Select Committee on Foreign Affairs Appendices to the Minutes of Evidence - Sixth Report


Memorandum submitted by British Invisibles (on behalf of its member companies)


  British Invisibles (BI) is a private sector organisation with 30 years experience of representing the UK's financial services industry throughout the world. Its membership (see Annex A) is drawn from across the spectrum of the UK's financial and related business services including, in addition to corporate members, trade and professional associations, exchanges and markets, the Bank of England and the Corporation of London. BI operates on a "not-for-profit" basis and is principally funded by its members' subscriptions. BI works in four key areas:

    —  helping overseas governments and companies access the expertise, advice and funding available from its members;

    —  encouraging greater liberalisation of international trade in financial services;

    —  promoting the UK as a healthy and well-regulated environment for financial services business; and

    —  promoting better understanding of the financial sector's contribution to global business and the role of specific services within the sector.

  Britain's ability to sell services and expertise in such areas as banking, asset management, insurance, law, accountancy and training is a key economic asset. London itself is one of the three main financial centres in the world and has the largest share of many international markets including cross-border bank lending, foreign equities trading, foreign exchange dealing, over-the-counter derivatives, marine and aviation insurance and international bond issuance and trading. Scotland is also a financial services centre of major standing with traditional strengths in banking, insurance, pensions and investment trusts. UK financial services account for 6.4 per cent of GDP and generated overseas earnings of £25.2 billion in 1997. Trade in financial services forms part of these overseas earnings and the UK's surplus of $11.7 billion in 1997 was larger than that recorded by any other country.


  Before addressing the key area of "the FCO's role in promoting British interests in and relations with" these countries, it may be helpful to set the scene as regards BI members' activities there. The positive political developments over the last eight years or so in the region have resulted in steadily increasing prospects for greater "invisible" trade between these markets and the EU. Unlike "visible" exports, there are no comprehensive statistics, official or otherwise, to record this growth. The financial and legal services sector is highly competitive and in many cases details of newly-won business are jealously guarded for fear of alerting others. Nevertheless it is possible to piece together views and comments from key BI members (who represent the leading firms in each sector) to form a snapshot of their activities in these markets and their hopes for the future.

  Although there is general consensus that these markets (all of which are part of the loose grouping known as the Commonwealth of Independent States or CIS) offer tremendous potential, the current level of interest and activity of BI members is not as high for example, as in Central and Eastern Europe. The latter regions are at a more developed stage both politically and as regards infrastructure.

  In order to build up a picture of BI members' activities in the Transcaucasian and Central Asian countries it may help to examine a couple of the key countries individually.


  Rich in natural resources, Kazakhstan has been ranked as fourth in the world in terms of estimated oil reserves. It offers significant opportunities in the "invisibles" sector. All the major UK accounting and consultancy firms have established offices there; Cameron McKenna and Baker McKenzie in the legal field; Sedgwick (now part of Marsh & McLennan), risk management and insurance (an office employing 16) and HSBC. ABN Amro and Rothschild advised on the partial sale of Kazaktelecom. Other Western advisers such as CSFB have been or will be involved in other partial sales of oil, copper and titanium enterprises. Kazakhstan is clearly viewed as having high potential but in the words of one commentator "patience is not only a virtue [there] but a necessity".

  The Kazakh Stock Exchange, despite an impressive start, has not progressed as fast as expected. The number of licensed commercial banks was 204 in 1993 (one bank for every 78,000 people in a country with an average income pa of $1,300). Steps are being taken to implement tighter prudential regulation and bank supervisory systems; the West can clearly help with expertise and experience. To date the number of licensed commercial banks has been reduced to 76, of which 22 are foreign owned with about 12 per cent of the market. At least 10 of the most significant Kazakh companies issued Eurobonds in 1998 to the total value of at least $1,000m. Numerous oil pipeline deals have encouraged international banks such as Societe Generale, Citibank and ING Barings to consider setting up full branch offices in Almaty.

  Pension reform is also pushing forward the creation of a securities market. As Kazakhstan moves from a pension system where 25 per cent of employee wages go into State funds, to one where 15 per cent goes to the State with a voluntary 10 per cent into an own-choice fund, the new pension funds will become major investors into domestic government bond and equity markets.


  Azerbaijan, too, has substantial oil-related reserves which drive the economy. Large scale state enterprises have begun to be privatised, with opportunities for Western advisors. A bank restructuring programme is being implemented, including privatisation of the largest state bank.

  Sedgwick-Marsh has an office employing five staff, who are involved in the development and handling of risk management and insurance business for both local and international clients. British Bank of the Middle East (HSBC). Ernst & Young, PricewaterhouseCoopers, (accountants) and Willis Faber Dumas (brokers) are all represented.


  In March 1998 the BI Export Promotion Team organised seminars in Kazakhstan and Uzbekistan with a project finance theme and thus gained first hand experience of the service offered by the respective Embassies. With a targeted audience of politicians, senior government officials and decision makers in the banks, oil and gas industry, these seminars focused specifically on "unlocking value" in each country's natural resources through the development of oil and gas pipelines. (See Annex B for more detail). The eventual aim was to encourage these countries to look to London-based firms for advice and finance. The seminars were particularly successful, due in no small measure to the help and support of the Embassy staff in both Posts, before and during the events. They were enthusiastic and pro-active.

  In July 1998 BI chaired a London round-table on privatisation in Azerbaijan with, amongst other guests, the Ministers of Economy, Telecoms and Agriculture.

  Possible outward visits to Azerbaijan and Kazakhstan covering issues such as development of securities markets, pension funding, insurance etc are under active consideration for later in 1999.


  For the purpose of this memorandum BI members gave their views on a confidential basis. The following commentary attempts to put BI members' comments, both general and specific, into a useful context for the Committee whilst at the same time preserving commercial confidentiality and avoiding identification of individual FCO officials, given the size of the Posts in questions.


  Overall the BI members polled were satisfied and in most cases more than satisfied with the service delivered by FCO Posts in the region. There was an underlying feeling that although much of what HMG does was broadly helpful and at times very good, it does not always make the best use of available resources and it is sometimes difficult to know who is responsible for what or has what information. Despite undoubted improvements BI members still feel that, generally speaking, officials in the DTI and the FCO do not have as good an understanding of, and interest in, the financial sector and its needs as they do of the "visible" sector.

  Inevitably perhaps, because many BI members are large they do not make so much use of the menu of export schemes and services offered by the Overseas Trade Services. What is more relevant to them (as is brought out in the specific member comments below) is the performance of the local Embassy in providing intelligence and access and HMG assistance in breaking down barriers to trade.

  There is a strong desire for good quality information and a request that Embassies undertake active networking from which companies can benefit. The Posts in this region are reckoned to be doing an above-average job but members want Ambassadors and Commercial Counsellors to have an even greater depth of knowledge and to be more proactive locally on commercial opportunities.

  For these markets and others, the dissemination of intelligence using the internet needs further examination. BI is aware of work being done in the FCO and the DTI and of the security issues. We have begun to carry Post's market assessments on the BI website for accessing by members but there is obviously great scope for further work and integration. As regards Post's level of understanding and knowledge of the financial sector, BI and the Corporation of London are working hard to improve this through the "Introduction to the City" programme. Other ideas worth pursuing include the increased use of secondees from financial services companies, participation in specialised courses such as the "FT City Course", and the possibility of a programme of visits and secondments to financial services companies for officials from the FCO and other Government Departments.

  BI members need access to foreign Government ministers, officials and top business leaders. Companies are looking for door opening and networking. Participation by an HMG Minister, whether on a mission or hosting a function in the UK, can be very helpful. Ministerial involvement should not be as mission leaders but rather to open events, make keynote speeches, etc. BI would also like to see more involvement by businesspeople in official overseas visits by the Prime Minister and senior ministers. BI needs more warning of incoming foreign visitors so that it can discuss the introduction of a financial services element into the programme. Involvement in inward missions can be very cost effective for members.

  There are likely to be increasing opportunities in at least some of the countries under inquiry for expansion in the field of pension and pooled fund provision, where in many cases the UK leads the EU in provision of cost effective products. Posts need to be more aware of this and HMG needs to be aware of the need for and benefits for the UK industry in terms of both earnings and jobs which could accrue from a single EU market.

  The response to the BI questionnaire for this inquiry indicated that several members were unaware of what is available from the Overseas Trade Services. Perhaps the sheer weight of information confuses the picture and there may be a problem of dissemination within a large organisation. There does appear to be confusion as to what services are available, from which Departments and on what terms. The idea of a "one stop shop" or "gatekeeper" central point of approach might be worth consideration, as might be measures to ensure that, at working level, a firm's managers are clear what information is available and where it can be accessed. Generally the service provided by OTS is felt to be of a reasonable standard with the recurring suggestion that greater attention be given to electronic delivery. BI has high hopes that the newly-created British Trade International will impact favourably across the board in this and other relevant areas.


  The following comments were made by individual BI member companies:

  Member A (professional association) "we have been impressed both by the quality of representation in the FCO Posts in this area and the work they do in promoting British interests".

  Member B (legal sector) "Business promotion is less about responding to requests for introductions than about trying to understand the business needs of the country to which he/she is posted and communicating these needs to a community in the UK who may be able to meet [them]. This is the argument in support of BI's attempts to ensure proper briefing of Heads of Missions and Commercial Counsellors by the City and through regular de-briefings. There is a continuing and developing overlap between the "political" and "commercial" aspects of what an Embassy is supposed to do. The World Trade Organisation rules introduced real grounds for challenge to local obstacles to trade; the DTI has responsibility (with the Commission) for UK partcipation in the WTO and deals effectively with Embassies when called on by an affected company. There is no necessary inconsistency between the "political" and the "commercial"; often the two can be promoted together.

  Above all what one should expect from the FCO and in particular foreign Posts is genuine interest in the development and current concerns of the countries to which FCO representatives are appointed. The UK private sector can contribute much if given the right encouragement." This member also made the point that with the growing "internationalisation" of the City, the FCO should perhaps be promoting the international interests of the UK as much as the national. Specifically, Member B had first hand knowledge of two Ambassadors in the region, both outstanding in different ways. The first "was excellent as a representative and quiet promoter of business and other interests"; the second has been "a first rate Ambassador, unstuffy, uncomplicated, prepared for almost anything and very encouraging for those who visited (ie proactive, not just responsive)".

  Member C (a leading insurance broker) "On the whole we have had a very fruitful relationship with the Embassies in the countries [of Transcaucasus and Central Asia] in which we have offices. The Posts have provided a good source of information and have been vehicles through which business issues can be presented to the host government. We doubt whether the full range of [Embassy] services are known and perhaps the Posts might prepare briefing documents to assist British companies to understand the role and work of the individual Post".

  Questioned as regards the work of the FCO in the UK eg policy initiatives, VIP inward visits etc, Member C commented further: "Clearly the FCO can have considerable influence on a country. Our fear is that the current Government has a short term view of developing business relationships. Senior FCO/Government Minister visits are essential even though tangible business opportunities may not be realised for a number of years afterwards. Senior visits demonstrate a commitment to the country concerned, particularly when it is struggling to get world recognition. A strategic visit by the FCO and other institutions such as the DTI can lay the grounds for a future strong partnership.

  Some countries such as the USA put far more people into a Post than the UK is able to do but it is what the people do that brings the success. In some parts of this region Germany and France have put in far more effort to support their national companies than has the UK. However, in Azerbaijan for example, the UK is in a pole position and we would hope to see that the UK government strengthens ties and promotes UK business in order to retain a favourable relationship. In countries in which we do not have "pole" position, and since business development is a long-term project, it is hoped that the UK Government will do more [in this way] to support [British business interests]".

  Member C also felt that a key obstacle to increasing their business was the lack of international-standard legal systems which regulate "life" business and can form the basis of liability litigations. Member C hopes to play a leading role in the insurance sector of these republics but to do this "we must have UK Governmental support for the UK financial expertise to be promoted, recognised and used. The Republics will only recognise the UK's strength if they are constantly exposed to UK financial organisations [and by definition the Posts have a clear understanding of the problem)".

  Member D (Merchant/Investment banker); the Director consulted knew the region well and felt that the service offered by the Posts there ranged from "good to outstanding". The region, particularly countries such as Kazakhstan, Uzbekistan, Azerbaijan and Kyrgyzstan, had undoubted potential. The reason why British firms were not as active as this potential would lead one to expect was not as a result of any shortcoming on the part of the FCO Ambassadors and commercial staff on the ground nor as a result of the knock-on effect of the Russian crisis. Rather the problem had existed for the last few years and was a combination of sheer difficulty of working in the region, low fees, delays on the part of the Governments there in making up their minds on what was required, eg Stock Exchange, privatisations and pension legislation. To some extent local corruption also played a part. Member D's view was that the British Embassies there were doing all that could reasonably be expected of them (more in one or two cases) but that their efforts were sometimes frustrated by the FCO in London who might refuse to receive a visiting PM at what was perceived (by his Government) to be the appropriate level.

  Member E (insurance broker) has some business activity in the majority of the countries under inquiry, including aviation (the biggest sector), marine, motor and property; employing some half-dozen not just designated to specific regions and one based in Azerbaijan. This member generally found the British Embassies helpful but had a feeling that the FCO staff regarded the insurance business as intangible and something they did not really understand. VIP and other OVIS-organised visits to London were perceived as "very good, very useful".

  Member E felt that the German diplomatic service was more organised, although "not sure whether in fact the number of `commercial' people in their Posts exceeded ours"; certainly "HERMES gives more support than ECGD". This member particularly emphasised the aviation/marine re-insurance" business it had built up in the region, but did not regard FCO services in the UK or overseas as playing a significant role in this.

  Member F (a retail and wholesale banker with active business in the region, employing locals and also operating out of London). As regards Armenia, Azerbaijan and Kazakhstan, this member felt that the Posts had a useful business role and offered extensive services. He would certainly continue to use them. He found the activities of the FCO in the UK eg VIP visits etc of more modest help; the Know How Fund had proved useful. "The activity of the FCO Posts in the Central Asian countries compares favourably with other nations eg US and Germany; in many ways the UK posts are more proactive". This member had won business in Azerbaijan on the Baku airport project and regarded the Embassy's involvement as key. He stressed the poor standard of legal and accounting service in the region and the amount of work required to improve it. "This gives rise to opportunities for British companies and more scope to work with the FCO Posts." (The member concerned is hoping to increase business in Kazakhstan over the next two to three years.)

  Firm G was a small consultancy with considerable experience of the region. The Chairman was "very pleased" with the service received, particularly from two of the Posts, both from the FCO diplomatic staff and the locally engaged people. He felt that across the region he had noticed a clearly perceptible change for the better over the last three or four years as regards the commercial "nous" of the Embassies and the willingness of the staff to be pro-active.

  Member H (a large international investment bank) had recently won a major privatisation advice contract in Kazakhstan; the British Embassy had played a useful role in the run-up.

  Member I was actively encouraging companies from the region to raise international capital through a listing on the London Stock Exchange. The development of these countries has yet to provide suitable opportunities but the member has received a good degree of assistance from the FCO Posts. Missions in both directions have been useful, particularly the visits to London by key figures in the privatisation and capital markets developments. This member felt that the USA and Germany were probably providing a higher degree of commercial assistance and support (although not necessarily a better quality of Embassy support). "Depending on the development of the legal framework and capital markets infrastructure, London Stock Exchange listings for companies from this region are a strong possibility within the next three years."


  Despite numerous current problems, the region is likely to be of significant future potential for BI members as a source of fee-earning capacity in the financial, legal, pension and insurance sectors. The fact that members have not committed to the region as deeply as in Central and Eastern Europe reflects that this potential will not be easily exploited. BI members are having to accept that considerable patience is required with political systems that move slowly, but change requirements rapidly. In some instances, eg insurance and pensions, a whole local mind-set needs to be altered. In such circumstances, where firms may not have the same degree of local representation as in CEE, for example, it becomes particularly important that they can rely fully on the expertise and advice provided by the Ambassador and his commercial staff on the spot.

  It is gratifying to report to the Committee therefore that both from the BI Export Promotion Team's experience and that of a good cross-section of member companies who responded, the feeling that emerged strongly was one of satisfaction and in some cases great satisfaction with the quality of service provided by the Posts under inquiry. It emerged clearly that a great deal depended on the quality of the Ambassador in these relatively small Posts. The best were enthusiastic and pro-active and able to enthuse their commercial staff likewise. The perceived downside to this in some cases was that the London end of the FCO operation had perhaps inevitably a different set of priorities, which might lead to missed opportunities in the region.

March 1999

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