SOCIO-ECONOMIC ENGINEERING

 Why consider investing in emerging market projects? The last six years in the United States and European financial markets has drastically changed the way we work, travel, invest and live. The United States and many Euro countries are even considering levying a “wealth tax”, which is a fee on all earned income. Things have even reached the point that U.S. legislation and regulations now determine what you can and cannot do with your own money. The average “angel investor” is now heavily taxed on earned income, told by his depository bank how and under what terms and conditions deposits must be made, liable for some serious bank “management” fees, wire transfer fees and transaction fees that, quite often, even the bank itself does not understand. These banking fees literally eat up the meager interest or dividends earned, so for major U.S. banks it is a win-win situation. They are now in the business of fee gouging, Gone are the days when banks encouraged long term savings accounts, paid a fair and equitable interest rate, so that they could keep your money on account, make money on using these assets to make loans, to earn lucrative income streams. Investors are seeking alternatives to United States Treasury bonds as worries escalate that lawmakers will eternally fail to reach an agreement to rein in the deficit, reform the tax code and raise the federal debt limit in the near future. Many are getting leery of stocks and also concerned that a downgrade of United States government debt by the rating agencies, or even the more remote possibility of a default, would erode the value of so-called “risk-free”Treasury securities. Many institutional investors are looking to faster-growing emerging markets.
 

It is a very volatile period for global markets, driven by almost unprecedented uncertainty amongst investors about the global economy and fears that politicians may be unable to fix economic problems. Recent economic data has suggested the recovery in the West may be petering out, feeding renewed worries about the Eurozone debt crisis.This, it is feared, could in turn cause a second banking crisis if governments are unable to pay back their debts. And in the face of these twin concerns some investors say policy-makers have not done enough to provide certainty about how the crisis will be tackled. The concerns about growth have also fueled worries about the indebtedness of Eurozone states. If economies are not growing, tax receipts fall, making it harder for governments to pay off their all to often poorly thought-out debts. 



 If banks were forced to accept similar or greater losses on the debts of other countries it could trigger a new banking crisis, further destabilising the global economy. Analysts have also questioned the lack of strong leadership coming out of the US and Europe.The G20 group of leading economies has said it is ready to "take action" to stabilise global markets. But there is disagreement as to what form that action would take. The advent of a Donald Trump to the presidency of the United States can only add more instability and confusion in the international financial marketplace. For merging markets, we cannot neglect the fact that these OECD countries, stymied with billions and billions of dollars of debt, are supposed to be setting the standards for developing countries.
 

Risk is inherent within every business ecosystem, adding to a multitude of existing challenges of operating in today’s global business climate. The threat of catastrophic loss – from natural disasters, financial mismanagement, IT security breaches, supply chain disruptions and more – demands preparedness to assure financial and business continuity. Yet recent studies suggest few companies fully understand or are properly prepared for the breadth of risks they encounter in emerging markets. Historically viewed as the domain of the CFO, less than 20 percent of enterprise risks are financial, legal or compliance in scope, yet all risks can ultimately have a financial consequence. Addressing the scope of Enterprise Risk Management (ERM) requires a level of organizational collaboration that culturally and practically can be very difficult to implement. The first step toward creating a robust ERM program encompasses understanding the scope of risk management and nurturing collaboration and preparedness – making it a “team effort” across the enterprise.
 

The challenge for Bankstreet has always concentrated on how to implement an ERM programs, in some emerging market cultures where just being “alive” often encompasses monumental risk. Managing enterprise risk is a critical and growing discipline within enterprises no matter the marketplace. Doing it right is difficult; many “clouding factors” can sabotage an ERM program at every step. But doing it well may ultimately determine whether a start-up venture can successfully avoid and/or mitigate risk. A successful ERM program does not guarantee success but it will put all SEE investors on the proper path towards longevity and success.   
Is there a common theme in start-up company failures? A 2011 study commissioned by IBM found that more than two-thirds of the nearly 300 respondents had at least one significant risk event in the previous year, and that only some 20 percent of organizations had both anticipated and reasonably estimated the impact of that event. An earlier IBM study of senior financial executives also found the vast majority of major risk events had their roots in non-financial causes. ERM misfires at most enterprises are caused by three major factors:
 

1. Not understanding the true scope of risk management.
 

2. Not being able to see and/or assess the potential risks facing the enterprise.
 

3. Inability to undertake key steps that “scatter the clouds.”
 

When organizations do not know what to do, risk events are the terrible things that ensue and slowly but surely cause the deterioration of value, competitiveness, capital and long meetings with regulatory agencies. These events can be large and externally driven, such as an unexpected natural disaster or the malicious sabotage of a product. They can be internally driven through mistakes, misinformation, poor design or inadequate safety systems. Lack of skills, purchasing decisions, operational actions, financial or infrastructure/asset decisions, poorly received or delivered communications, failed product launches or deliberate misbehavior can also lead to major risk events. Few business functions escape exposure to risk.
Much of what constitutes poor risk management occurs as a result of misguided or misinformed business decision making. Avoiding mistakes and making good decisions is certainly within the realm of all entrepreneurs. The first risk management misfire comes when organizations don’t understand risk management; they do not know what to do. They feel overwhelmed about risk management – its sheer influence and pervasiveness to the core of nearly every business function, at every moment the business is operating. In fact, more than half of the respondents to an IBM survey acknowledged having no enterprise-level process to identify risks.
 

Our Socio-Economic Engineering philosophy underscores the technical protocols, (“back office” criteria and strategies), used to structure and implement Social Responsible Investing projects in emerging markets. Our area of concentration is the Caribbean Region. Investors are beginning to look beyond the very fragile investment markets in their own North American and Euro economies, that yield somewhat meagre investment returns in a climate of increasing investment risk. These investors are our potential clients and form the core essence of socially responsible investing which has evolved as one of the most optimistic emerging trends in the financial world today. Socially responsible investing integrates an investor's financial goals and values with a voice in shaping the future of somewhat fragile societies.
 

Bankstreet researches and then promotes a number of small, yet, lucrative emerging market projects in the Caribbean region, projects that offer very secure investment opportunities principal among which we focus on low to middle income home construction projects for local consumption, high-tech pre-paid affordable cell phone opportunities, establishment of small, local banking and investment institutions, computer industry and peripherals), high-speed Internet services,  small manufacturing plants to produce exportable goods and Insurance products. Whether we are investing our own funds or client funds we become active fiduciary participants in all projects and, when necessary, become active owners. We strive to think and act locally but always stress the fact that we have the greatest impact on getting things done when we have a direct influence.
 

It has been our goal for the last twenty years to establish a Private Equity Group (note must be taken that we did not use the word “Fund”) that would promote the basics of “socio-economic engineering”. We believe that this is the only approach to be used in financing projects in what might be defined as emerging markets or to be more graphic, “developing nations”.. Unlike the more traditionally approach to Private Equity, socio-economic engineering requires a thorough understanding of  respective jurisdictions, cultural differences, education, customs, judicial systems, political stability, financial stability of the jurisdiction, …..None of these parameters can be evaluated effectively by EU or U.S. based financial groups who do not have professional “on the ground” teams.
 

Funding private projects in emerging markets requires a thorough evaluation and analysis of several aspects that are inherent in the project itself, specific country where it is located, and to the project owners. In almost all developing countries the stage of growth varies considerably due to for example,changes in the political environment. Consequently, in order to secure the viability of funding in these countries, a detail research and investigation of the following is initiated:
 

Since the evaluation of project funding requires careful planning at its early stages, the checklist to be met for each project should contain the following items:
a) A satisfactory feasibility study and financial plan
 

b) Does a market exist for the products, commodity, or service to be produced?
 

c) Is the contractor experienced and reliable.
 

d) Is the operator experienced and reliable.
 

e) Are Management personnel experienced and reliable.
 

f) Does a stable and friendly political environment exist; licenses and permits are available.
 

g) There is no risk of expropriation.
 

h) Country and sovereign risk are satisfactory.
 

i) The key promoters have made an adequate equity contribution
 

j) The project has value as collateral.
 

k) Satisfactory appraisals of resources and assets have been obtained
 

l) Adequate insurance coverage is contemplated.
 

m) The project will have an adequate Return on Equity, Return on Investment and Return on Assets.
 

n) Inflation and interest rates are realistic.
 

Other factors, such as the stability of the government, per capita income and economic growth are equally important. An analysis and diagnosis, covering the socio-economic, technological and governmental factors must be undertaken by lenders/investors to anticipate opportunities or avoid threats, and develop risk strategies for different scenarios. Probably the most important factor for private investors is the state of the local economy, which would affect the risks. The state of the local economy where projects are to be funded is also a very important factor and should form part of market studies. When investing in private projects in developing countries concern should be concentrated on the guarantees behind the project. The project owner must offer corporate and personal guarantees, since there are - in most instances - no governmental guarantees in privately owned projects.
 

Although risk analysis, which focuses on the probability of realizing certain rates of return, is an important part of economic project analysis, this approach to pure project financing must address in detail specific aspects of market risks which must be analysed before contemplating the realization and funding of any type project and in any location. Market risks are of utmost importance, especially when new technology is used in a project, as lenders are reluctant to support projects that use new technology for fear of delays, overruns, etc
 

Another important area of concern is the “legality” aspects of the project. The assistance of legal advisers is essential for both Bankstreet and project owners. Careful attention must be paid to investigating the structure of the financing and the overall allocation of risks and recourse between the parties involved. Many developing countries place strict controls over trade, licensing and foreign investment. Restrictions on investment, for instance, might include local participation requirements, and restrictions on the percentage of foreign ownership allowed. They may also require that the foreign firm train workers, utilize local management, build water treatment and sewage facilities, pay taxes, export a certain percentage of finished products, reinvest profits in the host country, introduce modern technology and products to the host country, and respect the cultural identity of its people.
 

The ability to deploy insurance capacity in developing countries is also hampered by local insurance regulations which restrict foreign market access. Insurance availability in developing countries is restricted by a lack of adequate financial, legal and service infrastructure as well as lack of credit worthy local insurers, restrictive local insurance regulations and limited distribution channels. Guarantee funds and partial credit guarantees to manage credit risks of both project developers and end-users Information sought by lenders and underwriters in assessing a project’s viability is often unavailable or in the wrong format:  

  • Key risks and barriers that inhibit financing of projects relate to the small scale of the projects, lack of technology efficacy, operational risks and regulatory uncertainty. 


  • Deficiencies in framework: the financial, legal and institutional structures supporting project 


  • Credit issues, loan tenors, and lack of bankable structures 

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