Examination of Witnesses (Questions 60-79)
AVIVA OFFSHORE
SERVICES AND
NORWICH UNION
31 JANUARY 2006
Q60 Miss Kirkbride: So the clock
that starts ticking on that is entirely separate.
Mr Egan: Yes. I would not want
to over-exaggerate this, however. In terms of your overall costs
of running a big operation—we have a very big operation,
we have 4,500 people working out there now and our ambition is
to get to 7,800, which is our publicly stated ambition. That is
a nice-to-have, if I could put it that way, rather than something
which is a determining factor in why you might place your investment
there. It has just facilitated things rather than hugely determining
them.
Q61 Miss Kirkbride: When are you
going to get 7,800 employees?
Mr Egan: By 2007.
Q62 Roger Berry: The support that
you receive from the Indian Government, how does that compare
with what might have been available in the UK to engage in exactly
the same activity here?
Mr Egan: The obvious comparison
in my mind is that we have set up offices in Belfast, which is
some kind of special economic zone, where there has also been
financial assistance available. In many ways both of those schemes
suit the circumstances of those countries; both of them help you
and they have certainly never been for us huge determining factors.
Again, I would say if we look at the Belfast one it probably makes
you want to choose one place in Belfast versus another place in
Belfast. Certainly in my experience of this it has not been a
huge determinant of what we do, for us it is to do with things
like where our customers are and where we need to serve them,
all those sorts of things in the UK environment are pretty important
to where we want to place our offices.
Q63 Roger Berry: Just to clarify
what you mean by huge determinant, are you saying, basically,
that the incentives offered by the Indian Government and the possible
incentives offered by the UK Government in relation to Belfast,
actually these did not determine the decision at all?
Mr Egan: Not at all. They are
nice to have.
Q64 Roger Berry: So the Indian Government
does not realise that they are offering these incentives and actually
it does not make any difference at all, they are just handing
out tax revenue for 10 years without any benefit.
Mr Egan: I think it is to do with
ease of set-up, it has to be seen within that whole package of
trying to make the regulation around this and going through the
bureaucracy in establishing something. It is all part and parcel
of trying to make that easy.
Q65 Roger Berry: I can see you would
not say no, if there was that offer on the table, but since you
have referred to it can I find out a bit about the problems that
you do face in India. In setting up offshoring activities, what
in your experience have been the main problems, the main obstacles
to doing it quickly and efficiently? What has really got you down
when you have been trying to make progress?
Mr Egan: I am going to draw the
distinction, because I think there is a distinction, it is a point
that was made earlier. We are working on the offshoring side in
Rolls-Royce of how to get it done, how to expand quickly and well.
Yes, there is bureaucracy to get through, yes, there are complicated
regulations but they have been simplified, they do not really
seem that much more difficult than if I tried to build a shed
where I live really. It is just familiarity, so local know-how
tends to be the most important thing. Where you start to then
say BPO is defined as this box and I would like to do something
that is a tiny bit outside that box, then you can start to see
"oh gosh, this is going to get very, very complicated, there
are going to be a whole load of different bureaucratic and regulatory
things that I might need to go through". So there is that
aspect, but I think the experience which we began in 2002 with
the Aviva life business, was probably a lot harder because it
took something in the region of 18 months to originally get a
licence. I know the world has probably moved on since then, but
there are very strict regulations about ownership, which cause
challenges for us in terms of how much are we going to invest
in a company in which we have got a minority holding of 26%—and
it is the same for all the financial services companies—those
then become barriers to how far you take that forward.
Roger Berry: Thank you.
Q66 Mr Hoyle: On financial services
what you are saying is that it really is a protected market.
Mr Ainley: It was denationalised
in 1972 and the old national company still has 70% of the market.
Having said that, they have lost 30% of the market relatively
quickly, over the last five to six years, when there has been
significant growth in other companies like ourselves coming in
to start joint ventures. So there is opportunity to grow and from
Aviva's perspective India and China, from a life insurance perspective,
are huge opportunities for us. There is a rapidly growing middle
class that has not yet got the levels of life insurance cover
that we would expect in Europe, and we would like to be very big
in that market. In contrast to China, India has much more restrictive
ownership rules than those that we would like to have.
Q67 Mr Hoyle: That is the point,
26% is what you can invest.
Mr Ainley: Yes.
Q68 Mr Hoyle: It really is a protected
market in a sense, is it not? You either gamble with a minority
stake or you do not enter the market.
Mr Ainley: The Indian Government
has said that they will change the law to allow up to 49% ownership,
and they have mentioned that subsequently that could go to 76%.
However, we have not seen any actual changes taking place as yet
to move towards that.
Q69 Mr Hoyle: Jam tomorrow but no
firm date.
Mr Egan: It does require in financial
services—for convoluted reasons I am sure—a change
to primary legislation, which is not true in other areas. In that
particular regulated area that is the case, but we have still
not seen a bill or plans for a bill to come before Parliament.
I know it is a sensitive issue and it is a coalition government
so it is not easy to make these things happen, but I guess companies
like us are patiently waiting for those promises to be delivered
on.
Chairman: We have some more questions
in this area, so I will move on to Anne Moffat.
Q70 Anne Moffat: In your paper you
spoke about political stability, that it is not going to be politically
stable, just by the point you were making about the coalition,
but my point is more about the barriers, some of which you have
referred to. What ideas would you have for both Governments to
lower those sorts of barriers? Would it be reduced regulation
and a cut in the bureaucracy, would it be other legislation? What
sort of ideas would you want to bring?
Mr Ainley: Certainly we would
like to have the opportunity of owning a far greater percentage
of our life company than we currently have, and we would like
to have the deregulation that exists in the BPO industry applied
to all our business. We have certainly been able to move very
quickly as a result of the extensions and reductions in regulations
that there are in the BPO world to achieve scale very quickly,
faster than we would have been able to do in the UK—not
to do with regulation, just to do with a workforce and the ease
of being able to build buildings quickly and recruit people quickly
etc. Do you want to add to that?
Mr Egan: My experience of India
is not that it is really any more bureaucratic than the UK, it
is just different. It is getting used to a different culture and
it is bureaucratic on the left side where we might be on the right
side or whatever. As John says, it is more about opening up some
of the other areas of the economy to things like foreign ownership,
to being able to clearly invest in them. I am not an expert in
this, but there are different regulations happening in different
sectors, it is not uniform, and that makes it probably quite difficult
if you are a big conglomerate type of company, I suppose, where
you might be wanting to go to more than one sector, because your
experience in one might not help you very much with the other.
Q71 Chairman: Do you have any problems
with differences between states and central government?
Mr Egan: No, basically, would
be our experience of it, and that is probably true of the life
business as well. That has not been an issue for us.
Q72 Mr Wright: In your submission
to us you mentioned "developing our offshoring operations
in India to support our UK businesses, also provides us with opportunities
to leverage Aviva's existing market in the country". You
have already touched on the fact that you have already got investments
in some of the insurance industry within India itself, could you
just mention what other products you are interested in providing
and what impact is that going to have on your UK interests?
Mr Ainley: We are a UK plc and
for Aviva to expand internationally helps UK plc. We do have growth
plans in India for the life insurance industry, but we have no
plans to grow outside the BPO work we are doing and our life insurance
industry. We see a huge market for us there. We think there are
roughly 300 million people who would benefit from life insurance,
of which about 80 million people are currently insured, so the
potential of the market is enormous. That is where we see our
expansion and, as Sean has said, we do not see us expanding the
BPO operation beyond our currently announced plans, we think that
that will give us the right level of capability and resource to
supply the right level of service that we want to give to our
customers in the UK.
Q73 Mr Wright: You did mention the
fact that you are only allowed to own up to 26% of a company,
is that very restrictive for you in terms of the way you are going
to go forward?
Mr Ainley: It restricts us from
growing more quickly. We have a very good and effective partnership
with Dabur, the Indian company that partners us, but we have made
no secret of the fact that we would like to have a greater level
of ownership for Aviva plc.
Q74 Mark Hunter: The evidence that
you submitted to us suggests that India has only recently reopened
its financial markets and that these offer very promising growth
opportunities for UK companies. Could you tell us a little bit
more about precisely what the opportunities are that you see?
Are they confined to the financial markets in India, or are we
talking about other markets providing opportunities, and if so
what are they?
Mr Ainley: Aviva will restrict
itself to the life insurance market and BPO but both of our experiences
of working in India are that this economy is shifting radically,
and the trickle-down impact of the new wealth that is in India
is causing a huge growth in many, many markets and therefore there
should be lots of opportunity for UK companies generally to get
out to India and sell more.
Q75 Mark Hunter: What do you think
the key market opportunities are?
Mr Ainley: I am not an expert
outside life insurance.
Mr Egan: There are huge opportunities,
I would say, around infrastructure. India's infrastructure is
not keeping pace with its development and there is lots of evidence
on that. Utterly anecdotally, I was living in a place which has
a big European manufacturing place and I guess it is true to say
that everybody's eyes seem to be turning to China as far as that
is concerned, so it does not feel to me that that is something—taking
manufacturing to India is a little bit old hat if you like. I
think around aviation there are huge opportunities.
Mr Ainley: Retailing as well.
The shift in retailing in India, in the small city that you lived
in, it is amazing the difference in the last 18 months in terms
of the shift from the small corner shop style of retailing to
enormous growth in shopping malls and the opportunities that those
provide.
Q76 Mr Bone: I gather from what you
are saying that the Indian market is not fully open to competition
from overseas companies at the moment. That is what you are saying
really.
Mr Egan: Yes.
Q77 Mr Bone: You have lifted some
of the barriers already; could you summarise what those barriers
would be?
Mr Egan: I know some of this is
changing, so you will have to forgive me if some of what I say
is a little bit out of date. When we started on this in 2002 I
know that there were basically foreign investment challenges about
where the investment was coming from; I believe, to be fair, that
some of that was removed in the last budget. Somebody alluded
earlier on to being able to buy property in India; again, when
I started on this it would have been impossible for me to buy
a home for myself, for example, but I know that is now possible
and was made possible last year. So there are changes happening,
but the challenge probably in my experience around this does come
down to the boring old stuff about know-how. A lot of India can
seem quite familiar; a lot of the laws are on the statute book
from pre-1947 and are very like British laws. It leads you into
a trap really of thinking that working in this country has a lot
more in common with the UK than it actually has, and one of the
best things that we did—and I would certainly commend this
to other companies—was to employ a good Indian legal firm
to take us through all of that, and therefore I did not think
it was that difficult. Because we made a good decision upfront
we found our way to navigate through it.
Q78 Mr Bone: It is a sensitive subject,
but I think it has been suggested somewhere that of course commissions
have been used in the past to ease the way forward. Is that something
historic now, or do you still see it?
Mr Egan: My personal experience
of this, being very honest, is that with the types of companies
that I ended up dealing with it absolutely does not exist, I have
not come across it. Where it is still prevalent would be much
more in day to day life: if you want to get a telephone put in,
you can get it put in more quickly if you are willing to pay a
commission. A number of Indian companies—CCS would be one
of them, Wipro would be another one which springs to mind, and
indeed our own company when we set up, it took us 18 months to
get a licence. Could we have got that licence quicker? I think
we probably could have done, but that world has really changed
in the last few years. Everything I hear and everything I saw
has said that to me.
Q79 Mr Bone: There are certain regulatory
barriers such as ownership, but generally speaking if you are
on the ball and you set up properly locally, you are going to
do well.
Mr Egan: You can go through that
pretty quickly, sure.
| 
