Select Committee on Trade and Industry Written Evidence


Memorandum submitted by the Corporation of London

  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 interests.

  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 delegation—the 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 areas—in particular Carbon Trading and Public Private Partnerships (PPP).


  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 companies.

  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.

The Economy

  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 margins—which 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 (CDM)

  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 outlook—all 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 exports—which 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 assistance—although 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 agenda—they 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 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 March 2006.


  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 requirements—which 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.

São Paulo

  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

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