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
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.
BI MEMBERS IN
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
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
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"
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
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
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
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
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.