Category: Investors

The future of investment dispute settlement

The original article was published in Family Office Magazine and can be found here.

Entrepreneurs engaging in international investments face several issues when they are accused of a breach of contract. When the investment agreement does not provide solid provisions for dispute settlement, endless legal discussions and expensive court cases in unfamiliar jurisdictions can be the result. This article provides simple solutions for both investor and beneficiary to avoid such issues. 

The solution to avoid endless legal battles is to insert an arbitration clause in the investment agreement (out of court legislation). Arbitration has numerous advantages.

  1. Unlike in court, parties can select an arbitrator with an appropriate degree of practical experience. For example, a Court of Arbitration has a list of arbitrators who are experts in the field of digital commerce.
  2. Arbitration is faster than litigation in court, and a time limit can be placed on the length of the process.
  3. Arbitration is cheaper and more flexible, more commercial and less formal than court.
  4. Unlike court rulings, arbitration proceedings and arbitral awards are confidential.
  5. Unlike in court, there are very limited avenues for appeal of an arbitral award, which limits the duration of the dispute and any associated liability.
  6. Due to the provisions of the New York Convention 1958, arbitral awards are far easier to enforce in other nations than court judgments.

From an international perspective, there are several courts of arbitration that offer an effective way to solve investment disputes. Below are examples (in alphabetical order).

Astana International Financial Court (AIFC Court)

The AIFC Court in Kazakhstan provides a common law court system that operates to the highest international standards to resolve civil and commercial disputes in the Astana International Financial Centre.  It adjudicates exclusively all claims arising out of the AIFC and its operations and other claims in which all parties to the dispute agree in writing to the jurisdiction of the AIFC Court.  

The AIFC Court has its own court of final appeal, its own procedural rules, and a special fast track for small claims. Its Chief Justice and judges are among the most experienced and distinguished judges from the common law world with global reputations for independence, impartiality, integrity, unconditional application of the rule of law, and incorruptibility. The judges, procedures, practices and standards at the AIFC Court will be familiar to businesses currently operating in major financial centres around the world.

Website: http://aifc-court.kz

Dubai International Financial Courts (DIFC Courts)

The laws establishing the DIFC Courts were designed to ensure the highest international standards of legal procedure, thus ensuring that the DIFC Courts provide the certainty, flexibility and efficiency expected by the global institutions operating in, with and from Dubai and the UAE. The laws enacted provide for a court system capable of resolving all civil and commercial disputes, ranging from sophisticated, international financial transactions to debt collection and employment disputes.

The DIFC Courts deal exclusively with all cases and claims arising out of the DIFC and its operations and any other claims where all parties agree in writing to use the DIFC Courts. The DIFC Courts carry out their functions in an independent manner, in accordance with the provisions of the DIFC laws and regulations.

Website: https://www.difccourts.ae

Court of Arbitration of the European Chamber of Digital Commerce (ECDC Court)

As an activity of its parent organization, the Swiss Chamber of Commerce in The Netherlands, founded in 1933, the Court of Arbitration of the European Chamber of Digital Commerce plays a crucial role in today’s digital world. Issues specific to digital technology include fintech, blockchain, cybersecurity, digital currencies, and intellectual property. Fairness has always been a business tradition observed in Europe, making the region so prominent as an arbitration location. The Court of Arbitration is conveniently located at Schiphol International Airport in The Netherlands.

The Court of Arbitration applies the UNCITRAL Arbitration Rules of the United Nations Commission on International Trade Law which meet international legal standards. The rules are concise and easy to understand, comply with current national and international legal developments, and are published in several languages.

Unless parties do not agree otherwise, the Court will apply the neutral UNIDROIT Principles of International Commercial Contracts to judge the dispute.

Website: https://europeanchamberofdigitalcommerce.com

London Court of International Arbitration (LCIA)

The LCIA is one of the world’s leading international institutions for commercial dispute resolution. The LCIA provides efficient, flexible and impartial administration of arbitration and other ADR proceedings, regardless of location, and under any system of law. The international nature of the LCIA’s services is reflected in the fact that typically over 80% of parties in pending LCIA cases are not of English nationality. 

The LCIA has access to the most eminent and experienced arbitrators, mediators and experts from many jurisdictions with the widest range of expertise. The LCIA’s dispute resolution services are available to all contracting parties without any membership requirements.

Website: https://www.lcia.org

Arbitration Institute of the Stockholm Chamber of Commerce (SCC)

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has developed into one of the world’s leading forums for dispute resolution. The SCC was established in 1917 and is part of, but independent from, the Stockholm Chamber of Commerce. The SCC consists of a Board and a Secretariat and provides efficient dispute resolution services for both Swedish and international parties. The SCC was recognized in the 1970’s by the United States and the Soviet Union as a neutral centre for the resolution of East West trade disputes. Also China recognized the SCC as a forum for resolving international disputes around the same time. The SCC has since expanded its services in international commercial arbitration and emerged as one of the most important and frequently used arbitration institutions worldwide.

Website: https://sccinstitute.com

Conclusions

When you want to avoid legal dramas unfolding from an investment agreement, check the websites above and copy the relevant clause into the agreement before signing. Another option is to persuade the counterparty to allow an already arisen case be settled by one of these arbitration institutions.

About the author: Bob Juchter van Bergen Quast, LLM, FSS, is the President of the Court of Arbitration of the European Chamber of Digital Commerce. Juchter van Bergen Quast has the right of audience before the AIFC. He is Chief Executive Officer of the Swiss Chamber of Commerce in The Netherlands and the European Chamber of Digital Commerce.

Intermediary commission percentages to raise money from investors

Investment banks and other consultants can plan and execute a fundraising campaign for startups and for companies in the growth phase. A reputable fundraising intermediary will likely speed up the process, reduce the legal risks, and negotiate a better deals. Most brokers will take a monthly retainer plus 5 percent to 15 percent of the investment. That may sound like a lot, but taking into account the time and risks, hiring an experienced expert can be very budget friendly.

Commission guidelines

The Lehman formula is a compensation formula developed by Lehman Brothers to determine the commission on investment banking or other business brokering services. Lehman Brothers developed the Lehman Formula, also known as the Lehman Scale Formula, in the 1970’s while raising capital for corporate clients.

The original structure of the Lehman Formula is a 5-4-3-2-1 ladder, as follows (accumulated amounts):

  • 5% of the first million EURO involved in the transaction
  • 4% of the second million
  • 3% of the third million
  • 2% of the fourth million
  • 1% of everything thereafter (above EUR 4 million)
Today, financial experts often seek some multiple of the original Lehman Formula, such as the double Lehman Formula (or the triple Lehman) (accumulated amounts):
  • 10% of the first million EURO involved in the transaction
  • 8% of the second million
  • 6% of the third million
  • 4% of the fourth million
  • 2% of everything thereafter (above EUR 4 million)
A more common variant used by mid-market M&A specialists and business brokers is the Double Percentage Lehman (“Modern Lehman”). Under this variation both the percentages and the scale are adjusted, instead of the percentages only. In addition, the percentage is held constant at 3% above EUR 8 million (accumulated amounts):
  • 10% of the first  million EURO
  • 9% of the second  million
  • 8% of the third million
  • 7% of the fourth million
  • 6% of the fifth million
  • 5% of the sixth million
  • 4% of the seventh million
  • 3% of everything thereafter (above EUR 7 million)

Source: Investopedia

How Chambers of Commerce Help Family Offices and Wealth Management Firms

A Chamber of Commerce has traditionally furthered the interests of businesses in a particular geography or market sector by way of representation, business services, and networking opportunities. Multilateral Chambers of Commerce can link the business environments of two or more countries, such as the Swiss Chamber of Commerce in The Netherlands.

International Chambers of Commerce, such as the European Chamber of Digital Commerce, aim to boost companies’ reputation and growth in a particular business sector, such as Digital Technology. Some are governmental, nonprofit, or private organisations.

This article, written by Bob Juchter van Bergen Quast and published in Family Office Magazine, presents some unique benefits that Chambers of Commerce can offer businesses in an independent, impartial manner.

Read the full article here

Functions of the AIFC Court

The AIFC is underpinned by an ambitious objective to become the financial hub for Central Asia, the Caucasus, Eurasian Economic Union, the Middle East, and Europe. The new financial centre is positioning itself to attract US$ 40 billion of investments by 2025 and ensure about 1 per cent growth in the carbonless GDP of Kazakhstan. Kazakhstan is the largest and most oil rich country in Central Asia.

Legal framework

The governing law of the AIFC is based on the Constitution of Kazakhstan and has a special legal regime, consisting of the AIFC Constitutional Law “On the Astana International Financial Centre” (the Law), its own independent judicial system and jurisdiction based on English common law and standards of leading international financial centres. The official language of the AIFC is English.

Like its neighbouring financial free zone the Dubai International Financial Centre (DIFC) (whose Courts were selected to advise the Kazakhstan Central Bank on establishing the AIFC’s commercial court and arbitration centre), the AIFC has its own specific legislation to address issues arising in the context of companies, contract, implied terms, obligations, damages and remedies, employment and partnership law.

It is reported by the Prime Minister of Kazakhstan that a total of 30 general-purpose AIFC Acts and 17 financial services regulation acts were developed and subsequently adopted by the relevant bodies of the AIFC. About 50 acts constitute the legislative framework of the AIFC.

Source: Norton Rose Fullbright

Official opening of the Court of Astana International Financial Center (AIFC)

The official opening of the Court of Astana International Financial Center (AIFC) took place in Nur-Sultan.

Since January last year, civil and commercial disputes have been solved in accordance with the best international practices and based on English law. The first case went to AIFC court in February of this year. The case is now available in English and Russian on the court’s website.
At similar international financial courts in Dubai and Qatar the first case was considered much later. “We managed to get enforced through the enforcement agency in Kazakhstan almost immediately and that is a world first, that never happens in new international financial centers,” said Registrar of AIFC Court, Christopher Campbell-Holt.
The AIFC Court is an independent institution as part of the financial center. According to the registrar of the Court, Christopher Campbell-Holt, the presence of this court in Kazakhstan is an additional factor to investment attractiveness of not only the country, but also the Eurasian region. “No one can tell our judges what to do. That is written in the constitution in law, court and arbitration center. It is very important to protect international investors, to show them, to give them perception,” Campbell-Holt also said. He added that the AIFC court and the International Arbitration Center will enable investors from all over the world to invest safely in Kazakhstan.

Do I need a private placement memorandum (PPM) when attracting investors?

Yes. If you are seeking to raise investment money for your startup, keep in mind that the best measure you can take to protect yourself against frivolous claims is by disclosing as much information about your company as possible. This way, if things go wrong and your private investors threaten to sue you for securities fraud or the government files a regulatory action against your company, you can use your disclosures in your defense.

One of the best ways to disclose information to investors is to have Private Placement Memorandum (PPM) made for you by a lawyer. What is a PPM?

Disclosure Document

A PPM is a detailed disclaimer that includes relevant disclosures about your business that allow investors to weigh the risks involved with providing your company the agreed funding. PPM’s share similarities, but are all different due to uniqueness of the type of the business and characteristics of each investment. PPM’s should contain warnings regarding the business, its history and background, risks involved, financial forecasts, legal structure and ownership changes, and legal and financial details about the offer. It is very important the the PPM contains a warning that governmental regulations regarding protection of the public (consumers) do not apply.

PPM’s are Worth the Investment

Your PPM is more than an insurance-type expense. The PPM can be used in your defence against frivolous claims from both investors and government regulators.The PPM makes it harder for a potential claim to be successful and it improves your legal position dramatically.

It is important to keep in mind that, if investors are not informed regarding the risks involved, you open the door to legal action and investigation by the Financial Authorities. Please also keep in mind, that investors will not be very understanding when they loose money and do not care about the personal relations you have built up in the course of time.

Like a prescription drugs is obliged to explain risks, your investment offer must follow the same requirements. You should be prepared for the worst in terms of lawsuits and most even lawyers, when you start the process of attracting investors.

Why Explain Risks?

The risks involved with investing in your company must be described in great detail in a PPM. Disclosing these risks clearly before investors start funding your business is the best way to protect you from lawsuits claiming you defrauded or misled them.

Risk Factors to Describe

General risk factors are common for most or all private placement offerings. A disclaimer is needed in your PPM. Furthermore, investors may not be able to sell the securities for a given holding period and must be made aware of this. Specific risk factors should focus on the challenges your business faces. These include a disclaimer regarding its industry, customers, strategy, and management.

The following is an example in a PPM of some of the risks involving an debt or equity investment:

  1. Lack of operating history. The Company is recently incorporated and has therefore limited operating history upon which Investors can evaluate likely performance. There can be no assurance that the Company will achieve its Investment objective or that the strategy applied to the Company will be successful.
  2. Key individuals. The Company is highly dependent on–among other factors- the attracted Investments, professionals employed by the Company and its advisors. There can be no assurance that the Company will have continued access to them.
  3. Development risks. The Company may be exposed to development risks and the returns on the Investments may therefore be subject to some extent to the risks associated with the development of certain projects.
  4. Business and market risks. Any future market recession could materially adversely affect the value of Investments and the assets of the Company. Returns from an Investment are generally affected by overall conditions in the economy, such as growth in gross domestic product, employment trends, inflation and changes of interest rates. Furthermore, the financial condition and results of operations of the Company will depend on the ability of the Company to manage future growth and effectively implement its business strategy.
  5. Currency exchange rates risk. Company will be exposed to foreign exchange risks if it has receivables and payables whose values are directly affected by currency exchange rates. Contracts between two different firms with different domestic currencies set contracts with specific rules. This contract provides exact prices for services and exact delivery dates. However, this contract faces the risk of exchange rates between the involved currencies changing before the services are delivered or before the transaction is settled. Company also faces foreign exchange risks due to economic exposure – also referred to as forecast risk – if its market value is impacted by unexpected currency rate volatility. Currency rate fluctuations may affect the company’s position compared to its competitors, its value and its future cash flow. When the Company bids for foreign projects, negotiates contracts directly with foreign firms, or has direct foreign investments, it faces contingent exposure. When Company negotiates with foreign firms, currency rates will continuously change before, during and after negotiations occur.
  6. Interest rate risk. Fluctuations and changes in interest rates may adversely affect the financial condition of the Company.
  7. Law, regulatory regime and permits. Laws and regulations governing the operations of the Company may adversely affect the business, Investments and results of operations. The failure to obtain or to continue to comply with all necessary approvals, licenses or permits, including renewals thereof or modifications thereto, may adversely affect the Company’s performance, as could delays caused in obtaining such consents due to objections from third parties. New laws may be introduced which may be retrospective and affect the business which the Company is involved with. The Company could be adversely affected by delays in, or a refusal to grant, any required governmental approval, as well as by the application to the Company of any legal or administrative restriction.
  8. Litigation risk. Investment in the Company involves certain risks normally associated with Investment in the business of the Company, which includes for example the risk that a party may successfully litigate against the Company, which may result in a reduction in the assets of the Company. The Management is not aware of any pending litigation against the Company.
  9. Tax and regulatory changes. The tax regimes applying to the Company and/or its Special Purpose Vehicles (“SPV”), the ability of the Company to repatriate its assets and other operations of the Company are based on regulations which are subject to change through legislative, judicial or administrative action in the jurisdictions in which the Company and/or its SPVs operate and/or invest, thereby affecting the tax treatment of the Company and/or its SPVs in these jurisdictions.
  10. Operations of the Company. The Company may be unable to pay interest. The Company may not achieve the Company’s business objective. The Company may experience fluctuations in its half-yearly and yearly operating results.
  11. Interest payments. Investors should note that interest payments on the participations is not guaranteed and will be at the discretion of the directors after taking into account various factors including the Company’s operating results, financial condition and current and anticipated cash needs.
  12. Collateral. The Company, either directly or indirectly through its SPV’s, may use property or other assets as collateral to secure a loan. If the Company stops making the promised loan payments, the lender can seize the collateral to recoup its losses.
  13. Insolvency. It is possible that the Company, due to many unpredictable and/or predictable factors, might become insolvent, whereby the potential Investors could lose all value of their Investment. However, currently there is no indication that such situation will occur in near future.

Choosing between debt and equity financing

Debt Financing

Borrowing money to finance the operations and growth of a business can be the right decision under the proper circumstances. The owner doesn’t have to give up any control of his business, but too much debt can inhibit the growth of the company.

Advantages

  • Retain control. When you agree to debt financing from a lending institution, the lender has no say in how you manage your company. You make all the decisions. The business relationship ends once you have repaid the loan in full.
  • Tax advantage. The amount you pay in interest is tax deductible, effectively reducing your net obligation.
  • Easier planning. You know well in advance exactly how much principal and interest you will pay back each month. This makes it easier to budget and make financial plans.

Disadvantages

Debt financing has its limitations and drawbacks.

  • Qualification requirements. You need to have a good enough credit rating to receive financing.
  • Discipline. You’ll need to have the financial discipline to make repayments on time. Exercise restraint and use good financial judgment when you use debt. A business that is overly dependent on debt could be seen as ‘high risk’ by potential investors, and that could limit access to equity financing at some point.
  • Collateral. By agreeing to provide collateral to the lender, you could put some business assets at potential risk. You might also be asked to personally guarantee the loan, potentially putting your own assets at risk.

Deciding factors

  • How important is it for you to retain full control of the business?
  • How important is it to know precisely what you’ll owe in monthly payments?
  • Are you comfortable with making regular monthly payments?
  • Are you able to qualify for debt financing? How is your credit history? Do you have a good credit rating?
  • Do you have collateral you can use? Are you comfortable with using it?

Equity Financing

With equity money from investors, the owner is relieved of the pressure to meet the deadlines of fixed loan payments. However, he does have to give up some control of his business and often has to consult with the investors when making major decisions. In the case of higher amounts, Rosemberg’s approach provides companies with fast and direct access to public capital without having to go through a complex and costly process to obtain a listing. This means that companies that are in an early investment phase will also have other funding options than only through venture capital or private equity.

Advantages

  • Less burden. With equity financing, there is no loan to repay. This offers relief in several ways. First, the business doesn’t have to make a monthly loan payment. This can be particularly important if the business doesn’t initially generate a profit. This also frees you to channel more money into growing the business.
  • Credit issues gone. If you lack creditworthiness—through a poor credit history or lack of a financial track record—equity can be preferable or more suitable than debt financing.
  • Learn, gain from partners. With equity financing, you might form partnerships—informal, perhaps—with more knowledgeable or experienced individuals. Some might be well connected. If so, your business could benefit from their knowledge and their business network.

Disadvantages

  • Share profit. Your investors will expect—and deserve—a piece of your profits. However, it could be a worthwhile trade-off if you are benefiting from the value they bring as financial backers and/or their business acumen and experience.
  • Loss of control. The price to pay for equity financing and all of its potential advantages is that you need to share control of the company.
  • Potential conflict. Sharing ownership and having to work with others could lead to some tension and even conflict if there are differences in vision, management style and ways of running the business. It can be an issue to consider carefully.

Deciding factors

  • If your creditworthiness is an issue, this could be a better option.
  • If you’re more of an independent solo operator, you might be better off with a loan and not have to share decision-making and control.
  • Would you rather share ownership/equity than have to repay a bank loan?
  • Are you comfortable sharing decision making with equity partners?
  • If you are confident that the business could generate a healthy profit, you might opt for a loan, rather than have to share profits.

Source: Jim Woodruff,chron.com

Getting Haiti back in the saddle

Goal of the article

In 2017, Professor Michael E. Porter of Harvard Business School gave an important presentation about a strategy for restoring Haiti’s prosperity. A crucial part of his advice is to “make attracting foreign investment a core strategy“. In this article I will provide a suggestion to implement such a strategy.

The causes of Haiti’s poverty

Poverty in Haiti affects its people in many aspects of everyday life, including housing, nutrition, education, healthcare, infant mortality rates, as well as environment. Haiti has constantly been plagued with low levels of living conditions, with many Haitians moving into the capital city of Port-au-Prince in a bid to escape poverty in the more rural areas of the country. Levels of poverty in Haiti are generally regarded as among the most severe in the western hemisphere. This short article describes the origin of Haiti’s poverty and provides a solution to get the country back in the saddle.

French extortion for re-enslaving

An important cause of this poverty is the debt they ‘owed’ to France after fighting for their independence; France demanded a payment of 150 million francs ($20 billion dollars) as ‘compensation’ for the profit they lost when Haitians freed themselves from slavery on plantations producing coffee and sugar. Most of this was still being paid until 1947.

The United States stealing Haiti’s gold

On July 28, 1915, United States Marines landed in Haiti on the orders of President Woodrow Wilson, who feared that European interests might reduce American commercial and political influence in Haiti, and in the region surrounding the Panama Canal. The precipitating event was the assassination of the Haitian President, Jean Vilbrun Guillaume Sam, but United States interests in Haiti went back as far as the previous century: president Andrew Johnson wanted to annex both Haiti and the Dominican Republic. Twenty years later, Secretary of State James Blaine unsuccessfully tried to obtain Môle-Saint-Nicolas, a northern Haitian settlement, for a naval base. By 1915, the Americans were also afraid that an ongoing debt Haiti was forced to pay to France tied the country too closely to its former colonizer; Germany’s growing commercial interests in Haiti were another major concern. So one of the first actions carried out by the United States at the start of the occupation was to move Haiti’s financial reserves to the United States and then rewrite its Constitution to give foreigners land-owning rights.

During the nineteen years of the United States occupation, fifteen thousand Haitians were killed. Any resistance to the centralized, United States-installed puppet governments was crushed, and a gendarmerie—a combination of army and police, modelled after an occupation force—was created to replace the Marines after they left. Although United States troops officially pulled out of Haiti in 1934, the United States exerted some control over Haiti’s finances until 1947.

Stealing by the Duvalier family

From 1957 to 1986 Haiti was ruled by the corrupt and oppressive Duvalier family. Loans incurred during this period alone were estimated to account for approximately 40% of Haiti’s debt in 2000, before debt relief was granted. These funds were used to strengthen the Duvaliers’ control over Haiti and for various fraudulent schemes. Large amounts were simply stolen by the Duvaliers.

New loans

With the devastating effects of the early 2010 earthquake in Haiti there came renewed calls for a further debt cancellation from civil society groups. In light of the tragedy and new borrowing that lifted Haiti’s debts back to $1.25 billion, groups such as the Jubilee Debt Campaign called for this debt to be dropped. Furthermore, during the aftermath emergency money was offered to the Haitian government from the IMF in the form of loans. Civil society groups protested the offer of loans and not grants for such an already heavily indebted country trying to cope with such destruction. 

On 28 May 2010, the World Bank announced it had waived Haiti’s remaining debts to the bank. The value of the waiver was only $36 million.

In 2015, France forgave only about US $77 million in a modern debt, unrelated to independence. In 2004, the Haitian government demanded that France repay Haiti for the millions of dollars paid between 1825 and 1947 as compensation for the slaves’ freedom. In 2015, the French government rejected this plan and said that it would consider investing in the country.

Conclusions

The Battle of Vertières on the island of Haiti on 18 November 1803 was the final event that stood between slavery liberty in Saint-Domingue. It involved forces made up of former enslaved people on the one hand, and Napoleon’s French expeditionary forces (who were openly committed to re-enslave the former enslaved people and regain control of the island) on the other hand. The result was that Napoleon’s troops pulled back from Vertières, knowing they were defeated and that Haiti was lost to France.

Because Napoleon had failed to re-enslave Haiti he was missing the plantation revenues. As war with England was inevitable and he could not raise enough assets, Napoleon abandoned his colonial policy. France’ immense territory of Louisiana was sold to the United States on 30 April 1803 by means of the Louisiana Purchase Treaty. It was the birth of what now is considered the most powerful nation in the world, as Livingston made clear in his famous statement: “We have lived long, but this is the noblest work of our whole lives…From this day the United States take their place among the powers of the first rank.”

The West still profits from the international political and economic role that the United States plays in the world. The country contributes to world peace and has liberated Europe twice from German dominance. However, until now, the West has only contributed to Haiti’s poverty. It is my opinion that not much can be expected from the West and that Haiti needs to take into account that it needs to get back on its feet without or with minimal foreign aid.

Solutions

In order to restore Haiti to its former glory, I suggest the following.

  • As France has suggested it would invest in Haiti, a way of doing so would be to implement access to internet all over the country, so Haitians can have access to the open education platforms of e.g. Coursera. The French government could also fund a liaison office of the Institut européen d’administration des affaires (INSEAD) in Haiti that provides open education. INSEAD prides itself that it offers participants a global educational experience. With campuses in Europe (France), Asia (Singapore) and Middle East (Abu Dhabi), and alliances with top institutions, INSEAD’s business education and research spans around the globe. Our 150 renowned faculty members from 40 countries inspire more than 1,400 students in our degree and PhD programmes. In addition, more than 11,000 executives participate in INSEAD’s executive education programmes each year. I see INSEAD as an institution that can provide an ideal impuls to develop the level of education that Haiti needs to become an emerging market.
  • A very important step to taken, is the implementation of Blockchain technology in a new (to be developed) Haitian offshore banking sector. There are offshore jurisdictions that are working to attract Crypto banks. As an example, Puerto Rico just issued a license for a Cryptocurrency International Financial Entity (Puerto Rico’s version of a banking license). Dominica is also active in the issuance of quality offshore banking licenses and makes allowances for cryptocurrency. 
  • In addition, a number of open-sourced groups have been formed to increase the availability of blockchain technology for offshore banks. For example, the Enterprise Ethereum Alliance became the world’s largest open-source blockchain initiative on July 18, 2017. With members like MasterCard, Cisco and Scotiabank, I have high hopes for this team.
  • A new Companies Act should be drafted, with input from the industry’s stakeholders. Such an act should eliminate the complex and cumbersome approach to formation and operation of companies. A well-functioning Companies Registry to compliment these new laws should eventually provide affordable accessibility to the company law. Ultimately, a significant reduction in the overall cost of doing business in Haiti should be the direct result.
  • With technical aid from the International Monetary Fund, a new International Banking Act should be passed to regulate and supervise all offshore licensed banks. This ensures protection of depositor’s assets and sound banking practice and qualified management are in place.
  • A Mutual Assistance in Criminal Matters Act is needed. The aim is to regulate the provision by Haiti of international assistance in criminal matters in the prevention of Money Laundering of proceeds from criminal activities and terrorist funding.
  • A new Insurance Act is needed to provide for the licensing, regulation and supervision of insurance business. This is to promote the maintenance of efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders.
  • Providers of company and trust services must apply for a license to offer such services and to be regulated with a system that sets out their legal obligations as license holders. This ultimately protects users of financial products and further enhances the reputation as a finance centre.
  • A new Companies Act should provide the courts with as much direction as possible to allow them to continue to make decisions on company law. The underlying objective of this is to reduce gaps and grey areas in the legal system.
  • The promise this proposed law is holding out is to ultimately remove the expensive, time consuming and protracted process of incorporating a company. The approach to this is to replace the traditional Memorandum and Articles of Association with a straight forward Application Form. The Application Form will contain the essential information required by the Registrar of Companies to satisfy himself prior to accepting or declining the application to incorporate a company.
  • Part of this shift is to introduce a set of “Model Rules”. This replaces the traditional Memorandum and Articles of Association which only serves the legally trained. The Model Rules is essentially the internal governance rules which apply to the company and by which the company operates on a daily basis. Logically therefore, the Model Rules cover such things as appointments of directors, removal and powers of officers, meeting procedures, shareholders rights and so forth. In line with the Act’s objective to reduce costs and achieve simplicity, Model Rules will be attached as schedules to the required Act. There will be no need to get the Model Rules prepared professionally. And the Model Rules will provide both directors and shareholders with guidance for the management of the company. All types of company: private, public, single shareholder and community will be covered by the Model Rules which can be amended to meet specific needs of the company.

Sources

  • Porter, Michael E. “A Strategy for Haitian Prosperity.” (pdf) In Keynote Presentation. Paper presented at the Forum on Competitiveness and Investment, Port-au-Prince, Haiti, September 22, 2017
  • “World Bank cancels Haiti’s debt”. AFP. 29 May 2010. 
  • Wroughton, Lesley (28 May 2010). “World Bank cancels remaining Haiti debt”. Reuters. 
  • “Hollande pledges Haiti investment”. BBC News. 2015-05-13. 
  • “France Confirms Will Not Repay Haiti ‘Independence Debt'”. TelesurTV. 12 May 2015. 
  • Wikipedia

The myth of the financialization of the housing market

Background

In February 2017, mrs Leilani Farha, the United Nations’ special rapporteur for housing, presented a paper on housing commoditisation to the UN human rights council in Geneva. The paper explains how an unregulated financial market has boosted housing prices to a level that excludes low-income households from certain attractive urban locations and created social inequality. Mrs Farha introduces the term ‘financialization of the housing market’. This article explains that execution of the ideas of mrs Farha will not lead to lesser social inequality. Other measures need to be taken rapidly.

What is meant by financialization of the housing market?

Global investment firms are looking for so called high-quality collateral investments, and housing is one of the asset classes that can be classified as such, together with US, German and Swiss government securities. This explains why housing is increasingly becoming financialized or subject to financial speculation. I would describe financialization in this respect as the increasing dominance of financial actors, markets, practices and measurements of the housing market. Thus, housing is disconnected from its social function and is part of an investment strategy.

Financial markets and housing prices

Stock markets and home building are leading economic indicators. The precise relationship is not known, but it can be observed that the housing sector influences the economy. When the stock market goes down, most portfolios loose money. The net worth of investors declines and so will their willingness to invest. Investors will also be influenced in their behaviour from a psychological perspective. In addition, contractors and their sub-contractors (plumbers, electricians, et cetera) are all dependent on housing. They will loose buying power, which influences other sectors as well.

Purposes of financial markets in general

Generally, the purpose of the financial (capital and money) markets is threefold: (1) raising money for new ventures (a small portion of the stock markets’ activity); (2) providing liquidity, so the investors and therefore contributors to the value of a company can cash in on their efforts and (3) allocating capital effectively, by setting the prices of the financial instruments. Stock markets all over the world list real estate companies.

Fundamental economic problems

One major economic “problem” is that the development of financial markets cannot be predicted. This is explained by the fact that it is too complex to specify all the original information and derivation rules that make up the price of financial instruments. Jeff Stibel (2009) explains this in the following manner:

The future, like any complex problem, has far too many variables to be predicted. Quantitative models, historical models, even psychic models have all been tried — and have all failed. Just imagine predicting something far simpler than the future of the stock market; say, chess. There are an overwhelming 10 to the 120th power possible moves. That’s a 1 followed by 120 zeros! As James Hogan explains it in his book Mind Matters, that sum far exceeds the number of atoms in the universe.

The same counts for housing prices. It is even hard to look back and compare housing prices in the past. Price alone is a misleading way to evaluate the performance of residential real estate. Those who fail to do additional analysis are likely to overestimate the attractiveness of housing as an investment. The only data available in this respect is Robert Shiller’s historical housing index (adjust for the significant increase in the size and quality of homes). To evaluate real estate as an investment, it is needed to consider the total impact that the purchase of the home has on the buyer’s finances. That is, incorporate all of the net additional expenditures (like interest, taxes, insurance and buying/selling costs) associated with the purchase.

The impact of time on the return of a real estate investment is often underestimated. In a 30-years time frame, in increase in price from EUR/USD 50.000 to 300.000 represents an annual growth rate of about 6.2%. The impact of time on the return on their housing investment is often under estimated. It should be stressed that this includes price increase with adjustment for inflation only. The average annual home price increase in the United States over a period of 100 years was about the same as the inflation rate.

Final thoughts

There is no such thing as a boost in housing prices over the years. Long-term housing prices are comparable to the inflation rate. They are not artificially kept high due to speculation. Houses are priced based on demand and availability. This does not mean that the government should not put an enormous effort into ensuring that everyone, irrespective of income or access to economic resources, has access to a safe, secure, habitable, and affordable home with protection from forced eviction.

The right to housing is a human right, protected by a number of fundamental declarations: Article 25 of the Universal Declaration of Human Rights; Article 11 of the International Covenant on Economic, Social and Cultural Rights; Article 27 of the Convention on the Rights of the Child; Article 5 of the Convention on the Elimination of All Forms of Racial Discrimination; Article 14 of the Convention on the Elimination of All Forms of Discrimination Against Women and Article XI (11) of the American Declaration on Rights and Duties of Man.

In my opinion, a governmental effort to reduce the so called financialization of the housing market is not an option to improve housing conditions for lower income households. It will lead to a housing bubble, since the market mechanism is artificially removed and prices do not reflect the real value of houses. In my opinion the only way to lower housing prices is to lower demand for housing. I cannot understand why it is not understood that reducing the human population is the most effective tool to combat poverty and inequality. As Paul Ehrlich, Bing professor of population studies at Stanford University in California and author of the best-selling book, the Population Bomb, in an interview with the Guardian (26 April 2012) says:

The optimum population of Earth – enough to guarantee the minimal physical ingredients of a decent life to everyone – was 1.5 to 2 billion people rather than the 7 billion who are alive today or the 9 billion expected in 2050.

We should not let mrs Leilani Farha’s ideas influence us, because they lead to a myopia. The focus should be on the factors that really can be influenced and make a substantial difference in fighting poverty.

Literature

Aalbers, M. (2016). The financialization of housing: a political economy approach. London: Routledge Taylor & Francis Group.

Ehrlich, P. R. (1975). The population bomb. Rivercity, MA: Rivercity Press.

Malthus, T. R. (2017). Essay on the principle of population. New York: W W Norton.

Shiller, R. J. (2016). Irrational exuberance. Princeton, NJ: Princeton University Press.

Stibel, J. (2009). Why We Can’t Predict Financial Markets. Boston, MA: Harvard Business Review.

Statistical sources

Eurostat, House Price Indices euro area and EU aggregates Index levels 2015 100 2017Q1

International Monetary Fund, Global Housing Watch

S&P CoreLogic Case-Shiller Home Price Indices

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