Memorandum submitted by the Corporation
I noted with interest the Committee's announcement
shortly before the House rose for the Summer Recess, of plans
for an inquiry into Trade and Investment Opportunities with Brazil.
The City of London has a growing interest in the Latin American
region, particularly with Brazil, and the City hosted a Banquet
for President Lula da Silva during his State Visit in March. I
thought it might be useful to set out some background to the City's
Brazil's contacts with the City are longstanding.
When Brazil declared its independence from Portugal in 1822, it
turned to the City of London to fund it first ever public loan.
Ever since Barão de Mauá, Brazil's greatest nineteenth
century industrialist, visited Britain in 1840, the Brazilian
business community has regarded Britain as an important partner.
As you will know Brazil is the UK's most important
trading partner in Latin America and the UK is a significant player
in Brazilian banking, with HSBC undertaking commercial banking,
trade finance and consumer credit. Brazilian companies are active
users of the City's insurance and commodity and, whilst the picture
is changing, much of the Latin American financial world overlooks
the City of London and turns instead to New York for expertise.
Sir Michael Savory and a supporting City business
delegation spent 3 days in Brazil when he visited Latin America
in September 2005 as Lord Mayor. You may find the enclosed report
of the visit of interest, particularly paragraphs 21-32 which
relate specifically to Brazil. As you will see from the report,
the visit also included calls on Buenos Aires and Santiago and
one of the key aims was to promote the City's expertise in a number
of areas, particularly Carbon Trading and Public Private Partnerships,
both of which are significant fields in Latin America. The next
Lord Mayoral visit is scheduled for September 2007, and will include
visits to Brasilia, Sao Paulo and Rio.
Extracts from the Report on the Visit of
the Rt Hon The Lord Mayor, Alderman Michael Savory to Argentina,
Chile and Brazil,
Saturday 3-Thursday 15 September 2005
1. The Rt Hon the Lord Mayor visited Argentina,
Chile and Brazil from Saturday 3rd to Thursday 15 September 2005.
The Lord Mayor was accompanied by The Lady Mayoress and by a small
business delegationthe composition of which varied during
the visit. A full list of the business delegation is included
on the final page.
2. The visit was the first to Latin America
for four years and followed those of two previous Lord Mayors,
Sir David Howard in 2001, and Lord Levene (to Brazil only) in
1999. The aim of the visit was to promote the City of London and
in particular its financial and business services sectors, and
to hold discussions in each country with business leaders and
with Government ministers and officials at both city, state and
national level. In each of the five cities he visited, the Lord
Mayor sought to emphasise the reasons behind London's success
as an international financial centre and the role that London
wished to play internationally with its expertise in many key
areasin particular Carbon Trading and Public Private Partnerships
3. The Lord Mayor and his party spent three
days in Buenos Aires, before travelling on to Santiago in Chile,
where he undertook a busy four day programme. Finally he flew
on to Brazil, where he made short but intensive visits to Rio
de Janeiro, Brasilia and São Paulo. A comprehensive programme
was arranged in each country by the British Ambassadors or their
representatives, and the Lord Mayor had the opportunity to meet
many senior and influential people in national, state or local
government and in business in each of the cities he visited. Formal
seminars or round table discussions with representatives of the
financial services sector took place in Buenos Aires, Santiago,
Rio and São Paulo, with Carbon Trading, Fund Management
Insurance and Reinsurance as the principal themes. The Lord Mayor
was supported by a small business delegation in each city, which
varied in composition according to the topics being discussed.
The Lord Mayor also made a number of keynote speeches in each
city, including an address to the financial services community
in Chile and a major reinsurance seminar in Rio. He paid official
calls on a number of Government Ministers associated with financial
and economic affairs, on the Vice President of Argentina, the
Vice Governor of the State of São Paulo and on the Governors
of each of the three Central Banks. He also called formally on
the Mayor of Buenos Aires and presented to him an engraved Armada
Dish on behalf of the Corporation of London.
4. The Lord Mayor's visit to Argentina was
hosted by the British Ambassador, Dr John Hughes, who generously
invited the Lord Mayor and Lady Mayoress to stay at the Residence.
The Ambassador also hosted a number of lunches and dinners at
which the Lord Mayor was able to meet a cross-section of financial
and legal business leaders working both for UK and Argentinian-based
businesses. He was accompanied throughout by Mr Michael Charlton
of Think London and by a number of local representatives of UK
5. The Lord Mayor had a full programme including
calls on the Vice President (Sr Scioli), the Minister of Economy
(Sr Lavagna), the Secretary of Finance (Sr Nielsen) the Minister
of Planning/Public Investment (Sr De Vido) and the Governor of
the Central Bank (Sr Redrado). He also paid a courtesy call on
the Mayor of Buenos Aires (Sr Ibarra) and the President of the
Stock Exchange. He also addressed the Argentine-British Chamber
of Commerce, and had separate meetings with senior British business
representatives as well as leading Argentine financial and legal
figures. The central element of the visit was a CDM/Carbon Trading
seminar at which he delivered a keynote address.
6. The Lord Mayor was please to have been
able to present a Mansion House Scholarship to Mr Diego Ardiaca,
an executive of the BICE Bank in Buenos Aires. Mr Ardiaca is to
study for an MBA at the Said Business School in Oxford, followed
by a two month internship with a City firm.
7. The Argentinean economy is recovering
slowly following the financial disasters of three years ago, when
the country defaulted on its sovereign debt repayments and the
Peso was decoupled from the US Dollar (Pesofication), losing at
least two thirds of its value. Economic growth has been strong
since then (8.7% this year and 7% predicted for next year) but
this is hampered by a severe lack of capacity in the energy sector,
despite the strong demand. This has been caused by a price freeze
and thus low profit marginswhich has in turn affected investment
in the energy sector. Tax evasion is endemic and thus the tax
system is skewed to those areas where collection is easiest. This
includes high export tariffs (up to 23% in some cases). There
is also some concern that inflation rates will begin to raise.
It should be noted, however that Argentina is currently running
a good fiscal surplus on its balance of trade.
8. The banking sector has been severely
affected as well, not only by heavy losses (HSBC alone is estimated
to have lost over $1 billion), but also a significant loss of
confidence in the banking system generally. At the same time,
the Government are seeking to encourage local investors at the
expense of foreign investors, thus denying the country any benefits
that might accrue from a general increase in investment activity.
However Ministers admitted to the Lord Mayor that they needed
to attract more foreign investment and were considering the best
ways in which this might be achieved whilst maintaining local
activity in the banking sector.
9. It has also been recognised that there
is a need to improve the access to capital (at good rates) for
Argentine SME's in order to promote their growth. However there
are some sensitivities surrounding Capital Market reform, which
is viewed by some as an internal, not international matter. There
is strong interest in reforming the Regulatory bodies and the
FSA will be visiting later on this year. ADR is also an area where
there may be some business opportunities, with large legal wrangles,
following Pesofication, involving sums of some $16 Billion.
Public Private Partnerships (PPP)
10. PPP is gaining momentum. It is seen
as one way of stimulating investment in the private sector and
interest is growing in the PPP philosophy, although current government
thinking is clearly some way from a practicable model. Argentina
is keen to learn from the British experiences, both good and bad,
and recognises that UK has a good story to tell and good examples
to cite. The Lord Mayor presented a persuasive case for the benefits
of PPP, and of London's expertise, but also gave a clear message
that the system required long-term stability.
Carbon Trading and Clean Development Mechanisms
11. The Lord Mayor opened a carbon trading/CDM
seminar organised by the Embassy and hosted by the Stock Exchange
which attracted a high quality audience of over 200. In all, four
UK companies spoke (CO2e, Eco Securities, Shell, and Sustainable
Development Advisers). Both the timing and the technical nature
of the event were very appropriate given the President's announcement
immediately prior to the visit, establishing a local emissions
market. There was wide press coverage in the national and the
business press which helped to underline the UK's leading role
in tackling climate change and reinforced London's pre-eminent
position in the funding and trading of carbon emissions reductions.
12. The Lord Mayor and party then flew on
to Santiago, where his visit was hosted by the Charge d'Affaires,
Mr James de Waal. In a busy two day schedule the Lord Mayor undertook
a full programme including meetings with the Economy Minister
(Sr Rodriguez) and the President of the Central Bank (Sr Corbo),
as well as a series of contacts with the financial sector and
a speech at a lunch hosted by the Chilean Institute, attended
by a number of the municipal mayors of Santiago. In his various
speeches, the Lord Mayor emphasised once again the vital need
for business-friendly regulation; the importance of adding value
through better skills; public safety/security; and London's innovative
and globalised outlookall of which struck a strong chord
in Santiago. His visit received good press coverage, including
an interview in FT-equivalent Diario Financerio, and articles
on carbon trading.
13. The business climate in Chile differs
markedly from that found in Buenos Aires, and Chile is widely
seen as one of the strongest economies in South America, with
an enviable record of consistent growth in recent years and flourishing
international trade. Chile has developed many bilateral and multilateral
trade agreements across the globe and its exportswhich
are predominantly wine, timber, food and copper, account for one
fifth of the country's GDP. Chile is the world's largest copper
producer and its output accounts for 40% of the nation's export
earnings (some $13 billion in 2004).
14. Whilst the United States still attracts
the bulk of the Chilean financial services business, the Sarbanes-Oxley
legislation is seen as imposing a serious constraint on the effective
conduct of international business and envious eyes are being cast
on London as an international financial and business centre. Business
education too is heavily biased to the US. Whilst some 15% of
students studying overseas come to UK, most of the rest still
study in the United States.
15. PPP has proved itself in Chile and the
process is well advanced, leaving little opportunities for London-based
firms to offer in the way of technical advice and assistancealthough
the opportunities to bid for and win construction and other contracts
of course remain high.
16. In his discussions with the Economy
Minister and Central Bank President, the Lord Mayor received an
impression of Chile's political stability and economic prosperity,
based on fiscal responsibility, low inflation and reliable economic
policy. He was told that more needed to be done however, including
the improvement of accounting standards and financial propriety.
He was briefed that further investment in business skills and
education (including English language training) was needed to
make business more competitive and also that Chile needed to look
at how to add value to its export products, particularly in forestry
and fishing. Chile's SMEs were still suffering lower growth because
the high interest charged by banks whilst continuing cuts in the
supply of natural gas from Argentina underlined strongly the need
for Chile to diversify the development of its energy sector. Investment
in energy and other infrastructure could absorb excess market
liquidity and certainly offered opportunity for London based investors.
17. Some concern was expressed at the perceived
difficulties in doing business with the City of London. It seemed
that New York-based investment banks often made it difficult for
Chilean fund managers to access the full range of financial products
available in the London. Chilean investment fund managers wanted
to see more British-based institutions visiting Chile, and for
the City to open its doors wider to Chilean fund managers when
they visited the UK.
18. Despite this, opportunities for building
business for UK-based firms still exist in key areas and these
include the pensions industry, private wealth management, insurance
and reinsurance and financial regulation. The Stock Exchange President
Yrarrazabal briefed the Lord Mayor that Chilean companies listed
in New York could be targeted to list in London, because of their
difficulties with SEC regulations/Sarbanes-Oxley. The AIM market
offered particular attractions and Sr Yrarrazabal thought that
opportunities existed for alliances between British banks/trading
houses and brokers in Chile.
19. The insurance industry briefed the Lord
Mayor about current challenges, including lack of skills and career
interest in this sector. The local industry felt that whereas
some reinsurers had a good knowledge of the Chilean market, Lloyd's
of London did not. Although Lloyd's eventually paid claims, it
was slow to process them, which Chilean insurers felt was because
of the lack of knowledge of the Chilean market. This damaged Lloyd's
reputation and sent business elsewhere. The Chileans felt that
Lloyd's needed to visit the market. The Lloyd's syndicates came
across as fragmented and never seemed to have a shared agendathey
needed to promote a common message and convey the right image.
20. Finally carbon trading and agricultural
derivatives are both seen as areas where much expertise abides
in London, which could with advantage be marketed in Santiago.
The Lord Mayor spoke at a carbon trading roundtable co-hosted
by the British firm CO2e.com. This event targeted Chilean companies
developing or already involved in projects which could include
the use of carbon credits to their project development. Participants
were concerned that the current Kyoto timeframe expired in 2012
and outlined their hope that a second Kyoto commitment period
would follow. Lord Mayor reassured them that by 2012 emissions
trading might actually be business led, which would alleviate
the need for future government-led policies on emission reductions.
This round table event helped to prepare the ground for a proposed
trade mission to Chile by the Climate Change Project Office in
21. The final leg of the visit took the
Lord Mayor to Brazil, where a very packed programme involved 24
hours in each of the three cities of Rio de Janeiro, Brasilia
and Sao Paulo
Rio de Janeiro
22. The Lord Mayor's visit to Rio was hosted
by the Consul-General, Mr Paul Yaghmourian who accompanied him
throughout his visit, and hosted a most useful briefing supper
on the evening of the Lord Mayor's arrival. Rio de Janeiro remains
the principal business centre for both the insurance/reinsurance
industry. Recent scandals involving corruption at the Brazilian
re-insurance monopoly IRB have produced renewed impetus to opening
up the market and to privatise the IRB. The Lord Mayor opened
a very well attended seminar, jointly organised by the IRB and
the British Consulate General in Rio. This seminar attracted a
full house of around 200 people and the Lord Mayor's address,
in which he argued that the time had come to put an end to IRB's
monopoly and move towards its full privatisation, was well received.
A lively debate ensued on the challenges and opportunities facing
the Brazilian reinsurance industry, building on an outstanding
presentation by a senior representative from Lloyd's of London,
Mr James Sutherland.
23. At a private meeting in the margins
with the new President of IRB, Marcus Lisboa, the Lord Mayor was
given confidence by Sr Lisboa that he is committed to the introduction
of competition and choice (including the imminent transfer of
IRB's regulatory functions to the insurance regulator SUSEP).
This would be followed hopefully by partial privatisation of IRB.
The President however was cautious about timescales for this,
since he himself was very constrained by the need for new legislation
to be passed by parliament. He was also defensive about the issue
of minimum deposit requirementswhich is an issue for Lloyds.
24. The Lord Mayor was given a short presentation
by the Rio Stock Exchange on their proposed Carbon Emissions Trading
scheme. Their plans are still at an early stage and the Lord Mayor
impressed upon them the very considerable expertise available
in London, which they were not currently tapping. He also commented
on whether their decision to base the Carbon Trading market with
the Rio Stock Exchange was wise, given Sao Paulo's position as
the principal financial centre in Brazil.
25. He then spoke at a lunch generously
sponsored by Lloyd's of London supported by two other UK based
insurance firms, Benfields and Miller Insurance. His address complemented
his speech at the Reinsurance seminar and included a general overview
of the City's depth of experience not only in the insurance sector
but in other fields also such as maritime, legal, privatisation,
PPP and Carbon Trading.
26. The Lord Mayor then flew on to Brasilia,
where he was hosted by the British Ambassador, Dr Peter Collecott,
who kindly provided accommodation for the night and hosted an
informal and convivial dinner with senior officials from the Foreign
Ministry, the Brazilian Bar Association and the Central Bank.
Discussions at the dinner focussed on progress on EU/Mercosul
relations in preparation for a summit meeting between EU and Latin
American ministers next May. The Ambassador's guests were also
most interested in the Lord Mayor's explanation of the development
of innovative instruments being developed in the City to hedge
agricultural risks once market subsidies are reduced.
27. Immediately prior to the dinner, the
Lord Mayor was particularly please to present Mansion House Scholarship
to a young Brazilian Treasury official (Mrs Dieguez Silva) who
is to spend a five month secondment with Partnerships UK, to study
the UK government policy and management of British PPP projects.
28. In a series of calls the following day,
the Lord Mayor met the Minister of Planning (Mr Bernado), the
Governor of the Central Bank (Mr Meirelles) and the Minister of
Finance (Mr Palocci). In each of these calls the Lord Mayor pressed
the advantages of further financial market liberalisation in Brazil,
and the international expertise and access to capital markets
which was available in and through London. The Governor acknowledged
the contribution of foreign banks, such as HSBC, to driving up
standards. He briefed the Lord Mayor that inflation was now under
6%, that confidence was beginning to be established in macro-economic
policy, so that long-term capital markets could begin to be developed.
In consequence very high real interest rates should begin to come
down substantially. However, he acknowledged that having a significant
amount of credit in the form of subsidised loans created certain
problems for the management of monetary policy and the development
of capital markets.
29. On PPP, the Lord Mayor had a brief discussion
with Planning Minster Bernardo, following a lengthy meeting with
his Deputy and the Head of the PPP Unit, who had briefed him on
their ambitious plans for PPP. Whilst there was acknowledgement
of the help the UK has provided via Partnerships UK, the Lord
Mayor was concerned that the full understanding of the role of
PPP was being misunderstood, particularly in the matter of the
transfer of risk to the private sector and in the selection of
projects which would attract the right levels of long-term investment
and commitment from the financial market. Whilst the projects
might well be worthwhile, without risk transfer and the long-term
prospects of profitability, they did not fully represent the PPP
model as UK would understand it.
30. The Lord Mayor then flew on again to
São Paulo, where, accompanied by the Consul General (Mr
Andy Henderson), his first call was on Mr Claudio Lembo, the Vice-Governor
of the State of São Paulo. The Vice-Governor spoke knowledgeably
and enthusiastically about British experience in PPPs, and was
keen to develop further links with UK service providers, including
PPP lawyers. The Lord Mayor felt that the State level approach
to PPP was much more encouraging than the message he had heard
in Brasilia and offered what help he could in the provision of
further advice. He was pleased to hear the State were planning
to set up a series of secondments in the legal sector for young
lawyers from each country to exchange ideas and expertise, particularly
in relation to PPP. Supported by Mr Michael Charlton of Think
London, the Lord Mayor also encouraged the Vice-Governor to consider
London as the right location if the State of São Paulo
were planning to establish a representative office in Europe.
31. The Consul General hosted a supper party
at his Residence, where the Lord Mayor had the opportunity to
meet and discuss City and financial affairs with a group of invited
guests from both the British and the Brazilian financial services
sector. At a breakfast meeting the following morning, hosted by
the British Chamber of Commerce, the Lord Mayor spoke effectively
on the role of capital markets and of the depth of liquidity in
the London market. As he had done in Chile, he emphasised the
general benefits of Brazilian companies listing in London rather
than in New York and undertook to advise the London Stock exchange
of the opportunities open to them to attract Brazilian listings,
now predominantly based in New York. There was a strong appetite
for a visit by the London Stock Exchange to São Paulo.
32. This was reemphasised in an excellent
briefing by the São Paulo Stock Exchange (BOVESPA) which
has been successful in seizing the opportunity to liberalise and
to grow the market. 70% of stock trades in Latin America are already
taking place in São Paulo and the Exchange are developing
new and innovative instruments to promote corporate governance,
such as a separate index for companies meeting set standards.
This new index, entitled BEST(Brazil, Excellence in Securities
Transactions) demands tougher standards of regulation, probity
and corporate governance and is already attraction a growing list
of investors and firms, who see this improved `kite mark' as a
measure of both confidence and excellence.
29 August 2006