Norsk Hydro ASA Executive Vice President Thorlief Enger, knows his nitrates. He also knows where the markets for these fertilizers are and how to beat the competitors to them.

But for the European fertilizer giant, the balance sheet was not always a pretty picture. Faced with declining markets for its products and the prospect that its share price was bottoming out on global markets, Enger, who is also President of Hydro Agri in Trinidad and Tobago, a subsidiary of Norsk Hydro, knew that he’d better face the music and as he put it, “get his house in order” or preside over a dying company. To prevent a free fall, he sliced US$400m in fixed costs and fired about 6,000-7,000 people globally. “It was all about leadership expectations and opportunities,” he said matter-of-factly. If this multi-faceted global company plays its cards right, it may well be the poster boy for a corporate turnaround in both the US and Europe. His words resonated throughout the room at the Crowne Plaza, where the Institute of Business (IOB) held “The Ideas Forum” last week. His talk on on “Restructuring for Productivity in a Dynamic Global Market” might have had a pretentious ring to it, but Enger was able to break it down. And break it down he did. In 1998, when Norsk Hydro had to close down plants across the globe, including Italy, France, Germany and Sweden, it had to get the go-ahead and cooperation of the unions. “Most plants are unionised,” he told his guests, drawing murmers and smiles from the crowd as he evoked the thorny issue of Caroni’s restructuring.   

 The company also trimmed businesses  and secured divestments for those that were not part of its core operations, this included 30 businesses and plants since 1999.   After all this, the data he presented showed that in 2001, there was a gross return on assets for Hydro Agri. He was able to show that employees’ production increased, while foxed costs per tonne dropped. On whether there was a sense of crisis during the turnaround, Enger said it appeared so, at first. “People didn’t realise where they stood,” he said, noting that when the plan was presented, some employees took their severance packages and walked. The important thing, he said, was to face the realities, even though unpleasant, and pull together. But his key message was that Norsk’s unique business model was based on global strengths and that good industrty performers deliver competitive shareholder returns. Norsk Hydro also owns and manages three ammonia plants, HAT (100 percent owned), Tringen 1 and 2 (49 percent) at Savonetta, Point Lisas. When he told business executives from both the private and public sector that strategising meant cutting costs to the tune of US $400 in fixed costs, they froze. Apart from cutting costs, they also had to keep productivity up, he said.  “We let people know what was going on, there was always communication,” he said in an interview later. “A company always has to be aggressive if it wanted to move ahead, he added.” He was quick to point out that Norsk Hydro fashioned its own business model for change, and refused to hire any consultants for the company’s new road map. Consultants, he felt, would not only cost money and muddy the entire process. “Consultants?” he asked, making it sound as if the word were obscene. “We did our own thing, the Norsk Hydro way,” he said, laughing.

The unions, he said, were helpful in the process and helped achieve results. “It was no magic, but hard work,” he said with a smile. In the end, the company had to sever ties with about 6,000 workers. It ditched business that the company felt hamstrung it , Enger said, and stuck to its core products: oil and energy, aluminium and fertilizers. “We had to go back to where the business was core,” he said, in response to a question from prominent accountant Vishnu Maharaj. The company now has a strong presence in Latin America, Africa, US and Europe. “We have a good spread globally,” he said. Norsk Hydro’s trump card which has been successfuly deployed against its competitors is that it controls and owns its own shipping fleet. It is something, he said, that his company will not compromise on. Having been in the fertilizer business since 1905, “we feel strongly about production and marketing,” he said. In his engaging presentation, he noted that in ammonia, the company was coming to grips with shifting global trends. Production, he said, is moving from where the market is, and being drawn to cheap material like natural gas. That’s why TT is crucial to its hub of global operations, noting that when natural gas prices rise, other global producers are either forced to shut down or close but with TT being a low cost producer of gas, Hydro Agri stays in business. Another leadership trinket he dished out was that ”if one wanted to be a global leader, one had to find one’s strengths.”

Today, Norsk Hydro has a strong financial base and demonstrated that it can still deliver profitability as well as share holder value and growth. According to Enger, Norsk Hydro knows what its chess board looks like; even though the world population is increasing, and the demand for land is diminishing, people must eat. For Enger, that means mineral fertilizer is going to be in demand. “Mineral fertilizer is the only sustainable major source of nutrient,” he said as he showed a graph depicting how the demand for fertiliser is growing. The expected growth for this sector is 2-3 percent, he noted. “Our agri-business is a unique combination of size and global presence,” he told business executives, noting that half of the company’s sales take place outside its European home market. While fertilizer consumption in Europe is stagnating, many overseas markets continue their strong growth. He is a pragmatist. “We will continue to apply an up-or-out policy to assests which do not perform,” he said, noting that in light of the ongoing consolidation, Hydro Agri was attracting players who want to exit the business or enter alliances. Enger was dismissive of the world’s appetite for organic food. “The plant can’t distinguish between an organic and mineral fertilizer molecule.” Asked if Norsk Hydro was going to be listed on the TT Stock Exchange, Enger said his company was listed on the major global exchanges like the NYSE and London stock exchange. Mark Loquan, President, Hydro Agri, Trinidad, noted that Hydro Agri was part of Tringen, which was listed in NEL, and therefore Norsk had an indirect listing on TT’s Stock Exchange.

Local fish processors are losing out on foreign exchange, because the European Union is not backing down on its food safety restrictions on TT.

TT still cannot export to the EU because the food safety control legislations and regulations in Trinidad and Tobago are not yet harmonised with those of the EU, say industry officials. This has been the case since 1998 when TT was banned from exporting to the EU and countries like Martinique and Guadeloupe, which were important markets for this country. TT used to export fish to the EU up till 1998. It currently exports to the US and some Caribbean islands. Last year TT exported about $90 million worth of fish products. According to Richard Joseph, general manager, Caribbean Business Services Limited (CBSL), TT saw the EU slap coming for many years and did nothing to stop it. He said while TT did try to amend the Food and Drugs Act in 1998, it did not implement the regulations that were necessary to allow TT’s fish into the EU. He added that the Government did not even submit a full application for allowing exports back into the EU. He explained that the EU is not interested in specific fish processing plants and factories like the United States (US), but want to ensure that the local regulatory environment protects, as far as possible, from food borne illnesses. “They want to make ensure that we have the same protection that they have. As far as they are concerned, if we cannot take care of ourselves in terms of making sure that we have proper fish to eat, we are not going to take care of them.” However, Joseph said the EU’s requirements are not any different from those in TT. “We have pretty stringent food requirements, but they are not enforced. That is why you have people selling fish on the highway and processing fish behind their houses.”

He said because these requirements are not enforced, there is no system of control to ensure that fish passes through proper processing before it is sold or exported. He noted, though that the EU is prepared to provide assistance to TT to help bring its fish processing industry up to international standards. “There is a big programme that is due to start this year with quite a lot of money available, some of which will be used to enable the Chemistry, Food and Drugs Division of the Ministry of Health to play a more active role in the industry.” The Chemistry Food and Drugs Division is responsible for the processing, inspection and certification of fish and fishery products for human consumption. He noted that the Chemistry, Food and Drug Division is supposed to have inspectors “check up” on local fish processors on a regular basis but added that as far he is aware, it does not even have a carefully, developed and executed programme. “They always use the excuse that they have resource limitations and that they only have two people to do inspections and those inspectors have other things to do.” However, Stanley Temal, director, Chemical Food and Drugs Division dismissed those claims, saying that they inspect fish processing plants on a regular basis. He said those plants that comply with the rules and regulations are issued a certificate for export. Temal admitted though, that there were only two inspectors, but he said they do conduct routine checks on these plants.

In an effort to help identify some of the major problems affecting the local fish processing industry, CBSL hired Dr Roland Vanthuyne, a Belgium veterinarian, sometime ago to conduct some research into the industry. Dr Vanthuyne’s research revealed that there were many problems in the fishery product sector in TT and some other countries in the Caribbean. He said the structure and hygienic conditions of landing sites are a matter of concern. He noted that many structures can be found on landing sites, which do not comply with minimum hygiene requirements. Dr Vanthuyne said the transport of fishery products has to be reorganised and improved. “Transport of fishery products is a problem everywhere. Fishery products are transported in an open pick up, on the floor of an insulated truck or in dirty containers.” Additionally, he said facilities for preparation and processing of fishery products are not complying with international standards.“What is needed is good plant, potable water, raw material, cleaning and disinfecting, pest control, personal hygiene, manufacturing and waste disposal practices.”  He said while quality assurance (good practices) and safety assurance (HACCP) systems are present in some establishments, they are not properly implemented and documented.

Dr Vanthuyne also cited problems with the airport facilities which lack proper cold chain facilities and discrepancies at the level of marketing. He also said there were problems on the level of communication with the European community. Joseph said there are lots of opportunity in fish for TT, however, he noted that the competent authority must be put in place now to supervise and monitor the industry. Samaroo Dowlat, chief executive officer, Namdevco shared some of Joseph’s views. He too explained that TT was banned from exporting fish to the EU because it could not assure the safety of the fish. “At that time we were unable to meet the basic requirements with respect to the quality of facilities which included landing sites, processing facilities and fishing boats.” In addition, he said there was also the need for a basic legislative agenda to ensure compliance with requirements.

Dowlat believes that once these hurdles are crossed TT can export large quantities of fish to the EU. “There is a demand and a big market out there. That market is ready and waiting.” He noted that TT can also obtain slightly higher prices for its seafood in the EU than it is currently getting in the US because there is a worldwide shortage of seafood. Dowlat is also of the view that government through different agencies like TIDCO, Namdevco and the Chemical Food and Drugs Division is trying its best to upgrade the industry. He said these agencies have undertaken various training exercises to sensitise all the stakeholders in the seafood industry about the requirements for safe food and the need for Hazard Analysis and Critical Control Point (HACCP) compliance. He said the private sector has taken up this challenge and has spent millions of dollars upgrading their fish processing facilities to make them compliant. With regards to the landing sites, Dowlat said Namdevco is currently tending to two sites which it manages in Orange Valley and Sea Lots and which should be HACCP compliant very soon.

Recent commentators have said that local managers in the energy industry are essentially caretakers. They have no input in the decision-making process other than on technical issues in response to handed down assignments.

Similar comments made about our other industries suggest that we are market-takers rather than market-makers, and our position is one of reaction rather than initiation. This situation is not unique to Trinidad and Tobago and one of the responses that has been successfully employed in other countries is the concept of continuous improvement. Is continuous improvement a fad created by consultants as part of a “make work” exercise, or is it a useful concept that should be adopted as a strategy for any organisation expecting to survive in the fast paced environment in which we live? Can it be adopted in our culture where trying is regarded as an end in itself, rather than achieving results?

Companies practicing Continuous improvement challenge their employees to regularly find new ways of making incremental improvements to processes and product quality. The Japanese have been particularly successful at this, with Toyota being considered a world leader. It has found one of its most visible expressions in the computer industry where the continual introduction of enhanced and new products is now almost taken for granted. It is hardly likely that our businesses will survive the breakdown of trade barriers unless our entrepreneurs rise to the challenge themselves. Fortunately, continuous improvement draws both on common sense and proven ideas that have been in existence for some time, and there is a considerable body of information about it.

In an article in Industry Week (www.industryweek.com) dated June 1, 2003, writer Patricia Panchak reported on the ten points that Pella Corp. followed to transform itself from a “factory-focused, top-down, change-averse culture, where change occurs twice a year, to an enterprise-focused, bottom-up, continuous-improvement culture.” They are as follows, along with this writer’s observations.
1.Top management commitment: The most successful improvement assignments I have seen have always been driven by the CEO. The CEO’s involvement ensures that the project enjoys a high level of priority, resources are made available and problems are quickly resolved.
2. Dedicated resources: Improvement projects are almost never completed on time if the person with the responsibility for it has other conflicting responsibilities as well. In such cases the issues with an immediate impact always take precedence over the future impact of an improvement programme.
3. No layoff history: Pella committed that productivity improvements would not lead to layoffs, and retrained workers for new assignments.
4. Share the wealth: The financial benefits of improvements should be shared by all employees of a company, not just a favoured few.
5. Training: There has to be a continual investment in updating skills based on new developments. Even in mature industries, customer requirements and attitudes may change, requiring training to reorient employees.
6. Communications: Employees will only support the process if they believe that they have been honestly informed about all of the issues that impact on them, and that there are no hidden agendas.
7. Frequent reviews of progress: These are necessary to make sure that the project remains on track and that problems are resolved before they delay achievement of targets.
8. Track performance: Any improvement activity should have specific and measurable impacts that deliver improvements to profitability. The identification of these measurements is of critical importance to the process, as those that are irrelevant or impractical would not provide a true assessment of the situation.
9. Maintain intensity: Targets should be challenging and stretch the capabilities of the team to improve the processes. Targets that are easy for the team will also be easy for competitors, and would not result in having an advantage over them.
10. Get people involved: For a continuous improvement programme to be effective, it has to have the support of all of the employees of the organisation, not just the production department, or the customer services department. Administrative and support departments provide critical inputs to front line departments, and any lack of co-operation or enthusiasm on their part would compromise the entire process.

Survival in a liberalised environment will require a thorough understanding of what our customers need, what our competitors can deliver, and a clear idea of what we have to do to get the business. Because all our competitors will be doing the same thing, the process of improvement must be continuous and focused on keeping ahead. We have to accept our responsibility to do this, and most importantly, get it done. The ability to adopt and master the process of continuous improvement will enable us to take the reins into our hands in the future.

The views expressed in this column are not necessarily those of Guardian Life. You are invited to send your comments to guardianlife@ghl.co.tt

Q. I’ve read in this column something about saving US currency, but this is my situation. My brother living in the States has been sending money every month for me to put aside as he wants to build a house in Tobago. Should I convert to TT, keep it in US and where to put it?

Melanie, Trincity

A. Keep it in US dollars. Here’s why.
In the financial markets interest rates on stronger currencies are lower than those on weaker currencies. The higher rate on the weaker currency is compensation to investors for taking the risk of that currency depreciating. Therefore, under normal circumstances the interest rates on TT dollars are higher than those on US dollars as the TT dollar is weaker relative to the US currency. However, in Trinidad and Tobago at the present time the rates on TT and US dollars are very close such that the current interest rate spread between the two currencies is at an historic low. This situation is due to two factors :
1. the unusually high levels of TT dollar liquidity in the financial system
2. the current tightness in the market for US dollars which according to the Central Bank of Trinidad and Tobago was especially so during the first quarter of 2003.

Investors are therefore in a win-win situation. Normally by converting US to TT dollars to get a higher interest rate, the investor is faced with foreign exchange risk, that is, the possibility of the TT dollar depreciating against the US dollar. But because the difference in interest rates between the two currencies is currently small, an investor can keep his savings in US dollars and not sacrifice the return he gets. He therefore has the dual benefit of a good return in a currency which is relatively stronger whereas before he would have the trade off of a comparatively lower rate in US dollars. Deciding where to place your US funds depends on your view on interest rates. It may be better to keep your funds in a US dollar Money Market Account since the interest rate on such instruments move with market conditions. If the predictions do materialise then the rate of return on your funds would move up in line with the market.

Q. A friend of mine who works in a bank says when stock markets in the US or Europe take a dive and stay low for an extended period it can have a negative effect on my savings. If that’s true how does that work?

Leslie, Maraval

This depends on the characteristics of the instrument in which you are investing. If you are investing in a fixed income instrument such as a savings account, fixed deposit or money market account then there is no direct effect on your savings should there be a downturn in the US or European markets. However, if you are investing in an “income and growth” type fund then there is a possibility that this fund may have invested in the stock markets abroad. The amount that you lose from your investment in such an instrument would depend on the investment policy of the fund.

There are different types of income and growth funds. Some are conservative and invest a small percentage on the international stock markets while some aggressive growth funds can invest larger quantities. This is why it is important to read the prospectus of each fund to be very clear about the types of investments the portfolio manager is allowed to get into. During the Asian crisis such aggressive mutual funds lost a lot of money as stock markets all over the world tumbled. Therefore, you must determine whether you have the risk tolerance to invest in such funds. If you already have invested and the value of the fund has declined substantially, the best option may be for you to leave it there. The reason is that while stock markets are susceptible to crashes they have also shown some remarkable resilience and potential to rebound. Therefore, while the value of the shares may be below the price you paid for them, once you have the time to wait they most probably would go back up.

Q. Should I pay for tertiary education in cash or borrow from a financial institution?

Anesa, Tunapuna

There is a saying in finance and that is it is always better to use other people’s money. So if you can obtain a student loan from a financial institution then this would be better than drawing down your cash savings. Remember, as a student you may not have a source of income and as such your savings would be important in paying for living expenses, rent etc. Even though the interest rate could be high, the value of your savings to pay for necessities far exceeds that. Moreover, some student loans are structured where the payments are not due until after your period of study when you would have a job and be able to afford it. Make sure and shop around from a number of institutions to get the best deal and try to get unto the Government-subsidised facilities where the interest rate would be lower. Talk to your Student Advisory Services.

Questions can be sent to : PO Box, 1830, Wrightson Road, Port-of-Spain.
Email: cmmbsecurities@mycmmb. com

Gillian Hislop is one business woman who knows her tank, all 79, 365 pounds of hulking stainless steel.

Hislop, Director of All Clear, a company based in Glencoe, has carved a niche for herself by transporting liquids and powders. Not into your stereotypical business woman, Hislop is at ease in jeans and boots as other women are in stockings and pumps. With twenty-five tanks under her watch, each carrying  6,500 gallons and transporting substances which range from the innocuous-like water to the truly hazardous stuff, ammonia. All tanks are ISO certified and undergo safety measures like pressure testing. Unlike traditional drums they are built with fixtures and piping to facilitate proper transportation of the product. There is also a safety release valve on each tank which prevents products from escaping. The company was formed in 1982 by Gillian Hislop’s father, Aldwin Hislop,  a marketing manager for Shell. The name is actually derived from the combined first names of Hislop’s parents, Aldwin and Claire.

Hislop, a former student of Bishop Anstey High School, said she learned her marketing and sales skills from her father. He taught her “how to penetrate an account, how to move clients from what they’re used to into something new.” After apprenticing with her dad for two years and getting to know the ins and outs of the business, Hislop took the helm. In what is typically a male-dominated industry, she has been pushing the envelope the past five years. Her clients are diverse ranging from manufacturers to bulk exporters of products in powder or liquid form. In TT, she has locked in ten clients and hooked an additional six throughout the region. She is optimistic that business will pick up in the Caribbean region. The challenge, according to Hislop, is to educate prospective clients on ISO tanks and the benefit of choosing them over traditional drums. “Recycled traditional drums are less sturdy than the ones of long ago,” she says, adding that clients bringing in drums have problems with disposal because they contained hazardous materials.

One advantage she thinks she has is that her tanks offer an expedient way to solve these environmental concerns: her tanks are easily cleaned in a two- hour process at stations in Laventille and Barataria. “We must be environmentally conscious,” says Hislop. In fact, preserving the environment is a chief driving force behind her efforts, so much so that she will at times make “cold calls” at companies, simply walking in and introducing herself and her service to the appropriate persons, if she becomes aware that they are still using drums. Leasing the drums makes no economic sense, because leasing companies have hidden charges like repair costs which, she adds, are incurred after the initial bill. At All Clear there is just one bill, inclusive of repairs. Leasing, she adds, are for a minimum of one year; with All Clear the client only pays for the period between the time the tank is loaded until it returns to the point of origin.

Hislop is also willing to accommodate clients who need a one-way service but this is negotiated on an individual basis. “People are trying to outsource for items that are not their core competencies,” she explains.  “You don’t have to hire a full-time logistics person to manage your tanks,” says Hislop, a member of the Association of Female Executives of Trinidad and Tobago. What may have placed her a notch above the rest is her belief in service, something ingrained in her when she was in the hospitality business prior to joining All Clear. “I love dealing with people” she says. “My other main motivator, besides the environment, is to satisfy my clients.” Gillian sees customer service as a key ingredient in her work ethic. “I am self-motivated but I don’t see myself as being my own boss. My client is my boss. If my client calls I jump.”

When Hislop is not winning over prospective clients, she and her small staff are busy creating proposals, filing records and arranging repairs. They use a computerised system comprised of specially designed software to track the containers. On an average day, they liase with several agencies such as suppliers and brokers who haul cargo as well as keep tabs on the shipping industry. By cementing ties with all the shipping lines, she has been able to generate business and often makes special arrangements with the shipping lines when they have to drop off  highly flammable cargo. Over the years, All Clear has aligned itself with several international companies thereby boosting its credibility and competititiveness in the local arena. Its tanks, for instance, are manufactured in South Africa, its depots are in Louisiana, Houston and Florida.

In addition, it is financed through a parent company, Trans Nexus Logistics, which operates out of New Jersey. This latter company pays the freight and haulers, handles the bills and owns the tanks outright. When pressed on how lucrative her business was, Hislop would only concede that it is thriving and was looking to expand. “Any business depends on the work you’ve brought into it,” she says, noting that her business has grown not only because of aggressive  marketing but also because TT’s economy is so bouyant. “You gain some business and you lose some business,” she says. “It is lucrative but it is competitive.” Hislop emphasises, however, that although she has competition in the form of conventional drums and leasing companies, All Clear maintains an edge in the market by offering a unique service: conveyance of materials in tanks at an economical rate. But Hislop is also in  the chemical business. All Clear also sells chemicals used in the manufacturing process such as Vam, which is used for making glue, and products needed by foam, paint and petroleum based companies.

Hislop also uses her organising talents to assist producers with plays and performances. Shanghai Moon done by Cherise Parsons and Nikki Does featuring Nikki Crosby are merely two productions in her portfolio. She is now assisting Meiling with her up-coming fashion show in July and is helping to arrange the Cacique Awards this year. “Money,” she says, “should never be your God. “I never tell my clients no. At least I say, ‘Let me see what I can do.’ The impossible at times ends up being quite do-able.”

The Caracas-based Latin American Economic System, commonly known by its Spanish acronym SELA, has raised questions about the US commitment to the FTAA process.

This, in the context of the lack of support the US received by the majority of countries in the western  hemisphere in their military action against Iraq. SELA said it is possible that these latest events will further encourage the United States to concentrate its FTAA negotiations on specific partners, rather than entire regions. “ In the long term, both the war on terrorism and the associated efforts to promote peace in the Middle East have inspired a proposal that could affect the interests of the oil-exporting countries in the region. President Bush has called for the negotiation of an FTA with the Middle East,” according to SELA whose membership includes Trinidad and Tobago. But  Director, Caribbean Studies Programme at the University of Miami, Professor Anthony Bryan does not hold the view that the FTAA is being purposefully watered down nor is the US showing less importance to it. “The pursuit of FTAs has nothing to do with support or lack of it for the Iraq war,” Professor Bryan told Business Day in an interview from Miami. He noted that the US and Chile, a UN Security Council member which did not back the war in Iraq signed an FTA in Miami on June 6. “Both countries had been mulling over a free trade pact for the past ten years and during that time Chile moved ahead to sign its own free trade agreements with the European Union, Canada, Mexico and other countries. The US and Chile had invested a lot of time in drawing up the FTA,” said Bryan, a Professor of International Relations. “From the US perspective, the pact with Chile is intended to help the US regain momentum on free trade and serve as a model for the Americas and  beyond.”

SELA believes that the decision of four Central American countries to join the “coalition of the willing” may have also enhanced their position in the ongoing Free Trade Agreement (FTA) negotiations with Washington. “Pressures have also been brought to bear on other countries in the region, including members of the Caribbean Community. In the medium term, the conflict has added to the strains on the Free Trade Area of the  Americas (FTAA) negotiations,” said SELA. “There is absolutely no reason to expect that the war per se will cause the FTAA process to break apart, but it does produce one more source of centripetal pressure on the hemispheric negotiations.” US Trade Representative Robert Zoellick has also notified Congress of his intent to pursue FTAs with five nations of Central America; Australia; the South African Customs Union of South Africa, Lesotho, Botswana, Namibia, and Swaziland and Morocco and has started negotiations toward this end. Last month the US signed a free trade pact with Singapore, which incidentally supported the war. “ The essential point is that the pursuit of FTAs has nothing to do with support or lack of it for the Iraq war. Rather the administration’s concern is that domestic labour and environmental groups could impede the FTAA schedule via US House and Senate committee hearings beginning later this month on Capitol Hill,” said Bryant. Next year is also an election year and some legislators have to be careful in their home constituencies where there is fervent opposition to the FTAA, he said. He said the Bush administration is encouraging the use of global FTAs to keep up the momentum even while they are aware that the FTAA has announced a time-line. “And most importantly, the FTAA is but one of several other complex trade negotiations involving the US.”

FTAA negotiators have set ambitious goals. By June15, 2003 the five groups negotiating market access will exchange requests for revised offers and all ten negotiating groups are working to provide vice ministers with a revised text at their next meeting on July 7 in El Salvador. Their objective is to have a rather advanced agreement by the November FTAA Ministerial in Miami. “ In my opinion, the goals of this phase are very ambitious and will require a series of trade-offs,” said Professor Bryan. He said the FTAA will be signed in 2005 but it will be  bracketed because of the failure to completely and successfully negotiate each and every issue before the deadline. “Difficult negotiating issues such as agricultural subsidies and perhaps services will be continuously negotiated for some years after or until the WTO resolves those issues. “In fact, the resolution of the key issue of agricultural subsidies has been linked to ongoing negotiations in the WTO and these are currently bogged down,” he said. “In any case, the various Western Hemisphere FTAs are building blocs and perfectly compatible with the WTO. They all accrue to an eventual FTAA.

Essentially the US will push the envelope to the best of its ability. President Bush, Bryant said, will want to see the FTAA as a success if he does get elected to a second term. SELA also talked about pressure on the Caribbean Community which did not join the “coalition of the willing” and cited the possible backlash on trade that small countries could feel from the US. To boost its case, SELA said on May 15, a group of thirteen members of the House of Representatives sent a strongly-worded letter of protest to President Bush.  The letter, written by Ranking Minority Member Charles Rangel (Democrat-New York), the most senior Democrat on the House Ways and Means Committee, protested the high-pressure tactics that the Bush administration used. The letter cited Caribbean media reports noting that “just hours before the start of the war, Jamaica, Barbados, and other member nations of the Caribbean community (CARICOM) were contacted by the US State Department and warned against participating in a proposed special meeting of the United Nations General Assembly to discuss the US invasion of Iraq.” It quoted Reich as declaring that, “I would urge CARICOM to study very carefully the consequences of” their position. “What do I tell a member of Congress if I go asking for increased access for Caribbean products for example? — ‘well they didn’t support us in our time of need’.” Noting that Caribbean countries “fear that blacklisting, sanctions, and other retaliatory measures may be imposed by the US at a time when their fragile economies are even more vulnerable as a consequence of the drop in tourism caused by the war,” the letter warned that “threatening our friends because they do not agree undermines the credibility of our commitment to the very democratic principles we espouse.”

Slow, steady improvements to your products and services won’t guarantee your company’s future: You also have to be capable of making big changes at the same time.

Back in the 1960s, the Japanese firm Hattori-Seiko was a small player in the global watch industry. But as Michael L Tushman and Charles A O’Reilly III relate in Winning Through Innovation, Seiko made a bet on quartz technology — a low-cost alternative to mechanical movement, then the dominant technology-and transformed itself “from merely a mechanical watch firm into a quartz and mechanical watch company.” That move helped reshape the business:

The Seiko story corroborates the conclusions of population ecologists Michael Hannan and Glenn Carroll, who point to similarities between the way that organisations evolve and the punctuated equilibrium that, according to one theory, describes biological evolution. On the one hand, the incremental innovations that make a company more competitive in the short term by improving its efficiency; and, on the other, the architectural innovations (which reconfigure existing technology) and discontinuous innovations (which involve new operating principles in core subsystems or revolutionary process innovation) that ensure a company’s long-term success. Some experts believe that companies’ shortcomings when it comes to innovation stem from not enough deviant or outside-the-box thinking. In fact, most well-established, legacy companies have far more of that than they realise. Other experts argue that companies aren’t deliberate enough in their approach to innovation, waiting around for the next big idea instead of setting up systems and processes to help them bring innovative ideas to market.

But at least as far as incremental innovation is concerned, the leading companies do a pretty comprehensive job of planning. “Taking a portfolio approach, leading companies look not just at the products in the development phase, but also at those one’s in the currently-in-market phase, as well as those at the end stage of the product life cycle,” says Bob Gill, president of the Product Development and Management Association in Mt Laurel, NJ “That way, they can get a better idea of what their expected revenue targets from existing lines will be and thereby determine how much growth they’re going to need from innovation. They’re also very targetted in their approach to identifying new product opportunities. They look at the gaps in their product lines, their core competencies, the markets and technologies in which they excel, and the state of current markets and technologies in which they excel, and the state of current markets-which are saturated, which are growing — to find the optimal arenas for innovation.”

The real problem, say Tushman and O’Reilly, is not a lack of systems and processes; it’s the tendency of incremental processes to strangle discontinuous and architectural ideas. But herein lies a big problem: The culture of incremental innovation often creates an institutional hostility toward the culture of architectural and discontinuous innovation. Streams are so different from incremental streams that some leading experts have recommended that they be spun off into separate organisations. But the common wisdom seems to be shifting. If you can distinguish incremental ideas from nonincremental ones and create separate tracks for shaping and developing them, then having the same management team oversee both streams — despite the “multiple, internally inconsistent architectures, competencies, and cultures” that will be required-has distinct advantages over spinning off the nonincremental streams and having them overseen by a different group. Not only does it become possible to do your job, improve your job, and revolutionise your job all within the same organisational structure, but the opportunities for one innovation stream to cross-pollinate the other also improve.

Multiple innovation streams, one structure

Ciba Vision, which in 1981 became the 27th entrant into the US contact lens market, had by 1995 become a 6,000-person company jostling for global leadership of both the contact lens/lens care and the opthalmics (drugs related to vision and eye health) markets. Under CEO Glen Bradley’s leadership, the company realised that its current products would not be sufficient to sustain market leadership. Ciba Vision’s response was to defend its position in the markets for conventional soft lenses and lens care products by investing in incremental product and process improvements and, at the same time, use the profits from these improvements to fund three autonomous teams working on discontinuous product and process innovations that had the potential to substitute for the company’s current offerings.

In the contact lens market, one team worked on “an entirely new continuous production process to radically reduce the cost of manufacturing disposable soft lenses,” write Tushman and O’Reilly. Another worked on “an entirely new type of contact lens that could be worn safely all day and night.” The teams — made up of people from the R&D, clinical and regulatory, engineering, manufacturing, marketing, and finance areas — were “co-located, headed by strong project leaders, and allowed to work independently from the rest of the organistion.” Similarly, in the opthalmics market, a team set to work developing a discontinuous pharmaceutical product named Visudyne that, in concert with laser therapy, would counteract age-related macular degeneration.

Although these teams were given a great deal of independence, a single group of managers — Bradley and his senior team-oversaw all the work. Keeping the discontinuous experimentation in one organisational structure, explains Tushman in a recent interview, enabled Ciba Vision to leverage its existing customer base. For example, had the extended wear lenses and the cheaper disposables been housed in a spinoff organisation, that new firm would have had a harder time getting access to the same customers Ciba Vision already had close relationships with. Running both processes out of the same organisational structure allows you “to leverage not just your customers, but also your technology and infrastructure” to an extent that wouldn’t be possible if you had spun the nonincremental idea off into a separate organisation, Tushman continues. In fact, as long as your management team is able to differentiate incremental ideas from nonincremental ones and put them into separate development tracks, “the only time you should spin off the nonincremental innovation is when there’s nothing to leverage.”

Cross-pollination benefits

Another advantage of housing incremental and nonincremental innovation streams within the same organisational structure has to do with the often unpredictable nature of innovation itself. “The solution to the problem you’re trying to solve often lies at the edge of the dominant model, or way of thinking about the problem,” says Robert J Thomas, senior research fellow at Accenture’s Institute for Strategic Change in Cambridge, Mass. “A game-changing idea rarely shows up at the precise time it’s needed — isssst often shows up before the problem manifests itself. So you have to have your ryes on the central tendency while allowing your peripheral vision to notice things that are relevant to your business.”  Thus, the chances of the incremental stream’s informing the nonincremental one, and vice versa, improve when you have one team managing both processes.

The value of stock options may be an incentive to staff  but how do they fit in the bottom line. One of the business world’s longest running controversies is almost over. The issue of how to treat stock options — offered to as enhancements to executives, particularly in developed and modern economies — is about to be resolved.

The argument has been raging for at least 30 years, but the International Accounting Standards Board IASB, which issued an exposure draft on Share-Based Payment in November 2002, is about to confirm that these perks must be accounted for as costs in the annual financial reports.  If this were to follow in the Caribbean, especially in Trinidad and Tobago, as is expected in its mentor economy Singapore, this could have a significant impact on the profit and loss accounts of Singapore companies. Even though no cash will actually ever leave the companies, executives are being given something valuable by the company which should be costed. Let us suppose that the companies’ shares are currently trading at TTD$10.  As a reward — and incentive — to increase the companies’ share value, they will offer the executives the chance of buying 50,000 shares at $15 each in three years’ time. It is a ‘no lose’ situation for the executives. If they do well, and as a result the companies’ share prices rise to $25 each, the executives buy 50,000 shares at  $15. If they sell those shares immediately, they will make a profit of $500,000. If they sit on the shares and they continue to increase, the perk improves.

But if things do not go so well and the share price drops to $5, the executive is highly unlikely to exercise the right to buy at $15 and the incentive remains unused. Once it was established that this incentive should appear as a cost to the company granting it, the argument was then about how the cost should be established. The alternatives are either to cost the benefit at the point at which the options were given — the grant date — or else at the date at which the options can be taken up by the employees because their performance targets were met — the vesting date — or the date they buy the shares — exercise date. Currently in Trinidad and Tobago, it is not necessary for companies to recognise the stock options issued as an expense in their profit and loss accounts at the point of grant.  They may recognise them when the employees exercise the options. If the company buys back shares from the market to honour its employee stock option scheme, it must recognise the difference between the prevailing market price and the exercise price as an expense.  However, if the company chooses to issue new shares to meet its employee stock option obligations, there is no impact on its profit and loss account. This is also the approach taken by other jurisdictions.  Based on information from ACCA’s Singapore Office, that country’s accounting requirement is consistent with the existing International Financial Reporting Standards (IFRS), which are set by the International Accounting Standards Board (IASB). But, following the recent corporate governance scandals in the US and elsewhere, the situation is changing. The US Financial Accounting Standards Board (FASB) recently announced that it would review its accounting standard on employee stock options (FASB Statement No. 123), to decide whether to require companies to treat employee stock options as an expense, based on their fair value, at the point of grant. 

A number of US companies, such as Coca-Cola, Amazon, General Electric, the Washington Post Company, Citigroup and Bank One, have already started to account for stock options in this manner. The IASB’s Exposure Draft on ‘Share-based Payment’ proposes that entities should recognise an expense in the profit and loss account, measured at fair value, whenever a share-based payment is made.  In the case of stock options, the Exposure Draft requires the fair value of the stock options issued to be recognised as an expense at or after the point of grant (i.e. grant date). ACCA can see the arguments for costing those options at the time they are exercised, because the cost of the options will be easily measured: it is the difference between the purchase price of the option and the higher value of the shares when they are sold. However, that means that the options might not appear as a cost on the accounts until they have been exercised and, in the post-Enron world where shareholders want more information, that is clearly not acceptable. Therefore, ACCA supports the case for options to be costed at their fair value at   grant date.  That, in itself, involves applying an appropriate model because the market values for these sorts of stock option are not readily available.
 
Examples, such as the Black Scholes or Binomial models, are based on complex set of equations being brought to bear. These take into account such elements as the current price, the price agreed, the volatility of the shares, the time to expiry of the option, interest rate and the likelihood that the executive will meet his targets. Once the calculation is done, there will be a ‘fair value’ for the options which can then appear in the annual accounts. These costs will be spread over the years between the grant date and the exercise date. In the case of our example, that would be three years, so a third of the overall calculated cost is charged each year against the company’s profits. Obviously, if the company has a tough few years and the options are not taken up, the costs which have been allowed for will never be issued as shares. We are calling for the Trinidad and Tobago Stock Exchange to adopt a similar accounting standard to that proposed by IASB which requires companies to expense stock options at the point of grant. While the new standards have been driven by scandals in the US which have not been experienced in Trinidad and Tobago or the Caribbean for that matter, the Round Table called for the accounting standard to be adopted as part of good corporate governance.

It also said that the adoption of the accounting standard will prevent companies from using stock options liberally. Companies will have to grant stock options carefully as their bottom lines will be affected. The implementation of the accounting standard will enable stakeholders to compare the bottom lines of companies which make cash incentive payments and companies which offer  share-based payments. The objective of the accounting standard is to protect investors. Although most unlisted companies have either no private investors, or very few of them, the change will make them more aware of their costs as they are forced to account for them. ACCA also believes that, while the valuation methods proposed by IASB are appropriate, other valuation methods should be allowed provided there is full disclosure and a justification for doing so. It also stressed that disclosure is not an effective alternative to share-based payment accounting. Stock options represent a major cost and companies will not be presenting the true picture if they are not accounted for. Although the accounting app-roach thus far is that disclosure is sufficient, some companies worldwide have already moved towards accounting for share-based payments as they feel that it is a better approach.  I think so too!

ACCA is the largest professional accountancy body operating on an international basis, with almost 300,000 members and students in 160 countries. 
www.accaglobal.com or email emile.valere@accaglobal.com

Can the struggling Caribbean air transport industry set aside internal squabbles and find a recipe for success in the face of increasing US competition?

Boasting crystal clear waters, white sandy beaches, lush vegetation and breathtaking sunsets, the Caribbean has long been a sunspot of choice for European and US leisure travellers. Even in the aftermath of September 11 2001, the Caribbean’s closeness to the US mainland and its accessibility by air from most major US gateways saw American tourists continue to flock there, albeit in fewer numbers. In contrast, the Caribbean saw a steeper drop-off in European traffic during the same period. By early February 2003, however, the Caribbean Tourism Organisation was predicting that tourism would this year recover to 200 levels and resume real growth in 2004 — barring a war in Iraq.

US airlines, however, are optimistic that the Caribbean will continue to be one of the fastest growing segments in the industry. Even as they bleed red ink, carriers such as American Eagle Airlines, Delta Air Lines and US Airways are expanding services to the Caribbean. US-owned regional start-up Caribbean Sun Airlines, a sister to Antigua-based Caribbean Star Airlines, is injecting competition into the market by initiating services from San Juan, Puerto Rico to several Caribbean islands. While US carriers turn to the Caribbean for growth, the region’s own airlines — which for years have gone from one financial crisis to another — are downsizing, citing increased security, insurance and fuel costs, as well as the softening in the market. Caribbean international carriers, including Air Jamaica, Bahamasair and BWIA West Indies Airways, as well as regional Liat, all seek government assistance. In addition, says Trinidad and Tobago-based BWIA, US majors are “dumping capacity into the Caribbean”, and discounting fares to a level that makes it difficult to compete. No North American carrier has grown its Caribbean service more quickly in 2002 than US Airways. In the past few months, the carrier, which has just emerged from Chapter 11 bankruptcy, has introduced services to the Bahamas, the Dominican Republic and Puerto Rico and boosted frequencies on several USA-Caribbean routes.

The airline is also gradually building an intra-Caribbean operation, the GoCaribbean network, which includes marketing agreements with Dutch Antilles carrier Winair and Caribbean Star. US Airways declines to say if a codeshare with Caribbean Sun is in prospect. Such a partnership, however, would boost the US major’s chances to compete against American Airlines and its American Eagle subsidiary, the dominant regional carrier in the Caribbean. St Kitts and Nevis-based Nevis Express was also involved in GoCaribbean until financial difficulties forced it to slash its operations and pull out of the grouping in December 2002. Doug Leonard, US Airways vice-president, international, says: “A lot of people who live on the East Coast take their leisure trips to the Caribbean, so it is natural for us to grow our eastern-focused network down to the Caribbean. We break our business into three pieces, domestic, Caribbean and the Atlantic, and of those, the Caribbean was the best performer for the last year. We did carry reasonably high loads, probably mid-70 percentile, and we did pretty well on the yields compared to what we were seeing throughout the rest of the network.” US Airways does not intend to shelve its planned new services to the Caribbean, including flights to Bermuda next month.

Dominant regional

Delta, meanwhile, has initiated an assault on US Airways by increasing services to the Caribbean and Florida. To boost its winter schedule, the carrier expanded services from its Atlanta to Providenciales in the Turks and Caicos, and from New York Kennedy to Aruba. It also added capacity on its Aruba-Atlanta and Nassau, Bahamas-Cincinnati, Ohio routes. Continental Airlines and Northwest Airlines also are increasing flights to the Caribbean. Keen to keep its edge in the Caribbean, American Eagle — whose Executive Airlines unit has hubs in Miami and San Juan — continues to expand. It will add services between San Juan and Nevis from May 15, to fill the void left by Nevis Express. The regional is also negotiating with Puerto Rico to open year-round services to Vieques by mid-year. Plans are in place to expand services to Nassau and add charters to Cuba. American Eagle hopes to initiate flights between San Juan and Georgetown, Guyana, via Port-of-Spain, Trinidad, as well as on a San Juan-Port-of-Spain-Suriname-Guyana routing. “Because of the war, this summer people are coming to the Caribbean. People believe the Caribbean is safe because it is close to the mainland USA,” says Pedro Fabregas, director of sales, marketing and planning for American Eagle’s operations in Florida and the Caribbean.

By the end of this year, American Eagle will retire its 16 ATR 42s and increase utilisation of its 48 ATR 72s. Eventually, says Fabregas, American Eagle plans to acquire regional jets “that can seat 70 passengers, but which have capacity for 100”, noting that Caribbean nationals haul large amounts of luggage back and forth. For some Caribbean carriers, the continued expansion by US airlines to the Caribbean has proved to be a double-edged sword at a time when international traffic is down as much as 20 percent. Increased US flights mean more feed to Caribbean regional, but it spells more competition to the area’s international carriers. “The US carriers can afford to deeply discount fares to the Caribbean to get new revenues. So while they can go after the cash revenue of low fares, what they are doing is eroding a bedrock of a fares base that BWIA operates on. As a national carrier, our hands are tied,” says BWIA.

Safety handicaps

Exacerbating BWIA’s position is the fact that Trinidad and Tobago is designated Category 2 under the US Federal Aviation Administra-tion’s International Airlines Safety Assessment Programme, meaning the country’s civil aviation authority does not meet ICAO safety standards. As a result, BWIA is restricted from expanding its services to the mainland USA, changing equipment on Caribbean-USA routes or developing its codeshare with United Airlines, making competition against US carriers “a one-handed fight”, says BWIA. Also hurting from a Category 2 rating is the Organisation of Eastern Caribbean States (OECS), which comprises Anguilla, Antigua and Barbuda, the British Virgin Islands, Dom-inica, Grenada, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines. To regain Category 1 status, the grouping must upgrade its Directorate of Civil Aviation (DCA) office to an official authority vested with much greater power to regulate and manage the OECS civil aviation system. The island members must also harmonise their aviation legislation, most agreeing to switch over from a UK regulatory model to one that mimics Transport Canada. Without a Category 1 rating, the OECS is also prevented from entering into fruitful discussion with the USA about an open skies agreement.

“The OECS is using Great Britain’s CAA rules and regulations, which are not bad rules if you’re flying a Boeing 747 in bad weather between Iceland and England. But that same set of rules don’t work for flying a Britten-Norman Islander between two islands with nine passengers or less,” says Nevis Express president Allen Hadaddi. But the OECS’s transition to a civil aviation authority has proven time consuming, much to the dismay of even the smallest Caribbean operators. SVG Air, a charter and scheduled operator at Saint Vincent and the Grenadines, wants to expand to the USA, but its plans are stifled. “We have three (Rockwell) Commanders, two Cessna 402s, three (Britten-Norman) Islanders and one (DHC) Twin Otter. We wanted to add a (Cessna) CitationJet last year, but we couldn’t take it into the USA, so we didn’t do it,” says managing director Paul Gravel. SVG and other Caribbean regional hope that a transition to a civil aviation authority will bring a change to DCA regulations governing pilot duty limitations. The pilot duty limitation differences between the USA and the OECS are inequitable, says Gravel, noting that a flightcrew working for American Eagle from San Juan may operate for 14 hours a day, whereas flightcrew working for Liat or Caribbean Star is permitted only to operate nine and a half hours a day. “This effectively means that a US carrier can employ 47 percent fewer pilots to achieve the same amount of work,” says Gravel. “For an OECS airline that employs 90 pilots, the savings incurred by reducing the number of pilots by one-third would equate to $32 million over 10 years.”

The millionaire owner of Liat’s biggest rival, Caribbean Star, has managed to strategically bypass Category 2 restrictions. Allen Stanford founded Caribbean Sun and based it in Category 1-rated Puerto Rico. He envisages Caribbean Sun connecting with Caribbean Star to provide one-stops throughout the region, posing competition to American Eagle. Meanwhile, Stanford is moving Caribbean Star’s Antigua headquarters to St Kitts, where there are more relaxed “route rights and a host of economic benefits”, says Caribbean Star chief executive Paul Moreira. Stanford’s organisation also plans to redevelop St Kitts Robert L Bradshaw Airport and create a fixed-base operation to handle private jets.

Lack of co-operation

At least part of the long-running crisis in the Caribbean air transport industry is due to a lack of co-operation, experts say. Caribbean carriers are generally owned in part or wholly by the indigenous island states and each country is proud and protective of its own airline. In Miami, some small Caribbean airlines operate limited daily services to the islands, but refuse to even share the same booths at the airport. “Instead of sharing costs, they try to kill each other,” says Carlos D?vila, the director of transport for the Association of Caribbean States (ACS), a political body that helps guide policy about trade, tourism and transport throughout the region. Caribbean nations have never signed a multilateral aviation accord that would give the airlines broad blanket rights to fly between each island, fly across territories without landing, making stops for non-traffic purposes and operate with third, fourth and fifth freedom rights. D?vila hopes the fall-off in bookings will force ACS members to agree in principle to a multilateral aviation accord this summer. “We need to do it. With the crisis in Iraq, the tourism sector is going to suffer, especially with a decrease in the number of bookings,” he says. Even with unanimous ACS member agreement, however, such an accord cannot be put into effect until one-third of individual island governments ratify it. Although airline officials have long paid lip service to plans for airline co-operation, the most significant teaming to date has been that of Liat and its minority stakeholder BWIA, a partnership that has been limited at best. With both companies in need of fresh financial assistance from the government, Caribbean Community leaders have begun a dedicated push for a more formal tie-up between the two airlines.

John Gilmore, the founding member of the Air Jamaica Acquisition Group that negotiated the purchase of Air Jamaica from the Jamaican government, says Air Jamaica, BWIA and Liat “need to be merged into a single organisation for scheduling and planning. I would assume that Cayman Airways and Bahamasair would probably participate as well, since they are relatively small and they both lose money. Every bailout (the Caribbean governments give), the always say ‘it’s the last one’. They have to come up with a solution.” But Caribbean airline executives are sceptical about a merger. “Regional integration will never work because West Indians can never work together. Each one will want to be the boss,” says Gravel. “How can they help each other if they are both bankrupt? Liat and BWIA have been cutting each other’s throats for years.” Air Jamaica chief executive Chris Zacca adds: “We are not interested in a merger. We would be much more interested in functional co-operation, including schedules and codesharing as well as accounting and some technical co-operation and purchasing.” A Trinidad and Tobago-funded study into the feasibility of a merger is due to be released in May. Whether Liat will be able to stay afloat to see such a merger come to fruition remains to be seen. For 46 years, the regional has been the backbone of the transport system between the islands of the eastern Caribbean, operating Bombardier Dash 8 turboprops. But the economic downturn, coupled with competition from rival Caribbean Star, has left Liat in need of $37 million in investment over the next year. Even though Liat has initiated cost cuts across the board, without new funds, says chief executive Garry Cullen, the carrier faces aircraft repossession and will have difficulty in paying its debts to Bombardier, GE Capital Aviation Services and Pratt & Whitney.

Privatisation plea

The former prime minister of Saint Vincent and the Grenadines, Sir James Mitchell, says governments must stop bailing out cash-strapped Caribbean carriers and seek to privatise them. “The Caribbean governments are just pouring money into the (region’s) airlines without demanding serious restructuring,” he says. Like BWIA and Liat, Air Jamaica is also turning to the government for assistance. The carrier needs up to a $30 million government is likely to demand a debt for equity swap in the deal. Air Jamaica will remain majority owned by private shareholders, says Zacca. He says the carrier, which has pulled down a chunk of its US-Caribbean schedule and initiated layoffs, is confident that after the war, the carrier will recover. “I feel strongly that when our yields come back, without fleet rationalisation, and with other cost-cutting measures that we have been working towards over the last few years, we would be in excellent position to be profitable,” says Zacca. The company hopes to eventually expand its codeshare with Delta, and launch services to new US destinations, once a newly signed USA-Jamaica open skies agreement goes into effect in the next few months.