Author: Charlotte Gill

New pipeline to fuel Ethiopia’s economic expansion

Posted on by Charlotte Gill

According to Bloomberg, on September 29 Djibouti and Ethiopia signed an agreement to proceed with the much-anticipated 550km-long fuel pipeline that will connect the two countries. The Horn of Africa Pipeline, which is due to be completed by the first quarter of 2018, will transport gasoline, diesel and jet fuel from storage facilities in the Port of Djibouti to Awash in central Ethiopia.

Although it is one of the world’s poorest countries, in recent years Ethiopia has experienced a period of rapid economic development

With an annual growing demand of around 15 percent, transporting fuel by tanker trucks is no longer sufficient to meet Ethiopia’s energy needs and its impressive rate of economic development. The pipeline is expected to increase capacity considerably to 240,000 barrels per day, as well as reduce the time and cost of transportation, factors which could potentially unlock further GDP growth in the landlocked country. Moreover, the Horn of African Pipeline will vastly improve Ethiopia’s energy security, while also reducing the carbon impact of current transportation methods.

Although it is one of the world’s poorest countries, in recent years Ethiopia has experienced a period of rapid economic development and is now one of the fastest growing countries in the world. According to the African Development Bank Group, its economy grew by 10.3 percent between 2013 and 2014, with strong growth expected for this fiscal year also. The rate of Ethiopia’s economic expansion has surpassed its Sub-Saharan neighbours as a result of growth in all sectors, including, most importantly, agriculture, which accounts for over 40 percent of its GDP.

The project is being undertaken in a joint venture by infrastructure development group Black Rhino and Mining, Oil and Gas Solutions (MOGS), a subsidiary of Royal Bafokeng Holdings.

Handle that scandal: how corporations use problems to grow

Posted on by Charlotte Gill

Around the world, the corporate governance landscape is shifting, as efforts to improve business practices and policies gain support and momentum. The wave of reform has become visible everywhere – from tough new regulations in Japan to sovereign wealth funds like Norway’s Norges Bank Investment Management taking a more active approach to their investments – and it is certain to continue to rise.

Three factors are driving these developments. First, today’s deep economic uncertainty has broadened ordinary people’s awareness of the influence that companies have on politics, policy and their own daily lives. And people are not only paying greater attention; they also have more power than ever before to make their voices heard.

Second, there has been a burgeoning awareness among governments that economic growth requires a proactive regulatory approach. Robust and resilient economies need strong businesses, and, to build strong businesses, governments must play a role in ensuring high-integrity oversight of business activity. Company stewardship and country stewardship are increasingly linked, and authorities now recognise that paying to ensure good governance now is far less costly (both financially and politically) than paying for the consequences of bad governance later.

Paying to ensure good governance now is far less costly than paying for the consequences of bad governance later

Politicians take action
In Japan, the Financial Services Agency enacted a Stewardship Code in 2014, with a Corporate Governance Code from the Tokyo Stock Exchange entering into force this June. By creating a more equal environment among shareholders, ensuring more disclosure and transparency, specifying the responsibilities of company boards, and requiring outside independent directors on company boards, the codes enshrine changes that make Japan more attractive for foreign investors. More generally, Prime Minister Shinzo Abe has emphasised that good corporate governance is critical to long-term economic growth and prosperity.

Toshiba’s recent accounting scandal – the company was found to have inflated its profits by JPY151.8bn (£779.9m) over several years since 2008 – presents an opportunity for Japan’s government to demonstrate its seriousness about the new regulations. Toshiba CEO Hisao Tanaka and other senior executives have had to resign; the interim CEO apologised to Abe’s office; Norio Sasaki, the company’s vice chairman and former CEO, has quit his posts on government panels; and the former chairman of Toshiba’s audit committee has stepped down from the government accounting panel.

In the US, the Securities and Exchange Commission enacted a rule at the beginning of August requiring public companies to disclose the pay gap between workers and CEOs. Corporate behaviour and governance has emerged as a campaign issue for US presidential candidates. Hillary Clinton gave a speech at the end of July decrying “quarterly capitalism” that chases short-term growth at the expense of sustainable business development, as well as addressing the exponential growth of CEO pay, and the need for a minimum-wage increase.

The European Union and its member states are also taking an increasingly active approach to corporate governance, including regulations concerning boardroom diversity. Italy, France, Spain, Norway and others have all enacted boardroom gender quotas, with companies required to fill 30 to 40 percent of independent board seats with women. The latest example can be found in Germany, where, after much debate, new quotas require that from 2016 large companies fill 30 percent of non-executive board seats with women.

Enforcement through investment
The third, and perhaps most important, factor underpinning recent changes in corporate governance has been the sharp rise in cross-border investing. Sovereign wealth funds, pension funds, global investment banks, and hedge funds do not invest only in their own backyard. They scour the planet looking for places to put their money, and they expect companies that receive it to play by rational rules.

The Olympus scandal of 2011 to 2012 – when investigations in Japan, the UK and the US revealed that company executives falsified accounts to hide losses of JPY117.7bn (£60m) – is a watershed example of a traditional closed corporate culture coming up against international scrutiny. As the full extent of the cover-up was revealed, foreign investors, like GIC Private Limited (Singapore’s sovereign wealth fund), rebelled.

Singapore sold nearly all of its two percent stake almost immediately, and other foreign investors and analysts reacted similarly. It was a turning point for Japan, as the country’s clubby investment culture came up against global transparency and accounting standards. Things have not been the same since, either for Japan or for companies’ understanding of the expectations and influence of international investors.

International investors are in a unique position to encourage, or even enforce, global best practices in corporate governance. If such investors show that they are willing to withdraw financing, they will gain real influence in bringing about sustainable change – to the benefit of us all.

This is especially true if investors are guided by principles that go beyond financial returns. Global funds that uphold high ethical standards concerning labour practices and environmental protections are safeguarding the global ecosystem on which they, and the rest of us, depend. As they establish and implement such principles, the resulting momentum has been changing corporate governance and behaviour across industries and regions.

This is evident from several high-profile examples. The California Public Employees’ Retirement System, a $300bn pension fund, has published its corporate governance principles, which include boardroom diversity, fair labour practices, and environmental protection. Norges Bank Investment Management, Norway’s $870bn sovereign wealth fund (the largest in the world), has also pushed for changing governance rules, including separating the role of chief executive and chairman and better reporting by companies on how they are addressing climate change.

The shift in emphasis on best-practice corporate governance is real, and it is here to stay. It comes from people finding and raising their voices, from politicians recognising the importance of corporate governance for sustainable economic growth, and from influential investors putting genuine pressure on companies to change their behaviour. Companies and boards ignore this trend at their peril.

Lucy P Marcus is CEO of Marcus Venture Consulting

© Project Syndicate 2015

 

Are tech exec $1-a-year salaries an empty gesture?

Posted on by Charlotte Gill

In August, JD.com was pleased to report “strong performance” for the year’s second quarter, as figures for China’s number two e-commerce venture showed net revenues were up an impressive 61 percent on the year before. The number of fulfilled orders, meanwhile, was 87 percent greater than in 2014, and mobile orders were up a mammoth 290 percent in the same period. “Encouraged by another quarter of strong top-line growth”, said the company’s CFO Sidney Huang, the results underscored the company’s already stellar reputation and the opportunities still on offer in China’s burgeoning e-commerce market. Beyond that, buried beneath the headline figures, was another announcement of note: JD’s Chief Executive, Richard Qiangdong Liu, for his services, was to receive an annual salary of just one yuan.

Unusual in the sense that improved company performance is usually coupled with a pay rise, Liu has chosen instead to line up alongside Mark Zuckerberg, Steve Jobs and Meg Whitman, and join the $1 salary club. “Under this plan, Mr Liu will receive CNY1.00 [10p] per year in cash salary and zero cash bonus during the 10-year period”, according to the company statement. In a period when pressures to narrow the pay gap are weighing on policymakers and corporates, executive compensation appears to be breaching the lower limit.

“It ties pay to performance mechanically”, said Professor Martin Conyon, Director of Doctoral Programs at Bentley University. “If your salary is a dollar then all other compensation is in the form of bonuses, equity plans and so on. These, by design, always link compensation payouts to the performance of the executive.”

Combined market cap of companies with the $1 pay scheme

$0.5bn

1993

$875bn

2011

0.01%

Share of the S&P 500, 1993

7.5%

Share of the S&P 500, 2011

When introduced in the early decades of the 20th century, the scheme was originally intended to free funds for the war effort, and participating business and government executives were dubbed ‘dollar-a-year-men’. “This historic foundation for the $1 salary gives it a ‘public service’ aspect”, said Jennifer Hill, Professor of Corporate Law and Director of the Ross Parsons Centre of Commercial, Corporate and Taxation Law at the University of Sydney. Skip forwards to the present day and the scheme has enjoyed something of a resurgence – albeit for very different reasons.

A popular party
“CEOs generally elect to receive $1 in salary when they already have a significant equity stake in the company”, said David Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and Faculty Director of the Corporate Governance Research Initiative. “You generally see this with founder CEOs – like Larry Page of Google or Steve Jobs at Apple. They already have a lot of stock and they want to signal to investors that they are on the same page with them, that they’ll earn money dollar for dollar as stock price changes rather than through salary and bonuses. It’s rare that you see a non-founder CEO agree to this arrangement, although Meg Whitman did so in her early years with HP.”

Studies show that between 1993 and 2011 the combined market cap of companies employing the $1 pay scheme went from $0.5bn to $875bn, and grew from 0.01 percent of the S&P 500 to 7.5 percent.

“The trend towards the $1 salary club is certainly a reflection of public ire during the global financial crisis, and the fact that in many jurisdictions taxpayer funds were used to bail out financial institutions”, said Hill. The reasons for the payout, however, varied greatly from case to case. Chrysler, for instance, adopted the scheme as part of its financial bailout conditions, whereas Apple and Steve Jobs did so due to the latter’s faith in the company’s ability to turn a healthy profit.

“There are two types of CEOs who fall into this category”, said David Yermack, Albert Fingerhut Professor of Finance and Business Transformation at New York University Stern School of Business. “Some are company founders who are extraordinarily wealthy and have no real need for a salary, so they pay themselves a nominal amount – maybe not $1, but something far lower than usual. Bill Gates and Warren Buffett are two well-known examples in this group.

“The second type is more interesting: these are CEOs who voluntarily forgo compensation, almost always at a time that the company is facing financial problems. Bill Ford Jr, Chairman of Ford Motor, very publicly did this during the financial crisis years. It is harder to take these cases seriously, because usually there is an implicit contract between the CEO and the board to award make-good compensation in the future if the company recovers.”

Justification for the decision lies with the philosophy that taking a $1 salary not only underlines a commitment to company performance, but also ties the employee’s financial gains to that of investors’.

“The CEO is making it clear that, if the performance does not improve, they will take nothing. It is equivalent to someone working on an extremely aggressive sales commission arrangement: you eat what you kill”, said Brian Main, Professor of Business Economics at Edinburgh University Business School.

Inequality and insignificance
Membership of the $1 club also flies in the face of criticisms regarding the widening executive-to-worker pay ratio, and a great many tech execs have gone to great lengths to escape accusations of inequality and make a positive contribution. One report, authored by the AFL-CIO and published in May, showed S&P 500 executives received on average 373 times that of the average worker, up from the 331 in 2013 and – more tellingly – 42 in 1980. Across the Atlantic, High Pay Centre figures show the average CEO to worker pay ratio of the FTSE 100 companies came in at a lesser, albeit unsavoury still, 183 to one. The problem is so acute even the US Securities and Exchange Commission (SEC) voted in August three to two in favour of a motion that would see publicly traded companies disclose the ratio between executive and worker pay.

The share of corporate income put aside for the five highest-paid executives has ballooned in recent decades, up from an average of five percent in 1993 to more than 15 percent in 2005. Economic Policy Institute figures show inflation-adjusted US executive pay increased 937 percent between 1978 and 2013, more than double the amount by which the stock market expanded in the same period. More important still is the extent to which it eclipsed the 10.2 percent rise for the average workers: while in 1965 the ratio stood at 20 to one, it has lately tipped the 300 mark.

Intent on escaping the reputational damage wrought by income inequality, major names in technology (whose CEOs often take up a more public position than those in rival sectors) are warming to the idea of a minimum or less-than-minimum wage. Steve Jobs popularised the idea, receiving a salary of only $1 a year between 1997 and 2001. More recently, serial entrepreneur Elon Musk was unhappy with his $35,360 minimum salary in 2014 and took not a penny of it – reminiscent of his days at Queen’s University when he lived on a budget of $30 a month. Oracle’s Larry Ellison, Google’s Sergey Brin and Larry Page, Twitter’s Jack Dorsey, and the ubiquitous Mark Zuckerberg are all distinguished members of the $1 club, but their cumulative effect on pay inequality is marginal.

“The $1 salary executives are not the norm. Their influence on the average (or a better statistic is the median) CEO compensation to worker pay ratio is negligible”, said Conyon. “Besides which, what is really important is the fair market value of the executive’s pay (not just the salary element). The SEC – and other good corporate governance dominions – require the reporting of this figure – not just the ‘salary’. It’s very difficult to ‘conceal’ CEO compensation in countries like the US.”

Not what it seems
The decision to take a $1 salary is seen by opponents as either an overblown PR initiative or – worse still – a means of escaping taxes. Stock growth and capital gains are taxed at a much lower rate than income, and, assuming the company is doing well, a $1 salary brings with it far greater rewards than a fat paycheck would. As Warren Buffett so succinctly put it on CNBC: “I’ll probably be the lowest paying taxpayer in the office.” In 2013, Meg Whitman and Larry Ellison earned $17.6m and $79.6m respectively in stock options and performance-based awards. Likewise, despite Zuckerberg’s assertion that he has “made enough money”, his net worth exceeded $41bn as of August, according to Forbes, and left him little incentive to supplement his income with a generous salary.

The trouble comes when a commitment to a $1 salary is coupled with philanthropic-minded statements about pay and progress, when in actuality the measures do little, if anything, to benefit anyone other the executive in question. For critics, the mere fact the $1 salary is so widespread is confirmation enough that the decision carries more benefits for firms than they are letting on, particularly when taking into account the fact that adoptees are typically among the most profitable technology companies out there.

“The financial benefits to the company are fairly straightforward”, said Larcker. “The company saves the dollar value of compensation that the executive has forgone. In the case of a true $1 salary, this amounts to a few million – depending on the size of the company. For a company such as Google or Apple, this is relatively trivial, given the profits these firms generate. From a symbolic standpoint, a $1 salary tends to generate goodwill – among investors, the press and especially employees – that the CEO is personally invested in the company and working to grow value. How much of that goodwill translates into economic goodwill is hard to say.”

The debate about pay disparity is not merely confined to salary but to all forms of compensation, and for as long as the gulf between executive and worker compensation remains, a consolatory $1 salary amounts to nothing in the way of a solution.

“I think the real point of these decisions is to demonstrate commitment to the company by the manager, and also to put moral pressure on the regular workforce to accept wage reductions”, said Yermack. “In a unionised company like Ford, this sort of gesture may be especially important as a negotiating tactic.”

Critics of the system also note $1 salaries do not necessarily show executives are focused on income inequality, and instead highlight the ability of wealthy individuals to shift income for personal gain where others cannot. As has been highlighted time and again by the likes of Joseph Stiglitz, Thomas Piketty and others, inequality will continue to widen for as long as inefficiencies in the taxation system remain, and members of the $1 club are no exception – though that is not to say they are necessarily offenders either.

Gap in faith
In a period when many have grown frustrated about the gulf between executive and worker pay, the principle of a $1 salary, at least symbolically speaking, is a sound one. Certainly, the decision is arguably more useful as a PR gimmick than it is as a solution to income inequality, but it does also do a great deal to align executive pay more closely with performance.

“While there is certainly a public relations element to the $1 salary, it is hard to fault an individual for taking less in compensation than they deserve”, said Larcker. “It’s hard to discern what the motivation is behind each of these CEOs – each one of them makes this decision for their own reason – but it might be too cynical to say it is purely a marketing ploy. Certainly if you think of the other side of the coin – the very wealthy CEOs such as Larry Ellison at Oracle that continue to receive very large annual equity grants – the contrast couldn’t be more stark. Generally, a $1 salary CEO is demonstrating some level of good faith, even if he or she wants the public admiration too.”

“It’s the design of the compensation package that matters and if the expected value of it is at market rate”, said Conyon. “A lot of the $1 folks are executives with a significant ownership stake in the company. So their incentives are to optimise firm value and this is aligned with the interests of other owners. They all sink or swim together. Remember, too, that this is a market-based contract: neither the executive nor the firm is forced into it and the terms are presumably mutually agreeable to both parties.”

Looking at the issue objectively, where the $1 salary is most effective is with regards to performance-related pay. “The arrangement is less about ‘marketing’ and more about establishing the CEO’s commitment and belief in the viable future of the company”, said Main. “If it works out, then the CEO will do very well (as happened for Jobs) and no one will really grudge them that reward. But is should not be seen as a cheap or charitable arrangement.”

It may be the members of the $1 club have done little to close the gap between executive and worker, but they have done a great deal to quieten critics who say the ties between pay and performance are too loose.

“The $1 salary might obscure the pay gap, but more generally it should remind investors that it’s not the annual pay of the CEO that is important, it’s the total wealth that the CEO has invested in the firm and how that motivates him or her on a day-to-day basis”, said Larcker.

The method is not exempt from criticism, but few would dispute the fact that a $1 salary ensures the executive’s own gains coincide with those of the company. And while the decision does little to combat income inequality, as it is so often said to do, that isn’t to say it doesn’t have a role to play in protecting against wayward executive pay.

10-year research reveals secrets of start-up success

Posted on by Charlotte Gill

Silicon Valley and its colony of technology start-ups are often the spurious backbone of social commentary. Whether it’s end-of-history style think pieces proclaiming Tinder is heralding some sort of dating apocalypse, or book-length polemics extolling the ‘sharing economy’ as the foundation for a post-capitalist social order, the mysterious group of websites and internet apps founded on the US’ West Coast are regulatory cited as the cause of social malaise or bringing us to the cusp of some brave new world. Everything is the ‘Uber of X’ and the internet is constantly ‘changing the face of Y’.

A new study by one of the biggest seed investors in the world of technology start-ups, however, gives a glimpse into what is really going on in the inventive hubs of the Pacific shores. First Round Capital is a venture capital firm that was founded in 2004 and provides seed-stage funding to technology companies during their first 18 months. It has grown to be the third busiest venture capital investor in the US in terms of deals made, and has worked with big and diverse names such as Uber, Warby Parker and Wikia.

The firm has analysed and released its data going back to 2005. As it noted, venture capitalists “are constantly telling the entrepreneurs they invest in to make data-driven decisions. But as an industry, we haven’t been very good at doing it ourselves”. With a wealth of data accumulated over the years, they “were able to sit down with 10 years’ worth of our proprietary investing data in front of us — since we’ve been capturing data about founding teams in our community since we made our very first investment in January 2005”. First Round looked at its data from 300 companies and almost 600 founders to determine “characteristics that accompanied successes and not quite successes”, through “looking at how much their value has grown (or shrunk) between our initial investment and their fair market value today (or at exit)”.

Start-ups with female founders, on average, outperformed male-founded firms by
63 percent

Education and location
That the Bay Area is the centre of gravity for tech companies is no secret. It’s understandable why young firms would want to set up shop there: the area has a pre-existing support infrastructure, such as lawyers and other third parties that specialise in aiding start-ups. However, within this, there is a trend towards a consolidation of start-ups within the city of San Francisco, at the expense of other Bay Area locations.

As First Round said: “For the first five years of [our company], 2005 to 2009, we invested nearly equally between San Francisco and the rest of the Bay Area. During the last five, the pendulum has swung decisively toward San Francisco with 75 percent of our Bay Area investees starting their companies in the city over that period.”

Yet despite the Bay Area being the natural home of start-ups, performance isn’t necessarily connected to the region. Using a sample of 200 companies, First Round found the 25 percent located outside the Bay Area and New York outperformed their coastal counterparts by 1.3 percent. However, the fact that only a quarter of firms were outside these hubs suggests attracting investment in such regions is harder, with only the very strongest and dedicated making the cut.

First Round’s data also provides an interesting insight into the link between universities and start-up performance. While there is a perception that there is a Stanford-to-the-Valley pipeline, with graduates from a few elite universities dominating technology companies, top firms actually recruit from a variety of institutions. Apple, for example, recruits heavily from San Jose State University and the University of Texas at Austin.

However, the data does show that the alma mater of company founders matters: founding teams with alumni from at least one “top school” (defined as Ivy League universities, Stanford, MIT and Caltech) accounted for 38 percent of First Round investments and outperformed those without by 220 percent.

Breaking the bro culture
Another stand out statistic is that start-ups with female founders, on average, outperformed male-founded firms by 63 percent. Silicon Valley and the technology industry are often seen as dominated by men and sometimes fostering a sexist environment, leading many commentators to accuse such companies of having a “bro culture” and being staffed by “brogrammers”. Companies that are guilty of creating such a workplace culture may not only be detestable, but also missing out on talent.

The data also challenges the idea of the lone-wolf tech start-up guru. “The history of the world is but the biography of great men”, wrote Thomas Carlyle in the 19th century; the way technology firms are often written about, one could be forgiven for thinking the story of the Silicon Valley was also a string of such biographies. Yet despite the constant adulation to the ‘Great Men of Tech’ such as Steve Jobs, Mark Zuckerberg and Elon Musk, success is more likely to come from small collectives of people working together. Data showed single founders were outperformed by founding teams by 163 percent and on average received an initiation valuation of 25 percent less. While Silicon Valley may be the new frontier of capitalism, it doesn’t seem to have much bandwidth for rugged individualism.

Further key findings of the First Round Study

Firms with founders under the age of 25 at the time of their initial investment were found to have performed close to 30 percent above the norm, while First Round’s top 10 investments had founders with an average age of 31.9: the overall average was 34.5.
The Halo Effect in the Valley appears to be real, with founding teams containing at least one former employee of tech giants such as Amazon, Apple, Facebook, Google, Microsoft and Twitter performing 160 percent better than average. Their firms also received 50 percent higher pre-money valuations.

Contrary to what may be expected, founding teams that were first-time investment receivers performed statistically just as well as those that had previously received investment. The perception of experience may seem significant, with repeat founders’ initial valuations tending to be over 50 percent higher than that of first-timers, but in practice it had no demonstrable effect. Experience may lead to a greater valuation, but it is no guarantee of success.

How start-ups and venture capital firms can meet and connect is vitally important for the tech industry. There’s probably an app for it. First Round found that companies they discovered through platforms such as Twitter or Demo Day performed 58.4 percent better than average, while founders that directly approached the venture capitalists did 23 percent better.

Let’s not whitewash the dangers of a breastmilk economy

Posted on by Charlotte Gill

For millennia, infants have sometimes been fed another mother’s breast milk. Whether to ensure the infant’s survival following the death or illness of its own mother, or as part of a wet-nursing arrangement (common for high-status families in some cultures), sharing breast milk has long been acceptable, if not lifesaving. But, over the last five to 10 years, a new kind of internet-fuelled milk-sharing economy has emerged – one that magnifies certain risks to recipient infants.

Numerous websites now exist to connect lactating women with excess milk and mothers who, unable to meet their own child’s needs, are seeking it. In 2011, more than 13,000 women posted on such websites with the intention of providing or obtaining milk, either for free or for payment. Today, that figure has grown to over 55,000.

Moreover, though these websites have so far been most popular in the US, they are beginning to appear in numerous other countries. And, of course, many more women are probably sharing milk offline with friends, relatives, and acquaintances.

Raw human milk can carry infectious diseases like HIV, syphilis
and hepatitis

All that glitters
The recent upsurge in milk sharing can be explained by shifting attitudes towards breastfeeding in many countries, with the public-health and medical communities sending the message that breastfeeding is the best option for babies. It is a message that the millennial generation has taken to heart. In the US, women giving birth today are more likely to breastfeed than any generation since the Second World War, with 79 percent of infants being breastfed at least once.

Nowadays, many young mothers report feeling significant social, not to mention self-imposed, pressure to breastfeed as part of an ‘all-natural’ approach to child-rearing – one that eschews commercial infant formulas produced by ‘untrustworthy’ corporations. The problem is that many women have difficulty with breastfeeding, lack access to high-quality and timely lactation support, and face heavy demands, especially from work, that make lactation difficult to sustain. It is these factors that may lead some women to turn to milk-sharing – a process that is often facilitated by social media.

The problem is that the public lacks an adequate understanding of the risks and benefits of milk-sharing. Public-health messaging has given some women the impression that human milk is an infallible substance, often described in online breastfeeding communities with terms like ‘liquid gold’.

But raw human milk can carry infectious diseases like HIV, syphilis and hepatitis. Pathogenic bacteria in milk, such as salmonella and coliforms, can cause food-borne illness. If a lactating woman uses prescription or recreational drugs, her milk can transmit drug metabolites. And, of course, it is possible that some breast-milk sellers adulterate their product to boost volumes and profits.

In 2010, the US Food and Drug Administration cautioned the public against feeding infants milk from unfamiliar sources, citing a series of risks, many of which my own research team has since confirmed. Three-quarters of the milk samples that we purchased online were so contaminated with bacteria that they were not safe to feed to an infant in unpasteurised form. Moreover, 21 percent of samples contained cytomegalovirus, which can cause long-term neurodevelopmental impairment in susceptible infants. And one in 10 samples contained significant amounts of added cow’s milk or formula.

Yet the FDA has not taken steps to regulate the exchange of human milk, and the ‘buyer beware’ approach is simply inadequate to protect infants who are being fed shared milk. After all, unless you have a laboratory in your kitchen, you cannot know for sure that what you are getting is healthy and 100 percent human milk.

Get rid of the guilt
Even if parents had the means to choose healthy milk donors, the benefits of milk-sharing remain dubious. Existing scientific evidence for the benefits of breast milk over formula has emerged from studies that assume that mothers are feeding their own children from their own breasts. We do not know whether these findings apply when an infant is fed another mother’s milk from a bottle.

In this sense, though breastfeeding remains the best choice for able mothers, the single-minded focus on breastfeeding that prevails today could have adverse effects – at least in advanced countries where safe alternatives are available. Indeed, in countries like the US, strong regulations ensure that mothers who cannot breastfeed can access infant formula that is as safe and nutritious as possible, based on existing scientific knowledge – not to mention clean drinking water to prepare it. Where breastfeeding is absolutely critical – often by any means necessary – is in environments where formula or clean water is not available, affordable or reliable.

This is not to say that advanced-country mothers who struggle to meet their babies’ needs should necessarily defer to formula. On the contrary, governments can take steps – from promoting more flexible workplace policies, including better options for maternity and paternity leave, to expanding the availability of high-quality lactation support – to help ensure that mothers who want to breastfeed can do so.

Moreover, public-health campaigns should expand their message to support women who are struggling to breastfeed. This includes helping women feel more comfortable seeking lactation support early, while recognising that some women will be unable to fulfil their child’s feeding needs with their own milk, and that they should not be made to feel guilty for using formula.

Paediatricians should reinforce these messages, in order to help families make feeding decisions that account for the particular needs of each mother and child. An awareness of the prevalence of milk-sharing, and a willingness to foster an open discussion about it, could go a long way toward achieving that goal.

Sarah A Keim is Principal investigator at Nationwide Children’s Hospital

© Project Syndicate 2015

Arabian frights: the Saudi struggle with oil prices

Posted on by Charlotte Gill

Starting in the summer of 2014, despite declining world oil prices, OPEC members under the leadership of Saudi Arabia took the seemingly counterintuitive decision to maintain production levels. This increased supply on the world market, leading the price of a barrel of oil to plummet from roughly $100 in July 2014 to $50 in January 2015, with prices hovering around this low point for much of the rest of the first half of the year.

Most commentators seem to agree this decision was part of a strategy to kill the burgeoning US fracking industry in its infancy and undermine production for non-OPEC countries. The Saudi-led strategy seems to have worked in one sense: producers have cut back, stalled, delayed investment decisions, or halted a large number of drilling projects around the world, amounting to cuts of $100bn as of May, according to the Financial Times. Although a report by the Saudi Arabian Monetary Agency recently noted that, while future investments have been cut, producers were not so quick to stem “the flow of oil from existing wells”. Whatever the success of this strategy, however, Saudi Arabia itself is now reeling from the effects.

The kingdom needs the cost of a barrel of oil to remain at $105 to maintain its spending levels

Relying on reserves
Relying as heavily as they do on oil revenues, this year’s steep price decline has led to a gap in Saudi Arabia’s finances. In July, the kingdom had to raise $4bn from bonds – the first sovereign issuance in eight years. This was soon followed by another foray into domestic bond markets in August, with an attempt to raise another $27bn of funds. According to the Financial Times, the kingdom needs the cost of a barrel of oil to remain at $105 to maintain its spending levels. As a result, the Saudis have had to rely on $65bn of reserves they built up in boom years.

Despite this cushion, the country is expected to see a fiscal shortfall of $100bn this year. The decline in oil prices has not tempered the opulence of the monarchy’s state spending, with generous bonuses being bestowed upon state workers this year, capital spending being sustained at pre-price drop levels, and the country pursuing an increasingly expensive war against Houthi rebels in Yemen.

Mopping up
The problems facing Saudi Arabia now oil prices have collapsed, however, may become a longer-term issue, with 90 percent of its revenues coming from oil and little in the way of other industry to speak of. While conventional oil production in non-OPEC countries may have been cut back, the shale oil industry will not be so heavily affected. Even if some companies have gone out of operation, as The Telegraph noted: “The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations.”

The shale oil industry is highly responsive. Once oil prices start to rise, production will boot up once again in the shale industry. As The Telegraph further noted: “Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly.” What this may mean is that Saudi Arabia and other OPEC countries will be challenged by shale oil producers whenever prices rise, with the potential to keep prices low perpetually. If that is the case, the current Saudi budget deficit could become much more serious, putting the future economic prosperity of the kingdom at risk.

Everything you ever wanted to know about being a CFO

Posted on by Charlotte Gill

The CFO role is widely regarded as the most complicated position in the C-Suite, and only those with a close attention to detail will excel in the position. The New Economy spoke to Suzzane Wood, Head of Russell Reynolds’ European Financial Officers Practice, about the ways in which the role of the CFO has expanded in recent years, as well as what’s holding them back from making the leap to CEO.

What core attributes do CFOs share?
The attributes CFOs share are the same ones I think make them unique in the C-suite. At the core of their role as risk managers they need to have diligence, detail orientation, a strong focus on data and, of course, the technical knowledge for regulation and governance, whether they’re listed or private companies.

It’s a common misconception that there are major differences between a listed CFO versus one for a private equity or family-owned business: the truth is that governance is strong on every well-run board, and the CFO is a critical steward, custodian, strategist and operator on any board.

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Have these attributes changed?
They haven’t. What happens is that the business agenda changes, and therefore the skill set required of a CFO has to tune into that agenda. So an example would be back in the dotcom boom days, when companies needed very strong M&A skills. If you remember, people were actually buying and selling companies very quickly, so they needed people who ensured they were good at crafting messages. As a result, they were going for CFOs with banking or consulting backgrounds: advisory types who were used to working with boards, making quick changes, and crafting messages.

Then, of course, with the financial crisis, the pendulum swung, and what we saw was an emphasis on a safe pair of hands at the helm: one who could de-risk the balance sheet. I would have boards say to me, “Have they actually dealt with debt markets?” and, funnily enough, many of the CFOs, because we were following a dotcom boom, had only ever worked in equity markets. No one knew how to deal with this new situation, and you could see the differences between the CFOs who had been through tough times, and those who had only been in good times.

What I’m saying here is that the business world is speeding up on its agendas, so that every five years or so we’re seeing a swing on the pendulum.

After the financial crisis, when boards made sure they had people who could de-risk the balance sheet, they then asked us, in 2010 onwards, for a CFO who could help find the growth story. “We need stronger performance management, we need to drive this business’ performance using the numbers”, they said.

Interestingly, they’ve been emphasising to us that the skills needed for a CFO are somewhere between operational and corporate, so they’re not letting go of the need to look at the details. They still need that, but additionally, they have to get more engaged operationally in order to help drive business performance and bring value-added to commercial decision-making.

Has the role of a CFO expanded beyond a traditional focus on finance?
The role has been expanding for the past couple of decades, largely because it’s the second most important person on the board. The two – CEO and CFO – are widely considered co-pilots – although it’s not a word that everyone likes. Regardless, it’s the second most important person in there, in that they’re a critical friend to the CEO and they’re also expected to put into strategies.

The role has been getting broader and, again from a sector point of view, that’s where it varies the most. There are some sectors where the CFO remit is much broader than others, where it could be narrowed by virtue of how finance impacts what they do, for example. If you’re in a technology company, then arguably the products are going to make or break the business, so it’s a different type of CFO remit there. On the whole, I’d say that their job is to look at functional areas such as procurement, IT, HR, supply chains and logistics – really anything you can centralise or have synergies across the group.

In the main, what’s holding CFOs back from making the leap to CEO?
They’re the counterbalance to the CEO, so the hardest transition for them is going from having been that advisor to the guy that’s actually the leader, the guy that actually has to have the ideas. So generally speaking, as the CFO, you’re evaluating the ideas, and suddenly, as CEO, you’re the leader.

It’s actually an emotional shift. Not all CFOs want to be a CEO. Many of them believe they can deliver and create value for an organisation from the CFO’s seat using their expertise. And to be a CEO you have to be outside of that area of expertise, and deliver value through all functional areas with a vision. That isn’t always the strength of a great CFO.

In fact, many of the people we interviewed said words to the effect of “if you’re a great CFO, you’re likely to be a poor CEO”, which I thought was quite interesting. If you’re an OK CFO and if you’re highly commercial, you’re likely to be a good chief exec, and I think that’s true, but if that’s the case then you need to make that transition to the CEO seat earlier in your career. You don’t really want to be failing on the board of a big company as a CFO before you realise you should’ve been the CEO.

Do you expect the percentage of CFOs making the transition to increase?
Yes, we’re seeing that happen already. It’s surprising that it’s not more common than it is, especially when you look at the UK, for example, and how many of the chief execs there have CFO backgrounds. Many of them are becoming chairmen rather than chief execs.

This doesn’t mean all my CFOs want to be CEOs – that’s not increased actually. If they do, then they get out of the CFO role quite early in their career.

Why is it CFOs have the most difficult balancing act of the C-suite?
They have to keep on top of all the details, input strategy and deliver service to every aspect of the business. They’re the ones that often have to say, “you can’t do that”, as well as saying, “if you did less of this then we can do more of that”. When it comes to capital allocation and prioritisation of capital, they have a valuable role to play. They must be aware of every aspect of the business. They’re the guys, along with the CEO, who have to think holistically about the whole overarching strategy.

Are there circumstances in which CFOs are particularly suited to the CEO role?
There’s evidence to show CFOs typically make the transition within their own company, where they have the knowledge of the business and people. That’s much easier than going from CFO to CEO externally. That’s very rare.

CFOs are generally selected to be the chief exec when the agenda is financial: if it’s, say, a financial turnaround, restructuring, or even M&A. In other words, when finance is at the heart of the strategy.

If it’s a culture change or a hearts-and-mind agenda, they generally lack the competencies to make a great CEO. I don’t like saying that because it goes with the stereotype that CFOs lack charisma. They don’t lack it in my experience; it’s just a matter of how they choose to use their competencies. Don’t let people assume accountants are boring. That’s absolutely not the case.

What advice would you give CFOs struggling to make the leap?
To think about the jump earlier in their career, and to think about their leadership skills and examine what they learn. If they find that these aspects are driving them more towards a general management or chief exec route, then they should back themselves to do that earlier rather than later. They need to examine themselves, rather than work hard as an accountant and hope to get noticed.

Shipping containers prove their investment potential

Posted on by Charlotte Gill

We all know about the impact the credit crunch has had well beyond the financial sector; as worldwide trade keeps tanking in cycles, so does the maritime industry. Industry leaders have virtually all upgraded their business operations, following a relatively recent tendency to use larger, more efficient vessels with more containers to put on them. General-purpose containers have come to play a major role in global trade, even representing a symbol of globalisation that has become indispensable to daily business.

One of the leading proponents of such a strategy is Magellan Maritime Services, a global leaser and trader of containers based in Hamburg. The New Economy spoke to its CEO and founder, Carsten Jans, about the company’s history, the attractiveness of containerisation, and why they are proving so popular for investors.

10,000

Investors in Magellan so far

How long has Magellan been offering investments in containers?
Magellan was founded as a container trading and leasing company in 1995, so we’ll be celebrating our 20th anniversary in 2015. We’ve also been offering investors outside the industry the opportunity to benefit from container investments since 2005. Our investors purchase containers at a minimum investment of around €10,000, and they are the sole owners of the containers, each with their own individual purchase agreement with Magellan – no investment fund or similar enterprise involved.

We also lease containers back for a five-year period in separate administration agreements that guarantee a fixed leasing rate of around 12 percent per annum on the purchase price. After the five-year period, we purchase the container back from the investor at a repurchase value of around two-thirds of the purchase price. We have since paid up all of our leasing payments and repurchase prices for the 59 container investments we have concluded since 2005, as predicted. Many investors have already invested in our containers more than once due to the good experience they have had with us at Magellan.

What do investors find attractive about shipping containers?
The low interest rate policy has reduced the number of investment opportunities with a decent return on investment and predictable investment security for investors in Germany and Europe. Containers as tangible assets have been satisfying these criteria for the increasing number of investors that go on and tell their friends and associates. Investors aren’t recommending fixed-interest bank deposits at a maximum yield of two percent, which are hardly inflation-proof. Containers ensure returns of around six percent per annum, and the risk is manageable.

Container values remain stable even in times of crisis – a 20-foot container consists of around two tonnes of steel. Tangibles with steady values have become more important to investors since the financial crisis – specifically, tangibles with values that can’t be written off to zero. Containers are mobile and can be used wherever they’re needed, so these tangibles will still make sense to investors in the future.

What sets your company apart from other investments?
Magellan Maritime Services is not a typical fund company so familiar in the world of investment funds, but an operationally active container leasing company that takes care of every part of the container’s value as a tangible asset from manufacturing to sale at the end of the investment period.

We represent traditional business virtues such as reliability, clean management, punctuality and economic sustainability – values our national and international partners from industry appreciate, values that we pass on to our investors. We pursue a sustainable container business approach that our investors automatically benefit from. This completely eliminates the risk of an asset manager doing well while the investor loses out.

What are the success factors?
Obviously, it takes a sustainable approach alongside sound business activity. We don’t depend on third parties in our business operations, but order our containers straight from the manufacturer thanks to the years of contacts we have formed. These manufacturers, as well as the liner shipping companies, have full confidence in our company as a sound partner, with the Magellan name on more than 200,000 TEUs (20-foot equivalent units).

No other container investment company can claim that. We don’t buy container portfolios to refinance them and sell them on for a better price as some investment companies do – our earnings come from the asset value of our containers in daily business. We have already gained a name as an international player in the container leasing business; Magellan is currently the largest container lessor in Germany, and the 13th largest in the world.

What makes yours a sounder choice than other container investments?
We lease our containers to the top 25 liner shipping companies without intermediaries; you will often find us at the liner shipping companies and container manufacturers, and this gives us a financial edge over other companies as we work directly with manufacturers and lessees without agents and intermediaries. Investors have confidence in entrusting their assets directly with an internationally experienced market player. There are no investment companies that also earn from financial management without themselves operating actively on the market, and no investment company would ever unnecessarily reduce its yield.

What containers does Magellan invest in?
We are involved in standard containers, with a few exceptions: 20-foot, 40-foot and 40-foot high cube containers. These containers have been crossing the oceans for decades, so they’re not a fashion thing. Standard containers have come to play an essential role in world trading, and you could even say they’re a symbol of globalisation. These container types are obviously also subject to market mechanisms that can impact both sales prices and leasing rates, and the fluctuating price of steel also has an effect. Even so, you’ll find these standard containers in any port, and they can be used virtually anywhere.

Major liner shipping companies order these containers as needed, and any excess capacity takes a few months to absorb – you won’t find the unused capacity that you might find in ocean-going vessels or real estate. Very few containers were built during the financial crisis in 2008 and 2009, so 2010 even saw a shortage of them.

We at Magellan tend to avoid specialised containers such as refrigerated containers (known as reefers) and tank containers, as markets and market participants are often too small to predict long-term trends over five years with any certainty; investments in those niche markets are riskier.

How did you make the investment offer so secure – no investor losses to date?
We apply all the necessary due diligence in our investment offerings. That is, we keep an eye on quality while purchasing containers, selecting liner shipping companies as lessees, and in how we draw up container leasing agreements. We only conclude long-term agreements that liner shipping companies can’t terminate, eliminating the need for container management by other container lessors or management companies, or any other third parties. This eliminates the risk of container returns from liner shipping companies before term – so far, all of our containers have gone through at least five- to 10-year leasing periods without a hitch. We only do business with the top 25 liner shipping companies with good credit ratings to match as lessees.

We survived 2008-09 without losses, so we can keep our own buoyancy in rough seas. Have the other forms of investment also proved their mettle like this? Apart from that, we have independent auditors look at our leasing agreements with liner shipping companies to confirm the quality of our agreements for our investors. Finally, the auditors have confirmed that we’ve always paid back our investors since our first offering as predicted. So far, every one of our investors has seen every penny of their investment returned as promised by Magellan.

How will new regulations on products and consultants affect the investor market?
Every investor has to give some thought to which investment has delivered the goods over the last 10 years and hasn’t robbed the investor of a good night’s sleep. What kind of investments were they? Bank securities? Investment company portfolios with hotshot asset managers? Or tangible assets in the real economy? Tangibles are and always have been the mainstay of economic development. But what tangible asset can compete with a shipping container on flexibility in shipping goods? Laws and politicians won’t ever be able to change this in any lasting way by creating new rules and taxes to get the financial markets back under control. We’ll simply adapt to any new rules affecting the shipping industry. Remember that, with Magellan, you’re investing in two tonnes of good hard steel – not in securities or other financial ‘products’.

This is a difference we’re proud of, a difference that our investors appreciate. The last financial crisis has shown how the markets have been moving away from the real economy, sinking astronomical sums into paper securities rather than tangibles. We think that we at Magellan have been playing a significant part in restoring investor confidence in the real economy over the last decade. More than 10,000 investors have shared our confidence so far.

Carnival Corporation takes lead on social impact travel with Fathom brand

Posted on by Charlotte Gill

A record 23 million passengers are expected to take a cruise in the next 12 months, and, as the numbers continue to pile up, the industry’s influence on the world economy, as well the communities in which it operates, will continue to grow. According to figures compiled by the Cruise Lines International Association, the industry contributed $117bn to the global economy in 2013 and supported 900,000 jobs: but more important than its size is the industry’s social and environmental contributions.

The New Economy spoke to Arnold Donald, CEO of Carnival Corporation, the world’s largest cruise company, and Tara Russell, President of Fathom and Global Impact Lead for Carnival Corporation, about the industry’s evolution and the role of social impact travel for the future.

“Attracting new cruisers to our industry is the next big opportunity for all of us”, said Donald. “Our chief competition is land-based vacations, so, as we better communicate our overall value, we can convince more new cruisers to vacation with us and exceed their expectations when they are on board.

$117bn

Contribution of the cruise industry to the global economy, 2013

900K

Jobs supported by the cruise industry in 2013

“Obviously, it is important for us to build a base of followers for the future. Millennials are now at that moment in their life when they’re making the decisions on where to go and how to vacation. If you look across our brands, particularly Carnival, about one out of every four people is a Millennial. The category has a need for exploration, knowledge, learning and adventure – we offer all of those… and at a great value in a convenient way.”

In catering to this emphasis on social and environmental development, particularly among Millennials, Carnival Corporation has introduced a new brand called Fathom: a different kind of cruise that combines one’s love of travel with one’s desire to make a difference.

“You haven’t seen anything yet like what’s to come”, said Donald. “This is the greatest industry in the world. Who else brings together families and friends to have such a great time at such a tremendous value?”

The Fathom brand
Millennials care about the impact of travel and tourism on society and the environment, and, in catering to this segment, the Fathom brand takes the expertise and resources of the world’s largest travel and leisure company, and channels them towards a sustainable end. By partnering with social enterprises and local organisations, Fathom can more easily bring sustainable benefits to the community, and in doing so underline the strength and depth of its commitments to corporate social responsibility.

By building long-term relationships both with local enterprises and the community, the benefits extend far beyond Fathom’s involvement and on to future generations. More than that, this commitment acknowledges the responsibility of the industry to protect and preserve the communities in which it operates. Being of the opinion that its reputation rests on sustainability and transparency, Carnival Corporation has done a great deal to pursue aggressive energy reduction and conservation initiatives, and reinforce its credentials as a valuable corporate citizen.

Fathom is due to set sail in April next year. Passengers will be able to choose from a range of social impact activities and experiences on shore and on board.

“Fathom will cater to a growing market of consumers who want to have a positive impact on people’s lives, and aren’t always sure where to begin”, said Donald. “We believe travel is a meaningful way to allow for personal growth while making purposeful and engaging contributions to the world.”

In realising this vision, Carnival brought in the non-traditional social entrepreneur Tara Russell, founder and chairman of Create Common Good, to work on the design and business model for Fathom, starting in 2013. “We created Fathom to meet the real hunger in the world for purpose, while at the same time tackling profound social issues through a sustainable business model”, she said. “We harness the assets and resources of the world’s largest travel and leisure company, and combine them with the talents and hearts of those working in social enterprises around the world.”

A growing market
The Puerto Plata region of the Dominican Republic is to become the company’s first partner destination, and those at Carnival are optimistic about expanding the benefits to the Carnival family. “Importantly, from a pure business perspective, Fathom generates a totally different conversation around cruising, stimulating greater demand for cruising in general”, said Donald.

On top of the brand’s on shore activities, the on board experience is focused on the social impact travel market and includes specialised, purposeful retail options and amenities, culturally and geographically relevant music and films, as well as Caribbean-inspired Dominican- and Cuban-themed menu options. Special on board programming will be designed specifically for Fathom travellers. Activities will range from an inspirational orientation, impact and casual fun education activities, to brief volunteer activity training sessions for some on-ground activities, and from conversational Spanish activities to personal enrichment. While docked in the Dominican Republic, the Fathom ship will serve as a comfortable, convenient home base for its travellers.

“Technically, Fathom is more than just a cruise; it’s a travel experience”, said Donald. “It’s very different from what people normally think of; like I said, there’s no casino on board, there’s no Broadway shows, the dining will be different – still fine dining, excellent dining and excellent food – there will be fun on board and all that, but the entertainment orientation is very different.”

Fathom has identified a sizable and growing market of potential social impact travellers – with an estimated one million in North America alone to add to the millions more seeking service-orientated travel experiences. Fathom will attract a significant and growing segment of travellers who have never before cruised, and cater to the next generation of travellers.

Russell said: “During the past 10 years, in countless conversations I have had with people eager to serve others and make meaningful societal contributions, there has been a common theme: people struggle to know where they fit in and often people have challenges finding trusted, easy ways to make a difference. Fathom exists to address this desire and to create an enduring, life-changing impact, both in the communities where Fathom operates, and in the lives of the travellers who embark on one of our journeys, allowing for unique impact experiences before, during and after the trip.

“With Fathom, we are building one-of-a-kind, collaborative community, social impact models and experiences, and a solid network of reputable local and global NGO partnerships that, once established, can be considered for replication across global regions and company brands. As Fathom grows and evolves, we will continue exploring additional Fathom destinations and experiences and identify powerful brand partnerships we can establish, both within the Carnival Corporate family, and also more broadly outside the corporation with other like-minded impact brands. In addition, we will evaluate these unique Fathom assets to determine which models can be scaled across other Carnival brands as a way to bring new experiences to existing cruise line guests.”

Rotterdam’s future shines bright

Posted on by Charlotte Gill

For the first time in history, more people live in urban than in rural areas, so it is more important than ever before for cities to become sustainable. This involves creating green areas, promoting efficiency and reducing waste – with innovation acting as the key for all these feats. Leading the way in achieving smart practices and improving the public space for all stakeholders is the Dutch city of Rotterdam.

For years, Rotterdam has embraced innovation and experimental programmes in order to develop into one of the world’s most sustainable cities. At the centre of its strategy lies a need for constant improvement, development and renewal. With this focus, it has achieved a worldwide reputation for its smart ambitions. By providing opportunities to those with proposed solutions – from small companies to large, and any individuals who might have an idea – Rotterdam is able to explore new concepts through an open-minded approach. And as a testament to its prominence in the sphere of modern metropolises, Rotterdam is preparing a bid to host the World Expo 2025, an event that tackles the world’s problems on an international stage.

A local government cannot dictate a smart city programme, it can only be realised
with partners

The New Economy had the opportunity to speak with Johan Vermeer, Managing Director of Project Management and Engineering for the City of Rotterdam, about what it takes to be a smart city and how Rotterdam is leading the way.

How would you define a smart city?
A smart city uses innovation to improve itself. Innovation can be related to new technology, but it can also mean working together in new ways and new levels of social inclusion. A smart city is not driven by civil servants or politicians, but by everyone who uses the city: inhabitants, institutions, businesses and the local government.

How has Rotterdam evolved and how has it come to be seen as a smart city?
Rotterdam has been working on smart city initiatives for more than seven years now, with the first steps focused on ways to improve the city’s climate. After a couple of years, innovation in other sectors also arose, such as domotics in healthcare, ICT tools for city security officers, open data programmes with students, improving fibre infrastructure in the city, and public Wi-Fi. People called it ICT innovation, but that is not the right word; instead it is innovation that derives from how you use all new technologies, in all aspects. Our continued efforts have resulted in Smart City Planner, Smart City Lightning, 3D modelling, city rain radar, open data platforms and sensor based garbage collection. We have also improved water management through methods such as underground water storage facilities.

What makes Rotterdam an ideal testing ground for the development of smart city applications?
Rotterdam was rebuilt after it was heavily bombed during World War Two. That’s one of the reasons Rotterdam is so accustomed to continuous development, as well as making bold and innovative choices – it has become part of the city’s DNA. People working and living in Rotterdam have an open mind-set, they embrace new ideas easily and, above all, there is a real ‘can do’ mentality. That’s why the municipality practices the lab philosophy in the city: they try to support smart city initiatives as much as possible by providing pilot areas and by connecting innovators with incubators, coaches and financers.

Furthermore, Rotterdam has many small companies in various sectors that are extremely innovative. For example, the city’s serious gaming industry is one of the best in the world. In addition, the city offers world-class education, which is provided by Erasmus University and the Delft University of Technology. For these reasons, as well as many others, earlier this year Cambridge Innovation Center chose Rotterdam as their first location outside the United States.

In what ways is Rotterdam investing in a more sustainable future, and for what reasons?
We strongly believe that economic standards in Rotterdam are changing. New business models are making an impact very quickly and Rotterdam has to change accordingly. This is easier said than done, which is why Rotterdam has started a programme called ‘The Next Economy’. The objective of this programme is to become one of the world’s top leading metropolitan areas. That entails being fully equipped to handle future changes, challenges and opportunities. Smart programmes, including Smart Industry, Smart Port, Smart City, Smart Government and our involvement with the 100 Resilient Cities campaign and the Rockefeller Foundation, all contribute to this overall objective.

Rotterdam is also one of the C40 cities, a global network of 40 megacities committed to addressing climate change. Acting both locally and collaboratively, C40 cities are making a meaningful global impact in reducing both greenhouse gas emissions and climate risks.

What are the biggest opportunities and challenges associated with the fulfilment of this vision?
The biggest challenge is to create a healthy, long-term coalition consisting of citizens, businesses, educational institutes and the local government. Investments are needed upfront and without the guarantee of profit. It is also important to learn from mistakes and keep focused on the long-term objectives. The biggest opportunities are the development of new ways of working together where all involved parties can benefit; this is how a smart – or rather, a clever – city should evolve.

VolkerWessels has an idea to make roads out of plastic bottles. Artist’s illustration
VolkerWessels has an idea to make roads out of plastic bottles. Artist’s illustration

Can you tell us about the Street Lab initiative and what it entails?
In the midst of our innovation district, the municipal engineering bureau has developed a Street Lab in which companies, such as VolkerWessels, are able to test their ideas. VolkerWessels had an idea to develop a road made out of recycled plastic bottles, which recently gained worldwide media attention. The local government acts as a facilitator, the companies actually develop the products and research, and knowledge institutes are asked to monitor and analyse.

Our goal is to create a green city, improve the air and public space quality, as well as reduce costs and energy consumption. The test area is open to the public, so there is normal traffic, just like in any other street. If new pavements or street furniture turn out to be a success, they are used on a larger scale in Rotterdam.

What’s next for the Street Lab initiative?
Street Lab is challenging companies to develop an energy neutral public space. We’re particularly interested in retaining rainwater, as well as generating energy in the test area. Energy Floors, a Rotterdam based company, and the Spanish company OTEM2000 are working on a unique system to achieve this. The main idea is to use solar and kinetic generated energy, and transport it to objects in the public space that require electricity, such as lampposts. Following this, we will continue making the public space more green and researching the effects of cities on society and nature.

What lessons should other cities in Europe take from Rotterdam’s evolution?
These things take time; you have to be patient and persistent. We started off by developing a vision of our future. Early in that process we involved our partners and stakeholders, making it a shared vision. From there on, we’ve held fast to that vision and translated it into guidelines, framework and programmes; both for ourselves and also to challenge and stimulate companies to come up with new ideas and concepts. Innovation often starts from small companies or individuals – that fact should be celebrated in order to facilitate growth and an environment that supports knowledge exchange and collaboration, particularly as a local government cannot dictate a smart city programme and it can only be realised together with partners. It is crucial to comply with open standards; only then do connections between applications, products and solutions become possible. Next to developing and inventing, it’s very important to apply. We have the habit of putting insightful ideas and strong concepts to the test. In Rotterdam, quality never ends up in a drawer.

What are your hopes and ambitions for the future of Rotterdam?
Rotterdam has been a hard working and open-minded city for decades, if not centuries, always reinventing itself and constantly developing. We will continue to do so, not only in the practical sense, but we will ensure that innovation is given the space and attention it needs. By doing so, the city will become a resilient, clever city. Rotterdam is a city with a bright, smart future, which we hope to demonstrate at the World Expo 2025.

Utrecht: where people come to live happy, healthy lives

Posted on by Charlotte Gill

Utrecht in the Netherlands manages to provide all the benefits afforded by modern urban life, but, unlike other cities, it is also able to offer a healthy living environment within which the mind, body and soul can thrive. As the most competitive region of Europe, it is a place where artists, entrepreneurs and scientists have been collaborating to create a city that not only drives economic growth, but where positive solutions are fostered that improve the lives of its inhabitants and fuel further innovation in the process.

This collaborative approach is exemplified by the Economic Board Utrecht. Its role is to foster strong relationships between business owners, local government organisations and institutions – commonly known as the ‘triple helix’ – with the intention of strengthening the local economy and finding solutions for sustainable improvements to people’s lives.

Utrecht is in the middle of building the largest bicycle parking facility the world has ever seen

Through such collaborative efforts, Utrecht has cultivated a smart, green and above all healthy-living city and region that act as a blueprint for other municipalities around the world to follow. Utrecht has been built on the belief that true economic value comes from having a strong and diverse cross-section of businesses, which work cooperatively to ensure societal challenges are seen as market opportunities to be capitalised upon, rather than as burdens for business. The city attempts to form alliances that focus on three main areas: the development of healthy city living, the transition to a green economy, and offering innovative services to citizens.

Its burgeoning population has allowed Utrecht to thrive economically, but also increased pressure on existing infrastructure. Accommodating such a large population within such a compact space requires careful planning and innovative solutions, which is why the local authorities are forming private partnerships that can hopefully overcome these obstacles.

Utrecht’s ambition is to retain the city’s attractiveness and accessibility by focusing its attention on promoting and facilitating healthy urban living. For city officials, mobility is not the goal in and of itself, but a tool for creating a city where people are proud to live, work, start businesses and meet new people.

The promotion of healthy urban living has been replicated by cities all over the world. In 2014, London chose to invest more than £107m (€150m) in cycling paths and electric transport, while Chicago invested in an online platform for smart mobility. Both these projects relied on the support of companies in the Utrecht region, namely PROOV and RoyalHaskoningDHV for London, and CleverFranke for Chicago.

City of cyclists
With a population of more than 330,000 people – and with 70,000 more expected to make it their home in the coming years – Utrecht is a city with a bright future. A key component to its success has been its ability to transform itself into a ‘city of cyclists’, with over 100,000 riders making their way through its bustling streets and meandering alongside its vast network of canals each and every day.

Cycling is one of the keys to cultivating a healthy urban living environment. It is a secret the Dutch have known for some time and one that has gradually been embraced by other countries around the globe. It offers a healthy, cheap, space-efficient, and, above all, clean alternative to traditional forms of transportation. And, when embraced by enough people, it has the potential to alleviate pressure on existing infrastructure. This is why Utrecht is committed to becoming a world class cycling city and why it plans to build a vast network of high-quality cycle routes and parking facilities that will allow its inhabitants to navigate the bustling city streets with ease. Utrecht already boasts one of the healthiest urban populations in the Netherlands.

So crucial is cycling to the creation of a healthy urban environment that Utrecht is currently in the middle of building the largest bicycle parking facility the world has ever seen. Once completed, this massive three-storey cycle park, which is located on the east side of the city’s central train station, will be capable of housing 12,500 bicycles. If that is not impressive enough, the area around the train station will accommodate a total of 33,000 bikes – helping incorporate the humble bicycle into the heart of the city.

Utrecht made history by becoming the very first city to develop its own referral system for bicycle parking. The system also stands as a testament to the local authorities’ understanding that, for a city to be both liveable and economically robust, it requires the involvement of citizens in the development and design of public spaces.

In autumn 2014, Utrecht made the news due to a malfunctioning traffic light that didn’t want to go green. It caused chaos, leading to a massive bicycle traffic jam that stretched over 100 metres. Always eager to take a proactive approach, the local government asked citizens which traffic lights they thought were redundant and, after expert analysis, a number of useless lights were shut down.

Another example of the city’s pragmatic approach came from a local businessman, Jan-Paul de Beer, owner of innovation agency Springlab, which aims to promote a more active and healthy lifestyle. De Beer noticed lots of frustrated cyclists in the city, so he launched the Happy Biking Project. It involved Springlab employees riding bikes through the city with a GoPro, allowing the team to find out what was causing all the anger and then working with local startups to improve the situation on Utrecht’s roads.

Utrecht’s energy storage schemes and smart grids have also helped establish it as a truly smart city. These innovative solutions allow stored energy to be fed back into the grid. This was made possible through the city’s smart grid project, which involved Europe’s first Vehicle2Grid energy storage system. This smart charging station, which was manufactured by Nissan, is designed to harness solar energy and is capable of charging and discharging electric cars, making it possible for car batteries to supply drivers’ homes with power.

Utrecht is also home to a vast network of historic canals
Utrecht is also home to a vast network of historic canals

Playful city living
“The truly smart city is a playful city”, said media scholar Dr Michiel de Lange of Utrecht University. By utilising playfulness, citizens are more engaged. Rather than boring people to tears, why not use light-heartedness to get them to connect with the city they call home?

While travelling through the streets of Utrecht, residents and visitors will notice these playful elements. A giant teapot sits on top of the shopping mall Hoog Catharijne, while a UFO rests atop an old brick building near the train station. In the Lange Viestraat, there’s even a rainbow crosswalk aimed at supporting the LGBT community. Playfulness is rooted in the foundations of the city, so it is unsurprising many games are created in Utrecht. In fact, the city is the cradle of the Dutch gaming industry; home to some of the biggest game developers and studios in the world, which are not only responsible for creating amazing video games, but serious gaming applications too, with a focus on using the medium to improve people’s health.

It is this blend of pragmatism and playfulness that has helped the city create a healthy living environment for its citizens and an inspiring and prosperous environment for its businesses and entrepreneurs. The quality of one’s life is of paramount importance to local authorities. Involving residents in key decisions helps breed togetherness, and this will only serve the city well.

Mannheim becomes one of the world’s smartest cities

Posted on by Charlotte Gill

Mannheim – the city where Carl Benz invented the automobile in 1885 – is yet again in pole position when it comes to the development of future technologies. As a successful smart city, this German town is currently making a new mark and sharpening its profile. Mannheim is active in all areas of urban sustainability and is consistently bringing relevant processes into the economic, ecological and social activity of a smart city – and at a fast pace.

It is not by chance that this multicultural and innovative city in Southern Germany received a New Economy Smart City Award in 2014 and featured in the magazine’s list of top 20 smart cities. The key criteria here were the first-class infrastructure of the city with its 331,000 inhabitants, its economic strength, its high quality of life with its rich cultural scene, and its pioneering projects in the fields of sustainability and smart urban design.

The Strombank takes up subscribers’ current energy generation surpluses and releases them when energy requirements are greater than actual generation

Mannheim’s city council is shaping the city by means of a strategic system of objectives, building upon indicators and sustainability management – and this has aroused international interest and already reaped the city the renowned German Sustainability Award in 2013. The New Economy named the University of Mannheim one of the most important pillars in this bastion of innovation – among the world’s leading institutions in the economic sciences, creating key impulses with “pioneering research”. The New Economy also praised the close cooperation between the city’s renowned academic institutions – such as the Centre for European Economic Research – and Mannheim companies.

The term ‘smart city’ describes the rapid development of future technologies that occurs in the traditionally cosmopolitan city of Mannheim, through the interplay of many partners across many spheres. It is perhaps because Mannheim stands on two rivers – the Rhine and the Neckar – that everything has been in a future-orientated flow for years. In the laboratories of the city’s companies and seats of learning, research is undertaken and solutions are sought for the problems of modern society. The release of over 500 hectares of former military land (through the withdrawal of the US Army) will free up a great deal of space for urban development, startups, living space and green spaces in the next few years, and this dynamic will give the metropolis of Mannheim a further boost.

Let’s look at some developments in the dynamic smart city of Mannheim.

Energy technology
Germany’s shift in energy policy (prompted by a desire both in the political sphere and society) gave renewable energies a significant boost. They now account for a roughly 30 percent share of energy generation. And this share is on the rise.

Related to this is a fundamental change in the energy system. In Mannheim, the energy firm MVV Energie contributes to this change with two innovative and pioneering projects: under the heading ‘Modellstadt Mannheim’ (Model City Mannheim), the City of Squares was part of the now concluded E-Energy project, along with five other regions in Germany. Here, MVV Energie developed a so-called ‘Internet of Energy’. This allowed consumers to adapt their energy requirements automatically and comfortably to current generation from the wind and sun. The results of the project in the field of intelligent energy distribution and usage have now been channelled into Germany-wide research and development.

Another future-orientated project is currently underway in the south of Mannheim. Funded by the BWPlus programme of the state of Baden-Württemberg, the ‘Strombank’ (electricity bank) makes it possible to store and stagger one’s own use of electricity from decentralised generation sources. A local storage facility, the Strombank takes up subscribers’ current energy generation surpluses and releases them when energy requirements are greater than actual generation. This makes it possible to increase the proportion of self-generated electricity, thereby reducing losses and pressure on the grid. Participants in the pilot project are connected with the storage facility online via an ‘Energy Cloud’. Participants have direct access at all times to their own generation and consumption data as well as their electricity account via tablet computer. The pilot is to run until the end of the year and a final report on the project is expected next year.

Transport technology
Leading this sector on Mannheim’s streets is the PRIMOVE bus. Since June, two electric buses from Swiss manufacturer Hess have been undergoing tests in real street traffic. Although they contain the latest technology, the buses scarcely stand out. The two 12-metre vehicles are the first e-buses in the world to be equipped with the complete PRIMOVE product package: wireless charging technology and a compact and fully integrated propulsion system.

Together with other partners, the Mannheim company Bombardier Transportation developed contactless charging technology that works according to the principle of inductive electricity transmission. This is used, for instance, in the electric toothbrush. Electricity is transmitted via charging stations that are located at several selected stops in the road floor. While passengers get on and off, the buses’ batteries are charged automatically, unnoticed, without the use of cables. On the central No 63 bus line, the traffic company Rhein-Neckar-Verkehrsgesellschaft, together with Bombardier Transportation, is now gathering experience in passenger operation. This pilot project in the field of sustainable urban mobility will be developed further.

Medical technology
Over the past few years, close cooperation with the Universities of Mannheim and Heidelberg – as well as with pharmaceutical companies located in Mannheim such as Roche, and numerous research institutions – has brought into being the medical technology business cluster. This cluster of expertise has a characteristic profile of strengths that is unique in Germany and Europe. Its research is focused on the future provision of public healthcare. This firstly centres on fields of care for cancer, diabetes, circulatory conditions, weight problems, musculoskeletal disorders and age-related symptoms. Secondly, the medical technology cluster focuses on the fields of interventional medical technology, neuro-engineering, cell and tissue technology, imaging, telemedicine and communication, modelling and simulation, and in vitro diagnostics.

An example: a large centre of expertise for meditech firms has been set up on the campus of Mannheim’s medical school in collaboration with Cubex. This is also where the Fraunhofer Project Group for Automation in Medicine and Biotechnology is located. It is also home to an experimental operation theatre with state-of-the-art imaging as part of the BMBF research programme ‘Mannheim Molecular Intervention Environment’.

Climate protection
One of the greatest aims in Mannheim is to further improve the quality of life of people in the city and to extend their leisure and relaxation options within the urban space. Creating and interconnecting the kilometres of green space that encircle and cross the city means people’s time in the city is improved, as is the climate – because the north to east green corridor provides Mannheim’s city centre with cool, fresh air. The city becomes cleaner, quieter, greener and healthier by focusing on future-proof sectors and jobs as well as on the development of sustainable mobility models, smart residential districts and social participation projects (such as urban gardening schemes and movement zones in urban natural spaces).

Under the heading ‘Blue City Mannheim’, a modern district for energy efficiency, smart grids and electromobility will be developed in the former US settlement of Benjamin Franklin Village – with living space for up to 10,000 people. In the coming years, jobs will be created near the residential zone, which is close to a large wooded area while still well connected to the city thanks to public transport. This is how the future of a modern city society is imagined. The project has been made possible thanks to the comprehensive conversion process and fast paced development carried out by many agents, including international architects’ offices.

The city’s techno-ecological projects also include a Green Logistic Park. This initiative aims to divert heavy goods traffic away from the city in the medium term. Large heavy goods vehicles can park in the Green Logistic Park, where their goods are transferred onto small electric vehicles to then be transported to destinations around the city (for instance the Port of Mannheim).

However, the urban districts of the city centre are also going green, as documented by the Urban Gardening Initiatives, which are making a mark thanks to the work of many active Mannheim volunteers in various parts of the city. The university city of Mannheim is now already green – with two large recreation parks. Nevertheless, it is a great objective to create even more open spaces and even more sporting options.

Open Data Portal
Another project featuring smart, and in this case digital, participation options for the urban society is the coming Open Data Portal, which will be made available by the City of Mannheim this autumn. Anyone interested can use this to obtain freely accessible and mechanically usable communal data – useful information such as urban mapping with relevant tree stocks for the allergic, cycle paths, refuse containers, and real-time data for public transportation.