Homeward bound: Why companies are ‘re-shoring’ back to the UK

This is a piece of mine just published in Financial Director, a monthly magazine for British finance directors and chief financial officers that I used to edit a few years before going freelance. A few of the big business consultancies are saying that the time is right for British businesses to stop sending their manufacturing work to China and use companies at home- but the evidence that British businesses agree is not compelling. There are, though, a few small-scale operations that are making it work. Read about them below.

The British economy is beset by persistent structural problems. We haven’t been a manufacturing power for generations because we’re a ‘knowledge economy’.  It’s more profitable to sell land to a foreign investor than to stick a factory on it and make things. So why is ‘re-shoring’ – the practice by which British businesses stop outsourcing production of some or all of their goods and services to China and other historically low-cost, high-volume countries, and bring it home to employ, innovate and build at home – being pitched as a good thing to do?

With the inception of minimum wage law and the emergence of highly-skilled, better protected, educated workforces in some Asian countries, manufacturing in that region has become almost as expensive as it is at home. Yet the operational risks unique to doing so remain. At home, labour is cheap because it is unskilled. The tide has gone out on the labour cost advantage that Asia has offered.

So re-shoring is a pragmatic choice. “For us, it was quite simply a matter of cost,” Eben Upton, a founder and now chief executive of the Raspberry Pi Foundation, which makes and sells the ubiquitous low-cost computer. The Raspberry Pi Foundation transferred production to Sony’s South Wales factory in 2012 through its partner, Premier Farnell.

“While we were satisfied with the quality level of our original Chinese contract electronic manufacturer and their factory-gate cost, we were able to reduce the UK landed cost of our product through re-shoring. Subsequent cost optimisation – easier without a language barrier and physical distance – has delivered further savings,” Upton tellsFinancial Director. “We build in the UK because it’s cheaper than the alternatives.”

According to Big Four accounting firm EY, which published a study of re-shoring earlier this year, about half the manufacturing businesses in the UK have actively re-shored part of their operations or have been considering doing so. The government has established its own advisory, Reshore UK, to guide small to medium-sized businesses (SMEs) on the process of re-shoring.

The tide has gone out on the labour cost advantage that Asia has offered

However, Civitas, the think-tank, found in its 2014 study that only 64 British SMEs of some 49,000 observed had undertaken re-shoring. The study concludes that “only a tiny part of current production in China will be returned to the UK during the next five to ten years”.

Yet, Civitas lays out several frightening examples of problems British companies have had when giving manufacturing contracts to Chinese companies that would give any FD reason to re-shore. These range from manufacturers ignoring specific instructions on how to produce a product, delivering it months late and with faulty parts, using counterfeit materials in high-spec products, even factories running two production lines – one for the contracted manufactures and another for illicit copies, with nothing but a curtain separating them for the benefit of their visiting clients.

Meanwhile, the language barrier and distances involved in visiting factories add cost and complexity to their supply chains that slow down everything. Re-shoring requires careful planning if it is to bring the financial benefits you want. And it can go wrong. When Magmatic, maker of the famous Trunki children’s wheeled suitcase, moved all its production to a British manufacturer, Inject Plastics, in 2012, it was forced to buy the company six months later to keep the whole project afloat. Inject had cash-flow issues that resulted in the withdrawal of bank finance.

The move to buy Inject became pivotal to making re-shoring work: on closer inspection, it wasn’t equipped to do the job. “When we acquired Inject, we had a good look at what it needed and, yes, it did need further investment – in equipment and the organisational structure,” says Andy Jones, finance and operations director at Magmatic.

“Whether this turns out to be expensive will depend on the value we can continue to create. If we just saw a UK facility as cranking out a standard product at volume then it’s likely offshore operations could do it cheaper. We gave some thought as to how it could offer us a point of difference over our competitors.”

Raspberry Pi and Premier Farnell collaborated for some months on finding costs that could be removed from the manufacturing process, so that the re-shored operation had many more automated steps and needed fewer humans. Adding two holes to the circuit board greatly improved automation and allows faster response to spikes in demand.

Tim Lawrence, a manufacturing expert at PA Consulting, says FDs with whom he has spoken about re-shoring usually prioritise this ability in their considerations.

“Those FDs we have spoken to are interested in the ability to respond to customers’ demands more quickly and to hold less inventory,” he tells Financial Director.

At Trunki and Raspberry Pi, a vital benefit had to be the ability to bring research and innovation teams physically closer to production, to respond to the increasing thirst customers have for customisation and evolving design or capabilities of products. Manufacturing in Asia was simply too cumbersome. Re-shoring made it cheaper to chop and change designs, functionality and to release upgrades and new designs faster.

Magmatic’s Andy Jones says that buying Inject Plastics (now called Magma Moulding) gave the business a readily available, fully controllable and flexible resource that has created new business. “The inputs you need for successful innovation can vary greatly; it’s difficult to predict exactly what you’ll need and for how long. We’ve found that parts of our process lead us in directions we’d not fully considered at the outset,” says Jones.

“Having this access to our quality people has paid dividends in delivering brand new products – like our Trunki case with ‘in-mould’ labels, around which the case is actually moulded so you get no join lines. This has allowed our design team to be more creative with their artwork.”

Jones says there are no other case manufacturers that can in-mould labels onto a case surface which curves over numerous plains, making this a unique selling point it can offer its clients. “We can now make up to 1,000 Trunki cases a day, but we restrict it to about 600 to remain flexible and responsive if we get a sharp fluctuation in demand,” he adds. “Being able to develop new case decoration processes in the UK has helped differentiate us from the copycats. And the factory also acts as our warehouse, which saves us a lot of money on storage and gives us better control over our customer service.”

Those FDs we have spoken to are interested in the ability to respond to customers’ demands more quickly and to hold less inventory
Tim Lawrence, PA Consulting

But little has changed in Britain’s ability to provide skilled technicians and craftspeople, a linchpin element of the re-shoring proposition as painted by advisers such as EY. It posits a government policy of lowering employers’ national insurance contributions, especially for under-25s, to exploit the pool of young unskilled people for the purposes of promoting re-shoring.

However, re-shoring is more likely to be predicated on more automation, rather than more hands, as in the case of Raspberry Pi.

“The key issue in any migration project is retaining and transferring the necessary knowledge that can be difficult to capture and document. In the case of re-shoring, it applies especially when that knowledge, after a long period of offshore activity, has completely been lost in the country of origin,” says PA Consulting’s David Vasak.

With emerging technologies – such as 3D printing and global machine-to-machine connectivity on the internet of things – “a new industrial era is emerging. The way value is created in manufacturing will completely change,” he says.

“Productivity will be based on complex technology and a ‘knowledge workforce’ supporting flexible, highly automated value chains. These will project customer wishes through product development and production to a network of suppliers. Cheap labour won’t drive productivity anymore; here, we see great potential for the UK.”

It remains to be seen how many businesses are prepared to make those complex and fundamental changes to their model in order to benefit from the re-shoring idea.

Bolivia’s doble aguinaldo

I wrote this just before Christmas for the news briefing of the Bolivia Information Forum, about Evo Morales’ decision to double the annual Christmas bonus for state employees – and to enforce private businesses to pay it too. There is very little space in the briefing to discuss all the ramifications of the decision, be they political, social, and financial, as well as what it says about the trajectory of the Plurinational state today. I await late February and the deadline by which private businesses are legally bound to pay the double bonus. And I wonder what would happen if such a measure was taken in the UK!

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Double Aguinaldo: Private business on board, but some will struggle to pay

On 20 December, the Bolivian government issued a decree that brought into force the double bonus, or doble aguinaldo, a payment equivalent to one month’s salary to all salaried workers. This is in addition to the bonus, equivalent to one months’ salary, to employees each Christmas. The Supreme Decree 1802 states that the double payment this Christmas is intended to reflect the fact that economic growth is above 4.5%. The doble aguinaldo is to be paid each year for as long as growth remains above that point. In 2013 Bolivia expects to register growth of 6.5%, slowing to 5.7% in 2014.

Cerro Rico at Potosi, now a down at heel city in Bolivia but once the centre of the Latin American silver mining trade.

Christmas bonus payments equivalent to one months’ salary are common in Latin America. Critics have suggested that the doble aguinaldo is a political tool that Evo Morales is using to buy votes in the run-up to the 2014 national elections. Bolivia has around 400,000 state employees on an average monthly salary of $500.

The decree also requires private enterprises to pay their employees the double bonus, leading to criticism that doing so would push up inflation and make them less competitive. Daniel Sánchez, the president of the Confederation of Private Business of Bolivia (CEPB), met with Labour Minister Daniel Santalla and Finance Minister Luis Arce to negotiate the terms of the payment. As a result, a memorandum of understanding was signed giving private businesses extra time, until 28 February, to pay the bonus to their employees. State employees meanwhile were to have received payment by 31 December.

Several municipalities have said that they will have trouble meeting the requirement, despite the decree stating that, where this is the case, the Treasury will transfer the necessary funding. Meanwhile, smaller businesses, non-governmental organisations and the Catholic Church in Bolivia have said that they will find it next to impossible to fund the double bonus.

Less has been made of the fact that some 70% of Bolivia’s urban and rural workforce are in informal employment, meaning that the vast majority of individuals will not receive any bonus. Pensioners were quick to take to the streets to protest against their not receiving the doble aguinaldo, though they managed to negotiate a 3% increase in their pensions from 2014 over and above inflation.

Financial Director: Raising hope for Haiti

British medical charity Merlin won a charity prize last night and their tweeting about it reminded me that I had interviewed its director of finance, Vicky Ennis, in the aftermath of the Haiti disaster in 2010, about how charity finance people lead efforts to respond to major emergencies of that scale. Very much enjoyed researching and writing this article, and speaking with the finance directors from several charities who responded to the Haiti disaster – have a read.

One of Merlin’s mobile clinics in Haiti. Photo from Flickr.com/merlinphotostream

The utter devastation suffered by Haitian citizens after the 7.0 magnitude earthquake that struck on 12 January rendered the biggest humanitarian response ever recorded, reports claim. No ballpark figures yet exist, but several billions in individual donations combined with government gifts and a raft of large celebrity cheque signings amassed unprecedented sums, all within days of the event.

Getting it into the country in those first few days, though, proved impossible. Most of Haiti’s infrastructure and banking system are out of action; roads are decimated by mudslides or mountains of rubble from the estimated 280,000 collapsed or badly damaged homes and commercial buildings. And what use is a single dollar bill in a place where the markets, their suppliers and the ports allowing essential imported goods in are destroyed ­ while their proprietors may be among the estimated one million homeless, or the 530,000 dead or injured?

In fact, due to the level of disturbance, the response from UK charities to these challenges was quite literally to bundle up thousands of pounds and wire it to Haiti through neighbouring Dominican Republic. Vicky Annis, head of finance at medical charity Merlin, explains that her team of 12 finance staff had to do just that from its central London headquarters. “It has been quite literally a case of three or four members of my finance team taking £3,000 in cash down to our local Western Union several times a day,” she reveals. “It’s enormously time consuming.” Merlin was one of the first charities that had no previous business in Haiti to land there after the disaster.

David Membrey, acting chief executive at the Charity Finance Directors’ Group, confirms this has been practice elsewhere. “I know in the case of the 2004 tsunami that some charities, in the weeks after the event, were literally sending staff out with rucksacks full of dollars,” he says. “The destruction was so wide there that you could be on a project where there might not be a working bank for a 100 miles. It’s not a long-term solution but it’s a practical one.”

Faith-based charity Cafod’s head of finance James Steel has to employ his skills of persuasion and pull in help from around the business to cover sudden need from finance. Cafod has a financial accounts team, a financial management team and a humanitarian finance team, he explains, as well as donation processing people to call on if it needs extra hands.

Charity FDs say they were not hit with the response for Haiti until between 72 hours and the first week after the event, once trustees and directors (including the FDs) had decided on their level of response. Says Steel: “In early February, while Haiti was going on, we had external auditors going through what we’d done in Southern Sudan and Mozambique with a toothcomb. You’ve got to balance that over the life of a response to something like Haiti,” he says. “It brings a level of complexity into the organisation.”

In and out
While the process of getting money in the door is now automated thanks to online and text donations, FDs in even large charities found themselves struggling to upscale dramatically in the first days after Haiti to get it out again. It meant diverting finance staff from modest teams away from their usual duties, diverting funds to hire temporary staff or persuading other managers to get their non-finance volunteers mucking in.

“This office was full of volunteers processing credit cards on the weekend, because suddenly we had this massive surge and we had no time to plan around it,” says Joe Ghandhi, head of finance for Médicins Sans Frontières UK. “I was ringing our 0800 number first thing every morning to test the response time and some of our country websites had real bandwidth issues, so we had to switch things around.” MSF already had around 800 staff in the field on a long-term programme.

Cafod’s Steel concurs. “In the 2004 tsunami appeal we couldn’t change the message on our freephone donation number. It was Boxing Day and I was in the office trying to change it, but we couldn’t get hold of anyone,” he says.

Charity FDs are learning valuable lessons around how to plan for these problems that really hamper the increasingly common emergency responses they have to make.

In other, ongoing ‘silent’ crises such as the conflict and mass displacement of people in Jos, central Nigeria, or responding to the immediate needs and longer-term rebuilding efforts in Sumatra after last September’s earthquake, getting funds to disaster-struck communities on a regular basis proves difficult, too ­ and is part of the FD’s remit.

Cafod’s Steel reveals how far down in the detail FDs mobilising resources can be. “We’re making quite a big response in Jos and for that we had very immediate spending needs. We decided on the Friday that we needed money to respond and it got there on the Monday” ­ good going, given that getting money into rural Nigeria is difficult and we work with a lot of individual clinics there, says Steel. For Haiti, Cafod sent four people immediately, “but we were short on dollars, borrowing them right, left and centre, making sure they’d got credit cards: small things, but just making sure that they had what they needed.”

Informed response
MSF’s Ghandhi highlights the communication skills needed from FDs in crisis response. His finance function worked closely with its fundraising and press departments on the Haiti appeal to stay informed about what campaigns were running, as it has a direct impact on his mandate. “Because of that, finance knew early that we had a fantastic response from the public so we then had to shift quickly to asking donors to donate for our general programmes rather than specifically for Haiti,” he says. This fulfils its other longer-term projects and uses money wisely.

Keeping track of what is spent where, as well as building an overall plan to rebuild communities is something the charity FD needs to balance. Cafod’s Steel says that 72 hours after the Haiti earthquake his finance team were finalising areas of responsibility for spending mechanisms and for setting a framework for accountability.

“You need to establish mechanisms for receiving money, setting up o utsourcers which can be complex, then working out how all of it is going to get back into your database and how it is going to be accounted for,” he says. “You’re sending people to Darfur and you have to meet their pension and payroll needs.” Merlin’s Annis designated an additional finance person to manage everything to do with Haiti from the UK and assigned a specific code to all costs arising from the response, to make accounting for it simpler.

“Now it’s about bringing in all our financial procedures and controls so we can understand where we are for developing a full budget, having that reporting on cashflow and having an idea on a weekly basis what cash is going to be required in the field, and managing how we transfer the money on a much more regular basis.”

She adds: “We need to identify our Haiti spend against different donor projects and split them down into project level, start reporting against it and understanding where we are on our budgets.” Merlin will place a permanent country FD in Haiti for the next six months to oversee this reporting process.

MSF’s Ghandhi will need to finance the rebuilding of its three field hospitals, all of which were badly damaged in the earthquake. “I have to talk with our central team about how much we can spend over the next three years, say, to fix them ­ so our campaigns have to match that amount.”

Against the backdrop of what corporate FDs have had to manage recently, the work charity FDs have done to respond to Haiti and other disasters is impressive. “It can be difficult to scale up in a very dramatic way ­ something that no one in a sane world would do ­ but you just have to do it,” says Cafod’s Steel. “There is the supply chain management, procurement is very difficult and there is all the political stuff.

We had a briefing in early February from someone who just came back from Haiti and his message to us was, ‘why send tents when the rainy season is coming, can’t we get into semi-permanent construction’. The logistics of getting materials into the country with no infrastructure make that absolutely impossible.” At some point, though, they’ll just have to.

The charity FD and disaster response
In regular contact with charities across the UK, the Charity Finance Directors’ Group has the big picture view on how the sector responded to Haiti and some chronic issues charity FDs face in disaster response. Acting CEO David Membrey spoke with Financial Director about his observations and where he saw the troublespots for FDs.

• Logistics
“A good charity FD really understands the operational networks and logistics of the charity better than anybody else. They should know what is where and they should understand the systems that will tell them how many blankets they’ve got at their depot in Wigan, for example. If they don’t, they should know where to get it.”

• Sector-wide collaboration
“If you don’t have a programme in Haiti you don’t have to set one up overnight: you piggyback on somebody else. That happens a lot in the charity sector as they all know each other and often get together, so can share resources. They can do more if they share resources than they can if they work in isolation and there’s no point ordering the same thing for the same area.”

• Disaster planning
I know of some charities trying to set up a network of warehouses and facilities to house goods for emergency response across the world, rather than mobilising stuff from, say, Europe to be flown to the Caribbean or Asia at a moment’s notice. The next disaster of Haiti’s kind is not likely to be in London, so why keep all your stores there? FDs of charities need to think about this and I know they have done.”

• Donors should listen to the FD’s funding decisions
“Donors to the 2004 tsunami wanted to see immediate results and it was difficult for many charities to reconcile that with the need for long-term planning. The fact that a lot of that money wasn’t spent after two or three years was viewed negatively, but charities wanted to make a lasting difference, to rebuild homes so they won’t fall down the next time. That is a very real issue for FDs: they have to say, ‘no, at the moment the bank is the best place for it’.”

Campen FO: How the Dimbleby family is working through its cancer charity funding crush – and the question of future family involvement

This has just been published by Campden FO, the magazine for super-wealthy business families and their charitable foundations across the world.

For two generations, the name Dimbleby has been associated with British journalism. The dynasty was founded by Richard Dimbleby, who made his name as a World War II reporter, sending the first broadcasts from Belsen. He was later famous for anchoring television broadcasts of the coronation of Elizabeth II and the state funerals of JFK and Winston Churchill. Two of his children, David and Jonathan, are today household names for their work on televised election coverage and political programmes, while two of his grandchildren, Joe and Kitty, are also journalists.

All very well for the pages of high society gossip magazines, you may think. But there is a largely unknown side to the family. For almost 50 years Dimbleby Cancer Care, a charity founded by the family following Richard’s death from testicular cancer, has been quietly partnering with major cancer charities and leading cancer centres to fund critical research projects. It also works with the UK’s National Health Service to run free drop-in services at two London hospitals, Guy’s and St Thomas’, for cancer patients and carers.

David Dimbleby, best known in the UK for presenting TV coverage of general elections and other major political programmes on the BBC

The Dimbleby family has dominated the board of trustees since inception. David (pictured, right) is chair, although Jonathan will succeed him in the role at the end of this year, when David will become a regular trustee. Their younger brother Nicholas, a sculptor, is on the board, while Joe and Kitty, David’s son Henry, founder of the healthy fast-food chain Leon, and daughter Kate are also family trustees. Other family members have come and gone.

Enthusiasm is not lacking. But money is. Times have changed since DCC was founded. When Richard died in 1965 the family asked people to send money so they could start a charity. They did, in envelopes stuffed with cash. But these days things are done differently, of course, and the long-term economic slump in the UK and Europe is forcing the family to rethink the way it operates. The main source of income, an endowment, is running out of cash after 46 years, while philanthropic giving is down.

DCC is run on a shoestring. Its two drop-in centres run on just £220,000 (€255,000) each year. The family’s particular corner of research – ways to help cancer patients better bear treatment, on imaging techniques to identify appropriate treatments, and on end-of-life care – doesn’t attract big money. “We’re exactly in the catch-22 of a small charity,” says Jonathan. “We can do very important work very cheaply, but because we don’t have the funds to make a huge noise about ourselves and employ fundraisers in large numbers, or spend a huge amount of money before we pull in a large amount of money, it’s quite difficult for our voice to be heard.”

The fundraising and communications expertise that DCC needs can’t be supplied by the family trustees, so they are considering bringing in outside experts. The charity is, says Jonathan, “in a state of flux”. The NHS is too, with talk about privatisation rife, and the family doesn’t know how this might affect its relationship with the hospitals. But money is the big, immediate problem. “As a family we’ve had to confront some uncomfortable realities,” says Jonathan. “We’re at a point where we have to think very hard about the best way to generate funds, and therefore the best people to be intimately involved in that. Of course this includes the family, but it must also mean other people from outside who are willing, able and have the knowledge and experience to make things happen.”

Jonathan Dimbleby, journalist and TV presenter

Having a board of trustees dominated by the family could be a problem for some big donors who focus on professional boards and shun any hint of nepotism. Jonathan (pictured, left) is alive to this – and philosophical about the fact that the next generation members might not be the right fit for the future. “We like to see our next generation as free and independent spirits,” he says. “One of the difficulties with young people who have their own jobs and are busy is that they just can’t find the time they want to put into a project like this, no matter how important they regard it as being. They’re travelling, they aren’t all in the same place at the same time, or their families need their time. It’s not easy. But I think the important thing is the commitment of trustees, more than anything else. It’s just romantic to imagine that because DCC was started by us it is eternally, generation through generation, run by us.”

The family did try out an external director in Malcolm Tyndall, who joined the DCC from a fundraising role with the UK’s Home Office in 2008. But when he was headhunted away two years later, the family decided not to replace him. “In retrospect we didn’t have enough time to decide whether or not a director from outside the family was a good thing,” Jonathan says. “My instinct is that to justify that post in a small charity where the principal trustees are closely involved, you have to be operating on a scale that we are not yet at.” Now, he says, they not only want this, but they need it.

“I personally wouldn’t want a situation where we have no family trustees,” Jonathan says, “but equally I don’t want a situation where merely because you are part of the family, you are in a controlling position. The work is what matters, and the funds, the delivery of the services, and the research.” That means that the board has to have people with the right calibre, and able to make a big enough commitment. “My father would not want it to be a mausoleum for his memory,” he adds. “He would want this work to progress, for his offspring to want to achieve that as effectively as possible.”

The plaque in the BBC London headquarters, commemorating Richard Dimbleby, in whose name the Dimbleby Cancer Trust was founded by his children

DCC – a quick view
The DCC’s service-delivery work is delivered through two NHS hospitals, St Thomas’s – perched on London’s River Thames opposite the Houses of Parliament – and Guy’s, nestled behind London’s newest landmark, the Shard.

The charity also runs three funding streams:
The Dimbleby Cancer Care Research Fund awards up to £250,000 each year, funding research into the care needs of cancer patients and is one of the very few charitable operators in that field.

The Richard Dimbleby Chair of Cancer Research, which through an endowment to King’s College London supports the Dimbleby Laboratories, is working on imaging techniques to identify the most fitting treatments for an individual patient’s cancer.

The Dimbleby Marie Curie Cancer Care Research Fund, a partnership with Marie Curie – one of the UK’s biggest cancer charities – funds £500,000 annually in research on end-of-life care, though this will end in 2012.

Where’s the money?
Despite the economic climate, charitable donations have not collapsed in the UK or the US. “In general those who give tend to have finances that change on a longer-term cycle,” says Professor Cathy Pharoah of the Centre for Charitable Giving and Philanthropy at Cass Business School. Some foundations have chosen to use up their money because they are worried that the cash, whose performance is tied to the market, is at risk. Some philanthropists have actually increased their giving because there is nowhere good to invest their money. Some charities struggle for other reasons. There is a market for charitable giving just like there is a market for anything else, and cancer charities with a strong focus – a brand, you might say – tend to attract more money than generalist ones. Those specialising in particular kinds of cancer, such as breast, skin or prostate, appeal more. “Unless it has a strong, distinct profile, then a cancer charity is going to have problems attracting money,” Pharoah says. There are two ways for smaller charities like DCC to attract more money, she adds. Firstly, they can merge with a larger one. Or secondly, they can leverage their networks and contacts to attract large donations from foundations. In the case of the Dimblebys, with their contacts and family name, that might be their best bet.

Kitty Dimbleby, one of the next generation of the family leading its cancer charity

The view from the next generation: Kitty Dimbleby
Kitty Dimbleby (pictured, left), 32, is the youngest member of the DCC board of trustees having joined at 18.
On her reason for joining DCC As long as I can remember my father went to DCC meetings; once or twice they were even held in our family home. I would sneak downstairs and listen through the banisters, not really sure what was going on but knowing that one day I wanted to be part of it. As a child, teenager and young adult I was in and out of hospital with health problems and I met many young people living with cancer: before I turned 20, I had attended two of their funerals. It was, I am sure, this greater awareness of the illness and our mortality that compounded my childhood desire to help.
On being a teenage trustee I became a trustee at 18 but soon realised I was too young and had nothing of any use to bring to the table. I was galvanised to sign up again a few years ago when a friend was diagnosed with cancer. Now in my early 30s, having worked for a few years for the military charity Help for Heroes, I feel I could finally be useful.
On what the next generation brings to the table I think the younger generation brings something different to the charity – a fresh perspective and passion for the cause, which reignites that of the older generation. We have been able to introduce more modern methods of fundraising, such as social media. Although it is sometimes hard to get a word in, my father and uncles do listen and appreciate my input. For the charity to continue and move forward it needs us to be involved – much as they would like to, dad, David and Nick cannot keep working forever.

BBC News: How China’s growth ambitions drive global commodities

My latest news feature for BBC Business News Online– published today.

A bit of blather first. What’s kinda funny is that I visited a mine this week – I was at Big Pit in Blanaevon, Wales, on Monday. I’m a big, big fan of mining and visiting mines: I’ve been to the salt mines in Austria, iron ore mine in Broken Hill, Australia, opal and gypsum mines in Coober Pedy, Australia, silver and tin mines in Bolivia and now a coal mine in Wales.

I think it’s fascinating and important to see how the resources we never think about but that shape our lives come out of the ground, and to know the conditions the people who haul it out the ground have had to endure.

I got lucky on the Big Pit tour because one of my fellow tour-takers is a mining engineer having worked extensively in South Africa, and he told us that it is still law in South Africa that every mine must still have a canary. In this technological, safety-savvy era I’d have thought that method of checking for gas build-ups was long gone, but sometimes the simplest, cheapest methods are the best.

On my mine tours I’ve observed every level of safety preparedness – from world-class cutting-edge super machines, down to nil. Right now as you read this on your laptop or mobile, children are mining the raw materials in Latin America, Africa and Asia that will eventually be made into the components that make up your laptop or mobile. And the chances are, they are not wearing any of the safety gear you’d hope, the shoes and clothing you’d hope for very hot/very cold/very wet conditions, may not have access to water or sanitation or proper ventilation as they work, and are likely to be missing out on both education and decent pay and rights. (Let’s not even start on the topic of why children are working at all). So mining is worth reading about as we should not walk through life ignorant of this: though these are not issues I had a chance to explore in the piece below, you can Google all of that stuff and learn at will. Or go and visit a mine.

One more quick note. If you’re interested in the big cheeses running big mining firms, I interviewed the finance director of Rio Tinto, the FTSE-100 resources giant, a couple of years ago. You can read that interview here

And here’s the BBC piece.

Australia’s resources minister, Martin Ferguson, has caused a stir with his assertion that the country’s mining boom, one of the biggest drivers of its economic growth, is “over”.

Opal mining in Coober Pedy, Australia. Nothing whatsoever to do with this article except it’s a form of mining, and a photo I took myself. 2007.

As he acknowledged, the state of the global economy has depressed demand for Australia’s minerals and led to sagging commodity prices.

But those commodity prices have not just taken a tumble in Australia.

They have fallen globally, seemingly because Chinese economic growth has finally started to slow.

That is in part because European demand for its products has slowed. So China has started to produce less of those products, and needs smaller quantities of raw materials such as iron, copper, zinc and gold to do so.

Could Mr Ferguson’s call on Australian commodities also be true for the global commodities market at large?

Exit the dragon

You know how you so frequently see “Made in China” stamped on the back of your toys, phones, in clothing labels, and on your food packets?

To make that volume of products that quietly dominate our lives, China has had to suck in a huge amount of the world’s commodities.

According to the International Monetary Fund (IMF), in 2010, China consumed 40% of the world’s base metals – aluminium, copper, lead, tin, zinc or nickel, all widely used in manufacturing the gadgets and goods we use every day – and 23% of the world supply of major agricultural crops like wheat and corn.

And to build the cities, roads, ports and factories needed to produce that stuff, China has staged a construction boom – upping its need for commodities even more.

But Chinese policymakers have decided it is time for their economy to move away from that.

Thomas Helbling, a research chief at the IMF, said that China’s latest five-year plan for growth “strives to move the economy from investment- to consumption-driven growth”.

In other words, it wants to stop pumping cash into importing commodities and building infrastructure, and focus on selling products and services to its growing middle class instead.

Changing it up

As China buys less raw material, the effect of its dominance becomes apparent and global prices are now going down.

That is having an impact on economies as a whole, as Australia’s Mr Ferguson suggested.

Australian mining giants recently disappointed the country’s politicians. One, BHP Billiton, said it would put on hold its Olympic Dam extension project, reportedly worth as much as $30bn, which it was hoped would create 25,000 jobs in South Australia.

Some thought BHP Billiton’s decision was evidence of China’s change in growth expectations beginning to impact global demand, and other economies as a whole.

And having been protected from global recession by their mining boom, Australians do not want to hear that this is now under threat.

But BHP Billiton said it thought shrinking commodities demand would stabilise in 2013, including from China.

Ruchir Sharma, head of global emerging markets equity at Morgan Stanley, told the BBC that China’s economy was simply maturing, but that resulting lower global commodity prices could be good for emerging markets.

“China is moving to a much lower growth trajectory,” Said Mr Sharma.

“It is maturing, just as Japan did in the 1970s, [South] Korea in the 1980s and Taiwan’s economy in the 1990s.

“It has become too large to grow that quickly, and it is becoming less commodity intensive.”

Mr Sharma thought lower commodity prices would benefit a lot of developing countries such as Turkey and India, and even developed countries including the US.

And he added that the price of oil was more likely to fall than to keep rising, in his view.

“If China’s slowdown is managed right, it will be OK,” he said.

Supply and demand

One thing that has kept commodity prices high has been the lack of supply to meet a huge growth in demand.

The demand has been fuelled by China’s stellar growth, as it has become a major producer of the mobile phones and cheap T-shirts we use daily.

Commodities businesses all over the world have grown quickly off the back of that demand, making investments in mines, oil exploration, and boosting soybean production in Brazil, among other things.

But those investments often take time to bear fruit.

So commodities companies such as BHP Billiton are now deciding that the reduced demand for their products from China make it harder to justify investing in those projects for the moment.

For example, Jim Rodgers, co-founder with George Soros of the Quantum Fund, told the BBC that a lack of farmers played a starring role in a recent spike in food prices – grain, corn and soybean being critical parts of the food supply chain.

“The main determinant to commodities is supply and demand,” said Mr Rodgers. “We are running out of farmers because nobody has gone into agriculture for the past 30 years.”

The US, France and Mexico have said they may convene an emergency meeting at the end of August to address the high price of grain.

But Mr Rodgers does not think commodity prices will decline.

“I don’t see any significant new supply to bring this bull market to an end,” he said.

BBC News: amid the Olympic security blunder, who are G4S anyway?

I wrote a mini feature for BBC News online (front page for a while!) yesterday as a sort of primer for people reading a lot about how crap G4S are allegedly, but not actually having ever heard of G4S before. In short, G4S is a security firm that has a contract with the British government to train and supply 13,000 security staff to the Games and all the venues it’s being held in. But the scandal is that this week is was revealed they can’t supply all those people in time for the Games, so at the last minute 3,500 British soldiers have been drafted in to do it instead.

A great story to develop while the oncoming traditional summer story drought gets bedded in (only a shame it doesn’t feel like summer) that touches all the live topics in the UK right now: people’s thoughts on the incompetence of government and ministers, political game playing, greedy companies looking to make coin of government incompetence, and the hype from Britain’s biggest international event in decades.

Read on.

This is one of the UK Government’s posters to promote tourism in England while the Olympics is on. My self-hatred as an English person requires me to show you. Flickr/The Department for Culture, Media and Sport

“Securing Your World” is G4S’s maxim. But it looks like the world’s largest security firm has failed to secure its own world, at least as far as London 2012 is concerned.

Just fifteen days before the start of the Olympic Games, it has had to admit that it cannot supply all of the 10,000 security staff to Olympic organiser Locog it is contracted to.

As a result, 3,500 soldiers will stand in for G4S, at a time when the British Army is undergoing large-scale redundancies.

Who is G4S?

G4S has 657,000 employees in over 125 countries and makes its money from companies and governments outsourcing “businesses processes” – placing security staff where there aren’t enough police, for example, or prison officers where those are lacking.

Government contracts accounted for 27% of its £7.5bn turnover in 2011, and it had hoped to have a bumper 2012 as a result of its work on the Olympics.

“We protect rock stars and sports stars, people and property, including some of the world’s most important buildings and events” is how it presents its business – security made sexy, almost.

But G4S has run into difficulty with high-profile contracts before.

Last October inmates in Birmingham Prison, under G4S’s management since it became the first British prison to be transferred into private control, were locked in their cells for almost a day after a set of keys fitting every cell door went missing.

G4S runs seven prisons in England and Wales and is eyeing new business as police forces, under budgetary pressures, are looking to out source to companies like G4S.

Soldiering on

G4S is contracted by London 2012 organisers Locog to supply 13,000 staff to the Olympics.

G4S is not saying why it cannot fulfil the contract. It simply issued a short statement saying that it has almost 4,000 people at work across 100 Olympic venues and another 9,000 going through the final stages of its “extensive” vetting, training and accreditation process.

Now 3,500 British soldiers are to be deployed at two weeks’ notice to fulfil G4S’s pledge to keep the games safe, and during the time many of them had planned to take their summer holidays.

Keith Vaz, Labour MP and chairman of the Commons’ Home Affairs Select Committee said G4S had “let the country down and we have literally had to send in the troops”.

The question remains as to whether, or to what extent, the security firm will lose out financially.

Home Secretary Theresa May told the Commons that there was a clause in Locog’s contract with G4S that set out a penalty if they did not fulfil their agreed responsibilities, though she said that was a matter between G4S and Locog.

‘Significant challenge’

G4S shares fell as much as 4% after news of its contract troubles emerged.

But Caroline De La Soeujeole, an analyst at Seymour Pierce who covers G4S, said she did not think G4S would suffer financially.

“The share price reaction is overblown as the Olympics contract is a relatively small part of G4S’s revenues,” she told BBC News. “I don’t think profits at the year-end will be significantly affected by this news.”

G4S says that it experienced delays in processing its Olympic security job applicants that have held many back from completing their final checks and starting work.

BBC News online understands that many thousands of young unemployed people had completed the training but then had problems with incorrect employee system logins, or simply not heard from G4S about when they were supposed to start work.

At the time of writing, G4S’s Olympics homepage still said that there were places waiting to be filled at the Olympics.

Another analyst, who wanted to remain anonymous, suggested the way G4S handled the contract was not unusual, but it should have started the process earlier.

“G4S has managed this too tightly [to the deadline],” he said.

“But the government knew that the company would not hire people months off from the Games, that it would ramp it up much closer to the time they were needed,” the analyst told the BBC. “Any other business would do the same.

“The final part of the accreditation process is done by the government.

“One cannot start work until they have completed that. It’s a bottleneck.”

In March, the Public Accounts Committee said it was “particularly concerned” that Locog had asked G4S in December 2011 to supply twice the number of security staff it originally agreed to, trebling the cost of the contract from £86m to £284m.

It said that Locog and G4S faced a “significant challenge to recruit, train and coordinate all the security guards in time for the Games”.

Margaret Hodge MP, chair of the Public Accounts Committee, said it was “staggering that the original estimates were so wrong”.

Financial Director: Falkland Islands’ CEO Keith Padgett on preparing for oil wealth

I’m quite proud of my latest work for Financial Director, where I was editor until last May. It intrigued me to learn at the start of 2012 that the finance director for the Falkland Islands had been promoted to its chief executive. Why would a British Overseas Territory need a CEO, I wondered – and do they report to the Queen? I made some enquiries and managed to get in touch with him to organise the interview I turned into this piece, which is a departure from the usual profile style FD magazine runs because, well, the job and the setting are pretty unique. The man, readers would be pleased to know, is an absolutely standard finance man from the grass roots up, but took a life less ordinary. My only question now is: where does the job of Falkland Islands CEO take you for your next job?

I went for the interview because the Falklands and its future is so newsworthy this year, with the anniversary of the Argentine-British conflict and because it is on the brink of becoming an island of the oil rich. It was a real pleasure to explore it – if only FD’s budget could stretch to sending me out there.

I must give some props to Richard Crump, who I hired as my deputy editor and who now acts as my de-facto editor in my freelance life, for succeeding in getting some original photographs of Keith in situ. To see one go here.

Have a read.

Fires in East Falkland Island. Flickr/By NASA’s Marshall Space Flight Center. 2007. http://www.flickr.com/photos/nasamarshall/4058290521/

LAMENTING THAT Financial Director’s budget won’t accommodate a flight to Port Stanley, I ask Keith Padgett, chief executive of the Falkland Islands Government (FIG) since his promotion from director of finance in March, to paint me a picture of what he sees from his office window: “I can see the bay that is Stanley Harbour; on the other side the rolling hills and mountains beyond it. Straight in front of me is a flagpole with the Union Jack on it.”

Google Maps adds some more: there’s the 1982 Memorial Wood, the Falklands Brasserie, the Victory Bar. Two blocks over is Victory Green. Zoom out of the port inhabited by most of the Islands’ 2,478 residents and suddenly there’s just wilderness – nothing but long, lonely highways crossing vast tracts of land, where half a million sheep graze and where no trees have ever grown.

“It’s a place you either like straightaway, or you don’t. There’s no half measures here,” says Padgett. “Everybody knows who you are; everybody knows what I do. If I go to my local pub, I end up talking about government stuff in some way.”

Padgett arrived in the Falkland Islands in 2001 as its treasurer, fax machine in hand, advised of its perilously slow dialup internet. A Barnsley boy and local government finance careerist, he married in Port Stanley (the Islands’ governor, who acts as the Queen’s representative, gave the bride away), and little more than a decade on, Padgett has the future of his wedding guests in his hands. As for the internet connection, it remains one of their biggest problems, he admits.

Big opportunities

Its biggest opportunity is the quest for oil. As Argentina reignites the Falklands sovereignty debate, Padgett is studying the effect a major oil find could have on the economy, environment and way of life so cherished by locals.

Five exploration companies drilling around the Islands are hoping to find between 8.3 billion and 60 billion barrels of oil, three times what remains of the UK’s North Sea claim. A report published in February by analysts Edison Investment Research suggested FIG could see a $180bn (£116bn) windfall in tax royalties from oil. That compares with its current main source of income, fishing for Illex squid, which brings in $23m annually, demonstrating the pressure under which Padgett currently finds himself.

“I’ve commissioned a study – I call it the ‘ringmaster’ study – and what I want from it is for someone to come and tell us what kind of circus we might have down here,” says Padgett. “There’s going to be rapid expansion of the population and the amount of money in the economy, so it will affect us in all sorts of ways, and we need to be prepared for that.”

The expansion has already started. Padgett reported a million-pound budget surplus last December on the back of drilling income (as well as a bumper Illex squid crop). When the budget was prepared, there weren’t even concrete plans to drill. In the next financial year, Padgett expects another surplus, again from drilling revenues.

While he has received assurances from the industry that onshore effects will be limited by keeping floating extraction platforms and storage kettles, he will spend on readying the Islands to provide a support industry to rigs and vessels. But the tension between the potential for historic economic development and preserving a way of life is palpable.

“We need to spend on dock and port facilities, and short-term accommodation – and we’ll have to look at our immigration policies,” he says.

All this upheaval could change the Falkland Islands to a very different place by the end of his tenure, but Padgett expects the status quo to remain. “People down here are very conscious that they don’t want oil to change the place significantly. That is going to be a difficult challenge. We are not going to allow a free-for-all – it will not just be a case of grabbing every drop as quickly as possible,” he insists.

Having climbed from treasurer to deputy financial secretary and then to financial secretary proper, in 2008 Padgett felt ready for the CEO job and applied. He lost out to Tim Thorogood, but four years later had built the networks to demonstrate his non-financial skill.

“Although I was in charge of treasury, I was spending a lot of time in policy advice in all kinds of areas – running all kinds of things – and other service managers were looking to me for advice. So I had became a sort of de facto CEO some years ago,” he explains. “Everybody knew me and I knew them. I knew what the Islands needed.”

Village green feel

A place where the entire machinery of government is run by 550 people is going to have the village green feel. Padgett and the other members of the Legislative Assembly take on several portfolios at once; the director of education doubles as director of health.

“This place is different in that people expect me, as chief executive, to get involved in all kinds of things you’d employ a specialist to do in a UK organisation,” Padgett admits. “We’re an island that is very resourceful. One body does everything central government, county councils and parish councils do. Everybody turns their hand to all sorts of things, and that applies all the way through our society right up to the top levels of government. It makes life a lot more complicated.”

With the Argentine sovereignty row – which analysts Edison say is the single “proverbial spanner in the works” for FIGs’ oil ambitions – looming large, Padgett could expect a change to his daily life. He is “absolutely positive” that Argentina will increase the pressure, but says it makes little impact on his work.

“It’s frustrating and it’s annoying – we have shortages of things because of political interruptions – but they aren’t things we can’t live without,” he says. “Argentina has reneged on almost every agreement we had with them anyway, so there’s little else that they can actually do. We’re not particularly concerned and our major partners in the oil industry are also not too fussed.”

Padgett even thinks that Argentine president Cristina Kirchner’s provocations on the sovereignty of the Falkland Islands are helpful. “The amount of rhetoric Cristina produces gives us a world stage to say our piece. Before that, we had a difficult task getting anyone interested in the Falklands side of the argument,” he concludes.

Campden FO: Can Western family offices find El Dorado in Latin America?

 

My latest article on Latin America, published by Campden FB, a magazine for super-wealthy business-owning families.

There’s such a delay between when I file the copy, when it is published in print, and then when it goes live online, that some stuff seems out of date: the vagaries of publishing.

Have a read.

Can Western family offices catch a good investment in Latin America? Photo by me, Santa Catarina, Brazil. 2007

It’s accepted investment wisdom that Latin American economies offer spectacular returns for investors. The region’s economies are expected to continue to soar while Europe and North America bump along the bottom, printing more money just to survive. So is Latin America El Dorado for family offices?

Stocks on Mila, a stock market trading Colombian, Chilean and Peruvian companies on a single platform, rose in value by almost 19% in its first 12 months to May 2012, compared with the FTSE 100’s 9% rise and the S&P 500’s 12% in the same period. Brazil’s minimum wage will increase by 14% in 2012 and public expenditure on infrastructure is expected to rise.

Such numbers have the same effect on investors as micro-bikinis on Rio’s Carnival-goers. But Latin America has other attractions. It is in general more stable than it used to be (Argentina notwithstanding, see box). Such horrors as narco-trafficking and corruption are no longer as endemic as they once were in the region. Most pertinently, in many Latin American countries a massive middle class is rapidly emerging, and with that comes demand for better healthcare, retail, banking and other products and services. To meet that need, a Latin Mittelstand of dynamic, fast-growing businesses has begun to emerge; just the sort of businesses that appeal to investors.

The Latin American region still only represents a modest corner of most family office portfolios – usually between 3% and 5% – but it is increasing. Some family offices are taking advantage by buying up direct controlling stakes in growing businesses. Others are allocating capital to funds and funds of funds, channelling into the new area of middle class-targeting businesses.

So where to invest? And how? “The 800-pound gorilla in the room is Brazil,” says Paul Karger, founder of Boston-based multi family office Twin Focus Capital Partners, which invests directly in private equity in the region as well as through funds. “When you’re investing in Brazilian public equities most of that exposure is in the big commodity names – Petrobras [pictured, right] and Vale,” he says. The problem with such investment is that “you’re not really playing this emerging middle class, the 40 or 50 million middle-class consumers coming online needing all different sorts of products, technologies, education, insurance”. Investing in other countries can play into this story more effectively. “If you look at a market like Chile, it’s pretty mature,” Karger says. “Great regulatory system, transparency and so on. There are some incredibly compelling opportunities.”

Colombia is also seeing strong interest from investors in Europe. With more experienced managers who have plenty of experience with North American and European partners – and with Moody’s recently raising the country’s credit rating to investment grade – family offices are keen. “I wouldn’t even have thought about going there 10 years ago, let alone investing there. But if you go to Bogota or Medellin today you’ll see cities that are robust and bustling with commerce; people feel safe there,” says Karger. “I see a couple of private equity opportunities there each month; all they need is the foreign direct investment to provide the next layer of growth.”

Vitally important when moving into a new region is finding the right partners. Investment advisers helping European family offices access the region for the first time say they avoid the global finance names operating there and seek out the local banks, investment managers and local family offices with which to co-invest. Not only are the fees charged by local operators much lower, they are the only partners who really understand the environment, the risks and opportunities on the ground. Plus, the local families have skin in the game and an interest in picking winners.

The best tactic is to look for local managers who have spent time in Europe or North America. They understand the local market, and also the viewpoint of a western investor in Latin America for the first time. “There are groups locally who are well respected but the real problem is finding one who understands the mentality of the investor,” says an experienced Argentinian family office investment adviser, who has worked out of Europe for 20 years and helps European investors find Latin American partners. “In Brazil you’ve got lots; there are a few in Colombia, Mexico, Peru and Chile, but in Argentina, Uruguay and Paraguay there is only a handful.”

Corinna Traumueller, chief executive of Family Office Management Consulting, which works with families all over the world, says: “Family offices want a partner who can give them a good estimation of the risks in that region, especially political instability, in places like Brazil or Argentina; they’re asking now how Latin America can fit into their portfolio. They’ve done land investments there, they’ve done commodities there, and now they are interested in small businesses where they can invest significantly in a venture opportunity with a local partner.” She says a number of her clients in New York and Miami are particularly keen on Latin America, although the Europeans on her books have so far not taken the plunge.

Traumueller says the private banks, family offices and advisers that have those local contacts, and which host the networking events that bring Latin American families and funds together with potential investors, are the gatekeepers to the region. “More and more investment networks are popping up to bring together co-investing families of a similar size,” she says. “But there is still no one good way to facilitate those meetings.”

Therefore a good, trusted partner is invaluable. Rampart Capital, a London-based multi family office, relies on a principal partner, Brazilian bank BTG Pactual, for its pipeline of local investment opportunities, introductions to local managers and for local due diligence. “Most families are overweight in their own markets, so when you try to go outside it, and try to find a good local partner, you’re starting with a blank sheet of paper asking: ‘Who do I know?’” says Graham Noble, partner at Rampart. “At BTG Pactual I know the principals and most of the senior executives. They still treat their investors as partners, which is a rarity. It’s a question of trust; if they’re doing a proprietary trade I know they’re putting a significant amount of their own cash into it. That sort of relationship is a prerequisite for a lot of families going into Latin America.”

Don’t get hung up on getting a board seat, says Noble. “Good shareholder agreements and the proper paperwork will get you to where you want to be. If you can get the right local partner who is putting their own cash into a deal, and you’re comfortable with their abilities, you don’t need to be that actively involved,” he says. “The hardest bit is to find that good local partner, someone who will enhance your return on capital, and if everything happens to go south they are the same person who will help you to get out of it with a minimal loss.”

Personal contacts can help, of course. When he was looking at the region, Rod Walkey, managing director of Latin America Alternatives Management and formerly chief investment officer at Migration Capital, the family office for the founders of Fortune 500 technology company EMC Corporation, teamed up with a Harvard MBA classmate who used to be the portfolio manager for the Petrobras pension plan’s private equity group.

“I interviewed several private equity managers in Brazil and came to the conclusion that it was going to be difficult to find the best managers on my own,” says Walkey. “You want locals that have done at least one fund and can show a track record. I searched for a fund of funds but there was no good alternative, so I wrote a business plan for one of my own. Through my study at Harvard I met my business partner, who had invested $1.5 billion into just about every local fund manager in Brazil. He had a very deep scorecard system and all the analytical tools that have tracked the market for five years; it shows me who the real players are down there, where the best deals are, and that means we get entry valuations far lower than foreign funds can.” Together Walkey and his partner built a $400 million private equity fund of funds investing into mid-caps in Latin America.

Amid the excitement, a quick reality check. Investing in Latin America is not a sure-fire winner. SAP forecasts growth in Latin America to slow from 4% in 2011 to 3.5% in 2012 and 3.6% in 2013, and believes the region will be prone to shocks as Europe’s economic shifts play out. Emerging markets including Latin America will see more capital inflows from abroad as they post stronger growth than advanced economies, the agency says, but warns “there will be periods of reversal and tighter financing conditions”.

And while there are undoubtedly opportunities, foreign investors might well find it tough to get hold of the real peaches. The very best local investment houses and family offices often don’t need to co-invest with outsiders. “Perhaps they don’t need the capital, or they don’t want to share,” says Rampart’s Noble. Walkey agrees that this can be a problem. “Most of the money going into the local funds is from pension plans,” he says. “In my opinion, the best local managers are the ones who aren’t looking for money outside their market, because they have a sufficient supply from their home market from those pension funds.” The ones who are looking abroad are the ones who have to. El Dorado hasn’t been found just yet.

A food market in Salta, Argentina. Photo by me, 2007

Wealth and soberania
Cristina Fernandez de Kirchner’s decision in April to nationalise the 51% stake in Argentinian oil company YPF that Spain’s Repsol owned is a reminder of the risks posed by investing in some Latin American economies. Two weeks later, neighbouring Bolivia – already in The Hague with British utility operator Rurelec over its nationalisation of that company’s Bolivian assets – nationalised the country’s main power grid, owned by Spanish firm Red Eléctrica Corporación.

Repsol says it will pursue compensation; possible tariff punishments are threatened by the European Union, and EU trade commissioner Karel De Gucht says it may take the case to the World Trade Organization.

Economic arguments are put forward to explain nationalisation; the pretext that foreign owners had not invested sufficiently to make the assets work for their host countries.

Beneath that is the thorny issue of sovereignty – soberania – and votes. The spectre of colonialism is a common lever among some Latin American governments desperate for the popular vote. As China’s dominance in Latin America grows, there are fears Argentina will write more protectionist investment rules, as did Brazil in 2011 over foreign land ownership. “Argentina is going in the same direction because of Chinese and Middle Eastern investors in the region. Governments want to be careful how much of their resources are owned by foreigners,” says one Argentinian family office investment adviser. “Argentina has fallen off the map as far as investors are concerned.” That said, FOMC’s Traumueller says families she speaks with put Argentina second on their list of interests after Brazil.
The China effect
A sign that growth in Latin America is sure to increase is the Chinese interest in the region. Thirsty for more natural resources to fuel its growth, China has $43.9 billion (¤33.78 billion) invested in Latin American stocks, according to the Latin Business Chronicle, citing data from China’s Ministry of Commerce. Chinese exports to Latin America were valued at $121.7 billion in 2011 while the value of its imports from the region reached $119.8 billion. FOMC’s Traumueller, who has some new family office clients in China, says while they have made no investments in the region yet, they are enquiring about it. “They are part of an emerging market themselves and operate businesses taking risks every day in those markets, so they are now looking for a safe haven for their money further afield than their usual favourites in Europe, such as Germany,” she says. “As Europe has become unstable, they’ve started looking elsewhere.”

Campden FB: Is film investment all fur coat and no knickers?

“It’s possibly the only instance in which prospective investors will be disappointed to see no sign of knickers.”

How did I get away with that one – in a magazine for the world’s wealthiest, often most conservative business families? This is a piece I wrote in 2004 for Families In Business magazine (now called Campden FB) about investing in film production. Very enjoyable.

Have a read.

Members of Lord KItchener’s First Aid Nursing Yeomanry, 1907. But have they got knickers under those fur coats? Heh. Flickr/National Library of Scotland

Returns of 500% sounds pretty juicy, but nothing’s for free. Melanie Stern scratches the surface of film investment and finds that this silver screen temptation is, well, just a boring old tax shelter – albeit a useful but ill-understood one

You might think it would take a pretty radical game of free association to link film and hedge fund investment, but it’s simple. The relation is three-fold – big due diligence and regulatory concerns make them both very high risk.

If one looks behind the proverbial fur coat of the film industry, it’s possibly the only instance in which prospective investors will be disappointed to see no sign of knickers. Film investment is simply a tax deferral scheme for the very wealthy, which is fortunate since this group is most likely to have the capacity for losing vast amounts of cash. Experts stress repeatedly that most individual investors never see their money again but the investment can be valuable as a capital gains shelter within the family portfolio – or simply, a pure passion investment with no expectation of returns.

The provision for the wealthy to invest in films has recently come under threat in the UK. Last February, the UK Treasury closed down a number of film production funds operating to the new Generally Accepted Accounting Principles (GAAP) on fears they could give rise to abuses. To keep an eye on money flowing into these schemes and to keep it closer to the country, the Government has also been working to ensure that only ‘British-qualifying’ films are accessible.

One of the more popular tax deferral schemes – due to expire next July – is Section 48 Sale & Leaseback. Focused on production budgets below £15 million for a British-qualifying film, investors put up around 20% of the gross investment, and are permitted to write off the investment to receive a 40% tax rebate on exit from the scheme, paying the money back to the Revenue over 15 years.

It is to be replaced with ‘son of Section 48’- but observers say this will benefit only the producers and not investors.

“The whole industry is trying to figure out what role there might now be for the private investor, as there are no solid products replacing the closed schemes,” says Martin Churchill, Editor of the Tax Efficient Review (TER) and an expert in UK film partnerships. “I think the market for the private investor will drop away completely post-July.”

Section 42, providing tax deferral for budgets over £15 million, remained untouched by the Treasury but is less popular with the wealthy as the tax deferral structure is shorter-term, and because it is focused on smaller, less commercial projects. Institutional investors, though not as commonly involved, can benefit from this scheme because they pay a lower rate of corporation tax.

Like the scandal-ridden hedge fund industry, film partnerships grapple with a nascent and shifting regulatory landscape that serves to keep many wealthy investors, such as families, away. In the UK, the Inland Revenue keeps a close grip on these schemes for its own gain, but the UK’s Financial Services Authority sees them as unregulated collective investment schemes. Additionally, most companies selling investment participation have not been obliged to take regulatory status from the FSA, although they can be if a large group of individuals decide to sell these schemes together. It’s a vague distinction, but it is changing. The Treasury announced in February that all intermediaries will “soon” be required to register with the Inland Revenue, which could improve investor protection and sell-side transparency.

Simon Conder, creative products director of London’s Brass Hat Films, accepts the drivers of negative perception and explains that it is down to investors to swot up before they hand over cash to the industry. “You don’t need to be regulated in this business but it is in everyone’s best interests if you are,” Simon says. “If we’re selling directly to an individual, we will do it through our FSA-regulated arm which provides financial advice outside film.”

For the meantime though, many family investors just won’t touch anything entertainment-related as a matter of course, and the number of film investment fraud cases can only perpetuate that. “We keep away from entertainment unless we have real inside information on the company and the people,” one US-based family office member tells Families In Business. “Private investors are being seduced by the promise of glamour and high returns, but as I understand it, film is very high risk and only offers a very small opportunity for a very large payout.

“Of all the private equity opportunities out there, entertainment is the one with the most fluff.”

Companies that sell private placement in film do appear to make much of the ‘soft’ perks, offering investors one’s name on the rolling credits, on-set passes, premiere tickets, director’s chairs, and lots of other high-falutin activities – but spend less time detailing the financial risks resulting from one of the financial sector’s perennial bugbears, due diligence.

There are many risk factors in film investment that merit thorough due diligence before parting with any cash, usually all relating to how commercially successful the film can be, the main driver of returns for the hierarchy of investors.

Everything from the choice of director to the cost of each production stage, to the intermediary going bust, through to the star quality of the cast and the possibility that the film will not even be released threaten the individual investor’s chances of a return. (Take the precarious examples of Swept Away directed by Guy Ritchie and starring wife Madonna, or Gigli, starring celebrity ex-couple Jennifer Lopez and Ben Affleck: sure-fire mega-hits on paper, unbelievable loss-making stinkers in reality.)

Some companies allow clients to decide which parts of the process one’s money goes to, while others put it all into a pot and decide for themselves. That aside, the distributors always take between 50–75% of the box-office profits as the first creditor in the queue, followed by the major studio investors like MGM who take similarly large slice, followed by region-specific distributors like 20th Century Fox and recoupments for ‘print and advertising’ costs. Simple arithmetic can illustrate how low individual investors rank. For example, of the total US$22.5m capital currently being invested to make one commercial film starring a top Hollywood star, one leading film partnership company sunk $2.1m for its investors; to its own conservative projections it expects to end up with $571,500 (UK£311,105) to distribute to its clients, who each put in a minimum of £50,000.

“The majority of films turn a profit, but individual investors often don’t see it, because they’re right at the end of the creditor’s line,” Conder explains. “But if one of our current projects, Steve Martin’s Shopgirl, does as well as Sofia Coppola’s Lost In Translation did, then our investors will see a return of around 450-480%.”

If that were the case, perhaps film partnerships would be more popular with the wealthy than other risky investments like derivatives or art.

Currently there is no legislation or any best practice guidance for the sell-side to ensure that clients are shown proof of thorough due diligence and risk assessment, and the relevant authorities have so far not shown interest in reviewing this. “There is usually a sponsor involved in projects who conducts the due diligence, but it is a very difficult area and investors need to be extremely careful,” TER’s Churchill warns. “There’s a lot of mis-selling in this business – these are very complex schemes and the risks are not always pointed out. Some IFAs don’t even know the risks themselves. I think most investors are told, ‘put in £1 and walk away with £1.50’, but life is never that simple.”

Our family office member concurs. “The golden times of high return, risk-free investment through tax deferrals has gone. Film investment always requires massive due diligence – you’ve got to know who you’re getting into bed with. That’s why it is so illiquid as an investment choice. A film investment is not an investment in film – it is an investment in a tax scheme.” Despite this, Churchill estimates that in 2003 UK investors pumped some £1.5bn into these schemes

The allure of the red carpet has clout among the wealthy and even with their close advisors, but involvement in the sector is held back by a lack of understanding or education. “People continue to think that film is fundamentally risky, but it is no more speculative that buying oil or commodity stocks,” Conder argues. “It is still outside most people’s financial understanding and there still aren’t enough experts in the field to guide investors.”

HR magazine: How can finance directors and human resources directors collaborate on ROI?

My second piece for HR magazine, and one in which I found hardly anyone wanting to go on or off the record. I think I clocked about 15 finance director calls and almost as many HR directors. Goes to show that FDs, who are the top numbers people in their organisations, don’t want to know the return on everything the company does – though it’s interesting to consider whether they should, and how they could do that. I once had a boss who told me that each page in the magazine I edited, if the magazine is working, should have the same and specific cost, vis-a-vis my monthly editorial budget (I forget the number). He was bean-counting it. I thought it was stupid. But then companies need to know what their outlay is to know their profits.

By the way, doesn’t the term ‘human resources’ make your blood run cold? Ah, we are but wooden beads on an abacus: assets to be counted, sweated, used and abused. The word ‘human’ there is not really more than a figleaf – we’re merely ‘droids.

Have a read.

Japanese merchant, identified as “Mr Shojiro”, holding an abacus, taken between 1867 and 1869. Flickr/National Library NZ on the Commons

It is funny how, at the hint of a chance to talk about an HR director’s recent success in launching some shiny, new, bleeding-edge benefits system, a contacts book can fly open – and how it snaps shut when you want to talk about how they measure its return on investment.

Even funnier how the same thing happens when you want to talk to a finance director about those metrics.

Of about 10 finance directors approached for this feature, not one wants to talk about how they measure ROI on HR systems, and of the same number of HRDs approached, just two agree to discuss it on the record.

The HRD at one of the UK’s largest retail gambling outlets, which recently bought and rolled out a platform it hopes will help improve service levels, increase staff productivity and reduce staff costs across 10,000 employees, tells me off the record it initially wanted to roll the system out across the entire business – but decided to only use it in one part, because the trial showed “it didn’t forecast the ROI results we initially thought it may”.

That HRD doesn’t want to go into why.

At the same time, the HRD at a large hotel group implementing a system to automate labour scheduling and improve productivity says it is too early to talk about ROI. “We are in the middle of implementation and nowhere near able to comment on how we measure the ROI,” she tells me.

Another knockback comes from the chief finance officer of one of the UK’s oldest employers, which has just started rolling out a self-service system merging payroll and training on one platform for 16,000 people: “The system is only just about to go live, so I have no idea of its impact on the business – and the bit we are most interested in, which will pay staff, won’t be up and running till the autumn.”

Even these titbits open up a plethora of questions: Didn’t our gambling company HRD need to be confident of the ROI prospects before disrupting the business with a trial? Didn’t the hotelier HRD consider ROI measurement before buying in the system? And is it worrying that an organisation’s chief numbers person has no idea of ROI on his burning platform ahead of launch?

Could it be that neither HRDs nor FDs have a clue how to measure ROI on their reassuringly expensive employee benefits, online training, employee engagement and payroll systems – so simply don’t?

As another finance director – who prefers to remain anonymous – tells me: “It is a pretty cutting-edge area.” Why? “I have never done it.” It seems that’s a common response.

According to talent management technology provider SHL, which surveyed its HRD clients in November 2011, just under half of those clients across the globe collect metrics to demonstrate the value of their HR investments – 6% less than in 2011 – although 70% of its clients admit they feel under pressure to demonstrate ROI on the hire assessment platforms they use.

Interestingly, 42% of SHL’s clients are required by ‘internal stakeholders’ – be they the FD, the CEO or the board – to demonstrate a link between hire assessments (increasingly done through HR platforms) and business outcomes.

SHL’s survey shows that, while more HRDs are being asked to demonstrate the benefit of HR platforms to the company’s bottom line, fewer HRDs are now doing so. And the silence emanating from HRDs and FDs when asked to talk this through is deafening.

The motivation for buying in an HR platform that can automate employee benefits, training and the like often comes from somewhere other than the HRD, says Doone Selbie, an interim HR systems director who works with a range of UK employers on their platform implementations and setting their ROI metrics. With the single metric usually being to save money or reduce headcount, the finance director is frequently the person making that call.

Selbie has often seen HR platforms integrated with those of the finance department. This means HRDs don’t own or have access to the data the platforms produce – so they can’t do any value analysis. “And what they have access to they don’t use, because HRDs, although they are in charge of a lot of processes, aren’t good at process standardisation and ownership,” she says. “Quite often the end-to-end process of an HR platform isn’t within their remit. If HRDs don’t have good processes, it is difficult for them to measure ROI on their systems; if they don’t have good systems, it’s difficult to measure the effectiveness of their processes. Often, they just have a gut feeling that the process needs improving and will buy a new recruitment system for that. They know the system will cut a few days off their hiring process, but they won’t have the time or resources to work out how long that new process is, end to end.”

And the way HR defines a metric is different to how finance does it – another bone of contention. “I don’t think FDs are interested in HR… they report numbers and payroll costs, but the numbers that finance does on HR are to do with cost of employ,” adds Selbie. “And I would say HRDs don’t understand their systems – they don’t see it as their job and they’re not massively systems-literate. They have delegated it somewhere.”

In 2009, mid-sized business publisher Incisive Media built its own employee benefits, training and payroll platform, YouChoose, using its in-house IT team. Some 73% of its UK staff use the platform.

Incisive’s HRD Stuart McLean believes the platform costs nothing, because it was built by existing staff and is run by the existing HR team. It seems more likely the costs are hidden, because no-one wrote any cheques to platform vendors or consultants. Measuring ROI on YouChoose could include the salary costs of staff that were taken off other projects to build the platform and the proportion of time its HR team spends on running it; this data would provide one metric towards the true cost, versus the £100,000 annual saving McLean says the business enjoys from it every year.

“Return on investment is not something we specifically measure. There was no real cost and no budget attached to YouChoose; it doesn’t really cost us anything, because we run it ourselves,” says McLean. “Yes, it does take up staff time, but that is very difficult to measure, because it looks after itself to a large extent.” What about other metrics: does it retain staff? “We would like to think so, but there’s no absolute measure of that,” he says. “What do we get back from it? We believe we are a more attractive employer because we offer benefits, but that is incredibly difficult to measure. Maybe it sounds naïve… but measuring its ROI is just not something we do.”

If HR were a religion, judging the value of a platform by what you like to think it does for staff retention would be adequate. One department that could provide hard-boiled ROI on HR investments is that of the chief technology officer or chief information officer, where they exist. CTOs and CIOs drive efficiency from systems across all parts of a business, and are experts in data collection and analysis to be used in business strategies. In other words, they are the cone-heads who really take an interest in HR ROI.

Information systems (IS) staff, as Selbie terms it, “are the gate-keepers of ROI, rather than the finance people, in my experience. Funnily enough, I see more cases of IS enforcing ROI calculations, justifying the business case for such investments and ensuring a business follows the appropriate project-management steps before investing, than I do from FDs,” she adds.

So many HRDs not only delegate ROI somewhere else, as Selbie says, or don’t see how things such as employee engagement or better employee satisfaction can be measured. Stanley Janas, a former HRD at US performance-management business, Halogen, warns that HRDs can’t hide from the increasing demand for HR ROI for much longer. “One of the things we often hear from customers and prospects is that they struggle to define the ROI of an automated talent-management system in order to justify its purchase,” he writes for Halogen’s blog. “Let’s face it, most of us don’t have deep training in finance, and are sometimes a bit intimidated by the prospect of financial calculations and estimates. But calculating ROI is critical for HR to get support from their business leaders for any investment in talent management.”

Speaking on how finance and HRDs can – or should – work together on ROI, Kathryn Hill, finance director at Crown Paints, dismisses as a mere excuse the notion that HR can’t measure metrics. “A business operates to maximise shareholder value, which is measured through financial results. Human resources has a role in explaining how performance strategies affect this, or how staff engagement impacts on performance,” she says. “It is not about who moves closer to who, but that the two disciplines drive towards the same strategic function.”

Do HRDs and FDs understand why they should know the ROI on these platform investments? They often say they do, but the evidence is stacked against that assertion. Incisive’s McLean says that his CFO is happy with the savings YouChoose has brought the business, but that ROI doesn’t come up in conversation at all. “If the organisation doesn’t force the HRD to measure HR ROI, they won’t do it. And the people to force it are likely to be the IS people more than the finance people,” adds Selbie.

In the future, though, HRDs may be forced by economic imperatives to get familiar with ROI and taking responsibility for process ownership. Jason Averbrook, CEO at HR consultancy, Knowledge Infusion, says the IT organisations he deals with regularly want to support HR, but not by “spending time writing custom reports or designing one-off interfaces between applications”. He believes HRDs need to ask themselves how they move towards a model that removes heavy reliance on IS or IT.

And Selbie adds that HRDs get frustrated with tech people when they can’t grasp how to extract data from their systems.

“They don’t understand all the nuances around the difficulty of extracting information, except that people will tell them it is difficult. They may talk about how long it takes to recruit and how much it costs, but they won’t be asking what their system does to support that and how valuable it is in helping with that – ‘does it give us those calculations?’ They just want to know how to increase the speed of hiring.”

Finance directors, ironically, have a similar mindset.

How do employers measure ROI on their technology systems?

The difficulty in measuring return on investment (ROI) through HR technology is that these tools often give intangible returns that can lead to more effective systems within business, but don’t translate into financial figures.

The Society of Human Resource Management (SHRM) advises ROI of HR technology could be measured as follows:

• Reduced time and resources required to deliver outputs
• Improved data reliability and validity
• Improved maintenance and operational costs
• Contributions to strategic business objectives
• Contributions to strategic talent objectives
• Indirect costs – avoiding unnecessary costs made by incorrect decisions
• Improvements to user satisfaction
• Improved individual and team performance
• Improved attraction and retention of HR staff

With technology, rather than using traditional ROI to measure effectiveness of HR technology, SHRM also suggests employers could consider a cost/benefit analysis. SHRM compares the two methods as follows

ROI

• Appropriate only when both ‘investment cost’ and the ‘return’ come over a short period
• If longer, need to factor in time
• Problem is finding an appropriate investment cost figure
• Sometimes presented as a set of financial metrics, rather than one

Cost/benefit analysis

• No precise definition
• Positive and negative impacts are summarised and weighed against each other
• Include a time dimension
• Attempt to quantify every impact
• Do not exclude an impact if it cannot be quantified

Here are some practical examples of how employers we spoke to measure the value of HR technology:

• Reduction in HR staff time spent carrying out administration processes
• Reduction in staff absence through measurement through online systems
• Reduction in time-to-hire and cost of advertising jobs through use of social media recruitment
• Up-take of employees using e-learning or mobile learning solutions
• Cost savings from avoiding sending staff to training courses or bringing in trainers through e-learning or mobile learning
• Cost savings on purchasing HR software by using cloud technology to store data
• More collaboration between employees and higher staff engagement scores, thanks to more effective internal communications