which ultimately rendered them uncompetitive. Getting a job on GM’s assembly line in its heyday was a ticket to a middle class life with good wages and a robust package of healthcare and other benefits. People paid off their mortgages, lived in decent neighborhoods and put their kids through college all on an assembly line wage and a high school education. With the constant erosion of the auto industry in the US and the steady reduction in wages and benefits, an auto industry job will in no way represent the security and stability of past years. The question then is: what opportunities at a decent wage await people in the US with only a high school education in the new global economic reality. Although the book doesn’t proffer solutions for addressing these issues, I think its still a very good book about a very important time in the global economy.

“No thanks!” – HSBC sensibly decides to withdraw from acquiring Nedbank

The past couple of months has ushered in a flurry of positive deal and investment activity on the African continent, notable among which are the proposed acquisition of South Africa’s Nedbank by HSBC and Massmart – also of South Africa – by Walmart. Many analysts and investment managers focused on Africa and other frontier markets hailed these moves as signs that the rest of the world has begun to see the light in the “dark continent”. Investment bankers have been quick to talk up these announcements as just the advance party in a wave of acquisitions of African assets in the coming years.

Many analysts surely would have regarded HSBC’s recent announcement that it is pulling off from the deal as a blow to the “rising Africa” theory. Well I think this may be a setback for Nedbank and Old Mutual (its parent company that really can use the extra cash to deleverage its balance sheet). I believe this deal is idiosyncratic and is not representative of the potentials for acquisitions and investments in Africa. When the proposed deal was announced, I kept on struggling to understand the strategic benefits of the deal and I could not find any that was very compelling. I understand HSBC’s rationale for seeking a foothold in Africa: the continent is growing fast, banking penetration is low and banks can still make decent money from boring stuff like taking cheap deposits and funds out at much higher interest rates. Western bankers will give an arm and a leg to achieve the sort of Net Interest Margins that African banks take for granted.

So what is my grouse with the deal? HSBC picked the wrong target to expand in Africa. Nedbank is not Standard Bank – the market leader in South Africa with a wide footprint across the continent, it is basically the 4th largest bank in a South African market dominated by 4 banks!!. It has very limited operations in the rest of Africa and its international operations are concentrated in a handful of small Southern African countries. It is practically absent from the other big sub-Saharan African economies of Nigeria, Ghana and Kenya (not to mention North Africa). I concede that there is a partnership with Ecobank Transnational, which has a wide banking network across much of Sub-Saharan Africa. However, I don’t believe alliances are the most cohesive forms of business combinations and they can be like mermaids: i.e. you get a fish when you need a human and you get a human when you need a fish. The Nedbank-Ecobank alliance will be more valuable - in my opinion - if it were a merger. It is therefore clear that Nedbank is not the best vehicle for a bank like HSBC to gain a continent-wide exposure to the African banking sector. If it did the deal it would have had to execute another major acquisition – maybe with Ecobank – or buy multiple banks across Africa. Which is frankly time consuming!

Which leads me to the ideal suitor for Nedbank. I believe the ideal candidate for the bank has to be a global bank with an existing network across Africa that it can integrate Nedbank into. The two banks that fit the bill are Barclays Bank and Standard Chartered Bank. However, Barclays already controls ABSA: one of the big 4 banks in South Africa and I am near certain that the South African authorities will be very reluctant to approve such a deal due to competition considerations. Which leaves Standard Chartered Bank, which has a formidable presence across Western and Eastern Africa. It has significant operations in fast growing economies such as Ghana, Nigeria and Kenya, however the missing piece in its strategy is a sizable operation in South Africa (the region’s largest economy). Acquiring Nedbank will complete the picture and open up hitherto unlocked cross-selling opportunities. However, the bank – which is currently in the middle of a cash call – has basically signified that it would not be bidding as it intends to use the rights issue proceeds to bolster capital ratios not fund acquisitions. This really puts Old Mutual in a bind and it may have to reevaluate its strategy. However, if Old Mutual and its advisers want to get paid anytime soon, they have to beat a path to Standard Chartered CEO Peter Sands’ door and fall at his knees, kiss a ring and do whatever it takes to get him and his board to make a good bid for Nedbank. I think that is the only game in town!

Mobilizing domestic financing for infrastructure – recent positive developments

The past few weeks have ushered in a flurry of announcements of various policies/initiatives aimed at improving the infrastructure situation in Nigeria, with electricity power reform always leading the discussions. The reactions trailing the government’s decision to effectively privatize the electricity power sector has largely being met with positive comments by both Nigerian and international analysts. A major concern that has however underlined these positive comments has been the nation’s ability to attract sufficient investor interest in the power sector. An initial estimate of US$10 Billion is currently being bandied around as being required in the power sector.

This will require a massive sales effort by the government, the privatization agencies and the Nigerian finance & investment community. A very common response to the financing question has been: “Foreign investors are interested”. While I believe that the Nigerian power sector – if properly structured – presents a compelling investment proposition, there are also potential limitations that may prevent the expected rush of foreign investors. Firstly, Nigeria is setting on a privatization program for its electric infrastructure at a time that major emerging market economies are launching programs of similar nature. Brazilian President Lula has announced a US$500 Billion infrastructure upgrade plan, an integral portion of which will utilize private funding. The Indian Government is also planning a multi-billion dollar transportation and electric power upgrad that is expected to require huge private investments in the near future. Therefore, a lot of the infrastructure funds and big firms will be concentrating on these markets and we would face an uphill task competing against these destinations. Secondly, Nigeria also has some way to go in proving its stability as an investment destination particularly with the upcoming elections.

Hence, it is clear that while we should work hard at getting foreign investors we should also be doing as much as we can to mobilize funds domestically. That is why I am quite happy at PENCOM’s – the national pensions regulator – proposal to allow Pension Funds in Nigeria to invest up to 20% of their assets into infrastructure projects and funds. Given the current estimate of pension assets size of N1.73 Trillion (US$ 11.5 Billion), this proposal may free up to US$2.3 Billion for investments in infrastructure. I believe the bulk of these infrastructure investments will be in the electricity sector. I think the proposal to allow Pension Fund Administrators to invest in assets such as Private Equity and infrastructure is a good one as I have long believed that the pension guidelines - as they are currently written – suffer from an illusion of safety. I believe a good national pension fund system should serve two goals: mobilize savings for developing the nation and provide good returns on pension contributions to ensure a decent nest egg for retirees. The very restricted nature of the previous guidelines have led – in my opinion – to distortions or overheating of certain market segments in the country. Pension funds’ constant purchases of Federal Government bonds once pushed the yield on the longest dated (i.e. 20 year) bonds to 8%, in a country with double digit short term inflation rates!!! Analysts also believe that pension funds’ purchases of subnational, state government debt may also spark a bubble in the primary markets for such instruments.

This is why the current proposals to enable Pension Funds invest in infrastructure and private equity should be a win-win for both pension fund contributors and the economy as a whole. Infrastructure and Private Equity investing – if properly managed – should lead to greater diversification and mitigate some of the concentration risks in most pension portfolios. It should also be beneficial to the economy as the country will be creating a domestic capital pool for some of the electric power privatizations and investments that should be coming on-stream in the next 1-3 years. In addition, allocations to private equity should also help catalyze the emergence of a domestic private equity and venture capital industry that will provide much needed funding to early stage ventures, Small & Medium Enterprises (SMEs) and larger pre-IPO companies.

However, while the motives seem honorable and the benefits seem clear we must be mindful of potential pitfalls, with a key pitfall being the dearth of project finance structuring competence among Nigerian financiers. PENCOM should work with key DFIs such as the IFC to build pension managers’ capacity to properly evaluate infrastructure projects as well as private equity and infrastructure funds. The regulator has taken a step in the right direction by mandating minimum standards for such funds and projects, but it will need to go further to encourage best practices and ensure that fund managers do not engage in a race to the bottom to see who can throw the most money at the worst deals. These are solid proposals but the regulators, fund managers and the broader financial industry should work together that the pension contributors and the economy reap the most benefit possible.

The Next Brazil?

A lot has been made of the seminal Global Economics paper by a Goldman Sachs research team in which they heralded the dawn of a new era in the global economy and its driving forces. The report: “Dreaming with the BRICs” moved the discussions about the economic power of Brazil, Russia, India and China (BRIC) from the hallowed corridors of global investment houses and Bretton Woods institutions to the dinner tables of every globally aware household. Of this group, China & India have captured the imaginations of many who seek to make fortunes (or a quick buck) and added significant fuel to the fire burning under the policymakers or pessimists worried stiff about the decline of the United States and other G8 countries. Although the Dragon (China) and the Tiger (India) have gotten most of the attention, I seem to be personally most fascinated with “B” in BRIC: Brazil. I think Brazil has undertaken a remarkable journey with the potential to be greater economy, hence it probably represents the best model for developing countries – primarily in Africa – to emulate.

Why my fascination with Brazil? I think its modern economic and political history is much more similar to the rest of the developing world. On the political end: China has been governed in an autocratic fashion by a tight group of unelected “wise old men” since the communist victory of 1949 while India has remained a chaotic, multi-party, parliamentary democracy since its independence from the Brits in 1947. Brazil on the other hand has – like much of the developing world – had its fair share of democratic and not-so democratic civil rule, self interested military juntas and the often benevolent or enlightened military dictatorships. The country seems to have been a large scale experiment for various political and leadership philosophies: for heaven sake they replaced a technocratic, doctorate wielding president (Henrique Cardoso) with a former trade unionists born into poverty with very little formal education who turned out to be an avid free-marketer delivering record economic numbers (President Lula)!.

The country’s recent economic history is no less colourful. Brazil has been transformed from the hyper-inflationary land in which grocery prices changed a couple of times a week – or even in a day, to a country now able to issue long-dated bonds due to much more stable inflation outlooks. It has moved from an era of near habitual bond defaults to being adjudged investment grade by the most powerful folks in the world: the Rating Agencies. The Real has moved from being near worthless due to frequent devaluations to becoming one of the most actively traded currencies in the world.

Which now leads me to the most important question: which country will (or can) be the next Brazil?. One thing is clear in my mind: there will be no “next China” or “next India”, these countries are freaks of nature and cannot be replicated. No other country has got a Billion people and counting in an economy which (in the case of China) is run by a couple of old guys with decades of experience running stuff and who can always take a long term, pragmatic view of policy because they never have to bother with the “minor inconveniences” of elections and opinion polls. So the jury is out for African nations: you can’t be the next India or China, sorry!!. So we are left with the “Next Best Thing”: becoming the Next Brazil. So the question up for debate is what African country has the potential to be the next Brazil?. I would say it is Nigeria, not because I am Nigerian (it obviously helps) but because it is a view supported by serious people like the Development Finance Institutions (DFIs) and leading fund managers with experience in emerging economies. Although I admit that DFIs have a penchant for viewing the world with rose tinted glasses while emerging market fund managers are quick to talk up any country with half decent economic prospects (how else are they going to profitably exit the positions they’ve taken in such countries’ stock and bond markets). This notwithstanding, I believe compelling evidence exists to support the case of Nigeria of POTENTIALLY becoming the “Next Brazil”.

First is population. Brazil’s got about 190 million people while Nigeria’s got about 140-150 Million people which can form the base for potentially lucrative domestic markets. I believe domestic market sizes would become increasingly important for countries – particularly African ones – seeking economic growth. Let’s face it: we are not going to be the world’s workshop as China will have that honour for a while due to very cheap unit labour costs (the consequence of a billion people), low state mandated financing costs and ridiculously low electricity costs fostered by mind boggling hydro projects like the Three Gorges Dam as well as an almost fanatical commitment to cheap coal plants in this environmentally sensitive days. African countries are also not likely to become global hubs for high end manufacturing or products. That crown – in my opinion – will remain with the Europeans (due to excellent craftsmanship honed over centuries) and the Americans (with their world leading research universities). So African countries may have to rely to a greater extent on domestic investment and consumption to a greater extent than the Chinese have done. On this point, Nigeria is the most ideally placed African country to build a vibrant domestic market on the back of a huge population. South Africa – the other big Sub-Saharan African economy – with a population of 45 Million is simply too small to be creditably tipped to be the next Brazil. In fact many analysts expect Nigeria to eclipse South Africa as the biggest African economy within the next decade.

I also believe that going forward in this century, population size will become increasingly correlated to economic power and GDP size. I think its a classic situation of history repeating itself, this time through the impact of technology. For much of human history, human conditions were pretty uniformly grim across much of “the known world”, first through “hunter-gatherer” societies and then through subsistence farming. So it was quite simple, the larger a country or kingdom the larger its economy or GDP. What changed the game was the Renaissance (with the invention of joint stock companies, financial markets etc) and the Industrial Revolution (which ushered in machines, railways and automation). Both of these events led to productivity imbalances and the world was split into the “haves” (countries with the tools of the modern age) and the “have nots” (countries lacking such tools). So we could easily have small countries with the modern tools (industry, transportation, communication etc) having economies many times that of much more populous countries still stuck with near primitive tools, techniques and economic organisation. What has changed in the past couple of decades (and will probably be more pronounced in the future) is that as technology becomes more widely adopted, the productivity gaps among world regions will gradually shrink. Witness the rapid growth in mobile telecoms in Africa, the continent practically skipped the landlines that cost developed economies hundreds of billions of dollars to install over many decades. I expect this scenario to also play it in other areas such as the internet (we are going from having no access at all to adopting broadband and skipping dial-up). In a world that is hopefully more even in terms of productivity, it will be a return to the pre-Renaissance age in which population size largely determined economic size. Nigeria with 150 Million people (40% of whom are teenagers and below) is also better placed than many economies to be one of the next growth engines in the long term.

Second similarity with Brazil is the resource story. While very creditable stories exist chronicling effects of “Dutch disease” and the “resource cause”, Brazil’s recent history suggests that it is indeed possible to utilise bumper profits from as a catalyst for modernising an economy. It is generally accepted that life in the coming century will be a lot more resource constrained than in the 20th century with the attendant rise in the costs of such commodities. Nigeria – like Brazil – is quite resource rich with huge concentrations of Oil and Gas on both onshore and offshore locations. I expect that while Crude Oil has been the mainstay of the Nigerian economy for the past half-century, Natural Gas may turn out to be the growth engine for the future. The country is already ranked 7th worldwide in terms of proven gas reserves. These reserves will be further developed as nations all over the world shift from coal to cleaner burning Natural Gas and the country itself develops the domestic gas gathering infrastructure needed for dragging its citizens from darkness into the marvellous (electric) light. Bitumen is another resource, Nigeria accounts for much of Africa’s bitumen reserves. The massive infrastructure projects in major emerging markets is likely to improve demand for bitumen, lead to higher prices and help further validate the commercial rationale for bitumen mining. In essence, in the resource constrained “new world” in which we live, access to resources will underpin economic growth and on this point Nigeria seems to be a good bet.

….To be continued

President Obasanjo’s greatest achievement

The nation experienced eight years of good, bad and ugly times under Olusegun Obasanjo’s 2-Term presidency. Under his tenure good things such as privatizations, liberalisation of the telecommunications sector and repayment of almost all of our crippling external debt occurred. Some bad things such as the aborted 3rd term bid and widespread corruption and election fraud also occurred, while we were also not spared downright ugly events such as the Odi Massacre. However, I believe on the economic front, President Obasanjo’s most enduring legacy will be the Pension Reform Act of 2004. This reform has significant implications for our long term economic sustainability and is indicative of the sort of large-scale, system-wide policy initiatives that have to be brought to bear in tackling some of the big challenges that we face in the areas of electric power supply, healthcare, education, transport infrastructure and other burdensome issues.

The Pension Reform Act mandated the vast majority of companies operating in Nigeria to subscribe to Defined Contribution Pension Schemes. The employers and employees each contribute 7.5% of the employee’s monthly income into a tax-exempt Retirement Account managed by a licensed Pension Fund Administrator of the employee’s choosing. The Retirement Accounts were made fully portable with employees being able to migrate their accounts as they change jobs, a critical option in these days of high job mobility. To ensure proper security of these Accounts they were also mandated to be safeguarded by Pension Fund Custodians (PFCs) owned by well capitalised and regulated banks with strict investment guidelines provided to PFAs to guide their investment decisions. As unsexy and possibly boring as this reform may seem it occupies first place in my mind for a number of reasons.

Firstly, it provides a social safety net in a society that is sorely lacking in countries such as ours. We do not have unemployment benefits or social security payments like developed countries hence siblings, children and close family end up acting as many Nigerians’ pension plans and unemployment insurance programmes. Prior to the advent of the Pension Reform Act, pensions were an exclusive privilege provided only to employees of the government and very large companies – mostly domestic operations of multinational corporations. The vast majority of Nigerians just retired without any dedicated funds set aside for their retirement with many people being left to the vagaries of unstable personal savings and the fickle charity of friends and family. Even public sector employees with supposedly pensionable positions found it difficult to depend on their pension checks as pension payment backlogs grew due to a combination of corruption, inadequate budgetary provisions and plain incompetence associated with a “Pay as you go along” pension system. The pages of Nigerian newspapers were replete with tales of pensioners living in penury and giving up the ghost before the first pension cheques arrive. Adopting a compulsory system-wide process that reduces the government’s involvement in pension payments was a great step forward in extending a safety net to a greater number of Nigerians.

Secondly, the reform has helped improve the long term competitiveness of Nigerian Companies. A close following of the travails of the US automobile industry will realise that a major challenge to the long term profitability and competitiveness of the Detroit Big 3 are their substantial pension obligations. These companies typically run “Pay As You Go” schemes that depend on the payments of working employees to cover defined and contractual payments to the company’s retirees. This is okay when there are much more current workers than there are retirees, it really starts getting ugly when there are more retirees than active workers as the companies are liable for making up the difference and rack up significant pension liabilities in the process. This makes every single product produced by these companies relatively more expensive than those produced by firms without such costs. What the pension reform in Nigeria did was to move most of the country into a Defined Contribution system that caps an employer’s liability to the 7.5% matching contributions that have to be made very month for the period under which the employee remains in its service. This makes it much simpler as company management – and would be acquirers – don’t have to become actuarial experts trying to figure out how long their employees will live for and how much their payment obligations will grow by in the future, as the costs are explicit and clear and have to be accounted for every financial year so their are no pension time bombs waiting to happen!!

Thirdly, the Pension Reforms have led to the creation of a significant pool of investable assets that have a potentially significant multiplier effect on economic growth. As at last count, Pension Assets under management is estimated at about N1.7 Trillion (US$ 11.3 Billion) and represent the single largest investment bloc in our capital markets from a base of nearly zero just 5-6 years ago!!. The emergence of such long term funds has helped in making our domestic government bond markets one of the most liquid in Africa with maturities extending up to 20 years, up from exclusively short tenors (i.e. 90, 180 and 270 days) just a couple of years ago. Furthermore, Sub-National Governments – such as Lagos State – have been active in issuing bonds with maturities up to 7 years. Companies have also joined the rush with Guaranty Trust Bank Plc successfully launching and pricing a 5-Year, Fixed Rate Bond late last year (which happens to be the only corporate bond in issue in Nigeria). All these long tenured issuances – and planned issuances – would definitely not be feasible without the long term funds that the Pension Reform Act created. The positive effects of the reform extend well beyond the fixed income markets as they have had a stabilizing effect on the equities market as well. At the height of the market downturn, PFAs were one of the very few net purchasers of equities on the Nigerian Stock Exchange. Their buying activities probably helped in placing a floor on stock market prices and it is reasonable to suggest that the stock market rout would have been deeper and more sustained had sizable and investible pension assets not been in place.

However its not yet “Uhuru” for the Pensions Industry in Nigeria has the industry is likely to be plagued by a number of factors that may delay or prevent the full realization of the reform to Nigerians. The first is the potential for non-remittance and/or participation by employers. Although the Act details fines payable by employers for non-remittance of pension contributions to PFAs, it’s an open secret that many employers have not been as conscientious in making remittances as the Pension Act envisaged. The pension regulator – PENCOM – has to step up its monitoring activities in this regard to ensure that hard-working Nigerians are not been denied the opportunity to quickly begin building a nest egg. As if non-remittance is not bad enough, a number of employers and employees – especially in the very large informal sector – are yet to join the scheme. A lot has been achieved in boosting participation by government and Organised Private Sector (OPS) employees, the next frontier will be in ensuring active participation by the much larger informal sector. This must be an industry wide strategy involving PENCOM, all PFAs and the Federal & State Governments, as they need to embark on a massive enlightenment campaign to bring more “converts into the fold”. It sure will be good economics for all PFAs to participate in widening the pool of potential customers. Upper and Upper-Middle Class Nigerians can also help in this crusade by formalising the employment of their drivers, cooks and legions of domestic employers by encouraging and signing them to a Pension Scheme and making the required remittances .

The second challenge I foresee for the industry is a possible lack of capacity to deal with the relatively huge sums of money in the Scheme. The largest player in the industry currently manages about N450 Billion (approx. US$ 3 Billion) in hundreds of thousands of Individual Retirement Accounts. Now, managing a large mutual fund – because that is essentially what a pension fund with thousands of IRA accounts is – requires substantial analytical, operational and customer service support. PFAs need to bulk up the strength of their investment teams to ensure above risk adjusted returns to investors – a task that becomes increasingly more difficult as the funds get larger!. Furthermore, ongoing plans to allow PFAs to invest in asset classes such as Private Equity and Infrastructure demand different skill sets from the typical stockbroker cum listed-equities analyst types that currently dominate the industry. In addition, PFAs may also collaborate on shared services platforms to support their operations and customer service activities to save costs and enable fund managers concentrate on their core competence: managing funds and not spend precious time reconciling accounts and/or responding to IRA account holders’ queries.

On the whole I think the Pension Reform is one of the greatest positives in Nigeria over the last decade (alongside our exit from the Paris Club debt overhang). However, we must “work out our pension salvation with fear and trembling” to ensure that all Nigerians realize the promise of a golden old age and a fulfilling retirement.

“Premium on Political Power” - Nigeria and the unproductive craze for political power

We are intoxicated with politics. The premium on political power is so high that we are prone to take the most extreme measures in order to win and maintain political power, our energy tends to be channelled into the struggle for power to the detriment of economically productive effort, and we habitually seek political solutions to virtually every problem. Such are the manifestations of the overpoliticization of social life in Nigeria - Late Professor Claude Ake

The eminent professor's quote, although almost three decades old, still rings true in the Nigeria of today. Since he spoke those words the political parties have changed, some of the actors in this political drama of shame have also changed, the styles of the Babarigas and suits have changed and even the internet and mobile telephony have also come to change the way we live and communicate. However, one factor in our lives still remains as constant as the Northern Star: many Nigerians still continue to regard the pursuit of political power - either through a ballot box or the barrel of a gun - as a "do or die" affair entirely devoid of principles and focused solely on self-aggrandizement, preservation and crass opportunism.

Although elections are keenly contested in every country with considerable sums spent on campaigns, Nigerians and other Africans have taken them to a whole new level and have proven to be only too willing to shed blood over the results. I have often wondered why this is the case, and the simple answer is: Government is TOO DAMN LUCRATIVE. The most lucrative line of work in Nigeria is not financial engineering, neither is it biotechnology or some other “esoteric” endeavour, but public “service”. The quickest and surest way to riches does not involve innovating to bring about new inventions, business models or even entire industries as we have seen developed world tycoons do, it simply requires an election to an executive or legislative post (executive preferably as you have control over budgetary spending and security votes).

I have therefore come to the conclusion that the best way to infuse some sanity into Nigerian and African politics and break the vicious cycle of violence that trails elections is to drastically reduce the size, functions and revenue streams of our governments. I am convinced that our politicians will not become less rapacious and vicious simply out of the kindness of their hearts, they will do so only if there is little or nothing for them to embezzle and by snapping the arteries that feed the great vampire squid called the “political class”. One tested way of blocking these “arteries” is Privatization: Nigeria and other African countries need to accelerate the pace of their privatization programmes and ensure that every “State Owned Enterprise” is auctioned off. I don’t care who they are sold to or what prices they are sold for: although I would be glad if they are sold at fair valuations to competent and credible organisations but that isn’t even a deal breaker for me. The critical point is to ensure that these companies cease being “wards of the state” with business operations existing solely for the enrichment of political party members.

Many Nigerians can still remember a time when the largest banks in the country were majority owned by the Federal Government, with many politicians – and military apologists – coming to regard the chairmanship and directorships of such banks as nothing more than “jobs for the boys”. The board members were making out like bandits while the banks were underperforming and neglecting their desired intermediation role in the economy, thereby hurting the very taxpayers that ended up subsidizing their inefficiencies. As if that was not enough we had to endure decades of import license regimes – our own insidious version of the Indian “license Raj”, which created black markets through which politically connected people made good money from just auctioning off these “pieces of paper”. As if this was not enough to test the patience of the ever long-suffering Nigerian populace, obtaining an amenity as basic as a telephone line became a jostle for supremacy as only people close to the powers that be could avoid a waiting list that was many years long. Now most people can just walk across their homes, buy a SIM card and be instantly connected for less than a thousand naira and I am sure nobody bothers to be friends with the district managers of NITEL (the state-owned company that has now lost its telecommunications monopoly)

Given the near eradication of the above mentioned absurdities, one will be tempted to declare victory and believe that we have climbed out of the abyss. However, this is far from true as the same disease is manifesting though different symptoms. Fertilizer distribution in the agrarian communities of Northern Nigeria remains a key avenue for patronage, with many fertilizer distribution lists closely approximating the membership lists of the political party in power. I still struggle to understand why the Federal and State Governments should concern themselves with importing and distributing fertilizer? This is something that can easily be left to the private sector with market forces ensuring that “rent seeking” middlemen are cut out with the farmer assured of constant supply at competitive prices without having to belong to the party in power. Electric power is another issue, as long as PHCN retains the effective monopoly for generating, transmitting and distributing electricity, Nigerians will continue to suffer the near-total absence of power while politicians use the Company as a time-tested and dependable avenue for patronage. Every year billions of dollars will be spent on generating plants, building transmission lines and buying transformers yet little discernible progress will be made in the electricity situation. The simple solution is to get these assets out of the government’s hands, private concerns will run it more efficiently and deliver reliable electricity to consumers at a fraction of what it will cost the government.

If Dr. Jonathan seeks to write is name in gold lettering in the annals of Nigerian history,, he would have to tackle corruption head-on and the best way to start is by instituting an aggressive privatization plan to sell off every concern that is not directly related to ensuring a social safety net and providing security law and order. I believe strongly that politicians in Nigeria - and Africa in general - would not get on the “straight and narrow” simply because it is the nice thing to do, they will only do so because of structures that constrain what can be mismanaged and misappropriated. It’s high time we starved these “great vampire squids” of blood!!

Electricity in Nigeria: Light at the end of the Tunnel?

“It is not written on the face of Nigerians that thou shall not have reliable electricity” – Prof. Bart Nnaji.

The above quote is from Prof. Bart Nnaji, professor of robotics, former Minister of Science and Technology, power sector entrepreneur and most recently the man charged by Acting President Goodluck Jonathan with delivering a new power sector blueprint. Prof. Nnaji’s statement summarises the frustrations felt by many Nigerians regarding the power situation in Nigeria and the attendant negative impacts that the power sector has on the Nigerian economy.

If the “Olduvai Hypothesis” statement of electricity being “the lifeblood of civilization” is true, then Nigeria must still be in the stone age with our businesses and households existing as though Thomas Edison was yet unborn. Our electricity sector is one of the worst in the world and is more reflective of a post-conflict society rather than that of a country that claims to be “the giant of Africa” and whose politicians are quick to state an ambition to be one of the top-20 economies in the world by the year 2020 (i.e. “Vision 20-2020”). Many economists agree that the parlous state of electric power supply in Nigeria is fully responsible for knocking one or two percentage points off our GDP growth rate as the most elemental of businesses, such as barbershops and photocopy centres, have to generate their own electricity and be left at the mercy of an equally precarious petroleum products supply chain. I firmly believe that the Nigerian economy will be set for unprecedented growth once businesses are liberated from the yoke of a power sector which has remained moribund despite billions of US dollars in government spending.

The key, in my opinion, to revamping the sector is not more government spending but a near complete liberalization of the sector. We must apply market-driven best practices to the power sector and fast track the unbundling, commercialisation and eventual privatisation of the PHCN. Market forces must be brought to bear in every aspect of the electric power value chain right from the gas supply infrastructure to the last-mile to the customer. Nigeria must be one of the few countries in the world in which gas-fired power plants will be fully completed and commissioned without the gas supply infrastructure to the plant sorted out. We must have a couple of hundred megawatts of electricity generation capacity idling because there is no gas supply to the plants, in a country ranked 7th in terms of proven natural gas reserves in the world. The answer is simple: the Oil companies would not invest in the domestic gas gathering infrastructure until the gas purchase contracts are at economically competitive prices which will ensure that they recoup their investments with a decent return on invested capital. The Federal Government can threaten all it wants but the honest truth is that domestic gas supply will remain poor until the gas supply arrangements are at market rates.

Secondly, the government must get out quickly from existing plants as well as those under construction or even contemplation and sell them to private operators. Most Nigerians above the age of 20 can vividly remember the pre-GSM era when NITEL officials were demi-gods who needed to be bribed, begged and even fed to fix lines that were disrupted due to the organization’s own inefficient billing system. I firmly believe that had NITEL kept its monopoly and the Federal Government pumped in enough money to rival all the investments by the various GSM companies to achieve our current 67 Million active lines, we would still not be able to check our account balances and we may never be able to make any calls on weekends when NITEL officials will want to spend time with friends and family. Anyone who thinks I am exaggerating should check the last time he saw someone make a phone call on the Mtel network ( NITEL’s GSM subsidiary).

Distribution Companies should be privatised quickly to competent private operators who will seek to profit by ensuring that the little electricity we generate gets to the consumer and is not wasted due to the inefficiencies of people who will complain of a lack of ladders. Generation Companies should be sold to profit motivated people willing to negotiate gas supply contracts at rates that will ensure that thermal gas plants do not turn to mere architectural masterpieces. Furthermore, these Gencos will also sign agreements to supply electricity to Distribution Companies with Service Level Agreements which will attract penalties when the terms are contravened. These investors will ensure that multi-million dollar turbines purchased are not left to rot in the ports, incurring demurrage for 4 years!!. Finally the National Grid, due to its sensitive nature, should remain under government control but with management and operation outsourced to a competent international firm whose compensation shall be transparently tied to the performance of the grid. Even the notion of a single National Grid should be also up for debate, why can’t we have multiple grids? Why must a Generating Company in Delta State seeking to sell power to the Port Harcourt distribution company have to go through a National Grid Station in Osogbo, Osun State?. We can break the grid into manageable chunks and get on with giving Nigerians electric power.

Will all this market determined rates lead to higher tariffs? You bet it will! My response to that is that the current PHCN tariff is artificial, Nigerians currently pay multiples of it by way of very expensive self generated electricity. The cost of small scale diesel-generated electricity, the main power source in Nigeria, is many times higher than any tariff a commercially minded electricity utility will charge. The government may choose to subsidize commercial tariffs over a period of time using some of the proceeds of the commercialisation and privatization programme. However, I think many corporate bodies and manufacturers will gladly pay higher fees, even in the absence of subsidies, as they will be spared the the capex of power generators and the recurring costs – and headaches – of purchasing diesel. I am sure MTN will be glad to stop maintaining 2 diesel generators per cell site and avoid its over N700 Million monthly diesel bill.

To deliver on these goals, the government must strengthen the regulatory capacity of the electricity sector’s regulator: Nigerian Electricity Regulatory Commission (NERC) to ensure that the reforms are carried out and the system works as envisaged.

Nigerians are one of the most enterprising people on planet earth and they will do much more with reliable electric power supply. I hope Acting President Jonathan writes his name in platinum by devising and executing a plan that rescues us from an electricity sector that has subjected many to subsistence living and exposed the nation to ridicule.