Saturday, April 21, 2018

Forget left and right – the new political divide is between open and closed

Major political events in recent times, from Brexit to the U.S. presidential elections, have been framed in the context of a debate between “open” and “closed” rather than “left” or “right.”

In a changing political landscape where President Donald Trump is a nominal Republican but runs on an anti-establishment “drain the swamp” platform; tears up trade agreements; institutes new tariffs on aluminum and steel; and famously advocates the construction of a wall on the border to Mexico, voter categories of “open” and “closed” can in fact better explain his election success.

In the U.K., a growing divide between open and closed voters was equally used to interpret the result in the British referendum to leave the European Union.

A new study by U.K. think tank Global Future claims that the “political axis is rotating” and that the elections of the future will be decided in the battle over a growing group of voters that favor “openness.”

Open voters, the report argued, consider multiculturalism, diversity and immigration favorably and would like their country to take an internationalist outward-looking approach to the world. Closed voters, in contrast, see these issues more skeptically.

A survey that measured voter attitudes found a significant generational divide between 18- to 44-year olds who tend to favor “openness” and those aged over 45, who were more inclined to support the “closed” argument.

The survey showed that under-45s strongly believe that immigration and multiculturalism have changed Britain for the better. The majority of over-45s say they have made Britain worse. Younger people regard overseas aid and the European Union as “forces for good,” while older voters on balance consider them “forces for ill.”

Younger survey participants expressed that increased diversity had a positive effect on the U.K., whereas the older group believe the effect is negative. The same applies to the views on the right of free movement for EU citizens. Again, younger people overwhelmingly consider it favorably, whereas those over 45 regard it negatively.

Three in five people under 45 describe themselves as internationalist/globalist rather than nationalist, while the majority of the older group say they are nationalists.

The same stark generational divide appears in social values such as attitudes toward gay marriage, feminism, measures to promote equality and human rights laws.

In short, the two age groups have considerably different world views.

In the past, simple economic characteristics like profession, home ownership and income were sufficient to determine whether someone was more likely to vote Tory or Labour, right or left, in the U.K. Age only became a factor because property assets, higher income and senior positions are typically attained later in life.

For Conservative Party strategist Lord Andrew Cooper, these political certainties started to change a few years ago and the political axis has turned to such an extent that the way people vote is now increasingly determined by cultural rather than economic characteristics.

“These days, a far better way of predicting how someone will vote is to discover whether they live in an ethnically and religiously diverse area, the density of the local population around them, how they define their national identity, or what their feelings are toward minority communities,” he writes in the report.

Cooper states that the referendum on EU membership was, for most voters, not just about whether they and their families would be better off with Brexit but a “binary choice between two fundamentally different reactions to the realities of globalization: nationalism or internationalism?”

A year later, the U.K. general elections were more influenced by voter feelings toward Brexit than by the political platforms of the parties.

“The political axis is rotating not just because of the referendum vote for Brexit, but because that vote connects directly to a spectrum of deep values that add up, for many people, to their whole worldview. This explains why the gulf between Remainers and Leavers has tended to widen, not narrow since the referendum,” Cooper notes.

Analyzing voting behavior according to “value tribes,” groups of people who share similar values and outlook on life is not new.

British political commentator David Goodhart has a distinct take on the notion of open and closed by separating the Anywheres from the Somewheres. In his book “The Road to Somewhere,” Goodhart described the main political faultline in the U.K. and other places as between those who are rooted in a specific community and socially conservative and the urban, socially liberal and typically university educated.

For Goodhart, Anywheres have “progressive individualist politics, which prioritize openness, autonomy and cognitive ability, have dominated policy for more than a generation and promoted, among other things, the two ‘masses’ – mass immigration and mass higher education.” The Somewheres in turn are “people who value stability, familiarity and more parochial group and national attachments and have experienced the declining status of so many non-graduate jobs.”

Goodhart’s analysis explains the Brexit vote outcome equally well but in his view Anywheres only make up a fifth to a quarter of the U.K. population.

Global Future, on the other hand, claims in its analysis that open attitudes are far more common and will grow over time.

Internationally applicable

The approach to analyzing voter behavior based on open and closed attitudes is not confined to the U.K.

The model used by Global Future combines economic factors such as income, occupation, home ownership, health and benefit claims in a dimension labeled security.

The security score is contrasted with a diversity dimension which aggregates factors such as ethnicity, immigration, age, and urban or rural location.

In the U.S., this model reveals that age is a key variable for a range of attitudes and values.

Authoritarian and socially or culturally conservative and nationalist attitudes correlate very strongly with the demographics of low security/low diversity scores, while socially and culturally liberal and globalist attitudes are more likely to be shared by those with high security/high diversity scores.

Naturally, the model does not predict the attitudes of everyone within these categories but indicates general trends.

When the model is applied to U.S. presidential elections since 1980, it shows that over time the average Republican voter has rotated from a high security/low diversity rating to a low security/low diversity score. The average Democrat voter meanwhile has shifted from a low security/high diversity score to a high security/high diversity rating.

In other words, open and closed factors are a much more stable indicator than economic factors for whether someone votes Republican or Democrat.

“Similar shifts, with traditional parties of the left increasingly appealing to more affluent, more diverse voters while traditional parties of the right increase their support from less affluent, less diverse voters, are apparent in other recent elections around the world,” the report concluded.

In the U.K., for instance, the average voter who switched to Labour in the last election was relatively better off, middle class, well educated and living in an area of high ethnic diversity. The Conservative Party in contrast increased its share of votes in many working class Labour heartlands.

In Europe, traditional parties of the left, such as the Social Democratic Party of Germany and the Socialist Party of France, recently suffered their worst election results as right-wing parties made significant gains among low income voters with a preference for “closed” attitudes.

Criticism

Not everybody is buying into the effectiveness of open and closed categorization.

Adrian Wooldridge, columnist in The Economist, says that many people who claim to have open attitudes are in fact very much closed when it comes to their own personal lives.

The typical argument is that the more educated people are, the more they are in favor of globalization, because they are much more able to adapt to its pressures.

Professional groups like lawyers or doctors, in addition, use licenses to restrict competition.

“Many of the supporters of openness thus occupy the best of both worlds: they live in fortified islands when it comes to their jobs and the value of their most important asset, with formal and informal barriers reinforcing each other,” Wooldridge writes. “But they can also benefit from competition when it comes to employing nannies and cleaners, getting their dry cleaning done or going out to dinner. Attitudes that look virtuous and open-minded from one perspective look opportunistic and self-interested from another.”

For Wooldridge, middle class people are more open about globalization because they tend to be in service industry jobs that are more insulated from international competition than manufacturing jobs.

He predicts “middle-class protectionism will be the wave of the future,” stating that “middle-class support for open economies will change radically in the future as middle-class people find themselves challenged by two forces – clever machines that reduce the supply of cerebral jobs, and clever people from the emerging world who compete for their jobs.”

Changing attitudes with age

One key issue in the open versus closed debate is whether younger “open” people will change their attitudes as they get older.

“As the generations of young people who have grown up comfortable with a diverse, multicultural Britain get older, we can expect to see Open voters becoming the majority in older and older age groups in future,” Global Future says in its report.

Wooldridge disagrees, stating that young people with few responsibilities are likely to be more tolerant to “drugs, loud music and general social mayhem than older people who are bringing up children” and people who have not bought their first house “are more hostile to the greenbelt.”

Conservative strategist Cooper in contrast says the “patronizing” line that younger people vote with their hearts and older people with their heads simply does not apply.

Cooper contends that open and closed attitudes are a function of the fundamentally different worlds in which the two groups have grown up.

The under 45s have spent “their entire adult lives in the post-Soviet rapidly globalizing internet era – the world of free movement of people, the age of Amazon, Google, Apple, a time of growing transparency and ever more openness.”

The people who remember the world before this “economic, political and cultural upheaval are much more likely to feel insecure about the breadth and pace of change,” he says.

Teaching the next generation about ‘money’

In this Sept. 24, 2013 file photo, cut stacks of $100 bills make their way down the line at the Bureau of Engraving and Printing Western Currency Facility in Fort Worth, Texas. - Photo: AP

Alessandro Sax

As individuals we all hold our own preconceptions of “money,” most of which were formed through our childhood and adolescent experiences. In today’s world most toddlers are able to navigate an iPhone long before being able to count a jar of loose change. In an age where the world is literally at your fingertips and shopping is as easy as the click of a button. How do we educate our children on the value of money?

Start young. As with most skills, the earlier in life you are taught the more it becomes second nature. A child’s foundation of money begins to develop as early as three years old, with studies suggesting that kids’ money habits are already formed by age seven. Knowing this, parents should take advantage of the everyday teachable money moments.

The earliest exposure to savings traditionally includes a piggy bank with kids rummaging under couch cushions for loose change. Instead of leaving savings up to luck, take an opportunity to implement a small regularly scheduled allowance. It will go a long way in keeping kids engaged in learning about money. Implementing which chores, duties or behavior parents require in exchange for allowance is a choice for every family to decide on. The concept of saving becomes even more powerful when linked to a short, medium or long term financial goal. Have your child set a goal, something that motivates them and is achievable in a reasonable time frame. Setting up your child for success is the main aspect of the exercise, leaving them feeling empowered and not frustrated is the desired outcome. For those larger goals encouraging your child with either a matching program or offering simple interest is a fantastic way to demonstrate the power of compounding. These exercises although simplistic should not be overlooked as goal setting and delayed gratification translate into successful spending habits and budgeting skills later in life.

Moving from a piggy bank to your first bank account is an important step in creating awareness and a comfort level surrounding money. Unfortunately, our schools still do not teach children about money, which is why many young adults find banking intimidating. Early exposure to the banking system can help alleviate these emotions down the road. Most large banks offer little to no fee banking services to those under the age of eighteen which helps to encourage savings at a young age. Exposing kids to financial transactions and even online banking early will give them the confidence later in life to, say, apply for a student loan or open up their first investment account.

Educating children of the concept of money is one thing, but creating an appreciation for the value of it is an issue with even greater complexity. There is no better lesson or self-satisfaction for a young adult than earning money through a part-time or summer position. The introduction of responsibility, independence and disposable income are key factors when it comes to future financial success. This also presents another perfect opportunity to educate on the power of investing and compound interest. Illustrate how small amounts of money invested over time can easily grow to substantial sums.

Including charitable giving or sharing throughout a child’s life can go a long way in understanding the true value of money. For young children “sharing” can be as simple as donating a small amount of change to a local coin drive. For young adults charitable giving can include the combination of a donating and volunteering.

Helping the next generation avoid financial missteps begins with creating comfort and understanding surrounding money. When it comes to instilling the importance of financial literacy never forget that parents hold the most influence over the future behavior of their children, implementing structure will raise long term awareness and prepare the next generation to be a financially savvy one.

Alessandro Sax, CFA, is an Investment Advisor at Milot-Daignault & Sax Team of RBC Dominion Securities Global.

Secular market cycles: What’s your strategy for your portfolio?

Brendalee Scott-Novak, Butterfield

Global financial markets have revelled in somewhat of a sweet spot over the last eight years. Most striking are the significant positive returns across major asset classes that historically exhibit strong negative correlation. The Standard & Poor’s 500 Index (SPTR500N), a broad measure of U.S. equity markets, returned 176 percent cumulatively to the end of February 2018, even as the bull market run in bonds defied investors’ expectations and entered its eighth consecutive year. Ten-year U.S. Treasuries during the same period returned almost 30.3 percent. With the U.S. economy now well into its ninth year of expansion, how long can this sweet spot last?

As expected, markets experienced several bouts of heightened volatility during the period. The TED spread, the difference between three-month U.S. Treasury bill rate and three-month London Interbank Offered Rate (LIBOR) and is indicative of perceived risks in the global banking system, recently ballooned to levels not seen since October 2016. These latest readings are baffling investors as to whether the spike is related to technical factors or a sign of the usual culprits: looming monetary illiquidity, global economic risk or deteriorating credit conditions. The question now remains, is this recent volatility indicative of an end to the current expansion? Exactly where are we in the expansion phase?

Admittedly the phases of a business cycle are not always linear. It is possible to have cycles where an economy skips a phase or even reverts to a previous one. There is also no fixed time frame for a phase to last, making the length of the current expansion which began in 2009 anyone’s guess. Irrespective of the answers to the questions above, one thing is certain, business cycles are extremely difficult, if not impossible, to predict. Consequently, the key to achieving optimal portfolio performance is to be cognizant of the characteristics inherent in each phase and maintain the flexibility to adjust your portfolio when key pivot points occur.

It is quite evident when an economy is in the expansion phase. Gross Domestic Product (GDP) typically grows 2 to 3 percent per annum, with stocks entering a bull market run. Developed markets stocks and fixed income instruments historically do well, with smaller companies providing some of the greatest growth potential given their flexibility to take advantage of changing market dynamics. Emerging markets (EM) also tend to grow at a faster pace during the early phase of an economic upturn. While developing countries’ equity and debt are generally considered riskier investment options versus developed markets, the risk/reward ratio can be very attractive at this phase. Furthermore, emerging markets have proven to be an attractive complement to developed market exposures as they provide an effective hedge against a falling U.S. dollar. Mid and large capitalisation developed market stocks, however, tend to perform better in the later stages of an expansion.

During the peak phase of the business cycle, the economy forges full steam ahead to operate at its maximum capacity. Investors often achieve and exceed lofty returns expectations late in this cycle. As euphoria sweeps across asset classes, GDP growth exceeds 3 percent, asset bubbles begin to form and inflationary pressure rears its ugly head. As markets climb to new highs, the consensus view of a ‘new normal’ becomes commonplace with returns expectations appearing absolute or almost guaranteed. At the end of this phase, cash and fixed income assets tend to outperform the general market, while stocks, commodities and junk bonds underperform. Cash market instruments such as money market funds, short-term assets and corporate bonds tend to make great investments at the end of an economic peak. Incorporating some gold exposure can also provide a good hedge against inflation including strong downside protection in the event of a market crash.

When fundamentals finally return to markets, investors are typically caught off guard. With bated breath, they anxiously anticipate every market action overreacting to any news that falls short of their lofty expectations. Anxiety swiftly manifests as fear, panic sets in and selling pressure begins to mount. As the economy contracts to a halt, equities enter a bear market (characterized by a reduction in prices of 20 percent or more) and panic selling becomes prevalent. During this phase, far too many investors sell into the downturn after it’s too late. In an economic contraction, fixed income instruments and the cash market tend to outperform the general market. Paradoxically, because markets are forward looking, a moderate exposure to equity is recommended in this phase.

With markets experiencing a free fall, consumers and business confidence sink to a low. After the economy contracts (negative GDP readings), recessionary indicators become more prevalent with experts predicting years of economic distress. During an economic trough stocks, real estate and commodities including gold and oil tend to be the more attractive investments.

Empirical evidence suggests that financial markets are indeed cyclical in nature. Consequently, addressing the ebbs and flows inherent in a business cycle should be a crucial tenet of any investment policy. Awareness of secular and cyclical market cycles, committing to a diversified risk/reward strategy and taking the emotions out of steep market movements are fail-safe ways to optimize your portfolio in any phase of the business cycle.

Disclaimer: The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.

Statistics and Data Source: Bloomberg LP, Bureau of Economic Analysis, The Canadian Encyclopaedia

Sea level, temperature rise threaten Cayman in just 80 years

Grand Cayman's Seven Mile Beach

The most-startling prediction is that a quarter-meter rise in sea levels, less than 10 inches, will swamp 33 buildings in Grand Cayman, among them 17 private homes and two apartment blocks.

Apart from the shock value, the striking thing about the forecasts are that they are nine years old, published in 2009. Yet little has changed. If anything, says Nick Robson, head of climate research organization The Cayman Institute, sea level rise has accelerated.

“The institute’s report on SLR predicted a one-meter rise by 2100,” he said last week. “However, SLR appears to be escalating and may well be more than one meter.”

Pointing to Government Information Services maps, Robson says, the flooding from a sea level rise of only one-quarter meter, 9.94 inches, rapidly becomes “progressively worse from there – and if you model an Ivan-type storm surge on top of the SLR, it quickly becomes frightening.”

Cayman’s population, his report says, has been growing at 4.73 percent annually. “The construction industry is booming with new condominiums, homes and apartments … and … new hotels flourishing.

“Rising sea levels … will affect construction of infrastructure such as roads, aircraft runways, port infrastructure, on fresh water lenses, on agriculture, on sewage and refuse disposal and on disaster management” and utilities.

As if to underline Robson’s worries, real-estate industry leaders last month predicted local population growth to nearly 85,000 in the next decade.

More and better roads and utilities, including a rebuilt Owen Roberts International Airport runway and cruise berthing, and new long-haul flights already planned by Cayman Airways from U.S. gateways in Denver and Los Angeles, were likely to boost Cayman’s population as much as 40 percent, 25,000 more people, who will need accommodation, transport, food and utilities, they predicted.

While an economic boost, however, the growth may come with a dark side. Cayman was lucky in 2017 when late-August “Ivan-type” storms Irma and Maria missed George Town, but destroyed a dozen Caribbean islands. Indicating the magnitude of damage climate change can wreck, however, mid-August’s Hurricane Harvey roared off the Gulf of Mexico, dumping 50 inches of rain on Houston in three days, causing $125 billion in catastrophic-flood damage.

Climate researchers subsequently reported – in the New York Times, Scientific American and National Geographic, among others – that Gulf waters, warmed by rising temperatures and infused with moist air, had boosted Harvey’s rainfall by 15 percent.

Robson said he was dismayed by a failure to plan for boosted storm surges and local infrastructure protection.

“One of the things that I have highlighted is the lack of long-range planning,” he told The Journal, pointing to his 2017 University College of the Cayman Islands TED talk.

“Successive governments have done no long-term planning. We pride ourselves on having been great seamen, however, no seaman would leave harbor without plotting a course on his chart to the desired destination. We today do not even pick up pencil and paper to jot down a note or two.”

Local government, however, has not been blind to the implications. Hazard Management Cayman Islands says, “Climate change is real; it is occurring and will have a major impact on the Cayman Islands.”

The “Cayman Islands Climate Change Policy,” originally written in 2011, says Caribbean jurisdictions “are amongst the earliest and worst affected by climate change,” citing “their small size, relative isolation, concentration of communities and infrastructure in coastal areas, narrow economic bases, dependence on natural resources, susceptibility to external shocks and limited financial, technical and institutional capacities.”

Exposure to extreme weather hazards such as Ivan – which caused $2.8 billion of damage, 183 percent of GDP – and Irma, Maria and Harvey “compound these vulnerabilities,” made the worse, it says, echoing Robson, “by inappropriate development policies and practices.”

Cayman Islands National Weather Service Director John Tibbetts has already said that climate change has boosted average local temperatures by 1.2 degrees Fahrenheit between 2012 and 2016, and now pegs average levels at 82.9 degrees, up from 80 degrees. Sea level rise, he says, is 0.12 inches per year, putting Cayman squarely on track for a 9.6-inch rise in 2100.

More dire predictions, based on Paris Climate Agreement projections, suggest a 2100 minimum sea level rise of 1.7 feet and a maximum of 2.3 feet.

Climate Change for the Cayman Islands predicts an outright threat to food security as temperatures and sea levels rise, and both inland and seawater flooding swamp fresh-water supplies.

Increased flooding of homes – Robson’s 33 buildings at immediate risk – and other “critical facilities,” including roads and developable land, both inland and in low-lying coastal areas, is also likely, while operational disruptions “are likely to airports, seaports, utilities, waste management including sewage, water and electrical-distribution systems.”

On March 20, under the headline “Tougher climate policies could save a stunning 150 million lives,” the Washington Post cited a recent NASA-funded study that said compliance with the Paris Agreement could save vast numbers of lives.

An “overlooked benefit” to lowering carbon emissions, according to the Post’s Darryl Fears, is that “it would probably save more than 150 million human lives.”

The study, published March 19 in the journal Nature Climate Change, said, “Premature deaths would fall on nearly every continent if the world’s governments agree to cut emissions of carbon and other harmful gases enough to limit global temperature rise to less than 3 degrees Fahrenheit by the end of the century,” a figure about a degree lower than the target set in Paris.

Estimates are that the benefits would accrue largely to badly polluted Asian cities, saving 13 million lives in India alone. The country has nine of the 19 most air-polluted cities in the word, according a measure of airborne particulates by the World Health Organization. China has four and Saudi Arabia three.

The study indicates, however, that another 330,000 lives would be saved in eight U.S. cities, including Los Angeles, New York, Philadelphia, Atlanta and Washington.

“Americans don’t really grasp how pollution impacts their lives,” said the study’s lead author Drew Shindell.

The Paris agreement seeks to limit global temperature rise to 3.6 degrees Fahrenheit, although hoping for a lower 2.7-degree threshold. Few experts believe either level can be achieved, however.

Shindell’s study expected 7 million deaths per year if governments fail to work toward zero emissions by the end of the century, starting today.

“There’s got to be a significant amount of progress within the 2020s or it’s too late,” the author told the Post. “Even for the researchers, it’s a pie-in-the-sky goal, given that South Asian nations such as India, where pollution is among the worst in the world, argue correctly that their per-capita use is small compared with historical use in the Western Hemisphere and that they should be allowed time to develop just as other countries did.”

The changing landscape of telecommunications

Logic technicians lay fiber-optic cables near the Government Administration Building in George Town. - Photo: Taneos Ramsay

Just several years ago, companies like Digicel were largely known as mobile phone providers.

But with the exploding popularity of WhatsApp and other applications that allow people to text and make voice calls over the internet, telecommunications companies can no longer rely on selling prepaid and postpaid bundles of minutes to make the bulk of their revenue. Instead of minutes, consumers are clamoring for data.

This has affected the region’s various telecom providers in various ways.

At first, around 2014 and 2015, Digicel and Flow allegedly blocked WhatApp and other “voice over internet protocols” in many jurisdictions, including Barbados, Jamaica and the British Virgin Islands – no reports about this were found in Cayman. However, pressure from consumers and regulators forced those companies to reverse that practice.

Rather than “swimming against the current,” as Flow Interim Managing Director Danny Tathum put it, Digicel and Flow have diversified their products and services.

“We started diversifying about five years ago, but in the last 12 months we’ve taken far more aggressive approach,” said Raul Nicholson-Coe, the CEO of Digicel’s Cayman branch. “We can’t rely on just voice anymore.”

Nicholson-Coe said one of his company’s main areas of growth its is “cloud-based telephony” services, which allow a business with multiple locations to communicate via a secure off-site server. Digicel also provides data-storage services, with a data center in Camana Bay that serves major law firms and accounting firms in the territory.

“Enterprise customers are looking for value-added features. Can you provide advanced security solutions, resiliency, routing solutions?” said Nicholson-Coe. “We sit with the customer and find what their needs are.”

Flow provides similar services, with its three-story building on the corner of Eastern Avenue and Shedden Road housing millions of dollars of equipment that stores untold amounts of information of some of Cayman’s largest trust companies, law firms, and other financial institutions – along with Flow’s own data.

Both companies also provide video streaming services, and Digicel has even gotten into the journalism business with its “Loop News” websites for jurisdictions across the region.

While Digicel and Flow have taken a hit from WhatsApp and other voice over internet protocols, those bandwidth-consuming apps have been a blessing for other firms that focus on providing broadband internet services, such as Logic and C3.

And with bandwidth requirements doubling about every year due to other data-intensive products like Netflix and YouTube and WhatsApp, the importance of acquiring bandwidth from off island is growing exponentially.

“Bandwidth is a scare resource everywhere in the world, even in New York City,” said Nicholson-Coe.

To solve their hunger for data, telecom companies are looking for ways to directly buy off-island bandwidth instead of relying on Flow, which has historically had a corner on this wholesale market.

Flow’s parent company, Cable & Wireless, has been the dominant provider of subsea cable access since 1972, when it first completed the construction of a submarine cable link from Cayman to the Prospect Pen Earth Station at St. Thomas, Jamaica.

However, that could change soon.

C3 owner Randy Merren said it is his company’s intention to join Cable & Wireless in connecting straight to the Maya 1, which is owned by a consortium of more than 30 telecoms companies.

“Right now, if we want to buy capacity, we have to negotiate it through [Cable & Wireless],” Merren said. “We want to get into the Maya 1 cable to cross-connect into our cable system.”

Another option for telecommunications companies could be the planned “Deep Blue Cable,” an ambitious plan by billionaire Digicel founder Denis O’Brien to lay a new, 7,456-mile subsea cable that will connect to 12 markets, including Cayman, Jamaica and Puerto Rico.

The Deep Blue Cable’s website states that the company hopes to begin manufacturing and installing the cable in 2019 and 2020, respectively.

That is good news for Flow’s competitors.

“It will revolutionize the market because you’ll be getting additional capacity, and there will be competition,” said Nicholson-Coe.

“When you boil it down, we’re in the business of buying and selling megabits,” said C3’s  Merren. “The more choice we have to buy those, it will ultimately bring down costs of internet access in Cayman.”

Even Flow officials said they see the potential to benefit from having another subsea connection.

“If the Deep Blue does come, we would probably be interested in buying capacity from them, too, just to build resiliency and redundancy,” said Flow Technology Operations Manager Jonathan Martin.

While telecom providers are looking for ways to acquire more bandwidth from off island, government’s main focus is on making sure that data can be speedily transferred to customers throughout the territory.

Public officials hope to accomplish this by ensuring that fixed-line internet services are transmitted over fiber-optic cables everywhere. Currently, most residents in West Bay and George Town receive fixed-line internet over fiber cables, but the eastern districts mostly must rely on decades-old copper cables.

To accomplish this, Premier Alden McLaughlin proposed in March that government achieve universal broadband access by building its own fiber network in the eastern districts.

The premier said this is necessary because the telecoms companies have been dragging their collective feet in fulfilling their licensing requirements. All the telecommunications companies, besides Flow, have deadlines in their licensing agreements to expand their fiber networks across Grand Cayman and the Sister Islands, and those deadlines passed more than a year ago.

“All these years, we keep struggling unsuccessfully to get [the telecom companies] to deploy the fiber they agreed to, so we’re going to abandon that approach,” McLaughlin said on March 16 in the Legislative Assembly. “We’re going to build the fiber network and we’re going to charge the licensees for it.”

Just how that will be completed is not clear. OfReg published a press release last month stating that the regulator “has been formulating a plan and considering timelines for the installation of the [universal service network] accordingly,” but does not provide any other details about the project.

Currently, the regulator is in the consultation process of formulating a broadband policy, which will define the term broadband and set a target for licensees to make broadband available to all residents by a certain date.

That consultation period ends on April 18, and is a precursor to OfReg determining exactly how it will implement universal broadband service.

“Once this new definition of broadband is finalised [as a result of the consultation], if we as the regulator feel, that the local providers are unable or unwilling to build out their networks to meet the specified targets, OfReg is willing to leverage its powers under the [Utilities Regulation and Competition] Law to build a [universal service network] to achieve the desired end result,” OfReg stated in its Thursday press release, adding that it expects to make a final determination on this issue by the end of September.

If implemented correctly, many telecoms officials think that a universal service in the eastern districts would be more efficient than having multiple telecom companies build out their networks separately in a sparsely populated area.

“There are only so many homes here, which means that there’s a limited amount of sales available for the service. If you have multiple providers putting up multiple networks, you’ve got a lot more costs involved, when one network could be sufficient,” said Sacha Tibbetts, the CEO of DataLink – the firm that telecom companies go through to install their fiber cables on Caribbean Utilities Company-owned telephone poles.. “So the universal service can make a lot of sense if it’s done correctly.”

From Cayman to the world, Canada corners global cannabis market

An employee works in the "grow room," at Scientus Pharma, a biopharmaceutical company focused on medicines based on cannabis, at their facility in Whitby, Ontario, Monday, Feb. 26, 2018. - Photo: AP

In May 2017, a George Town pharmacy housed in CTMH Doctors Hospital received a shipment that just a year prior would have been unthinkable.

That month, Professional Pharmacy Services legally purchased 12.96 liters (3.42 U.S. gallons) of cannabis oils from Canada’s CanniMed Therapeutics.

While the oils were not Cayman’s first such import – other oils arrived the previous month from Jamaica – the shipment marked a shift in dynamic in the cannabis trade between North America and the Caribbean. The sale was a first in the region for Canada’s incipient cannabis export industry.

As marijuana regulations in the region relax and more jurisdictions move to legalize the substance, Canada sits poised to dominate a now legal and increasingly global industry. A clandestine trade not long ago, legal cannabis is now one of Canada’s fastest-growing industries and one of the hottest commodities on the Toronto Stock Exchange.

Aurora Cannabis, 96-percent owner of CanniMed’s shares as of March 28, reported a market capitalization of CA$4.53 billion (CI$2.88 billion) on the TSE as of the end of March. The company’s Chief Corporate Officer Cam Battley places the company’s market value between CA$5.5-6 billion.

The only other Canadian company to export cannabis to the Cayman Islands, Cronos Group, became the first marijuana business to be listed on Nasdaq, with trading of the company’s common shares opening on the New York-based exchange on Feb. 27.

A budding industry

Cayman was one of nine countries – and the only Caribbean nation – to import Canadian cannabis oils in 2017, according to Health Canada data.

Of the 435 liters of cannabis oils Canada exported that year, the Cayman Islands received 26.52 liters.

Only Australia (158.12 liters), Germany (183.38 liters) and Croatia (40.05 liters) imported more Canadian oils that year than the Cayman Islands. Other importers included New Zealand, Chile, Cyprus, Brazil and Argentina.

Canada also exported 522.46 kilograms of dried cannabis in 2017 to Germany, Israel, Australia and the Czech Republic. That represents a 10-fold increase in dried cannabis exports from Canada in just one year. In 2016, 44.8 kilograms were exported. No dried cannabis was exported in 2015.

Ninety-nine export permits were issued in 2017 by Health Canada for medical or scientific cannabis oil products. For dried cannabis, 47 such permits were issued.

Much of the excitement around the cannabis industry in Canada stems from the export business, according to analyst Ken Lester of Lester Asset Management and McGill University.

“In terms of the business side, people are eyeing cannabis stocks and buying on hopes there is an export business,” he said.

“If you ask somebody who is buying cannabis stock, they say they don’t care about Canada. They care about the world.”

That is the attitude taken on by Aurora Cannabis, one of the largest global cannabis traders.

Regarding the potential for Canada’s legal marijuana exports, CCO Cam Battley speaks with unfettered confidence. He sees no real competitors to Canada’s cannabis trade.

Cam Battley, Aurora Cannabis CCO

Australia is the only other nation with publicly traded cannabis shares. While Australians are now eyeing an international medical marijuana trade of their own, Battley said Canada’s industry has a enjoyed a head start, with more advanced legislation in place and established support from the federal government.

“Canada is hands down the world leader in medical cannabis,” Battley told The Journal.

He described a rapid evolution in global attitudes and laws regarding cannabis that has enabled Aurora to partner with investors all over the world. In addition to sales in the Cayman Islands, the company also supplies or operates in Germany, Italy, Denmark, Australia and South Africa.

“What we’ve seen broadly, around the world, is a very rapid change in social attitudes and destigmatization of cannabis for medical purposes. It’s happening very, very quickly. What we’re seeing the Caymans and elsewhere in the Caribbean is consistent with what we’re seeing in Europe, Latin America, Australia, literally around the world,” Battley said.

“What that means for a company like Aurora, which has operations in multiple countries, is we’re moving very, very quickly to expand our capacity and to establish distribution arrangements, and in some cases, production capacity in multiple jurisdictions around the world.”

Caribbean trade and international investment

While the international interest in purchasing cannabis is immense – Battley estimates the global medical cannabis market could mature to a CA$180-billion a year industry in coming years – certain legal criteria must be in place.

Global Affairs Canada, a government department that promotes trade, explained: “Canada only exports cannabis and cannabis products for medical or scientific purposes. The export of cannabis or cannabis products for medical or scientific purposes is consistent with Canada’s obligations under the United Nations drug control conventions.”

In other words, to import Canadian cannabis, local laws must also be in place to allow the use of medical marijuana. The Cayman Islands became one of the first countries in the Caribbean to permit medical marijuana in October 2016, when the Legislative Assembly passed a limited legalization. An amendment to the Misuse of Drugs Act now allows cannabis oils or tinctures for medical or therapeutic purposes. Production of such products is not permitted in the Cayman Islands, so any legal cannabis must be imported.

Medical cannabis in Cayman must be prescribed through a doctor and imported through a pharmacy with approval of the Health Services Authority.

While the islands have a small population of around 60,000, Battley said it was worthwhile to export to Cayman if patients seek the product.

“The opportunity to meet patients needs in Cayman or any other country is something we are eager to do,” Battley said.

“We have a tremendous sense of mission.”

Canadian industry ties to the Caribbean have been at times controversial, however.

Battley described a patriotic pride in Canada toward its marijuana industry – a pride that demands high standards and attracts public scrutiny.

In January, investigative reporting by Le Journal de Montreal tied 40 percent of the nation’s licensed cannabis producers to offshore funds in the Cayman Islands, Bahamas, Belize and Luxembourg, among other jurisdictions.

Among the “offshore funds” described by the publication were CA$32.5 million attached to Aurora in the Cayman Islands. Other Canadian companies tied to Cayman Islands funding were Supreme Cannabis Corporation (CA$10.5 million), Cannabis Wheaton Income Corp. (CA$20.5 million), Hydropothecary (CA$15 million), Golden Leaf Holding (CA$5.7 million) and Invictus MD (CA$14.13 million), among others.

In the wake of the publication, Health Canada moved to establish stricter reporting regulations in the industry. In March, the Globe and Mail reported that federal authorities were seeking more information about cannabis industry investors. To prevent organized crime, government expanded its powers to obtain up-to-date financial information from licensed producers.

Battley said there is a public misunderstanding about international investment and offshore centers.

“I think perhaps what some people don’t understand is that a lot of international funds and hedge funds are based in the Cayman Islands and other international jurisdictions,” he said.

“International funds are commonly based offshore. I think there is perhaps a lack of complete understanding on that particular issue.”

Given the liquidity of Aurora Cannabis stocks, Battley said it is difficult to pinpoint shareholders from day to day.

“No public company knows who all it’s investor are on a day-to-day basis because we trade constantly. … Aurora is probably the most liquid stock in Canada. … People are constantly buying and selling,” he said.

“We can never say with certainty which jurisdiction owns our shares on a given day.”

Battley added that Aurora Cannabis does not work directly with offshore centers.

“Some hedge funds that invest in various industries like cannabis … are based offshore.”

As publicly traded companies, Canadian producers have not faced as much difficulty banking domestically as U.S. producers, he said, who are limited by the federal ban on marijuana. This has forced many in the U.S. to work on a cash basis or to partner with credit unions.

Canadian cannabis companies worked largely with credit unions until recently, as well, Battley added. But he described a change in attitudes that has opened avenues.

In January, the Bank of Montreal became the first major bank to lead equity financing for a cannabis company.

“The dam is breaking right now,” Battley said.

The flood waters are now flowing in, and Battley described eager investors and widespread international interest.

“The pace of this sector is like nothing I’ve ever seen in my career,” he said, alluding to his previous work in the pharmaceutical industry.

“We are literally inventing a brand new industry in real time.”

Medical cannabis is now mainstream, Battley said, and trade will continue to expand rapidly, alongside legislation.

Cayman moves up financial rankings

Cayman's Seven Mile Beach

The twenty-third edition of the Global Financial Centres Index (GFCI 23) ranked the Cayman Islands as the 22nd best financial center in the world out of 110 total jurisdictions. Cayman’s ranking improved nine places over the last year and was the highest among all U.K. Overseas Territories and Crown Dependencies.

Cayman is also one of only four centers from outside the G-20 to be included in the top 25 rankings.

 

Jude Scott, CEO of Cayman Finance, commented the GFCI 23 ranking showed that the more financial services industry and government leaders learn about the Cayman Islands, the higher they rate the jurisdiction among the world’s financial centers.

“We have spent the last year engaged in an unprecedented effort to define our long-standing commitment to serve as a premier global financial hub that meets or exceeds the highest global standards for transparency and cross-border information sharing and our improvement in the GFCI ranking is a reflection of the success of that effort,” he said.

“Once again, a comprehensive assessment of more than a hundred factors – many compiled independently by organizations like the World Bank, OECD and United Nations – and the input of thousands of professionals rates the Cayman Islands a top international financial center on par with those in G-20 countries,” Mr. Scott added.

“The Cayman Islands financial services industry remains focused on the kind of innovation and commitment to global standards that has helped us achieve this kind of success.”

All financial centers in Latin America and the Caribbean fell in the GFCI ratings except for the Cayman Islands. The British Crown Dependencies of Jersey, Guernsey, and the Isle of Man also all fell in the ratings.

Despite the fall in the ratings, six centers rose in the ranks with the Bahamas jumping 22 places.

The Cayman Islands is now the leading center in the region, overtaking Bermuda which plummeted seven places and now ranks 36th. The BVI fell even further, 23 ranks to the 60th position in the rating.

“The Caribbean is not a great place to be at the moment. Hurricanes and now a loss in confidence,” the report quotes an unnamed investment fund director in Miami.

Overall confidence increased for the leading centers with signs of a bias toward stronger and more established centers as the top 25 centers all rose in the ratings and ratings declined for the lowest 50 centers.

At the top of the table, London pipped New York by one point for the number one spot. Hong Kong retained third place.

Mark Yeandle, director of Z/Yen Partners and the author of the GFCI, said “All the top centers have risen in the ratings. London remains on top despite Brexit concerns but rose less than any other center in the top fifteen.”

The differences between the main centers is diminishing and there is less than 50 points between the top five centers. San Francisco and Shenzhen moved into the top 10, replacing Beijing and Zurich.

Demand billing, solar+storage and the looming challenge of renewable energy

Solar panels in Grand Cayman

Basing electricity charges on a consumer’s peak use in any single month is a departure for the Caribbean Utilities Company, but executives say the scheme accords with its still-unpublished – and 15 months delayed – 30-year planning report.

The utility says it submitted its Integrated Resource Plan – commissioned in August 2016 and written during 18 weeks by Virginia-based Pace Global consultants – last year to the Office of Utility Regulation and Competition, OfReg.

The office shows few signs of releasing it, however, and has not said why, but CUC says the plan recommends enormous increases in renewable energy and using natural gas instead of diesel to drive its generators.

The clean-burning gas will replace the more-expensive diesel fuel – and its oily emissions – in at least some of the company’s 17 diesel engines, although to what degree remains unclear.

CUC’s Vice President for Customer Services and Technology Sacha Tibbetts says the Integrated Resource Plan “supports compliance with the Paris [Climate] Accord, which requires a 60 percent reduction emissions of tCO2e” – a metric ton of carbon dioxide – compared to what Cayman produced in 2014 ”while put[ting] Grand Cayman well on the way towards achieving the goals of its National Energy Policy.”

In its turn, the 30-page National Energy Policy, adopted by the Legislative Assembly in March 2017, is itself a 20-year blueprint for the Cayman Islands, focused on “exploiting renewable energy, promot[ing] energy efficiency and conservation measures and support[ing] energy security by reducing reliance on imported fossil-based fuels,” according to its 474-word introduction.

The document specifies diversification of power sources – mostly solar, trailed by wind and industrial incineration of solid waste to generate electricity – and calls for 70 percent of Cayman’s power to come from renewable sources by 2037.

According to CUC’s 2017 annual report, published in March, “the IRP dovetails with the National Energy Policy and will give shape to the energy generation plans for Grand Cayman over the next 30 years. Both the IRP and NEP call for a significant increase in renewable-energy projects.”

In pursuing the still-unpublished Integrated Resource Plan recommendations and the larger National Energy Policy, CUC in January unveiled “demand billing,” a scheme by which Cayman’s largest companies – and, ultimately, interested individuals – are charged for electricity based on their highest demand for power on any day in any given month.
CUC says the scheme is “revenue neutral,” meaning the company will earn neither less nor more money than previously, but will accomplish at least two goals: funding future expansion of power generation and encouraging power conservation through a dramatic change to its CORE program, consumer owned renewable energy.

CORE, started in 2011, encourages consumers to install renewable energy generators – usually solar, but sometimes wind. CUC buys all the power created, channels it into Cayman’s national electricity grid, then sells it back to producers at discounted rates. CORE subscribers are prohibited from using the power they generate on-site. Excess production attracts a CUC credit at the end of each month.

Producers wishing to use energy generated on site were forced to sever all links to CUC, going “off grid” as has been done at the new Cayman Technology Centre at 115 Printer Way and in a dozen private homes.

However, pressure from commercial and private consumers; from Cayman’s growing solar industry; even a 2011 Solicitor General challenge to CORE; and, finally, from its own Integrated Resource Plan and the demands of the National Energy Policy, prompted CUC to devise an alternative.

In January, CUC launched “demand billing,” which encourages consumers to spread consumption to alternate hours and to employ renewable energy systems to reduce demand on the grid. In anticipation of the change, CUC’s first step was the 2016 universal installment of “smart meters,” enabling the utility to measure – and consumers to manage – power consumption in 15-minute intervals.

Presently limited to CUC’s 129 largest commercial clients, the new scheme allows consumers to use power generated through their own small-scale renewable-energy resource system and sell any excess to CUC.

These independent arrays are called “distributed energy resources” – DERs – because they are widely disbursed, located wherever an individual chooses to build.

Rates vary among the four classes of consumption, but dramatically reduce the traditional “base rate” of 10.58 cents per kilowatt hour paid by general CUC consumers and CORE’s 450 subscribers.

Under demand billing, the base rates are reduced to .00333 cents per kWh for residential DER customers and as low as .00323 for larger commercial DER customers. Tibbetts says that the fine-grained differences were stipulated in a “cost of service study.”
Along with the reduced DER rate are new charges: a “monthly billing demand” and an “additional capacity charge.”

The former, Tibbetts says, is “the measured peak load for the customer for the current billing month”; the “additional capacity charge,” he says, “is based on the peak monthly billing demand for the prior 24 months,” in other words, a customer’s two-year history of consumption and the materials and equipment CUC imported to supply it.

The two new rates, he says, make up for any losses incurred by lower base rates.

The program includes proscriptions on the size of solar arrays. It places a 250 kW size limit on any single DER and an overall 2 MW limit on all generation by all DERs.
Tibbetts says 250 kW “was a number agreed upon between OfReg and CUC that will allow more than a handful of customers to participate in this early stage of the DER program.

Additionally, this is an amount that is generally quite simple to integrate into the grid and does not require a detailed system-impact engineering analysis,” he said.

He dismissed worries the 2 MW limit was intended to slow adoption of renewable energy, and rejected suggestions that CUC sought to make up for revenues lost to renewable energy – especially in the face of National Energy Policy calls for an addition of 10 MW every year. Section 32.4 of CUC’s transmission and distribution license forbids the utility to earn profits from renewable energy.

“The DER program has been launched in consideration of the NEP and CUC’s IRP,” he says. “The 2 MW cap is needed temporarily while plans and supporting projects are put together to manage the larger amounts of renewable energy that is conceived in the NEP and CUC’s IRP.”

Tibbetts says the demand billing and DER schemes are still taking shape, and will be rolled out over the next three years.

Most of the rates are “part of the phase-in for demand rates for large commercial customers, and [are] only applicable in 2018 and represent a 33 percent implementation of the demand rate.

“This phase-in was done to allow customers an opportunity to see the effect of demand rates on their bills without having a sudden effect of a 100 percent demand-rate implementation.”

In its December 2017 press release announcing the demand billing program, CUC indicated that individual and system limitations will be reassessed annually. The deeper CUC moves into the business of renewable energy, the greater technological challenges it will face.

Increasingly, the utility must plan for “solar+storage” systems, in which batteries save excess generation, enabling owners to shift times of use and diminish grid demand. In its most extreme form, called “demand destruction,” an owner could eliminate dependence on the grid.

“Yes, they can,” Tibbetts acknowledges, but says a storage system must be registered with the company.

“If a customer wishes to install battery storage interconnected with the grid, they are required to advise CUC of this by applying for an energy storage interconnection,” he says, calling storage systems such as the Tesla Powerwall and competing lithium-ion configurations “a different type connection than, say, a typical [uninterrupted power supply] battery, which only comes on once there is a grid outage.”

Meanwhile, the CORE program remains unchanged. The March-published annual report said the scheme “has proven very popular with residential and commercial customers connecting their solar panels or wind turbines to our grid.”

As of last month, CUC recorded 450 CORE subscribers, up from 242 at the end of December, producing 3.7 MW of electricity.

Tibbetts explains the difference between CORE and DER programs: “CORE customers receive a fixed per kWh credit for all of the energy their system produces …. There is a system size limit of 10 kW.”

DER customers, however, “receive a credit only for energy that is exported to the grid. The amount of this credit varies with the cost of fuel and other sources of renewable energy on the grid. The energy that is used in the premise only reduces the amount purchased from the grid.

“DER customers will be billed for the monthly billing demand and the additional capacity charge and the new base rate ….”

The new “excess energy rate” for DER users is .00259 cents per kWh, a sharp contrast to average CORE rates of slightly more than 14 cents per kWh, and a clear incentive for CUC to reduce CORE subsidies. Company records indicate CORE subscribers in 2017 generated 5.5 MW of power, and collected more than $1.9 million from CUC. Those figures compare with 2016’s 3.6 MW of generation, and company payouts of nearly $1.35 million.

In the Dec. 22 statement, CUC President and CEO Richard Hew said, “It is important for customers to understand [demand billing] is not a rate increase and that this new rate structure is revenue neutral.”

CUC, he said, seeks to ensure “that the rate structure reflects [the] cost to serve our overall customer base and is equitable on a cost basis between customer classes. Based on the studies which have been done over the years on demand rates, it is fair to say that with the introduction of demand rates, there are potential savings for our large customers.”

From war-torn Liberia to Cayman, and beyond

Martin S. Kenney

The Cayman Islands has been linked to many cross-border legal disputes, but few span the number of jurisdictions or the amount of time as an ongoing case in the United States that is pitting a British Virgin Islands-based attorney against a U.S. district court.

The U.S. case stems from a series of events that go back to 1989, when former Liberian exile Charles Taylor led several thousand rebels in an attempt to overthrow the country’s then-president, Samuel Doe.

When that bloody conflict started winding down in the mid-1990s – not before more than 200,000 Liberians died – a series of insurance disputes began in multiple courts. One case was initiated in Cayman by BVI attorney Martin Kenney, leading to allegations that Kenney and others violated a U.S. anti-suit injunction.

Now, U.S. authorities are attempting to arrest and extradite Kenney from the BVI to stand trial for contempt of court.

Kenney, however, paints the U.S. court’s actions as a drastic overstep of the court’s authority.

“While I fully respect the District Court, to me it is troubling from the perspective of the international rule of law and comity among countries if a lawyer who is foreign to the United States could be required to come to the U.S. to appear before a U.S. court to be sanctioned for doing his or her best to represent foreign clients in foreign proceedings against a foreign company – and where no person in the U.S. could be affected by our actions,” he said in an interview with this reporter.

History

Faced with starvation, in the summer of 1990 a crowd of war-ravaged Liberian civilians raided 18 stores and warehouses connected to the grocery store Azar Trading Company, which was owned by Lebanese businessman Abi Jaoudi.

Jaoudi’s property was insured by the U.S.-based Cigna Worldwide, but the company declined to pay out on his subsequent claim, according to court documents about the dispute.

With the Liberian courts in a state of disarray due to the ongoing civil war, Jaoudi sued Cigna in the jurisdiction where the company was based: the Eastern District of Pennsylvania. In 1994, that case went to trial by a jury, which found in favor of Jaoudi.

However, the case’s judge overturned the jury’s ruling in 1995 in a “judgment notwithstanding the jury’s verdict,” according to Kenney.

Basically, the attorney explained, the judge at the time found the case to be so clear cut that no reasonable jury would have found in favor of Jaoudi.

As such, he ruled in favor of Cigna, Kenney said.

“It’s an extraordinary power rarely used because it’s an exception to the right to a trial by an impartial jury guaranteed by the U.S. Constitution,” he said of the judge’s action.

Liberia lawsuit

The U.S. court’s ruling did not end the matter.

In 1998, Jaoudi filed a lawsuit against Cigna in Liberia, which found the 1995 U.S. judgment to be in violation of the Liberia Constitution’s absolute guarantee of the right to a trial by jury, according to court documents.

After Cigna refused to proceed in a jury trial in Liberia, the Liberian court entered a default judgment against the company, court documents state. And in October 2000, the Liberia court ordered Cigna to pay some $65 million in damages to Jaoudi.

But by the time the Liberia court had assessed those damages, the company had already sold its entire property and casualty insurance business to the offshore firm Ace Ltd. – which was then based in Cayman – for some $3.45 billion in January 1999.

After it sold its business to Ace and lost the case against Jaoudi in Liberia in 2000, Cigna filed for an anti-suit injunction in the U.S. in March 2001, and was granted the injunction a month later, according to court documents.

That injunction prohibited potential litigants from enforcing the 2000 Liberian judgment, documents state.

This, however, did not sit well with the Liberian court, which in 2002 reaffirmed its 2000 judgment and ruled that the U.S. injunction was unenforceable, court documents state.

“Therefore, as of April 2002, two conflicting injunctions had been entered: the 2001 U.S. injunction, which prohibited the litigants from filing an action attacking the 1995 U.S. judgment or enforcing the 2000 Liberian judgment, and the 2002 Liberian injunction, which reaffirmed that the 2000 Liberian judgment was valid and enforceable, and provided that anyone who interfered with attempts to enforce it would be in contempt of court,” states a court document filed by Kenney, which lays out his account of the facts of the case.

Meanwhile, in a separate matter, a group of 22 other Liberian property holders also sued Cigna in the Liberian courts, and won $29 million in 2005, according to court documents.

Two years later, court documents state, the Liberian government concluded an investigation into Cigna’s by-then-defunct operations in that country, and appointed the Liberian insurance commissioner to act as a receiver for the company.

With two outstanding judgments against Cigna in Liberia, the insurance commissioner sought to collect on those judgments on behalf of Jaoudi and the 22 other Liberian property holders. This is around the time Kenney entered into the picture, helping the Liberian insurance commissioner prepare a case against Ace, in what was then the company’s home jurisdiction, the Cayman Islands (Ace is now based in Switzerland).

“I was instructed as a foreign lawyer, based in the BVI and acting for the commissioner of insurance of Liberia, to assist in the launch of a civil action against a foreign insurance holding company, Ace Ltd., in a neutral forum, the Cayman Islands,” Kenney said. “My client was representing the interests of 23 insured Liberian businesses which had suffered calamitous losses to their property in the Liberian Civil War.”

Kenney said that, according to his understanding of the law, the Cayman Islands lawsuit, which was filed in July 2008, should not have triggered the U.S. injunction because no U.S. parties were involved in the case: The defendant was a Cayman company, the plaintiffs were Liberian, and he was a BVI-based attorney.

Nevertheless, Ace’s attorneys – acting in Cigna’s name – filed in the U.S. a motion for contempt against the Liberian insurance commissioner for violating the U.S. court’s injunction.

That motion for contempt was eventually dropped against the insurance commissioner.

However, Cigna filed another motion for contempt of the injunction in 2015 against Kenney and two other individuals involved in the litigation, and in July 2016, the U.S. court issued a “memorandum opinion and order” in favor of Cigna, documents state.

Even though the lawsuit in Cayman had been dismissed by then because the claimants had run out of funds to litigate the case – “a tragedy,” Kenney lamented – Cigna still sought some $10.4 million from Kenney in “compensatory sanctions,” according to court documents.

The U.S. court set a Dec. 14 hearing date “to determine the amount of damages suffered by Cigna,” and told Kenney that he could be subject to criminal prosecution if he did not attend, documents state.

The threat of criminal prosecution was not enough to compel Kenney’s attendance, though: He said he was advised by his attorney that attending could have caused him to forfeit certain rights afforded to him under the BVI legal system.

“Under the BVI legal system, if I have never submitted myself to U.S. court for the contempt case, then I wouldn’t have any legal liability here,” he said. “But if I mounted a jurisdictional defense [in the U.S.] and lost, I could not take another step in the proceedings without it being interpreted here as a voluntary submission to U.S. authority.”

About three months after the Dec. 14 hearing took place without Kenney, a U.S. judge ordered the arrest and extradition of the BVI attorney.

Kenney, however, said he was not worried about being extradited.

“There’s no way to extradite anyone for this level of contempt offense. It’s more than a parking ticket, but less than a felony. And therefore, it’s non-extraditable,” he said.

After Kenney missed his April 2017 trial date for that charge – “[Kenney’s] foreign counsel has advised him not to appear in this matter in order to avoid prejudicing his jurisdictional defenses under foreign law, and Mr. Kenney intends to heed that advice,” Kenney’s attorney wrote the district court that month – the judge involved with the case requested the Department of Justice to seek an indictment against Kenney.

The latest filing in the case’s docket is from last June, and states that Department of Justice indeed intends to seek an indictment against Kenney. That filing also states that Kenney’s lawyer asked the DoJ to reconsider, but doesn’t state when a final decision will be made.

While he awaits the U.S. government’s next action, Kenney also continues to fight the civil contempt sanction, which is the basis for Cigna seeking $10.4 million from him.

While Kenney said he is open to reaching a settlement with Cigna to avoid costly and time-consuming litigation, he is willing to litigate that civil case all the way to the U.S. Supreme Court if a settlement isn’t reached.

“The case could go to the U.S. Supreme Court because there are so many important issues at stake,” he said, adding in a written statement that he is “confident that, ultimately, the U.S. Court of Appeals for the Third Circuit will conclude that the District Court has gone beyond the limits of its powers in this matter.”

While Kenney’s involvement in the ongoing matter raises important questions about the ability of U.S. courts to extend their power into other jurisdictions, the attorney said that people should not forget the injustice allegedly done to the Liberian property holders who have yet to collect payouts from Cigna.

Tesla-led battery storage set to boost renewable energy, efficiency, reduce costs

Solar panels in the Cayman Islands

The business of solar energy steadily expands, spurred by improved technology, and creating a race to design the most-efficient battery for storing excess power, enabling consumers to spread demand and defray costs.

Capacious and reliable storage of solar-generated power, whether utility- or home-scale, smooths out weather-related and overnight disruptions, and reduces vulnerability to grid outages, meaning it also provides a measure of “grid stabilization.” Storage can also speed payback periods for array owners and mitigate exposure to price fluctuations in a volatile energy market.

Storage is largely accomplished through serially linked batteries, increasingly made of lithium ion. Technology has rapidly shrunk and streamlined the units, enabling easier handling and better retention.

Developers have created fiendishly clever alternatives, however, simply based on the idea of converting potential energy into kinetic energy. One example is ice storage, whereby excess solar energy generated during the day freezes tanks of water, which slowly melts overnight, cooling the refrigerant in air-conditioning systems, reducing demand for power from the grid.

Equally, wind power generated by commercial installations overnight – when few consumers use it – can freeze tanks of water to reduce daytime air-conditioning loads.

Some ice-based energy-storage units boast a 20-year life and operate at less than half the cost of battery storage.

Alternatively, engineers in Denmark’s Faroe Islands pump water into a hilltop reservoir overnight, then during the day drain it through a series of pipes and pumps back to sea level, powering turbines and transformers.

Locally, James Whittaker, founder of solar designer and installer GreenTech Solar, and chairman of the Cayman Renewable Energy Association, says storage has only recently become practical for small-array owners.

“Pricing-wise, energy storage has become viable in terms of being affordable, reliable – with 10-year type warranties – within the last two years,” he says.

Most storage systems, he says, are used as back-ups during outages or other problems in the national grid, and are cheaper than traditional generation alternatives. The primary challenge to date has been high global demand and limited availability, but supply is beginning to catch up, he says: “We expect to see hundreds of storage systems deployed here in Cayman [during] the next 12 months to 24 months starting in summer this year.”

Another significant challenge, he says, is “creating the right regulations and consumer options to advance the adoption of battery systems,” which includes import-duty waivers and CUC agreement to include storage systems as part of its Consumer Owned Renewable Energy program for private solar arrays.

A January report by U.S.-based Wood Mackenzie Research, a leading power-industry analyst, said residential, grid-linked battery-storage in the U.S. for the first time outnumbered new grid-independent storage systems in 2017. By the end of 2017, Wood Mackenzie reported, those installations may make up 57 percent of annual storage deployments and 99 percent by 2022.

The upbeat mood about residential storage is undiminished on the commercial side: “In our market, storage is really coming on in the industrial space as costs come down,” said Kent Harle, CEO of San Diego-based Stellar Solar.

Counterpart Scott Wiater, CEO of Maryland-based Standard Solar, which built an early commercial design combining solar and storage, says he’s excited about the prospects.

“I think storage looks a lot like the early days of solar, so we’re hopeful that the price curves follow what happened with solar to become viable,” he says, anticipating sharp cost reductions as now-nascent technology improves.

Eight-year-old Massachusetts-based Solect Energy has installed more than 65 megawatts of commercial and institutional solar generation, and in December, seeing a widening market, opened an energy-storage division.

Solect Senior Vice President Scott Howe told Solar Power World he “had a lot of customers interested in storage. We’ve kind of held them off because Massachusetts is going through a whole evaluation right now … but … it’s all starting to come together.”

Pointing to demand billing charges, similar to those introduced locally in January by the Caribbean Utilities Company for “large commercial customers,” Howe said he expected to tap “a lot of commercial customers because the demand charges are very high.”

Both commercial and residential storage reduces those charges by shifting peak demand. Solect, Howe said, would target “efforts to shred demand through storage,” meaning “I think commercial storage will be a pretty good market for us.”

GreenTech’s Whittaker says storage technology has come a long way – recently and dramatically improved by Seattle mega-entrepreneur Elon Musk, famous for his Tesla electric vehicles and now for his sleek Powerwall storage units.

“Batteries have been around a long time,” Whittaker says, but “it’s just in the last few years with lithium ion technology and the mass scaling-up of that technology that companies like Tesla have been doing that these systems are now economic and reliable for consumers.

“Early battery systems were typically lead acid or gel batteries. They were very unreliable; they required a lot of maintenance; they took up a lot of space; you often had to build a special ventilated room; and, overall, those systems had a relatively short shelf life.

“Warranties were typically three years. Today, lithium ion technology is much more reliable and power dense and, thusly, the economics are much better for consumers. Other technologies are around the corner to improve yet again on lithium ion, such as solid-state batteries” – and even more exotic alternatives like redox-flow and zinc-hybrid ion batteries – “but these are likely a decade away from mass commercial production,” he says.

Lithium ion technology is also used in electric vehicle batteries, giving carmakers a potential role in residential storage.

Boris von Bormann, CEO of Mercedes-Benz Energy Americas, said in 2016 the company would compete with Tesla’s Powerwall, expanding its European-based stationary energy-storage business to the U.S, using its existing lithium ion EV technology.

The Powerwall weighs 276 pounds; is 29 inches wide, 44 inches long and 5.5 inches deep; and has a capacity of 13.5 kilowatt hours, discharging 7 kWh when pushed to its peak and 5 kWh continuously.

Scalable to as many as 10 units in sequence, the sleek, enamelled rectangles designed with gently curved lines, come in deep blue, “luxurious” black, grey, signal red and “the neutrality of white with a touch of daring that only purple can provide,” according to one Powerwall review on theverge.com, noting the glossy, violet highlights on the reflective ivory-hued surface.

Powerwall’s industrial-size Powerpack counterpart, boasting nearly unlimited scalability, is for commercial or electric utility-grid use, addressing “peak [demand] shaving, load shifting, backup power, demand response, microgrids, renewable power integration, frequency regulation, and voltage control,” according to one testimonial.

Whittaker says GreenTech Solar is Tesla’s “local certified installer,” and “has been designing all of its SunPower solar panel systems to accept the Tesla batteries.

“As such,” he says, “all GreenTech existing customers are able to add the battery with no issues. We can also retrofit any home or any solar system with the Tesla battery systems as well with some minimal design changes.”

Energy-storage systems typically vary between 5 kWh to 15 kWh, he says, and costs range between $8,000 and $15,000. Tesla is at the lower end, “typically around $9,000,” but Whittaker cautions that installation “has to include more than just the battery; it also typically includes a gateway, subpanel, design and Installation.”

Prices are likely to diminish, but only slowly, he says, “Demand vastly exceeds supply and also we have been waiting on regulatory changes to take effect such as including batteries as part of the renewable-energy systems that are duty-free, as well as forms required from CUC to include battery systems with existing CORE [Consumer Owned Renewable Energy, CUC’s subsidised program for private arrays] solar systems. These changes are in process as we speak and should be finalized within the next few weeks.”

He expects the first Tesla Powerwalls to arrive in the second quarter, “and [we] expect to start installing these systems around summer.

“These will be the first such energy-storage systems in the Cayman Islands and among the first in the Caribbean region,” he says. “It represents a turning point for renewables in Cayman in many ways looking into the future.

“We have approximately 60 systems currently on order for Cayman and 90 for Antigua. I expect there to be thousands of Powerwall battery systems deployed here over the next 10 years. It makes too much financial sense not to do so and these batteries can provide a win-win situation for everyone involved, including the local utility.”

Managed waste disposal slowly takes shape as DEH looks to DECCO project managers

A 2014 image shows the mass of tires at Grand Cayman's landfill.

Make what you will of the project to remediate the solid-waste disaster dubbed “Mount Trashmore,” but the effort to end the fire, smoke and leaching hazard has to be a good thing.

The shredding of 7,000 tons of discarded tires is nearly complete, and at 100 tires per ton, that makes 700,000 tires that will be removed from the George Town landfill by early spring.

The shredder spluttered to life on March 21 last year as Premier Alden McLaughlin donned work gloves and ceremonially hurled the first tire onto a conveyor belt, which dropped it into a set of whirling blades that carved it into two-inch chips – dubbed “tire-derived aggregate” – in five seconds.

Now, says Jim Schubert, senior project manager for government’s Integrated Solid Waste Management System, Davenport Development has used most of the tire-derived aggregate from the first 5,000 tons of discarded tires as filler in their three-phase South Sound Vela project.

“The remaining shredded tires, approximately 2,000 tons,” he says, “will be used in the ISWMS facility development – for roads, embankments, etc.,” and possibly in drainage works and erosion control.

The Canadian engineer says he has used the aggregate in Edmonton, consuming 600,000 shredded tires for a half-kilometer of road.

Schubert’s days as “chief project manager” are numbered, however. He and the Department of Environmental Health on Oct. 11 last year announced the appointment of Dart Enterprises Contracting Company, known as DECCO, as “the preferred bidder” to manage the 25-year waste-management plan.

Contract negotiations are due to complete this fall, says Martin Edelenbos, Dart’s solid waste management engineering coordinator, who has operated similar projects in Canada, worked locally from mid-1997 until early 2001 as assistant director for solid waste at the Department of Environmental Health, and operated a similar solid-waste-management system in Bermuda from mid-2005 through 2010.

Cayman’s waste management contract includes remediation of the existing landfill. Edelenbos says, “While details are part of the contract negotiations, the landfill will be capped and closed with the intention that it would become a green space,” dampening speculation that Dart might use the land to expand Camana Bay.

DECCO is negotiating with subcontractors and has proposed schedules for phasing the project as part of the talks.

The company’s partners include Denmark’s Burmeister & Wain Scandinavian Contractor as engineering procurement contractors for the 7 megawatt waste-to-energy facility on the landfill site; Cayman’s Island Recycling and U.K.’s Guernsey Recycling Group for recycling, tire shredding and composting; Australia-based environmental and design consultant GHD; and Miami-based Cambridge Project Development to handle such residual materials as fly ash, waste scrubbed from waste-to-energy emissions and other non-combustibles.

“Negotiations are going well with DECCO and the Cayman Islands government, and we hope to have a contract in place later this year,” Schubert says, cautioning that an environmental impact assessment must also be completed before work starts on the three-year construction schedule.

“The EIA that is required for the project is underway,” he says, “and also is planned to be completed later this year.”

Edelenbos indicated that if the contracts and the EIA are finished on time, DECCO could start construction in 2019, saying “all components of ISWMS will [be] in operation by 2021,” completed “on the basis of availability – with the waste-to-energy facility being the most complex, completed last.”

The partners may not have signed official documents, but a joint October 2017 press release names 2021 as the date the George Town landfill hits capacity. The document also suggests a slowly slipping schedule, however, predicting a September 2017 appointment of the “preferred bidder,” an April 2018 contract signing, EIA completion and Planning Department approval between September 2017 and July 2018, and an August 2018 start to construction.

DECCO will “design, build, finance, operate and maintain” waste management facilities; capital investment is pegged at $106 million – which includes $64.3 million for the 53,000-ton capacity, steam-driven on-site waste-to-energy plant – and overall operational costs for the 25-year project are estimated at $426 million, according to 2016’s Amec Foster Wheeler and KPMG outline business case. The company’s costs are “under negotiation.”

The consultants also pointed out that doing nothing would not yield meaningful cost savings – and would constitute an environmental disaster.

“A status quo-type system of just landfilling waste on the islands,” would cost $418 million, they wrote 18 months ago, and annual intake of solid materials would rise from current levels between 60,000 tons and 80,000 tons per year, to between 100,000 tons and 250,000 tons per year, adding exponentially to a mountain of refuse already 80 feet high.

A relatively modest investment, however, additional to that $418 million, the authors wrote, “will greatly reduce the landfilling of waste, as it will be either reduced, reused, recycled or recovered with the new system,” eliminating 95 percent of the material now placed in the landfill.

“The recycling materials collected from [half-a-dozen] depots [around Grand Cayman], metals collected and tires collected/processed are being diverted from the landfill now,” Schubert says, but at only minimal effect, “so less than 5 percent of the incoming waste is diverted from [the] landfill.

“With the future ISWMS, we anticipate that this will be flipped, and 95 percent of the waste will be diverted,” he says.

ISWMS will not be profitable. Government will pay a per tonnage fee for waste-management services, while operating costs for the DECCO consortium will be offset by revenue from electricity generated at the waste-to-energy facility. More precisely, Amec/KPMG project revenues of $269 million, including $108 million in sales of electricity to the Caribbean Utilities Company and wholesale deals with overseas aggregators for recyclable materials.

Schubert says preliminary designs for ISWMS and the waste-to-energy plant will be released only after DECCO and DEH sign the management contract, but both are confident of success.

“DECCO has many years’ experience in managing complex projects,” says Cameron Graham, DECCO and Dart Development president.

“Beyond design and construction, our investment analysis and business development teams support the delivery of development projects. Working with our partners in the consortium, we can provide a waste-management solution which provides the country with a sustainable alternative to the landfill.”

Edelenbos agrees: “A new waste-management solution is essential to the country’s infrastructure, and ISWMS aligns with DECCO’s focus on sustainability and innovation.”

Getting inflation right in 2018

Anticipating the changes caused by rising interest rates will be an important element of investment strategies a panel at the Cayman Alternative Investment Summit concluded. From left, Financial Times editor Peter Smith; Constance Hunter, chief economist, KPMG; Ben Melkman, founder, Light Sky Macro LP; and Jim McCaughan, CEO, Principal Global Investors.

Had the Cayman Alternative Investment Summit taken place in early January instead of February, all the talk about investment risks and threats to the economy would have been about geopolitics. Following the market corrections in early 2018, the debates instead centered on inflation and the potential for interest rate rises.

For KPMG chief economist Constance Hunter, the low interest rate environment with low inflation, near-full employment, good GDP growth in the U.S., tailwinds from fiscal stimulus and synchronized global growth, for the first time since 2007, constitutes a “snowflake economy.”

“It is perfect and beautiful but somewhat fragile,” she said.

The first indication that it cannot last came with the market turmoil, which saw the stock market spooked by the latest payroll statistics from the U.S., which many investors interpreted as inflationary.

“The thing to get right in 2018 is what is happening with inflation,” Hunter said in a panel that discussed investing in a world of uncertainty.

The question of whether higher wages will translate into higher inflation, and thus additional interest rate rises by the Federal Reserve, cannot be answered by looking at the headline figures alone. By drilling down further into the statistics, Hunter noted a pay disparity between wages at large, highly productive and high-paying firms, which make up 7 percent of the labor force, and all other companies.

In addition, almost all of the gains shown in the February payroll data went to supervisory workers who represent 20 percent of the labor force. Only if the data showed pay increases for non-supervisory workers in the U.S., the effect may, in fact, be inflationary, she argued.

The stock market fear of inflation is built into the current market structure. To generate returns of 5 or 7 percent in a low or zero interest rate environment required excessive leverage, said Ben Melkman, CEO and CIO of Light Sky Macro LP, who believes the stock market corrections were just the tip of the iceberg, with some investors unwinding their short volatility strategies used to achieve their yield targets.

“It is a warning signal of how much financial engineering there has been in a financial environment,” he said. Over the next two years as inflation calls for central banks to take liquidity out of the market, the excessive financial engineering will become unmasked, Melkman added.

Jim McCaughan, CEO of Principal Global Investors, noted that the markets are experiencing a period of heightened tail risk, a term for low probability risks that have a potentially high impact.

This was the result of populist and nationalist policies in the U.S. and the rest of the world as well as the increase of leverage, he said.

However, McCaughan thinks the fear of a hawkish Fed, which could raise interest rates four times in 2018, is “an overheated fantasy.” The idea nevertheless took hold of the markets, with the implication that this could bring forward the recession and make it more difficult to hold equities in a world of competing yields.

That on its own would have led to a 3 or 4 percent set-back in equities, he said. “The problem is there are a lot of procyclical strategies that when that 3 or 4 percent drop in equities happened, the algorithms behind the strategies basically forced selling.”

In particular, short volatility, target volatility and risk parity strategies have the potential to cause a serious set-back.

In addition, leveraged and short ETFs, which have grown significantly, are procyclical products that can lead to a self-feeding market decline, McCaughan said.

Melkman added that as investors have embraced passive investing, liquidity mismatches across all ETFs will also make them difficult to unwind.

Credit ETFs, for instance, represent even on a non-leveraged basis many hundreds and thousands of times the liquidity of the underlying product, he said, which means when the market tries to sell that ETF “it has no bid to hit.”

He argued that the market had become too worried about the inflationary mindset and this has caused a policy setting that is completely inappropriate for the state of the economy.

Quantitative easing and zero interest rate policies, which are still prevalent in Europe and Japan, were fine when there was excess capacity and no inflationary pressure. But Melkman sees the markets at an inflection point with every major economy running at full capacity, global demand running above trend and the beginnings of a more inflationary environment.

“What we are going to see through 2018 and going forward, there is no way to satisfy the above trend growth that we are seeing all across the world, except for high prices.”

McCaughan disagreed, arguing that this view underestimated the impact of technology on behavior and the economy. The effect of e-commerce on retail trade has made products up to 30 to 40 percent cheaper but this was not reflected in the inflation numbers. “I think that on its own is probably why inflation is overstated already in the economic numbers,” he said.

The deflationary effect of technology is also one of the reasons rates stayed so low, McCaughan noted.

He considered announcement of higher wages by companies like WalMart, which gave out large bonuses and increased their minimum wage, amounted to mere “political grandstanding,” because the next day the retailer closed 65 large stores, which in itself is deflationary.

At the same time the labor participation rate among the youngest and oldest Americans is rising, which is going to take the pressure off wage hikes, added Hunter.

She advised investors to watch real wage increases to non-supervisory workers in the U.S. and any reduction in purchases by the European Central Bank and the Bank of Japan throughout 2018.

Melkman said investors should be extremely cautious and book the profits after an “amazing” ten-year run.

“As we normalize the interest rate and liquidity setting, have some dry powder, don’t be overextended in some of the risky assets and don’t be overexposed to low-yield interest rates or leveraged credit,” he said. “Keep leverage low and have the dry powder to buy when other investors are having difficulties.”

Cayman aims to capitalize on blockchain boom

A panel of financial services industry officials talk about why the Cayman Islands is an attractive jurisdiction for blockchain companies. - Photo: Ken Silva

Though the price of Bitcoin has fluctuated wildly since its inception – with some economists expecting it and other cryptocurrencies to be speculative bubbles – that uncertainty has not dampened the momentum of the technology that underpins cryptocurrencies: blockchain.

In recent months, blockchain companies have been popping up on a nearly daily basis. As an increasing number of blockchain entrepreneurs look to develop their ventures from startups to successful companies, they are looking for business-friendly jurisdictions where they can raise funds and develop their products. The Cayman Islands is aiming to be one of those jurisdictions.

To that end, the jurisdiction is off to a nice start: Cayman Enterprise City CEO Charlie Kirkconnell said at a January “d10e” blockchain conference that some 50 blockchain companies have established or are in the process of setting up shop at “Cayman Tech City” – the recently branded branch of the special economic zone that caters to tech-related entities.

Now, about 25 percent of the total Cayman Enterprise City tenants are companies developing or using blockchain technology.

But Cayman is not without its competition. Other low-tax jurisdictions are also attracting crypto companies.

For instance, a New York Times article last month reported on a number of blockchain entrepreneurs flocking to Puerto Rico.

“Dozens of entrepreneurs, made newly wealthy by blockchain and cryptocurrencies, are heading en masse to Puerto Rico this winter,” the article states. “They are selling their homes and cars in California and establishing residency on the Caribbean island in hopes of avoiding what they see as onerous state and federal taxes on their growing fortunes, some of which now reach into the billions of dollars.”

However, Cayman officials are confident that this jurisdiction has more to offer than others.

“Not only are you in the gem of the Caribbean, but the Cayman Islands is one of the foremost financial centers, as well as the hedge fund capital of the world,” Premier Alden McLaughlin told attendees of the “d10e” blockchain conference. “We have a cadre of professional people servicing our financial services sector that is second to none.”

For Sensay co-founder Crystal Rose, the choice to domicile her company here was a no-brainer.

“We’re taking Bitcoin from places around the world, and America would tax that instantly as income … but that money is going to be circulated back into the company as an investment,” said Rose, whose company creates blockchain-based smart contracts.

Additionally, Cayman’s straightforward regulations made the jurisdiction more attractive than staying in the United States, she said. Blockchain companies are subject to know-your-client and other anti-money laundering rules, but Rose said that the U.S. Securities and Exchange Commission issued two conflicting statements about fundraising rules within the span of five months.

Kirkconnell said that Cayman Tech City is trying to make setting up businesses here as easy as possible. Cayman Tech City officials will help entrepreneurs obtain all necessary licenses and permits, and can usually have them ready to do business from the territory within four to six weeks of an application, he said.

That was the experience of Hercules SEZC President Cynthia Blanchard.

“[Cayman Enterprise City] helps guide you through the process, and makes it easy as possible,” said Blanchard, whose company uses blockchain for supply chain management. “Now, we have a community here.”

Cayman Enterprise City’s rules are also flexible in that entrepreneurs can travel and do business around the world while still maintaining a legal presence here.

“There’s no requirement to spend a specific number of days in the jurisdiction,” Kirkconnell said. “We want you to spend as many days as you can here because we want the knowledge transfer and your expertise in the jurisdiction, but the requirement to be here [for example] 6 months – that doesn’t exist.”

This is good news for many blockchain entrepreneurs who prefer the hustle and bustle of a metropolis over the island lifestyle.

“It’s wonderful to be here, but to be here six months, I would go crazy,” said a blockchain entrepreneur who raised the issue with Kirkconnell during the conference. “A week or two is fine, but I need New York, I need London.”

Given that the influx of blockchain companies has occurred just within the past six months, Kirkconnell said he expects dozens more to come here in the near future. The one thing the territory needs to prepare for that migration is more workers with technical skills, he said.

To that end, Cayman Tech City is setting up a training academy to teach residents coding and other tech skills. Kirkconnell said that Cayman Tech City has signed an agreement with the U.S.-based school Code Fellows to use its curriculum and that more information should be made public about the arrangement in the near future.

“One thing we need to respond to is many of these companies are looking for qualified, trained technical people, and that’s a bit of an issue here,” he said. “So we’re aiming to create a locally available critical mass of technical talent from the local community.”

Like other jurisdictions, Cayman is still trying to iron out details about how a blockchain industry might be regulated.

“That’s the kind of thing we’re going to have to build this year,” said Department of Financial Services Senior Legislative Policy Advisor André Ebanks, referring to the regulatory issue. “There are going to be some issues that we have to work through and think about.”

Among the issues policymakers are grappling with is how to make sure “tokens” (a common word for a single unit of cryptocurrency) aren’t used as bearer shares (shares that belong to whoever physically owns them, which allows for anonymity).

To illustrate his point, Ebanks said that he was recently on a conference call with five major law firms who were discussing legal issues surrounding blockchain and cryptocurrencies.

Normally, these fiercely competitive law firms would not be working together on legal matters, he said. But when it comes to an undeveloped industry, Ebanks said that doing so is for the benefit of all.

“Because this space is so new, it’s going to take education and collaboration to grasp,” he said.

Experts mull future at Cayman Economic Outlook 2018

Futurist Erica Orange talks about technological trends impacting the global economy. - Photo: Ken Silva

A list of speakers that included some of the world’s most prominent futurists and technology consultants discussed a variety of topics last month at the 15th annual Cayman Economic Outlook conference.

While the speakers had a wide range of backgrounds, all their talks had a common theme: They focused on current international political and technological trends, and what they could mean for the future of the global economy.

According to Atlantic Council senior fellow Jamie Metzl, the world is being pulled by two opposing forces, one political and one technological.

On the political end, there is a rising trend of nationalism amongst many developed countries, which are pushing against globalization with more isolationist trade and immigration policies, said Metzl. This is best illustrated by the United Kingdom’s vote to leave the European Union, as well as U.S. President Donald Trump’s decision to withdraw the U.S. from the Transpacific Trade Partnership – a trade agreement between 11 countries, most of which are in the Asia-Pacific region.

This is a dangerous tend for multiple reasons, Metzl contended. The current world political regime that has existed since the end of World War II – headed by the U.S. – has led to unprecedented prosperity, he said. Jurisdictions like Cayman are also some of the primary beneficiaries of globalism, he said.

The biggest threat posed is that if the U.S. withdraws as a leader on the political stage, it could leave a power vacuum for a country like China to fill. China is “rising with its own world view” that could be antithetical to the values that pervade the current political regime, said Metzl.

“What the future will look like is up for grabs in a way it hasn’t been since 1945,” he said. However, in direct opposition to the current anti-globalization trend is technology, which is tying the world closer together, he said.

While this has been an ongoing trend to various degrees for centuries, Metzl many changes have been “linear” trends that have built up over time – such as the airplane building on the steamship, making travelling easier. But other technologies will have non-linear impacts, entirely changing the way industries function, he said. For instance, Metzl said he recently was able to witness a Walmart store manager use a VR headset to receive training from other Walmart staffers in a different country. Technology like virtual reality will doubtlessly impact society in ways we cannot predict, he added.

Despite the unpredictability, all the technological changes will likely bind the world more closely together.

The disruption brought by financial technology will also impact labor forces throughout the world, including here in Cayman, according to Erica Orange, the chief operations officer for the futurist consulting firm Future Hunters.

Politicians on both ends of the political spectrum have been wringing their hands over the manual labor that is being displaced by automation. But that’s old news, said Orange.

“Most people focus on disintermediation of manual labor. But this is nothing new,” she said. “What will be new over the next 20 years is disintermediation of cognitive labor.”

The audience at the conference shifted uneasily as Orange predicted that thousands of legal, accounting, investment banking, trading, and other financial services positions will be automated within the next two decades.

“We’re already seeing this in the medical profession,” she said. The service industry, too, will be greatly impacted by technology. Cashiers are already being displaced by computers at fast food restaurants, and Orange said that businesses like Amazon Go – a store in Seattle that’s largely automated, with customers being able to buy products without going through a checkout station – will become increasingly prevalent.

With an increasing number of females occupying these professions, Orange said that the women will be disproportionally impacted compared to men. According to World Economic Forum, technological disruption will cause 5 million positions to be lost by 2020 globally, with women taking 3 million of those losses – and gaining only 550,000 jobs from the new tech during that time.

Even jobs based on “emotional-based” labor are being performed by machines. Orange showed a video of a robotic pet seal sitting the lap of an elderly Japanese man in a retirement home, keeping him company.

The skills that machines have not been automated are those that entail using emotional intelligence – recognizing non-verbal cues in other humans, for example – as well as critical thinking and creative thinking, said Orange. Though she did not specify what jobs will utilize those creative thinking- and emotional intelligence-based skills, Orange said thousands of financial service providers and other workers will need retraining to fill those roles. Developing a new educational approach towards young people is particularly important, she said. She said the generation following the Millennials is the first one to have a “truly symbiotic” relationship with technology. Therefore, she said this generation is being dubbed the “Cybrids.” Because the Cybrids are the first to grow up on smart phones and related technology, their brains are different than any other generation, she said. “Their neural wiring is different: They are literally growing new brains,” she said. Orange contended that this generation needs to be educated accordingly.

“When it comes to educating them, we are putting new brains in an archaic school system,” she said. “When they can’t perform in class, can’t pay attention, we think there’s something wrong with them.”

Orange suggested that virtual reality should play more of a role in education than reading something out of a book.

“Why read about biology when you can use virtual reality to – incorporating touch and smell in VR – if you can actually be a blood cell flowing through someone’s body?” she said. “Why read about planets when you can actually be an astronaut?”

But despite the advances in technology, younger people will still need to be taught the emotional intelligence and social skills in order to be able to interact with older generations and function in the real world, she said.

The country that gets the combination of tech and social education right will be able to “leapfrog everything that U.S. and Europe is trying to do,” she said.

Residential real estate growing by double digits; commercial ready to soar

The San Sebastian development on South Sound Road, an area that continues to be an attractive location for buyers. - Photo: Taneos Ramsay

The complaints nibble at the edges of their optimism, but the upbeat mood among real estate brokers remains firm, though things could be even better – and South Sound is still booming.

A growing U.S. economy has infused buyers with optimism, translating into abiding interest in homebuying, driving prices up more than 20 percent in the last year – itself a banner exercise in free-market economics.

No one has spotted any warning signs – inflation is low, pegged at 1.9 percent, unemployment is at 4.1 percent, matching the U.S. rate, and air arrivals are strong, setting an all-time record of 418,403 in 2017, and a January 2018 record of 39,185.

Those numbers, says Kim Lund, RE/MAX broker and co-owner, “should continue to increase in 2018,” largely due to “the influx of new tourism from hurricane-ravaged destinations.”

James Bovell, another RE/MAX broker/owner and head of the in-house “Bovell Team,” says tourism growth “may be due somewhat to visitors seeking alternatives to the Caribbean islands hit by last year’s hurricanes, but I believe that Cayman’s market is able to create such a positive experience for visitors that they will want to come back again, which bodes well for us both tourism-wise and for the real estate industry also.”

In late summer, of course, Hurricane Harvey wrecked Houston, followed by Irma, one of the two strongest storms ever recorded in the northern Atlantic, and Maria.

Hurricane Irma’s path qualified almost as a “Who’s Who” among tourist destinations: The storm-affected populations and infrastructure in Puerto Rico, the U.S. Virgin Islands, the British Virgin Islands; Antigua and Barbuda, Guadeloupe, Martinique, Saint Barthélemy, Saint Kitts and Nevis, Barbados, Saint Lucia, Saint Martin, Anguilla, Cuba, Haiti, Dominica, the Turks and Caicos Islands, the Dominican Republic and the Bahamas.

Two weeks later, Hurricane Maria, the deadliest storm of the 2017 Atlantic hurricane season, tore through Dominica, the Dominican Republic, Haiti, Puerto Rico, Guadaloupe, Martinique, St. Kitts and Nevis, and the U.S. Virgin Islands.

The Kimpton Seafire hotel and residences on Seven Mile Beach.

Sotheby’s International Realty owner and broker Sheena Conolly agrees with Lund’s observation, saying she sees the evidence in villa rentals as demand grows and people convert homes into villa properties.

“High-end villas are escalating in price,” she says. “People are purchasing them, then renting for investment purposes. The villa rentals are because of devastation from hurricanes, and we see more new homes being turned into villas.”

Bovell sees “an upswing all round, an upswing in prices, as well as volume of turnover.

“The greatest challenge the market faces currently is that choice and inventory has been declining; however, inventory is coming back in certain areas, which has been sorely needed.”

JC Calhoun, owner and broker at Caldwell-Banker, repeats his dictum from last year, saying South Sound is still booming because of myriad inland developments, like Davenport Development’s three Vela phases.

Buyers who were once able to find South Sound beachfront properties for under $1 million, cannot anymore. “There’s nothing available,” Calhoun says. “They had a good run in 2015-2017.”

Even if ablaze, he says, “South Sound is the second-best market in Cayman” pointing, like Lund and Conolly, to Seven Mile Beach.

“Tourism is up, and so is spending,” Calhoun says, boosting local incomes, supporting restaurants, liquor and grocery stores, hotels and guest houses, rental cars and a host of service industries – including real estate.

The “uptick of interest,” he says, comes largely from the U.S. and Canada “because they have some money” after a couple of hard years.

“We’re seeing an upswing in people from Canada and from Texas,” Conolly says, in a surprise reference to the U.S. state, “and from the traditional markets on the Eastern Seaboard,” meaning the New York and Washington, D.C., metropolitan areas.

Health City Cayman Islands In East End is driving property values. – Photo: Taneos Ramsay

Bovell agrees, but offers a surprise addition to the list of investors: Caymanians themselves.

“A huge variety of investors [are] looking to buy property in the Cayman Islands. Predominantly they are from the U.S. and Canada, but we have also seen an influx of European investors.

“In addition,” he says, “an increase in local participation has been the most surprising trend for the market most recently, including local residents [and] Caymanians.”

And that, says Calhoun, is “why Seven Mile Beach continues to be sky high. It’s taken off. Prices have risen between 25 percent and 30 percent in the last year, and last year it was already up 20 percent” from the year before … “and it’s still going up.”

Lund says Seven Mile Beach and South Sound are “two of the hottest markets” as sale prices of resort properties and residential real estate rise, as do “rental rates of hotel rooms and condominiums, both for tourism and long-term residents.”

Only two units are available on Seven Mile Beach under $1 million, Calhoun says. Between $1 million and $2 million, only 17 units are available, and most are Kimpton Seafire residences. Only six are not part of the Dart-owned development. Of those six, some are at the Villas of the Galleon, for example, where costs are $1.6 million. Lacovia units are priced at $1.8 million.

“Record sales prices are being realized almost everywhere,” Lund says, “whether in residential or resort real estate.” In 2015, Villas of the Galleon prices ranged between US$500,000 and US$600,000. Now, he says, “they are over US$1 million.”

“Avalon was at US$1.6 to US$1.7 million in 2015 and now they are over US$2.5 million.

“This story is being repeated up and down the beach, over the last few years, with new sales price records for almost every sale at each condominium or residential development,” the RE/MAX co-owner/broker says.

Between $2 million and $3 million, Calhoun says, nine units are available, seven at the Kimpton. Priced between $4 million and $5 million are 12 units, half at the Kimpton. Ranging from $5 million to $6 million are seven condos in WaterColours.

As a matter of record, Lund recently sold Cayman’s highest-priced condominium – at US$13 million – in the 35-unit, six-story Seven Mile Beach Water’s Edge development.

The Cayman Islands Real Estate Brokers’ Association lists 11 residential homes that have sold for more than US$5 million, and another 12 priced still higher.

Calhoun explains that as market forces drive prices, owners seek to cash in: “We’ve had almost no new supply, so prices are going up, and while more people are willing to sell, it’s only at those higher prices.”

Resales by owners comprise the bulk of the market activity, far ahead of sales by original developers – apart from the Kimpton. Conolly says, however, new product is in the pipeline, but will take some time.

Bovell points to “the new Seacrest development on Seven Mile Beach [as] a good example of new inventory coming online and quickly becoming absorbed. Each of these 20 condominiums has been sold, which is unsurprising because they fulfilled a need in the Seven Mile Beach market for three-bed high end condos for under US$2 million.”

The 10-story luxury beachfront Aqua, near Queen’s Court Plaza and Seven Mile Shops, is largely sold, but will not open until 2020. Other properties include seafront developments toward West Bay, expansions in Camana Bay and Britannia, and condos still being built in South Sound.

“Along the Seven Mile Beach corridor, you will find resort condominium development on the beachside and residential development inland, across West Bay Road from Seven Mile Beach,” Lund says, echoed by Conolly, who points to Crystal Harbour, Governors Harbour and Careenage, suggesting canalfront properties will prove to be popular.

“Canalfront homes under US$3 million will become increasingly more attractive, as the cost of land and build increases,” Bovell says.

Lund says, “South Sound has been experiencing a building boom of residential properties, predominantly condominiums. Some of the developments are being built in phases, but continue to sell well, and new development continues.”

Bovell also names Aqua, “in which each unit uniquely takes up a single floor. Fifty percent of these condominiums have already been sold.”

“Stone Island,” he says, “fulfils another market requirement for brand-new homes in a secluded and upmarket location at the Yacht Club across from Seven Mile Beach.

”The fact that 35 percent of these homes have already been sold from the first phase of the development tells us that this, too, is meeting a requirement of the market.”

Calhoun tells clients, however, that new product is unlikely to reduce costs, and they should not wait: “More supply is not going to be at lower prices. It’s all going to be at those higher prices.”

All the brokers acknowledge  that developers will eventually run out of land and Seven Mile Beach and South Sound beachfront property will grow scarce, forcing them to move east, starting with Grand Harbour, then Old Prospect, then Spotts.

“It’s difficult to say when we will see that trend start,” Lund says, “but at the current rate of construction, it may only be a few years away.”

Calhoun says as South Sound traffic saturates the area’s two-lane blacktop, prolonging commutes to schools and offices, developers will “move on out,” compelling government improvements to the road network past Hurley’s Roundabout.

“The road system needs to facilitate more traffic before a lot of new larger-scale development can occur east of that area,” Lund says.

Conolly – ever the optimist – says Grand Harbour “is already doing extremely well,” and that success will push further development.

Tacitly agreeing, Lund says now is a good time to buy land, “to bank some property for future development,” but offers a caution.

“It will likely be more than a couple of years, and more likely about five years plus, as there is still a fair amount of land available in South Sound. Prices vary in Spotts/Prospect according to location and size of parcels, so [it’s] not easy to describe pricing unless you are talking about a particular parcel.”

Bovell agrees: “Development sites located further east out to Red Bay have also been active although further east is still quite slow.”

Calhoun sees an eastward move looming in the mid-term: “There are people willing to buy a little farther out – in Rum Point, in East End. There is a trend in that direction,” often driven by the simple cost of bank funding.

“Land is starting to go up – in Spotts across from the beach and in Old Prospect and in Pedro,” he says, naming – instead of beachfront – seafront-panorama “view lots,” in less-crowded areas appealing to older residents and “people who work,” commuting daily to George Town.

Others, he says, “are buying along the West Bay seafront between West Bay Public Beach and Dolphin Discovery,” a 1.5 mile stretch where property sells for as little as $100,000.

In mid-December, Conolly and Lund set a US$12.5 million sales record for the 10,155 square foot, seven-bedroom Coconut Walk beachfront residence in West Bay, between Cemetery Beach and Boggy Sand Road.

Conolly specializes in high-end family homes, and sees “a pickup in values,” pointing to the other end of Grand Cayman, and a recent $3 million residential sale in Cayman Kai.

Bovell observes that, like Seven Mile Beach and South Sound, both Cayman Kai and Rum Point have suffered declining inventory, but points to the new Rum Point Club “with condos available in a wider price range.”

“This development has been particularly welcomed because there haven’t been any new developments in this location for some years,” he says, but notes the perhaps predictable outcome: “They have already sold over 50 percent of inventory.”

More modestly, Conolly speaks of values in Savannah, Bodden Town and East End, where beachfront remains available for as little as $500,000, and “you can still find good affordable properties and you can still do well on a budget.”

In East End, says Lund, Health City Cayman Islands is driving property values. In January, the High Rock hospital opened the first of two “Parrot Ridge” apartment blocks, comprising 59 one-, two-, and three-bedroom units, and 20,000 square feet of ground-level commercial space. A nearby hotel and shopping center are planned, as are expansions to the hospital itself.

“They already have had market impact, as the hospital is very well respected and the fact that Cayman can boast of three hospitals is a huge positive,” Lund says.

Both he and Calhoun agree that Cayman’s medical infrastructure is critical for overseas home buyers – “and we have that here,” Lund says. “As the Shetty [Health City] hospital site continues to expand, their volume of business will also expand and that will provide more local jobs and money flowing through our economy. Their ongoing development is providing a good, positive impact.”

In August, government will break ground on East End’s 10-acre long-term residential mental-health facility, investing between $10 million and $15 million, bringing roads, utilities, services and even employment to the district.

“All they need for the Eastern Districts is another good road to provide efficient and faster access and then more development will soon follow,” Lund says. “It is a pristine area of Grand Cayman, so in time, it will be discovered and more attention will be paid to that area.”

Health City development is largely commercial, a sector traditionally smaller than residential, though growing quickly – not just in East End, but, more significantly, back toward George Town where the 650-acre Dart Real Estate-owned, mixed-use Camana Bay is rapidly expanding, potentially drawing activity away from downtown.

“A lot of small companies have moved there. The staffs are happy, and it’s a good-quality environment,” Conolly says.

However, both Conolly and Lund wonder if an alternative business district might work both ways, at last galvanizing the decades-old debate: George Town revitalization.

“This could be a great opportunity,” she says, pointing to legal firm HSM’s purchase of the old Butterfield Bank Building.

Lund speculates that downtown cruise berthing might be that opportunity: “As cruise-ship tourism increases, downtown seems to be transitioning more to a cruise-tourism location, less focused on commercial activity than on retail and restaurants and small offices.

“With the new berthing facility, this transition could gain momentum as cruise passengers stay longer in town,” supporting “a surge in retail, restaurants, and commercial enterprises targeting that cruise business, over time as it expands.”

Ever-hopeful, Lund tentatively prescribes government incentives, encouraging developers to “transition” George Town “into a residential area.”

“If 10-story residences were developed with gorgeous views of the cruise ships, sea and George Town, then the whole area could be revitalized over the next 10 years – or longer – into a vibrant town that is alive during the day and evening with lots of restaurants, shops and residences.”

That vision is nonetheless shadowed by Dart planners as “The Rise” bridges the Esterley Tibbetts Highway and its counterpart bridges West Bay Road near Royal Palms.

Ambitious plans call for residential and commercial development extending from Camana Bay’s central Paseo, across the two platforms, terminating at a proposed five-star Dart-owned beachfront hotel at its newly acquired Royal Palms Beach Resort. Meanwhile, the company prepares expansion to the immediate north.

“Commercial development is mostly focused in the Camana Bay area,” Lund says, “and it is difficult for other locations now to compete with them within a mile or two of this area. Commercial activity is slowly transitioning out of George Town to Camana Bay and Regatta,” the 127,000 square foot, six-high-rise Dart-owned office park near Governors Square.

Bovell offers one addendum: “The commercial aspect of the real estate industry is somewhat closed off with, really, only two major players driving the market: Dart and the Flowers family, who are expanding Cricket Square.

“There are other, smaller commercial developments that appear to be absorbed by the market, although there is still a good supply of class B commercial property available.”

Clarence Flowers’s Orchid Development broke ground in 2016 on the six-story, $20 million, 130,000 square feet Cricket Square phase six, scheduled to open later this year with anchor tenant KPMG, and joined by Conyers Dill & Pearman.

In a larger sense, Dart’s commercial activity looks set to boost the entire community.

“Camana Bay has been an enormous positive to our economy and a strong support to our tourism plant and residential base,” Lund says, making Cayman “a more enjoyable place to visit and live.

“The current expansion of Camana Bay and other nearby buildings that will develop in tandem will make Cayman more desirable, due to “additional choices of restaurants, shops, offices and eventually residences and tourism accommodations.”

“Imagine how many other Caribbean Islands would love to have this investment and diversification to their infrastructure,” he says.

In October, Dart Real Estate bought the 144-acre, 365-room Ritz-Carlton, Grand Cayman, sparking expectations of further development involving vacant Dart-owned land nearby.

Meanwhile Naul Bodden’s NCB Group plans the boutique Wellness Hotel near the Wharf Restaurant, itself purchased by Bodden in late 2016, while Hyatt Hotels Group will manage the 10-story, five-star, 456-room Grand Hyatt Hotel and Residences, opening in late 2020 on the old Pageant Beach site.

Hotel owners Howard Hospitality Group also plan a 42-room business hotel in the unfinished three-story property at the foot of Lawrence Boulevard, adjacent to Laguna Del Mar, itself down West Bay Road from the old Treasure Island Resort, remodeled and reopened by HHG in February 2017 as the 285-room Margaritaville Beach Resort

Bovell is chief sales agent for Pageant Beach condos, and says they “fill a gap, this time in the less-than-US$1 million condo market,” calling them “a welcome new opportunity for investors.”

Early plans call for an unnamed number of 700 square feet beachfront suites priced between US$595,000 and US$795,000. Larger, more-expensive villas will cost between US$1.6 million and US$1.8 million, and at least two, three-bedroom, 4,000 square feet penthouses are prospectively priced near $5 million.

Brokers expressed quiet worry for Bodden Town’s proposed Beach Bay Hotel, agreeing “it has gone quiet for the moment,” and Frank Sound’s 600-acre, US$1.1 billion Ironwood commercial, tourism and residential community – and proposed 18-hole Arnold Palmer-designed golf course.

In a Feb. 21 statement, however, Ironwood developer David Moffitt sought to reassure investors: “Since the [Sept. 29, 2016] passing of Mr. Arnold Palmer, Ironwood and the Palmer family have been working closely together to bring his Cayman golf course design and vision to life.

“We look forward to restarting work this summer on Arnold Palmer’s Cayman Club & Lodge, the resort that will be the anchor of Ironwood Cayman,” he said.

Finally, Cayman Enterprise City, after six years, still awaits groundbreaking – now projected for late 2018 – on its 50-acre Fairbanks Road site and 850,000-square-foot campus. More than 225 companies – including increasing numbers of technology-oriented companies such as blockchain, Fintech and crypto technology – have joined Cayman Enterprise City, working from a handful of designated offices in Breezy Castle, the Flagship Building, BritCay House and the old Hongkong and Shanghai Bank building.

Lund credited government as a vital development partner, “supporting. better infrastructure such as new roads, airport [improvements], long-haul jets opening new tourism gateways, [a] cruise-berthing facility and others.”

Cayman Airways’ four new 160-seat Boeing 737-8 Max aircraft will enter service next year, opening new nonstop routes to Los Angeles and Denver.

“These jets will make a huge difference,” Lund says, potentially opening the western US, helping “compete with Mexico and Hawaii as previously popular nonstop destinations for that area of the USA.”

As more air arrivals boost market activity, both Lund and Conolly predict strong population growth.

“This is very exciting over the next five years to 10 years,” Sotheby’s Conolly says, “There is a real sense of optimism, and I think there’s going to be strong values.”

In the next three years to four years, she expects not only improved infrastructure, but also an end to immigration uncertainties and a clearer path to residential growth.

“Expectations are that an average of about 2,000 to 2,500 new residents will arrive each year over the next 10 years,” Lund says. “About 2,000 per year arrived over the last 10 years. This influx of new residents provides a constant demand for more residential development to house this increasing population,” fuelling the increased spending on services suggested by Calhoun.

“If this increases to 2,500 per year over the next 10 years, that is 25,000 more residents here,” Lund says. “That is about a 40 percent increase in our population in 10 years, which is enormous, and would require a lot of new infrastructure, from more new roads to new tourism accommodations, etc. It is a very exciting growth trajectory and would, be a significant boost to the local economy.”

Bovell has the last word – and offers hope for the less affluent: “The greatest driving force behind the strong market in the residential sector is the increase in the number of people living in Cayman. Inland condos, residential homes, all are seeing a really active market.

“The challenge comes with older properties in locations where people can still purchase land and build new homes incorporating new designs and technologies. But as land gets absorbed, older properties will become more desirable as home buyers realise they can purchase older properties and renovate them how they like.”

CEOs optimistic despite increasing anxiety over threats to growth

A record-breaking share of chief executive officers are optimistic about the economic environment worldwide, at least in the short term.

PwC’s 21st survey of almost 1,300 CEOs around the world found that 57 percent of the business leaders say they believe global economic growth will improve in the next 12 months. This is almost twice the level of last year and the largest ever increase since PwC began asking about global growth in 2012.

Optimism in global growth has more than doubled in the U.S. (59 percent) after a period of uncertainty surrounding the election last year. Brazil also saw a large increase from 38 percent to 80 percent of chief executives who are optimistic global growth will improve.

And even among the less optimistic countries such as Japan and the U.K., the positive outlook for global growth has more than doubled since last year.

“CEOs are optimistic because there are tangible signals in the global economy that opportunity abounds,” says Graeme Sunley, PwC Cayman leader. “Most of the world’s major economies are experiencing positive growth in contrast to the case just a few years ago. In the Cayman Islands, we should look forward with optimism to the significant role that Cayman will play in this global growth story.”

Impact of technology on employment and skills a concern

The impact of automation and artificial intelligence on jobs and employee retention is becoming a critical issue for business leaders, the survey shows.

Two thirds of CEOs believe they have a responsibility to retrain employees whose roles are replaced by technology, particularly in the engineering and construction (73 percent), technology (71 percent) and communications (77 percent) sectors.

Anticipated job losses as a result of automation and digitalization are especially high in the financial services sector with 24 percent of banking, capital markets and insurance CEOs planning workforce reductions.

“Governments, communities, and businesses need to truly partner to match talent with opportunity, and that means new approaches to educating students and training workers in the fields that will matter in a technology-enabled job market,” advises Sunley. “It also means encouraging and creating opportunities for the workforce to retrain and learn new skills throughout their careers.”

Confidence in short-term revenue growth on the rise

This optimism in the economy is fuelling CEO confidence about their own companies’ outlook, although the uptick is small. About 42 percent of chief executives are “very confident” in their own organisation’s growth prospects over the next 12 months, up from 38 percent last year.

North America is the only region where a majority of CEOs are “very confident” about their own 12-month prospects. This confidence in the U.S. market extends overseas, with non-U.S.-based CEOs once again voting it the top market for growth in the next 12 months, followed by China. Germany remains in third place, followed by the U.K. in fourth place, while India bumps Japan as the fifth most attractive market in 2018.

The top three most confident sectors for their own 12-month prospects this year are technology (48 percent “very confident”), business services (46 percent) and pharmaceutical and life sciences (46 percent).

For most executives (54 percent), expectations for short-term revenue growth are translating into jobs growth, as only 8 percent of CEOs expect to reduce their head count.

Healthcare (71 percent), technology (70 percent), business services (67 percent), communications (60 percent), and hospitality and leisure (59 percent) are the industry sectors with the highest demand for new recruits.

However, 22 percent of CEOs express doubts about the availability of key digital skills in the workforce.

CEOs see geopolitical threats

Despite the widespread economic optimism, there are also concerns about a range of business, social and economic threats.

CEOs are “extremely concerned” about geopolitical uncertainty (40 percent), cyber threats (40 percent), terrorism (41 percent), availability of key skills (38 percent), and populism (35 percent).

These threats outpace familiar concerns about business growth prospects such as exchange rate volatility (29 percent) and changing consumer behavior (26 percent).

The threat of over-regulation remains the top concern for CEOs (42 percent extremely concerned), and over a third (36 percent) remain concerned about an increasing tax burden.

Meanwhile, chief executives “are divided over whether future economic growth will benefit the many or the few,” PwC said. “They see the world moving towards new, multifaceted metrics to measure future prosperity.”

Asked whether globalization has helped close the gap between the rich and the poor, nearly 40 percent of CEOs responded “not at all,” whereas 30 percent said globalization had not helped “avert climate change and resource scarcity.” And more than one in four CEOs say that globalization has not helped improve the “integrity and effectiveness of global tax systems.”

Improving operational efficiency is top priority for private equity CFOs

Faced with increased competition, investor scrutiny and pressure on fees, private equity financial chief officers are looking to increase operational efficiency, but according to the EU 2018 Global Private Equity Survey, there is not a single clear strategy followed by the industry.

Nearly three-quarter of private equity firms said they have experienced significant pressure from investors to reduce management fees, and as a result, a third of CFOs report they have experienced some form of margin erosion.

To counter this effect, 19 percent of CFOs strategically cut expenses and tried to grow top line revenue. Growth, in particular, remains a top priority for private equity firms, which saw record fundraising in 2017. It is thus no surprise that 55 percent of CFOs said they expect to raise a new fund in 2018, and 60 percent of CFOs expect the fund to be larger than the last fund raised.

“The capital that continues to pour into the private equity industry – with more than $640 billion in new capital commitments for 2017 – is a positive sign for CFOs and management teams focused on planning to raise new funds or increase the size of funds in 2018,” said Jeff Short, Wealth & Asset Management Sector Leader for EY in the Bahamas, Bermuda, BVI and Cayman Islands.

To achieve operational efficiency and revenue growth, forward-looking CFOs are reevaluating where they want teams allotting time, preferring value-add activities such as investment portfolio analytics, technology transformation and investor relations, the EY report noted. Their aim is to divert time from tactical, routine areas such as fund accounting, treasury and human resources.

One way of achieving this objective is to leverage technology, but most CFOs reported that they are still in the early stages of developing innovative technology for practically every finance function, especially management reporting (51 percent) and valuation services (53 percent).

Although PE firms understand that using and managing data is an important focus, 62 percent of surveyed CFOs believe their data is not well integrated in their organization.

There was also a marked lack of confidence from CFOs that their organization could easily implement new technology solutions. They mainly blamed roadblocks such as updating fund accounting systems (83 percent) and management reporting solutions (75 percent), followed by valuation (65 percent), investor relations (64 percent), and cybersecurity (59 percent).

However, this does not mean that the firms do not plan to invest in new technologies. Two-thirds of private equity firms stated they are already or plan to invest in next-generation technology.

For the moment, they focus their investments on digital data delivery (37 percent) and advanced analytics (20 percent), with a small group implementing robotic process automation (4 percent), although more CFOs said they are planning to do so in the future (14 percent).

The annual survey of 110 private equity CFOs determined that larger firms with more than $2.5 billion in assets under management consider technology transformation and talent development as key priorities, while smaller firms are more likely to pursue outsourcing.

“While ideal operational maturity may be defined differently for private equity firms by size, it is clear that this needs to be their focus in order to compete for talent and investment capital,” said Mike Lo Parrino, partner, Ernst & Young LLP.

Talent management

In addition to the larger firms’ focus on technology, talent management remains one of the highest strategic priorities, as 48 percent of respondents identified talent attrition as a top risk.

“CFOs of private equity funds are increasingly focused on how to attract and retain the best talent,” said EY Cayman Partner Baron Jacob. “Many large private equity complexes are using employee rotation programs to help employees get exposure to all areas of the business. The goal is to maintain a 3:1 ratio of investment to finance professionals, while outsourcing lower order tasks to another party or covering these tasks through the increased use of in-house technology solutions.”

CFOs confirmed that they prefer a 3:1 ratio of investment professionals to finance professionals, but only 20 percent said that this is their current ratio. This indicates that many have yet to find the optimal technology or outsourcing solution for their finance function, the report said. At the same time, CFOs are more confident that they have a strong pipeline of future investment leaders (76 percent) than finance team leaders (54 percent).

Although CFOs are trying to engage millennials and tech-savvy individuals to stay within finance functions, 35 percent noted that it is difficult to attract talent in these functions.

As a result, firms are increasingly offering other incentives beyond compensation to retain talent, such as expedited title changes/promotions (62 percent) and flexible work arrangements (51 percent).

Outsourcing

For smaller firms, outsourcing is an attractive alternative to making significant investments in technology or talent in order to gain operational efficiency and remain competitive.

The desire to eliminate a finance team’s routine activities and replace them with more value-add activities could best be achieved by outsourcing activities like fund accounting (67 percent), tax (67 percent) and regulatory compliance (62 percent) to a third-party.

This also allows staff to focus on client-facing functions that require a more personal touch, with an average of 37 percent of CFOs saying they will continue to handle investor onboarding internally, and 37 percent saying they will do so for investor tax questions.

Cybersecurity breaches are a reality

Cyberattacks are a real, recognized threat for private equity firms, irrespective of their size.

More than a fifth of the private equity firms surveyed (22 percent) reported that they have experienced a cybersecurity breach, but many more may have been unreported. Most of those who had a breach (58 percent) considered it at least moderately serious.

To identify vulnerabilities and manage risk, 70 percent of private equity firms rely on externally developed intelligence products to monitor cybersecurity.

Firms are beginning to recognize the effectiveness of a multi-pronged approach, taking steps to improve employee training (87 percent), email monitoring (80 percent) and using external vendors to perform ethical hacks (80 percent).

Weathering the storm in volatile stock markets

Alessandro Sax

For the last several years, stock volatility had become all but a distant memory. The multi-year bull market marched on and stock indices across the globe set new all-time highs with minimal sell-offs that were nothing more than short-lived blips. While investors have welcomed this time period with open arms, it has been anything but a normal environment. Historically market corrections of 5 percent to 10 percent are commonplace, with these “market corrections” most often occurring multiple times in a single year. Early February 2018 was our most recent reminder of this reality as the Dow Jones Index fell over 1,000 points within a single trading session. This lasted correction will most certainly not be the last, so how can we better understand volatility and protect ourselves from it as investors?

When we hear the phrase “markets are volatile” or “volatility has returned” – what does that mean? Volatility occurs when fluctuations in the market impact the cost and returns of securities, making the direction of the overall markets unpredictable. Increased volatility is most visible in times of panic selling. The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility. The VIX is commonly referred to as the fear index or fear gauge for the S&P 500, with a low value indicating market calmness, and high values indicating large price swings, both up and down.

Understanding volatility and its effects on our investment decisions is the first step towards being a successful investor. Although this is much easier said than done, as we know in the heat of the moment our emotions often get the best of us; as investors we have all experienced the unnerving emotions associated with sudden drops in markets. The best way to counter this shift in psychological behavior is to expect it in the first place! Over long durations, markets will experience periods of heightened volatility and by preparing a game plan for these situations in advance you are much less likely to fall victim to your worst enemy: yourself.

The first line of defense from excessive market swings in one’s portfolio is diversification. Diversification can be defined as distributing ones capital amongst a pool of different investments. Holding investments that are affected by different economic and political factors helps ensure they perform differently from one another. Reducing overall portfolio volatility helps provide for smoother and more consistent return profile over time. It is essential, however, that diversification is not treated as a one-time strategy. As markets change and personal circumstances change, there is a need to review a portfolio on a regular basis to ensure it reflects the appropriate risk-tolerance as well as the needs for growth, income and liquidity.

When it comes to volatility, time is on your side. What exactly is meant by that? History shows us that the longer you stay invested the less volatile your overall experience becomes. The ability to build a portfolio that fits your risk-tolerance level will increase your odds of staying invested during those critical times of market instability. Most market downturns are short lived in nature and yes, Annie was right, “the sun will come out again tomorrow.” Having the ability to stick to your plan in times of market turbulence is a determining factor in achieving your long-term goals. As the popular adage often attributed to Benjamin Franklin states, “Failing to plan is planning to fail.”

Professional and experienced long-term investors are able to see volatility for what it truly is, an opportunity. The opportunity to act on one’s plan that has been set in place long before the market environment changed. There is a valuable distinction between stock markets and the actual companies which make them up. Most often the sensationalized headlines of day have little effect on the actual day-to-day operations of individual companies. Most quality companies have survived through multiple recessions, flash crashes, political crises, environmental disasters, heightened inflation and other volatility raising events. Taking advantage of others’ fear during times of disorder has consistently proven to be a winning strategy. This can be done with confidence for those who appreciate that volatility is not always an enemy but a friend as well. As Warren Buffet famously stated, “be fearful when others are greedy, and be greedy when others are fearful.”

Alessandro Sax, CFA, is an Investment Advisor at Milot-Daignault & Sax Team of RBC Dominion Securities Global.

The Non-Profit Organisations Law: Key considerations for charities

Charitable and non-profit organizations, like Meals on Wheels, who collect money from the public have to registered under the new law by the end of July. - Photo: Taneos Ramsay
Fraser Allister, Ogier

The Cayman Islands recently implemented legislation which will have serious implications for charities operating in the Islands.

The Non-Profit Organisations Law, 2016 (the Law) is part of the Cayman Islands implementation of Financial Action Task Force recommendations to facilitate the investigation and enforcement of anti-money laundering and terrorism financing. The Law will also give the public access to certain information about charities through the establishment of a new register, the Non-Profit Organisations Register.

Although the law will have an administrative impact on the entities that come within its scope, the changes are to be welcomed as bringing a robust governance structure to an important sector in the Cayman Islands’ life and economy.

Who does the Law affect?

The Law impacts any company, trust or other body of persons that:

  1. seeks financial contributions from the public (whether from within the Cayman Islands or from overseas); and
  2. is established primarily for the promotion of charitable purposes or activities; (an NPO).

This basically means that if you have a charity that operates in the Cayman Islands by raising money from the public, it is likely that your organisation will be caught by the new rules. It would be fair to replace the acronym “NPO” with the word “charity.” Many religious organizations may also be considered to be NPOs for the purposes of the Law.

How does the Law affect NPOs?

Firstly, and most importantly, an NPO cannot solicit contributions from the public unless it is registered with the Registrar of Non-Profit Organisations. This means that information about the NPO and its management team will become publicly available and available to law enforcement agencies.

Secondly, the NPO must make annual returns and keep financial statements. This may therefore increase the administrative burden on some charities or religious organizations.

Finally, for some organizations, it may mean making changes to their constitutional documents in order to comply with the minimum requirements for NPOs under the Law.

Registration

In order to register, the NPO must complete a form which is available by contacting the General Registry. The following information must be included on the form or provided in the application:

  • the NPO’s declared purposes;
  • the identity and address of the Controller and other senior management personnel (including proof of identity);
  • copies of the NPO’s organizational documents;
  • information on the location of the NPO’s money and other assets, including details on its banking arrangements;
  • the source or anticipated source of contributions; and
  • how those contributions have been applied.

Controllers of NPOs are trustees, directors, partners or the persons responsible for the management of unincorporated associations.

Applications for registration are submitted to the registrar who, as a matter of law, must accept or reject it within 30 days. This is therefore intended to be much quicker than the previous system under Section 80 of the Companies Law (2013 Revision) (As Amended) which meant that application had to be made for Cabinet approval.

Financial statements and annual returns

NPOs must file annual returns within six months of the end of their financial years. The annual return is a statutory form which again is available from the General Registry.

All NPOs must now keep financial statements that record, among other things, all sums raised through fundraising, all money received and expended, records of assets and liabilities and various non-monetary transactions. Where an NPO has an annual income of over $250,000 and it remits more than 30 percent of that income outside of the Cayman Islands, it must have its financial statements reviewed in accordance with international standards.

Constitutional requirements

As a minimum, the law requires that the NPO’s constitutional documents indicate that its assets and income will be applied exclusively in the furtherance of its purposes, and prohibit the distribution of assets or income to the NPO’s controllers unless such a distribution is to compensate that person for services rendered. If the NPO’s constitution does not already meet these requirements, it will have to be changed before it can be registered.

Other points to note

There are administrative penalties for failing to comply with the Law and these are levied against the NPO’s controllers.

Existing NPOs have until Jan. 31, 2019 to register and the registration fee of CI$300 will be waived until July 31, 2018.

Is it time to worry about equities?

After a phenomenal 2018 start, U.S. equity markets caused a bit of a commotion in early February, giving up all gains to-date. By the end of the trading day on Feb. 8, the S&P 500 index, along with the Dow Jones Industrial Average, had fallen nearly 10 percent from their record highs. While declines of this magnitude are certainly not unprecedented, they create quite a frenzy when they have not been experienced for a relatively long period. We tend to forget that equity markets are inherently subject to corrections and bouts of volatility.

The culprit of this latest market correction was identified as investor fears of higher than expected inflation, with January hourly wages coming in higher than expected. The data suggested this unexpected pressure would compel the Fed to raise rates faster than initially intended. This further explains the ensuing increase in 10-year yields and the sell-off in equities, as equity investors became nervous of the adverse implications for equity valuations. Like a snowball rolling down the mountain, one event led to another, ultimately awakening market volatility from her deep sleep. The incredible spike in volatility was also evident in technical factors. As short volatility investors were forced to liquidate positions, market volatility increased even further, resulting in a negative feedback loop of increased selling pressure.

Although the February market turbulence is already in the rearview mirror, the question remains as to whether this is just the beginning of the end of the bull market.

Can equity markets hold on in 2018?

Admittedly, another correction in equity markets this year is highly likely, and so is increased volatility (relative to what investors have come to expect). Yet, the fundamentals, which have sustained the equity bull market still remain intact. Undoubtedly, U.S. equities are at all time high valuations and by many measures seem overvalued. Still, corporate earnings remain strong and continue to surprise to the upside. U.S. tax reform, coupled with additional fiscal spending approved by congress in February, are a welcome tailwind for economic growth and by extension equity markets.

Of course, the Fed’s actions are key in assessing the impact on risk assets. By and large, everyone expects monetary tightening, but it is the velocity of interest hikes that will influence asset values. Gradual measured rate hikes as forecasted by the Fed should not impair U.S. equity values, so long as economic growth and corporate earnings remain strong. If, however, the Fed is forced to hike rates more rapidly due to an overheating economy, equities are not expected to fare well.

There remains grave and well warranted concern that the next recession will be caused by the Fed in an attempt to quell an overheating economy from higher than expected inflation. As the Fed works feverishly to reign in the excessive stimulus, to which we have all become accustomed, the ability of the central bank to accomplish its dual mandate continues to raise doubt. While the Fed has been successful in achieving maximum employment, they are still working towards their elusive two percent inflation target. In his testimony to the House Financial Services Committee, newly minted Fed Chair Jerome Powell advised that the FOMC was anticipating a rise in inflation this year. He also reaffirmed the committee’s commitment to avoid an overheating economy whilst pursuing its 2 percent medium inflation target. Given that inflation is a lagging indicator, there is concern that by the time inflation is reflected in the data, the Fed would be behind the curve. In that environment, the Fed would be forced to hike rates much faster than expected, potentially pushing the economy into a recession. Ultimately, the impact of monetary policy on the economy can be characterized as a tug-of-war between interest rate expectations and growth expectations. Rapid moves in interest rates are not necessarily damaging if supported by higher than expected economic growth.

From a risk-reward perspective equities are currently a more attractive option than bonds. Moreover, against the recent backdrop of robust economic growth, equities are poised to continue on their bullish trek. Despite these encouraging fundamentals, 2018 will unquestionably be a year of elevated volatility. Consequently, whether you’re a bond or equity investor it’s important to keep an eye on the data and not take on excessive risk.

Sources: Bloomberg LP

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited.  The Bank accepts no liability for errors or actions taken on the basis of this information.

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