“Planned a mission to Mars lately? Ever replaced a gyro on an orbiting telescope travelling at 17,600mph in a full vacuum?”

There just aren’t enough recruitment ads like this. These are the opening lines of NASA’s guide to employee benefits for its next intake of astronaut candidates – which is open for applications right now. Being an astronaut has been a dream to young people ever since the dawn of the Mercury and Vostok programs, but for a select few, it can be a reality.

But have you got what it takes to be an astronaut? And just what is it that you need to become one? To find out, DCM assembled some of the most knowledgeable voices imaginable: the head of astronaut selection at NASA, and two of the nine surviving men who have not only gone into space, but walked on the surface of the moon. You can’t get better advice than that.

To see this article as it ran, as Discovery Channel Magazine’s cover story, click here: Discovery_How to become an astronaut

THE GLAMOUR

“I was naked, lying on my side on a table in the NASA Flight Medicine Clinic bathroom, probing at my rear end with the nozzle of an enema. Welcome to the astronaut selection process, I thought.” So wrote Mike Mullane, who flew three times on the Space Shuttle.

For astronauts, the rewards of their missions are almost unimaginably good: sights that few others will ever see, and a chance to be part of the history of human endeavour. But all who have worked in the space corps are keen to stress that there is a lot of hard work, discomfort and a surprising amount of boredom involved in getting there.

Consider this: Alan Bean had one of the most stellar careers of all astronauts. He flew on Apollo 12 and was the fourth man to walk on the moon. He was mission commander on the second manned flight to the Skylab space station, and set a then-record for time in space. But in an 18-year career at NASA, he went to space just twice. Many fly once in an entire career. Vastly more time is spent waiting than adventuring.

“It was very frustrating,” Bean recalls from the Houston studio where, today, he paints pictures of his memories of the lunar surface. “Other people in my group were flying and I wasn’t. I felt that I wasn’t measuring up to the guys who were being selected.” But it was the same for all potential astronauts, even in the Apollo era when they tended to be fearless and hot-blooded “right stuff” test pilots from the Navy and Air Force who wanted nothing more than to get airborne. “Even in the early days there was a lot of preparation that went into a flight; it wasn’t just ‘let’s go strap it on’,” recalls Charlie Duke, the 10^th man to walk on the moon, on Apollo 16, who had been selected while a test pilot under legendary aviator Chuck Yeager. “So for an astronaut patience was a good character trait, because you needed to wait your turn.” He waited six years between selection as an astronaut candidate and flying in 1972 – his only ever flight into space.

But how to get into the queue in the first place? It’s no longer like Bean and Duke’s time, when you had to be a pilot (and a man) to stand a chance. For NASA at least, a surprisingly broad range of people are considered. And it really all starts with education. “To get to this astronaut selection office, you have to come through the door of the Johnson Space Center,” says Duane Ross, head of the astronaut selection board at NASA. “But that’s the second door. The first is the door to the school building.”

While NASA no longer requires doctoral level degrees, as it did when the focus started to shift from pilots to scientists in the late 1960s, it does require an undergraduate degree in engineering, science or maths. You no longer need to have flight experience – that can be trained later – and you certainly don’t need to have been in the armed forces. “As the Shuttle progressed, fewer and fewer who were selected were pilot astronauts,” recalls Duke, who was around for the early years of the Space Shuttle program. “There were more mission specialists and payload specialists. Plus, of course, 50% of the competition was cut out for my generation – because no women were allowed.”

In fact, you’re more likely to be restricted by health – which obviously must be good – and by height than ability to fly a plane: the earliest Mercury and Gemini-era astronauts could be no taller than five feet eleven, so as to fit into the tiny one-man capsules, and even today the height limit for the latest NASA intake is between 62 and 75 inches, to ensure you can fit in the Russian Soyuz capsules that NASA currently has to use to take astronauts to the International Space Station (ISS). “If you’re going to fly in space, you’ve got to fit in the spaceship,” says Ross. More than just height, he says NASA assesses what are called anthropometric requirements, such as the lengths of your arms and your legs, as spacesuits are also constrained by size.

Nationality is still an issue; NASA only accepts American citizens. But it’s no longer like the 1960s, when only a Russian or American could hope to go into space. Today, people from 38 nations have flown in space – and there’s every chance that the next person to set foot on the moon could be from China.

Don’t give up

The next thing you need is persistence. The first time Bean applied for the Apollo program, he was rejected. “They didn’t ever tell me why,” he recalls. But he noticed everyone who was selected was older and more experienced than him, so he just got more experience and applied again, this time successfully. In his view, it wasn’t just a question of being top of the class – which he was not, either academically, or as a pilot. “You need to be a certain IQ so you can learn things quickly, but you don’t have to be the smartest guy in the class. You’ve got to be able to get along with all sorts of other people, and not everybody can do that either. You don’t just hire a valedictorian and hope they work out.”

Some NASA intakes have attracted 8,000 applications, and the last time, 3,500 applied. 113 were interviewed, 48 got to a second interview – and just nine were hired. “There are two messages,” Ross says. “One, it’s very competitive. But two, the one guarantee is that if you don’t apply, you can’t get picked.” Like Bean, he stresses that being a genius isn’t the whole point. “It’s pretty simple: you need nice people. The world’s best scientists or pilots may not be the team players you need to go fly in space, particularly now we’re flying six months on the International Space Station. There is a huge personal aspect to this.”

Study once selected is intense. Ross calls it “kind of like getting a doctorate degree in being an astronaut in a two year period.” Since most space travel in the world today is geared around the ISS – and Russia’s Soyuz craft are currently the only way of reaching it since the Space Shuttle stopped flying – it is thought that astronaut training is fairly similar in Russia, Europe and the US today. On the menu are training to understand ISS systems, competence at flying (in NASA’s case in T-38 jets), land and water survival training, spacesuits, EVAs (extra-vehicular activity, or spacewalks), robotics on board, and mastery of Russian.

Parts of this are guaranteed to set the pulse racing: the jet flying, the simulators, the so-called Vomit Comet flights that simulate weightlessness. There’s plenty of work in 300-pound spacesuits in deep swimming pools.

There is, though, a lot of repetition. “In our lunar module simulator I probably landed on the moon 2,000 times over the time I was there,” recalls Duke. “I crashed it a few times too. But in the one that counted, we pulled it off.” In his case, one almost unique branch of training was the lunar rover, which he and John Young spent much of their three days on the moon driving around at what looked a fair old clip (in fact 11 miles an hour – the record for the fastest land speed attained on the moon).

Life in space

So you’ve waited the best part of a decade for your chance; you’re on the launchpad, ready to go. What should you expect about life in space?

OK, let’s deal with the obvious one first. Apollo veterans say the question they still get asked most frequently today is how you go to the bathroom. “When you’re on the moon and you’ve gotta go, you’ve gotta go,” Duke says. “You don’t run over to the nearest rest room and say ‘excuse me’.” In Duke’s day, when he was getting dressed in the lunar module to prepare to step onto the moon, the first thing he had to put on was something called an FCD, basically a diaper, followed by another similar gadget for urine, followed by a set of long underwear filled with plastic tubes to distribute cold water around the body and keep him cool. “One of the most efficient air conditioners I’ve ever had the pleasure of being associated with.”

By the Shuttle era, flight suits for take-off and spacewalks featured a sort of condom male astronauts would roll on before flight to take care of their urine; creating a similar system for women has been an enduring challenge. One of the biggest problems shuttle astronauts talk of is when they’re still on the ground, strapped on their backs, facing upwards, for several hours as the various checks are conducted during countdown. That condom device is all well and good, but try urinating directly upwards when strapped on your back. On board orbiting craft or space stations things are a little easier, with functioning toilets that never existed in the Apollo era, where they had to try to persuade their waste to descend into bags in a zero-gravity environment. “This bag,” says Duke, “is not a triumph of technology, believe me.”

Zero gravity is said to be a magnificent, freeing, euphoric experience, but it brings some curious reactions. Duke recalls zero gravity as “really fun, but at first very uncomfortable. Your head throbs with every heartbeat, your sinuses fill up; it’s like having a headcold. But within hours, everything adjusts.” And spacesickness has been a challenge ever since Apollo 8, when mission commander Frank Borman vomited and had diarrhoea, filling the cramped capsule with globules of vomit and faeces. Tricky to maintain mission camaraderie in those circumstances.

Odder still, astronauts routinely get taller in space, a consequence of the vertebrae of the back stretching out. “I grew about an inch and a half on my way to the moon,” Duke recalls.

Bean went into uncharted territory when he went 59 days in space on Skylab. “My concern to begin with was that we would get weaker and weaker as time went on,” he says. Much effort was spent on working out an exercise regime. “We began to understand what humans can do, which is why now they can go up on stations for six months or more and be OK when they come home.” This has given him some useful ideas about space tourism. “Someday when passengers go up in space, they’re going to have to spend an hour a day with a physical trainer. If one says ‘I feel sick today’, the captain’s going to say: ‘you got a choice. Exercise, or you go in the brig. Otherwise when you get back you’re going to die and then blame it on me.’”

NO FEAR

One thing early astronauts speak very little about is fear. It’s very much the Apollo-era way to be dead-pan about death (Duke on the parachutes on his returning capsule after re-entry: “Without those chutes, we would hit the water at a great rate of speed that would spoil your whole day.”) But both Duke and Bean had every reason to be fearful. Bean’s ship was hit by lightning in the first minute of its ascent, prompting Pete Conrad’s famous remark: “The flight was extremely normal for the first 36 seconds and after that it got very interesting”. One of its guidance systems was knocked out. And before his flight, Duke had seen the dangers while on the back-up crew of Apollo 13, which suffered an explosion and came within a whisker of losing its crew before a rescue even more remarkable than the flight itself.

But they were well trained and knew the odds. “We knew about risk before we joined up; we’d been doing things like that in airplanes for our whole career,” says Bean. “Some who weren’t so good at it got killed. You have to have luck. Look at Challenger: no matter how good an astronaut you are, you’re going to get killed.”He recalls Neil Armstrong saying he had a 90% chance of coming back alive and a 50% chance of making a landing; asked about his thoughts ahead of his own mission, Bean says his odds were “about the same. You have in your head these thoughts, but you think: is it worth it? Obviously, to us, it was worth it.” Chillingly, he adds: “Losing two crews on the shuttle [Challenger and Columbia] was better than we thought. We thought we’d lose more.” It’s a price crews are willing to pay to do what they love. “When you want to explore, it’s not like the American public think it is. You are on the cutting edge of what you can do.”

For Duke, the one moment he recalls fear was somewhat comical. He and John Young had spent three days on the moon and had achieved a great deal; it was almost time to go home, and with all their work done, in one-eighth earth gravity, they decided to conduct their own Lunar Olympics and set the record for the high jump. They began bouncing, then Duke fell flat on his back. You’ve probably seen the famous footage of Duke falling on his front earlier in the mission when attempting to conduct a drill experiment; his bouncing, press-up attempts to get upright again added to the sense of fun and humour of that whole mission. But falling on your back was a very different deal. “That was scary,” he says now. “That backpack was not designed for that kind of impact. If I’ve split my suit open, I’m dead.” He survived – and his high jump record still stands.

Nevertheless, acknowledgement of potential danger is essential. Mullane says that during his training, astronaut candidates for the Shuttle program were played the tape recording of Gus Grissom, Ed White and Roger Chaffee as they burned to death in the testing of Apollo 1 in January 1967, just to remind them what they were getting into. And, indeed, many members of Mullane’s class did die on the Space Shuttle Challenger in 1986.

There are sacrifices, too; separation from family is taxing, and not just on the astronauts. When Duke wrote his autobiography he did so in partnership with his wife, who wrote openly and movingly about how the depression she felt in being neglected during Duke’s career led her almost to suicide.

SO NOW WHAT?

For the Apollo moonwalker astronauts in particular, another question is just how you find meaning in your life after having done something extraordinary. “After Apollo I was standing on top of the mountain,” Duke says; “…there was nowhere else to go.” It’s fascinating to see the variety of paths their lives took. Buzz Aldrin suffered clinical depression and alcoholism after his return before successfully beating both; Armstrong became something of a recluse. Edgar Mitchell found belief in the paranormal and faith healing, while Harrison Schmitt became a Republican senator in New Mexico, and something of a sceptic about climate change.

For Duke, after a few years in the space shuttle program and a shift to business, he found meaning in religion. “I found peace and a purpose through my faith,” he says. And Bean found perhaps the most distinctive next phase of all: he has spent the later years of his life painting images from the Apollo missions, using small amounts of moondust from his mission patches, and applying texture through a bronze cast of his moonboot and the hammer he used for experiments while on the moon. “When I’m dead and gone these paintings will remain, and tell stories that would be lost any other way,” he says. When DCM calls, he is painting Neil Armstrong and Buzz Aldrin’s lunar module, the Eagle, flying over a crater looking for its landing site.

Have we put you off with this list of challenges, sacrifices and negatives? The final word, then, to a positive, to remind you what it’s all about. We asked Charlie Duke to cast his mind back 40 years to the Descartes Highlands of the moon and tell us what image stayed most clearly in his head. He thought for a moment.

“On our second EVA, we drove the rover to the south and up the side of Stone Mountain,” he says. “When we got up two or three hundred feet off the valley floor, we turned the rover around on a little bench on the hill and looked across the valley of the Cayley Plains. There was a distinct gap between the lunar surface and the blackness of space, with the lunar module sitting in the middle of the valley. It was a very dramatic sight… the beauty of the moon.”

It is for memories like this that people will always dream of being an astronaut.

Sidebars

Charlie Duke’s famous line

If you don’t know Charlie Duke by name, you know his voice. One of the most famous radio exchanges in history took place when Neil Armstrong piloted Apollo 11 on to the surface of the moon for the first time in 1969. Having found his planned landing site unsuitable, he flew over a crater and was almost out of fuel when he finally landed. “Houston, Tranquility Base here, the Eagle has landed,” said Armstrong. A broad southern drawl responded: “Roger, Twanq… Tranquility, we copy you on the ground. You got a bunch of guys about to turn blue. We’re breathing again.”That was Duke, serving as CAPCOM on the ground in Houston.

Today, he recalls: “The actual moment of landing was one of intense relief. I remember the tension in mission control was the highest I have ever felt it. There was dead silence, which was extremely rare, as people focused on their consoles. When Neil came back and said ‘The Eagle has landed’, it was like a balloon popping in mission control. I was so excited I couldn’t even pronounce ‘tranquility’. And it was true: we were holding our breath waiting for that landing.”

Charlie Duke’s famous measles

Charlie Duke had one of the world’s most famous cases of German measles. In inadvertently exposing Ken Mattingly to the illness, he caused Mattingly’s withdrawal from the Apollo 13 mission just three days before its ill-fated launch; it would have been him, rather than replacement Jack Swigert, who flicked the switch that caused the craft’s oxygen tank to explode, triggering the most audacious rescue in history. In real life Mattingly still got to fly to the moon, but on Apollo 16 instead – with Duke, the man who exposed him to the measles in the first place (which, incidentally, he never got).

Office politics on the moon

Even in the glorious Apollo era there were office politics when astronauts were jostling for assignments on to lunar crews. Alan Bean, prior to his assignment on Apollo 12, decided he must have been failing to show his good qualities to Deke Slayton and Alan Shepard, the Mercury 7-era astronauts with the greatest power in assigning Apollo crews. “If I had my time over, I would learn to hunt and go hunting, because Deke was a big hunter,” he says. “There’s politics in everything, it’s just the way it is.”

Looking back he thinks he was impeded by his tendency to go to Shepard and Slayton with occasionally crazy ideas; his colleague and mentor Pete Conrad, who would be commander on Apollo 12, told him to keep the weirder ones to himself. “I learned to shut the f*ck up. It worked out OK.”

But today, Bean thinks the differences in his approach serve him well – in his painting, such as using moon boot soles and a lunar hammer to give texture to his creations.  “If Al and Deke had been on my committee as a painter and I’d told them that, they’d have said: that’s a crazy idea, Bean. They’d be looking at me like: that is really stupid.”

Record breaker

The man who has spent the most time in space is Sergei Krikalev, a Russian cosmonaut. He spent time on Mir – he was up there when the Soviet Union disintegrated beneath him – flew on the first US/Russian joint space shuttle mission in 1994, and was one of the first two men to enter the International Space Station in 1988. By the end of his sixth mission in 2005 he had spent 803 days, 9 hours and 39 minutes in space.

Changing politics

It’s no secret the Apollo missions were launched primarily to beat Russia at something: they were a function of the cold war. “Apollo was a political decision in the beginning: a race to space with the Russians,” Duke recalls, although he said once selected, it was never really an issue. “The political context quickly changed to a scientific one.”

Today US-Russia relations have improved so much that American astronauts must use Russian Soyuz capsules to get into space, and are expected to learn Russian in their basic training. Russian cosmonauts must learn English and do parts of their training in the USA.

Instead, if there’s a space-race competitor today, it’s China. “I don’t have a sense of what China does at all,” says Ross. Well, the China Manned Space Engineering Office didn’t return DCM’s calls, but we do know this: the first Chinese man, Yang Liwei, flew to space onboard Shenzhou 5 in 2003; China launched a module called Tiangong 1 into space in September, then an unmanned ship, Shenzhou 8, to dock with it in October; and the first section of a permanent space station should be in place by 2015, with the full station complete by 2020 – when the International Space Station is due to retire. Further ahead, China has announced plans to send a man to the moon by 2025, to build a lunar observatory, and to send missions to Mars.

But increasingly, politics aren’t going to matter at all as the business of space travel – particularly cargo and space tourism – passes from state-backed agencies like NASA to the commercial world of groups like Virgin Galactic. Once it becomes viable to earn a profit from these ventures, expect space to become very crowded with private sector businesses.

Passport in Senegal

When Space Shuttle flights departed from Cape Canaveral in Florida, they had an option of a transatlantic landing if one engine failed, which on some launches would put them in Dakar, Senegal. To deal with this possibility, one astronaut would be sent all the way to Dakar International Airport to help air traffic control – with their entire crew’s passports and pre-arranged Senegal visas. Mike Mullane wrote: “I had a vision of standing in the customs line at Dakar airport in our shuttle flight suits with our helmets in the crook of our arms while a bureaucrat asked: ‘Anything to declare?’”

What’s next?

Since NASA no longer has a shuttle, why apply? In the short term, astronauts are being trained for the International Space Station. But a new multi-purpose crew vehicle is being designed (known as Orion), capable of taking humans beyond earth orbit. Further afield are plans to visit an asteroid.

But for Ross there’s one ambition that matters above all others. “For me, since I was a kid, all I think about is going to Mars,” he says. “That’s got to be one of the first destinations we go to. That’s the next hill we’ve got to go climb.”

Other missions will include developing and deploying a successor to the Hubble space telescope, and exploring what is probably the most exciting celestial body in our solar system – Jupiter’s moon of Europa, an ice-covered moon believed to have a water ocean beneath it. If there’s life elsewhere in our solar system, Europa’s our best candidate.

Advice from the man

Nobody’s advice is more relevant than the man in charge of astronaut selection. So, Duane Ross, what should budding astronauts do? “Don’t do anything just for the sake of getting to be an astronaut. A good education will help you whether you get to be an astronaut or not. Getting in to science and engineering is a good place to be. Also, it’s not just academics; be well rounded, do a lot of things, show teamwork, and enjoy working with other people in different situations and environments.” So far NASA has selected 330 astronauts since 1959.

[Facts and figures]

1. $45,360: The minimum price to commission an Alan Bean original.
2. 130-140: the measured heart rate of Alan Bean and colleagues when lightning struck Apollo 12 at launch.
3. 12: number of men who walked on the moon, in six successful missions. 24 men have been to the moon – three of them twice – but only half landed on it, and none more than once.
4. 1963: year Soviet Valentina Tereshkova became the first woman in space. 20 years later Sally Ride became the first American woman in space on the Challenger Space Shuttle.
5. 100: kilometres to the Kármán Line, where space officially starts (though NASA designates anyone who reaches more than 50 miles in altitude as an astronaut). Either way, it’s not far: you could drive there in an hour if your car would go straight up.
6. US$64,724 to US$141,715: pay scale for NASA’s latest intake of astronaut candidates (most new recruits will be at the bottom).
7. Charlie Duke left a picture of his family on the moon, including a dog called Booster – which provided a paw-print.
8. Among the benefits NASA lists for becoming an astronaut are “free parking”.
9. Transcripts of Bean’s flight are filled with Pete Conrad’s country and western music, starting with San Antonio Rose.
10. Apollo astronauts underwent not only the incomparable thrust of a Saturn Five rocket, but the jolts when one stage of the rocket stopped and was discarded and the next one fired up. Duke said it was “like a train wreck. So violent my first thought was we’d blown up.”
11. Apollo 16 was nearly aborted just a few miles from the lunar surface.
12. The first thing Duke and Young were ordered to do after landing on the moon was sleep.
13. Duke had a leaking valve in the drink bag within his space suit as he walked on the moon. Frequently a globule of orange juice would come out and start flying around his helmet. “It was very frustrating. It would hit my nose and start crawling up my head.”
14. Some found moonwalking easier than others. “John [Young[ could run like a gazelle,” Duke says. “I just waddled around like a duck.”
15. When Bean opened and Conrad opened their checklist on the moon, they found a picture of a naked woman had been added, presumably by a back-up crew, with a note: “See any interesting hills or valleys?”
16. On the way home Apollo 16’s Ken Mattingly did a space walk. As he did so his wedding ring, which had earlier been lost, drifted out of the capsule and into space – but bounced off the back of his helmet right back into Duke’s hand.
17. The last man on the moon was Eugene Cernan, who flew with Harrison Schmitt on Apollo 17 in December 1972. The youngest remaining moonwalkers are in their late 70s; Bean believes there will one day be nobody alive who has walked on the moon.

Euromoney, December 2011

Microfinance has its problems, but it can drive the economies of developing nations. So what if it wasn’t there? To find out, Chris Wright heads to the former Soviet republics of Tajikistan and Kyrgyzstan to meet its lenders and clients

In a village in rural Tajikistan, Mastura Asoeva is flicking through her accounts. Perched on a stack of wooden boards in front of piles of stick bundles and clay bricks, the mother-of-four doesn’t look an obvious CEO, but business is good: her basket-weaving operation is growing and, for a fee, she trains women in other Tajik villages in the same skill.

Some 2,400km by road to the north-east in Maevka village, Kyrgyzstan, Taalaibek Gaipberdiev is surrounded by traditional, local carnival costumes that his company makes for lease to the growing population of the nearby capital Bishkek. It wasn’t how he planned to build his business. “Initially, I just wanted a photo studio where children could take pictures in carnival outfits, such as fairy-tale pictures, but at the end of the year our customers asked to lease out the costumes for New Year parties,” he says. “I said no. But they wouldn’t leave my office.” Now he has 3,000 costumes and employs 40 people in an outlet and workshop.

Meet the next generation of banking clients.

To see this article as it ran in Euromoney, click here: CW Microfinance p2

Asoeva is a customer of Tajikistan microfinance lender Humo and Partners; Gaipberdiev a borrower from Kyrgyzstan’s Bai Tushum & Partners. They represent a growing constituency of people in the world’s more poor and obscure locations who are building businesses on the back of microfinance lending. Modest in scale individually, they are a powerful force in aggregate, and steadily growing to be the drivers of their national economies.

Microfinance has problems: that’s understood. There are those who feel it encourages inescapable indebtedness, that its interest rates are intolerably high and that the lenders lack governance or prudence.

But what if it wasn’t there? To find out, Euromoney went to two of the world’s least-visited nations, the former Soviet republics of Tajikistan and Kyrgyzstan, travelling between the capitals by road, to meet not only the lenders but the clients of microfinance.

Euromoney starts its trip in the Tajikistan capital Dushanbe, where a swirling Afghan dust storm has given its wide tree-lined boulevards an orange hue and closed the national airport. There’s always a local theme or need that distinguishes national microfinance industries – post-war rebuilding in Bosnia, agricultural efficiency in south Asia – and in Tajikistan, it’s the empowerment of women.

In a parallel of Yugoslavia, Soviet rule kept a lid on deep ethnic tensions here that dated back centuries. When the Russians left, civil war erupted, killing around 60,000 people and rendering half a million people refugees. The gutted economy, left over after peace was declared in 1997 – its GDP per capita having fallen 70% in the meantime – offered little hope. Many of the remaining working-age men went to Russia, often not returning. “The men in the country unleashed the war, fought the war and left the country, and the consequences fell in a burden on women, children and old people,” says Sulamo Khoshakova, director of the Association of Microfinance Organizations of Tajikistan (AMFOT). Every client, banker, leader who Euromoney meets in Tajikistan is a woman.

Complicated

Microfinance is youthful here. International organizations came in at the end of the war, and the first 10 years of microfinance came under their remit. It’s only in the past six years that local institutions have set up under Tajik legislation. It has not always been straightforward. “Extending loans to women was complicated at the beginning,” says Khoshakova. “Women were only expecting humanitarian assistance. The first steps were to make them understand these loans needed to be repaid.” There were social issues too. “The mentality in this country is that assets belong to men,” she adds. “Women have the capacity, but they don’t have the economic opportunities.”

The message has got through: AMFOT says there are 123 registered microfinance organizations in the country, 78 of which are members of the association. Shoira Sydykova, director at microfinance lender Arvand, says her institution has 15,000 clients – making up a credit portfolio of just 54 million somoni (TJS), or $11.36 million – and believes that in Tajikistan there are 160,000 micro borrowers. Loans vary in scale: $300 used to be a common starting point; these days it’s not considered sufficient to launch a business, and some loans might be as much as $5,000 (Arvand’s average is $660, with 60% of loans going to rural areas). Khoshakova estimates that 12% of able-bodied people in Tajikistan have received microfinance loans. “If there were no local microfinance organizations, most women would not have access to loans,” she says. “I’m quite sure rural women would not approach banks to receive a loan. The name bank dissuades women from approaching.”

Exploding myth

Approaching microfinance institutions (MFIs), it seems, is less intimidating than banks. Nazokat Hafizova runs a beauty salon on one of Dushanbe’s main thoroughfares. It is bustling when Euromoney visits, and the tape-recording of the interview fights a vibrant background noise of blow-dryers and bellowed Tajik and Russian chatter. Hafizova is on her fourth loan from local microfinance lender IMON International: the first, in 2007, bought the equipment; the second the property; the third rehabilitated it; and the fourth bought additional equipment, for more sophisticated laser treatments.

Talking to Hafizova explodes one myth: that microfinance recipients have no idea about finance and approach the lenders wide-eyed. She is, no doubt, among the sharper end of the borrower pool, but one lesson of the trip is just how savvy people tend to be about what is available. “There are numerous microfinance organizations in the city,” she says. “I selected IMON because it has the most attractive interest rates.” Talking about the benefits of information and training IMON has provided involving income and expenditure, she notes: “It is crucial, when the world is facing the financial and economic crisis.” I hear more calm common sense in these interviews than I had in the G20 press conference in Washington two weeks earlier.

The street-smart nature of microfinance recipients can be a double-edged sword. A challenge in microfinance is indebtedness, particularly where the same borrower will go to multiple lenders. Even in rural areas, we repeatedly hear of people knowing exactly how to shop around for loans. Khoshakova says: “When they approach us, we begin to explain something to them, and they say, ‘Of course we know that. Finco is doing this and IMON is doing that.’ They are well informed about what schemes there are in the country.” She adds it is common to find “women receiving multiple loans, borrowing several times”.

A comment from Hafizova, also repeated by others on the trip, concerns the broader social impact of microfinance lending. “My successful business has had an immense impact on my personal and family life,” she says. “I have been able to buy an apartment through the income from this business. I have created new jobs for skilful ladies who are working for me. And my husband has become a client at IMON and launched his own business.” Her sister is about to take a loan to launch her own business too. This is what microfinance advocates argue: improve one person’s life and the spill-over effects are potentially transformative.

Family provision

We leave Dushanbe for the suburbs to find Khakifa Sobirova, who runs a bakery. It’s a hive of industry in a dim room, where a young man in a white bandana hoists loaves in and out of a clay-walled oven while another kneads the dough. They then emboss the bread with local patterns.

In a courtyard, Sobirova is a woman of few words; it later turns out that, in this patchwork country of races and clans, she is Uzbek and understands little of the translator. However, she does tell a story of climbing a rung up the ladder: how the bakery, in the family for 40 years, was galvanised with a $300 loan in 2000 and now bakes its way through five bags of wheat flour a day for sale in the local green market; how it employs three family members and has helped her daughter set up an embroidery business, proudly displayed in a room off the courtyard; and how it has not only empowered a family but kept it in existence.

“Our business helps us a lot to keep the family together,” she says. “I have been able to arrange marriages for three of my children. Two are remaining. Hopefully I can manage a marriage for them as well.” With business good, her husband and son have never had to follow the herd to Russia for work; both drive taxis in Dushanbe.

Paid marriages and family unity will never show up in microfinance statistics, but nothing comes through more strongly in borrower comments than this: not the size of a house, or the food on the table, or a car or a cow, but the sense of providing properly for a family. Sobirova sums it up: “Before, life was difficult.”

Lenders, too, like to keep families together – it’s good for business as well as society. “It is a role model for the next generation to have a family consisting of a mother, father and children,” says Mavsuda Vaisova, general director of Humo and Partners – the suggestion being that this has not been the norm.

This is one of the happier borrower relationships. Sobirova poses cheerfully for pictures with an IMON branch manager, staging a chat about company accounts at the kitchen table, before handing out generous amounts of fresh bread. But is it always like this?

From the customer side, the big problem with microfinance is the rate of interest – although, lacking anything to compare it to, no client we met complained about it or described any problem in meeting terms. AMFOT says interest rates in Tajikistan vary from 2.4% to 3.5% per month. “Of course, it is a very high interest rate – we do understand,” says Khoshakova. “But we cannot simply extend loans at lower interest rates, because the funding we receive is expensive itself.”

Cost of funds is a common refrain among microfinance lenders, particularly when lending in local currency. “The basis for pricing is the cost of funds,” says Sydykova at Arvand. “Since somoni are much more expensive, the interest rates are accordingly higher.” Arvand charges 22% to 26% per year in dollars, 30% to 38% in somoni, but Sydykova says this is much better than working with a loan shark. Robiya Asrorova, a loan officer at IMON, says 10% per month is not an uncommon loan-shark rate – without sympathetic repayment terms – and adds: “There were cases where individual lenders gave out loans for a term of three or four months, then required the money back before the term expired.”

Cost of funding comes up in Kyrgyzstan too, where MFIs cannot do transactions in hard currency, yet get their funding from overseas. Bai Tushum & Partners, a Kyrgyz MFI, says that four years ago the hedging costs for it to manage this risk were 3% to 4%; today, a commercial bank will charge 12% or 13%. “In this situation, it is hard to talk about reducing interest rates for our loans,” says Gulnara Shamshieva, general manager. She says that, depending on external factors, interest rates on loans have swung from 48% a year in 2000 to 24% in 2005, before climbing again. “We have to provide a balance, but MFIs cannot directly affect this situation,” she says. Besides, it’s not an easy business to do cheaply. “We are an institution that operates in rural remote areas, trying to reach clients far from towns and cities,” she says. “We provide loans without any collateral. It’s high risk, high cost.”

Lenders say they have flexible repayment schedules, giving the impression that they are not particularly tough on missed payments, and that their delinquency rates are incredibly low, from negligible to 2%. Asrorova says that IMON has never, in 12 years, sold any property that was pledged as collateral for a loan; Sydykova says Arvand’s non-payment rate is 0.5%, adding: “The repayment rate is very good. It is because the loans are short term.” This is an interesting point, and on the face of it counterintuitive: why does a short-term loan make it easier to pay? Perhaps for someone new to debt, the immediacy of a deadline makes it easier to plan for. Sobirova, the baker, asked about the challenge of repayment, says: “It wasn’t difficult for us. The first loan I received was just six months and I had to repay in instalments.”

Training

Some 25km east of Dushanbe, we are in farmland. Near a cluster of houses, a boy is driving a cow across a field. Neat pats of manure dry outside the entrances to the homes, to be used for fuel. In one of these homes, we meet Mastura Asoeva, the basket-maker. “I am an entrepreneur and farmer,” she begins. “[Before microfinance], our living standard was average.” Then 10 years ago, an international NGO got involved in the local community, providing training in agronomy, engineering and farming, building capacity and eventually leading to an introduction to Humo, one of Tajikistan’s bigger MFIs. A loan provided agricultural inputs, from seeds to training, and the modest 0.1 hectares of land she owned became the source of tree branches for her basketry.

Asoeva exemplifies that – apart from the fact entrepreneurs can thrive anywhere – the money is not a lot of use without training to go with it, which somewhat blurs the line between a commercial lending operation and a development organisation. “Initially, the quality of our products was low,” she says. She got advice on improving them; now she trains people throughout the local region, receiving income for doing so. Today, she talks like a venture-capital recipient. “I have always been able to pay on time,” she says. “I was confident in myself and I have always produced my products with confidence that I would be able to sell them and repay my loan.” She has bought a plot of land to build a new workshop “to expand my production”; the foundations are being put in as we talk.

She has no doubt that, as a woman, life would have been much worse without the loan. “It’s important women have got this motivation, this desire of developing, of moving forward,” she says. “If a person tries her best, she will never fall into poverty.” Without microfinance, though, she says she’d have to go to “individuals”, a common shorthand for loan sharks. “There are many of them in this country,” she says. “They try to make you bogged down in debts.” All four of her children have been educated on the proceeds from the baskets.

Further out of Dushanbe, Burigul Kholova is a farmer in the village of Andigon. Where I am convinced Asoeva could run Hewlett Packard with a bit of training, Kholova, a mother-of-eight, is more guarded and probably more representative of the ordinary rural people who make up the bulk of microfinance clientele. Her first loan was just TJS68 ($14.30) for potato production, followed by another of TJS300 for goat farming, and then others totalling TJS7,000. Today, she combines land farming and livestock, with one hectare devoted to wheat, maize, tomatoes, potatoes and cucumbers, and then cattle that are milked.

The loan started simply: Humo came to the village to explain what it did. Along with the loan came training, on subjects including canning vegetables, cooking biscuits and writing project proposals. Asked what difference microfinance has made, the answer is familiar. “Our business has made a tremendous change to our life,” she says. “We had only a two-room house. With the money we received, we built additional houses, we arranged the weddings of our children and we provided for our children’s schooling.” One is at university. The next goal is “to buy a new tractor to improve our life”.

Remote areas

It is time to get moving to Kyrgyzstan. Heading south in a Land Cruiser with Lotte Pang from the global development institution International Finance Corporation (IFC), which is producing a video on microfinance, Euromoney is swiftly among cotton fields, then craggier, dusty land where little agriculture is supported, beyond hardy troops of goats. It’s out here, in the rural areas, where microfinance reaches places with no alternative. The road becomes uneven, then disintegrates. At times, it is a river bed. Late in the night, the driver points across a river at dim lights on the other side. “Afghanistan,” he says.

After that it takes a full day of driving along the Panj River, which marks the Afghanistan border, to reach Khorog, the capital of the semi-autonomous Gorno-Badakhshan region of Tajikistan. This is not so much Tajik as Pamir territory, and fiercely independent. Tribally and culturally different, it took the losing side in the civil war, and not much development funding has come this way from the government since. There was a time when money in Khorog ceased to exist, and traditional barter took its place, before the Aga Khan started pouring in money. Today, it hosts the University of Central Asia.

Getting this far into the wilderness gives one a new perspective of the challenges that face MFIs. “There are some technical problems faced by microfinance organisations in remote areas, such as not having a computer or internet,” says Khoshakova. Also, keeping track of a far-flung and often large client base with a low average loan amount is a headache. Sourcing personnel is another challenge, since microfinance organisations generally don’t pay well.

Euromoney might have overdone it. Driving up the Pamir Highway, built over the mountains by the Soviets, we blow a tyre at 2am, at an altitude of 4,000m and 90km from the nearest village – in a blizzard. The drivers get out to change the wheel. They hand me a torch and tell me to walk in circles around the car. “Watch for wolves,” one says.

Surviving this, we arrive at dawn in Murgab, a half-Tajik, half-Kyrgyz town, where electricity alternates between the two halves throughout the day. It is utterly bleak and barren but beautiful, and it’s hard to see where an economy could be built here. Much employment comes from the NGOs who have set up here to help. As the sun rises, a stream of grinning children, some probably no older than four, arrive with pails to get water from the well. Japanese stickers on the well’s pump show its foreign providence.

Jigsaw puzzle

It is another full day’s drive amid the mountains and alongside a Chinese border fence, newly moved after Tajikistan ceded a chunk of its territory to China in exchange for road-building assistance, before we reach the magnificent inconvenience of a Central Asian border and cross into Kyrgyzstan. On the other side, the land is more fertile; more populated by yurts. And that brings us to Kyrgyzstan’s theme of microfinance: the fact it is 66% rural (and 34% below the poverty line). “We are a mountainous country and we don’t have many big cities or towns,” says Shamshieva at Bai Tushum, whose own client base is 80% rural. That’s a business model, as well as being a challenge. “We provide access to financial services for all unbankable people in rural areas,” she says. “They have no attractive collateral.”

It is not an easy model to run. In a place lacking financial literacy, the problem of over-indebtedness is acute. “Our credit bureau [an IFC-backed initiative aimed at helping lenders assess indebtedness of potential clients] says about 35% of clients are running between institutions,” she says. “When business is going well, maybe you are able to repay multiple loans, but when it comes to a crisis, it creates problems – and not only for one institution.”Bai Tushum won’t lend to any client who has more than 70,000 som (KGS) – $1,536 – in outstanding loans, but not every lender applies such standards.

There are other problems. We spend the night in the city of Osh. Barely a year ago, this was the scene of bitter violence that one could justifiably call ethnic cleansing. There is still an edge here; a policeman was killed the night before we arrive. Stalin has a lot to answer for in this part of the world: it was he who set the random jigsaw puzzle of borders around these Central Asian states, where in the space of 100km one can go from Kyrgyzstan to Uzbekistan, back to Kyrgyzstan, and back, and back again, and in to Tajikistan, without turning left or right off the road. Tensions between these nations flare frequently, particularly if something such as a proposed hydro plant in one country threatens to cut water flow to agriculture in another – and this is yet another challenge microfinance must face.

Driving further through Kyrgyzstan, another problem becomes evident: corruption. Euromoney is stopped seven times in a day and fined each time. “It is illegal to photograph gas stations,” says one policeman, moving through the pictures on the cameras. There are no photographs of gas stations, but he fines us anyway.

There is a big push on microfinance in Kyrgyzstan. President Roza Otunbayeva has long championed it as a cause, and the National Bank’s Emil Saryazhiev, who heads the department for methodology and licensing, lists the statistics with some pride: 630 microfinance organisations, including four microfinance companies, 317 microcredit companies, 111 microcredit agencies, and 198 credit unions. Shamshieva at Bai Tushum says there is KGS18 billion ($397 million) in microfinance lending nationwide, or 30% of the total banking sector loan portfolio, covering almost 400,000 clients – far more than the banks. Even then, she estimates that only 17% of the economically active population of the country is banked.

Despite the huge numbers, Saryazhiev says: “The National Bank is doing its best to focus more on the quality of microfinance institutions than the quantity.” Amendments are going through on the licensing of microfinance, allowing institutions to upgrade to commercial banks, with the aim that they can provide a greater range of services to rural people, including leasing.

Talking to a central banker, though, exposes another area of potential conflict with this rapidly growing sector. “[Microfinance organisations] should be for the people, not the people should be for them,” he says. “Therefore they should not think about their own profit, they should rather think about assisting people to make up capital and start their own business. Those that are concerned only about their own profit should be step by step pressed out of the market.”

This approach sounds public-spirited but provides no reason to encourage anyone to lend. Microfinance providers believe they do good. “This is our social mission, to help eliminate poverty,” says Shamshieva. However, they also hope to turn a profit. Sydykova at Arvand says: “The profitability and sustainability of microfinance means it is a long-term activity. It means it will exist, it will expand and it will cover larger areas.” It prompts efficiency too, she argues. And Asrorova at IMON suggests customers don’t mind lenders making a profit. “There is immense trust between our organisation and its clients,” she says. “Both parties are interested in getting profit out of this business.”

MFIs are also wary of being seen as somehow invulnerable solutions to poverty. “Sometimes microfinance is perceived as a treatment for all pains, all diseases,” says Vaisova at Humo. “Microfinance provides access to finance. It is not a solution to all problems.”

She is right, and as Euromoney leaves Bishkek, questions remain about the whole model: the rates, the supervision, the habits it can engender. But it is, today, the best available model, and indisputably improving many lives. “If an MFI does not operate in this country, just think of all those people in remote rural areas,” says Shamshieva. “Who will go there? Who will finance them? Nobody.”

Box: Deposits

Microfinance in Central Asia is chiefly about lending, though some institutions are beginning to take deposits. It is not easy to do so. Arvand, for example, has just 660 deposit clients. “The population has not developed a culture of savings,” says Sydykova.

At Bai Tushum, Shamshieva says deposits are vital and not just for customers. “When we started, we considered this mainly from one side: a cheaper source of funding, but it’s also a product for poor people. It’s one thing to get a loan and use money to develop your business, but one day this loan must be repaid: there has to be something at the end of the cycle, something to save.” She says deposits are “one of the ways to reduce poverty” and generate internal sources of funds for the country, but she notes that, these days, they are not really a cheap source of funding anyway.

Box: International Finance Corporation/Lars Thunell

Microfinance has become one of the mainstays of the World Bank’s IFC arm and a passion of its Swedish CEO Lars Thunell.

IFC is working with 110 MFIs in more than 50 countries. Its investee clients had an outstanding portfolio of nearly eight million loans as of June 2011, worth just under $12.6 billion. Yet the feeling internally is that much more can be done; that there are three billion poor people on Earth and, at best, microfinance reaches less than 20% of its potential market.

Microfinance can be defined in a number of ways, but to Thunell, it is chiefly about “the very base of the pyramid. It’s a way of providing access to finance and loans to these people.” IFC’s role, as he sees it, is not just about pouring money in but helping to shape a sustainable industry, with proper training, improved capacity and a supportive regulatory infrastructure. And he likes the idea that microfinance can be an engine for gender equality. “It’s a lot about women,” he says. “Women are the ones who are picking up this opportunity and moving it forward. It allows them to create their business – which in certain cultures creates some tension – and we see that they reinvest the money and spend it on their children’s education, rather than going to a bar and spending the money there.”

Some of the key debates internally at the IFC concern job creation and productive use of loans. Thunell sees microfinance as being a spur to self-employed entrepreneurs in particular, but wonders how many other jobs are created as a consequence. “The debate now is how we move some of the small informal companies into real companies and get them to grow,” he says. There’s also an explicit goal at the IFC to ensure that microfinance lending goes into productive investment, not consumption. “But there is a question how stringent you should be about that,” he says. “If an entrepreneur has a sick child, the best thing might be for him to use the money for that. It’s not all black and white, and you have to recognize that.”

The IFC acknowledges the debate about interest rates but tends to come down on the side of lenders. “The costs are high in terms of administering the systems – there is the cost of money and losses,” says Thunell. “And we have to remember, what is the alternative? Not getting the money at all, or going to one of the peddlers and paying over 100%.

“As a development institution, of course we’d like interest rates to be lower, but at the same time we would like the microfinance institutions to be sustainable. In some countries, a government has come in and said you can’t have an interest rate higher than X. And in some cases that has meant the MFIs disappear. The interest rate came down, but the loan volume came down even more dramatically.”

Asked about the possibility of encouraging a culture of indebtedness, Thunell speaks about improving financial literacy around responsibility, but also makes a more fundamental point about inclusion. “Who am I to decide that here in Europe and the US we should be allowed to borrow but we should not allow the bottom of the pyramid to?” he says. “These are intelligent people, capable people, and if you give them the right education and incentives they will handle it. I’ve been amazed when I’ve visited slums around the world, you see micro businesses all over the place. The question is how you bring those ecosystems into the bigger world to benefit from trade.”

Thunell believes microfinance is “still at the beginning” and says there are “big parts of the world we haven’t really been able to reach”. The financial crisis has made this worse still: as Western banks deleverage, the ability to source funds for MFIs is getting worse. A long-term answer is the development of local currency capital markets, but that takes time.

Part of the problem can be at the top. “There are many places where you still have governments that are either suspicious, or haven’t put in place regulations,” he says. “You have banking regulators who are watching their turf. You need different regulation for microfinance, and sometimes that’s hard to get.”

Other challenges include lenders to MFIs overestimating the risks involved – IFC attempts to guarantee first losses to alleviate the risk – and quality of information, for which IFC often works to develop credit bureaux to help lenders make risk assessment on clients.

However, the message that keeps coming through is the need to build capacity in individual institutions. “In the long run, if we’re going to scale this and reach as many millions of people as we think we need to meet, then we need to make institutions sustainable,” concludes Thunell.

With thanks to Morag Livingston and Jonathan Lewis

Smart Investor, December 2011

How should a novice approach contracts for difference? For speculation or for hedging? Quick gains or safety? To find out, Chris Wright took a trail of a CFD platform during the most volatile month since the GFC

Monday September 5

It’s been a characteristically miserable day in the markets: the ASX 200 down 2.2% at lunchtime, Asian markets faring worse. The market chat is about miserable US economic data while the fate of European sovereign debt lurks in the background like a hangover. It’s against this backdrop that I key in my password and login to IG Markets for a month-long trial. I’ve been given $20,000 of mock capital (“regrettably, it’s not real”, IG’s Chris Weston tells me as he sets up the account) and I will paper trade until I think I’ve figured it all out.

To see the article as it ran, click here: diary1 diary2 diary3

As I log in my first impression is of a data-heavy page with some regular flashing red and blue lights. Closer inspection shows the flashing is next to buy and sell prices on AUD/USD FX rates, the spot gold price, the FTSE 100 (it’s late in the day and London is in session) and crude oil. I look at the various menus and within seconds realise I need some training.

IG has also given me access to its TradeSense training modules, and I’ve decided my job for the first few days will be to get through this six-part series before trying even a paper trade. The modules, in PDF form, are well ordered and filled with examples; the early emphasis tends to be on unfamiliar things like short positions, which makes sense since most people using this will already have bought shares in the traditional manner beforehand.

In real life, you’d also be making a decision on whether to pay extra for live data fees, which depends on just how closely you want to follow the market.

Thursday September 8

I’ve gone through the six training modules in the TradeSense scheme. A lot of it is about risk management, and I like the bluntness of some of the advice: “Do not trade for fun. Do not trade because you are bored. Do not trade because you are scared of missing out.” And: “Leave your ego at the door and admit when you are wrong.” The CFD trading process seems straightforward: there is a lot of explanation around stop losses, and I’ve decided I will use them (or a limit order) on every single trade I make.

In the time I’ve been going through these, the world has gone through yet more tortuous ructions: the Swiss central bank has set a ceiling (or floor, depending on which way you’re looking at it) for the Swiss franc against the euro and the fear in world markets now is of a currency war. It doesn’t look good.

For various reasons tedious and unfortunate, I own a ton of bank stocks which are a mile underwater. Had I had a CFD account earlier, I could have taken a short position against banks in order to hedge. It’s too late to insulate those losses, but frankly it looks like things will get worse before they get better, so I decide to short Macquarie as a hedge. The way I see it, if I’m wrong, then at least my other bank shares will be rising. Part of me can’t help but feel that this is cutting off my nose to spite my face, and that I should just have the courage of my convictions; the other half of me thinks it’s prudent risk management and if I’d done this ages ago I’d be living in a larger house.

Conducting a trade is very simple: pop the code into the Finder window, do any research you want to do in another window (charts, Reuters info, etc), set the size of your trade, put a stop loss on if you want to, and press buy or sell. I decide to sell 100 Macquarie shares, which are worth $2,380, roughly 10% of my opening account.

But I’ve forgotten just how powerful leverage is in a CFD platform. You only need to put down a fairly modest amount in order to effect a major exposure. So having made what, to a usually long-only investor, appears a reasonably significant trade, I notice that I still have A$19,992 of funds left, and have spent just A$87.49. My initial reaction is: oh, I should make it a much bigger trade. And then I realise I’ve learned my first lesson about CFDs. The power of leverage is great, amplifying good and bad calls equally, and just because you have the ability to use it doesn’t automatically mean you should.

I leave Macquarie as it is but also decide to short the European market. Nothing in recent weeks has made me think anyone has the faintest idea how to fix the European sovereign debt problems and that things are going to get worse before they get better. Again, there’s a logical hedge here: while I don’t own many European stocks I do have lots of stocks that fall when there are global macro worries – indeed, it’s hard to think of any that don’t. So I find that, without really thinking about it, I’m using CFDs as a hedging tool rather than a money grabbing exercise.

So I go to the indices panel and pick the EU 50. I take a bigger position here, and now I’ve used a total of A$2,000 of margin. Once again I’ve used a stoploss so, if I’ve understood the system correctly, the trade will close out at a point where my maximum losses are about A$4,000. While I wouldn’t normally want to lose that in real life, I comfort myself with the fact that if it happens, then probably my other shares (the ones I really own in this bitter reality) have been going up.

Within seconds I’m down about $500. I log off and get some work done.

Friday, September 8

Next day, I find myself up about $2,000. Suitably galvanised, I decide it’s time to try FX.

Being only a share trader by background, this is new to me, and it takes me a little while to work out which way I ought to be betting (let’s be honest, with forex, it’s all betting) to express my view. I have a theory, you see, and want to try it out: Switzerland pegged of Swiss franc, to support its exporters, is another bit of news that’s not great for the euro. Also, people are going to be looking for another safe haven currency if the Swiss franc can’t move; everyone’s talking about the Singapore dollar, but why not the Aussie? What could be safer and more supported than our very own Aussie dollar? So I take a long position on the Aussie-euro cross-rate. I notice that just one lot requires more than A$1,000 of margin – that’s a reflection of the leverage involved in CFDs. I decide to put my stop loss in 30 pips below the trade, which means that if the exchange rate falls from the 76.30 cents where I’ve bought in to below 76, the trade will close. On reflection I realise that’s probably too close to be sensible in a volatile market – just 0.3 cents! But I’m a bit paranoid about the leverage and the potentially bottomless pit of getting my call wrong.

Watching the FX screen is like a 70s disco: all flashing red and blue lights moving around. All it needs is a mirrorball. The FX market moves so exceptionally fast I can see why most people leave it to the professionals.

Monday September 12

After I turn off my computer on Friday, the chief economist at the European Central Bank resigns; the European market reacts as it does to anything with a hint of negativity about it and plunges. When I turn my computer back on on Monday morning, my short position on European stocks is in profit to the tune of Eu13,000; I instantly close my position. To my astonishment my A$20,000 of equity now stands at A$36,240. Clearly I’m a genius.

After this initial moment of euphoria subsides (it is, after all, pretend money) I analyse why I’ve just acted as I have. My view that European markets are going to get worse is considered and, I think, well thought out. It’s a reasonably long term view. So why have I just closed my position barely two days after opening it? To preserve profits, sure, but if I believed in that position, why not let it run?

I realise I have brought some preconceptions to CFDs and am acting accordingly. I have read that most people who use CFDs have their positions open for only a couple of days, sometimes even hours, and so I’m behaving in the same way. But the truth is, if you’re really going to use a CFD platform for hedging, there’s no reason to do that.

The very next day, I will regret this: Greece defaults and European markets plunge. Pretty much every day for the rest of the week something utterly miserable happens in Europe, culminating with a rogue trader losing US$2 billion of UBS’s money at the end of the week. Had I stuck by my convictions I’d have made more than twice as much – but, then again, I’m still ahead.

What next? I’m not generally using the platform to buy stocks I hope will go up – it’s easy enough to do that with my usual online broker. The novelty of a CFD is to trade things I can’t normally trade. So next, I decide to take a look at oil. IG Markets hosts a range of different oil contracts (Brent, US light), in a variety of amounts and durations. I’ve decided that if the world is in a mess then probably demand for oil will decline, plus the Middle East seems to be getting a bit calmer, so I take a short position on US Light Crude. I think about doing something similar with other commodities but can’t decide what I actually think and so, lacking an intelligent reason to trade, I don’t.

Next day, I find that both my FX trade and oil trade moved too far against me and hit stop losses. I lost a bit, but not too much, and am still well ahead overall; I’ve decided I like stop losses. In CFDs, putting in a stop loss also reduces the amount of margin you have to commit.

I’ve been having a think about gold. It’s at an all time high and there is more and more talk of a bubble. But I don’t see any reason for a decline in the near future. So I go long the spot gold price. This, I promise myself, will be a longer trade. I also go long the Aussie dollar against the US dollar, since it has retreated a bit lately and I can’t really see why.

Friday September 16

Swamped by deadlines, I take my eye off the ball for a few days, and it costs me. Both my trades from Monday – long gold, and long Aussie dollars – go against me and hit their stop loss positions. Worse, I realise I’ve miscalculated the margin on the FX trade and lost twice as much as I thought I would – wiping out the gains on shorting the European stock markets. I’m back pretty much where I started. It’s an expensive mistake, except for the fact that it’s not a real trade – and I am reminded again just how important it is to try paper trading first. Next time, when trading with real money, I won’t make the same miscalculation.

The following week I have to go to America and will rarely be anywhere near the system during trading hours. The only sensible thing to do is to hedge existing positions – which, again, means going short stock markets.

Tuesday, September 27, 2011

My week in America, attending the World Bank/IMF annual meetings, is an apocalyptic series of press conferences and meetings among the leaders who are supposed to bring the world away from the threat of recession and Eurozone collapse. To say that they don’t inspire much confidence is like saying the Titanic had a slightly disappointing maiden voyage. The markets, unimpressed, crash; the Dow loses almost 400 points in a single day on the Thursday.

So with my short positions on world stock markets, I must have made a fortune, right? Wrong. Although my call on stock markets declining has been entirely correct, I manage instead to lose half my money because I have failed to take into account volatility. On the way down, markets bounce and wobble, and my stop losses are too close to the level I bought at – so I get wiped out, despite having actually been right. This happens twice.

Seeing this, I then go short again, with a wider stop loss, and this time eventually get it right. By the end of the month, and the end of my four week trial, I have ended up just short of where I started out.

It takes some kind of incompetence to go short during a market rout and still lose money. Still, I have learned some valuable lessons, and am newly convinced of the merits of CFDs. Were I to start from scratch with real money, having learned about the pitfalls involved, I think I’d do reasonably well.

Postscript

Since the money is not real, I don’t close out the trades on the day I stop trading to file this article; I see what they’re worth that day, take that as my closing balance, and leave them. Two weeks later, out of curiosity, I open the system again to see if the account is still active; markets have rallied and all the capital has been wiped out. Of course this isn’t real, since in reality I would have closed the positions when I wanted the money. But it’s a cautionary tale: never leave your positions unmonitored and forgotten!

So what have I learned?

1. Spend a month paper trading! You may think you know what you’re doing with a new system but you’re very likely to find a couple of areas along the way where you mis-step because you’re unfamiliar with the program and its processes. There’s no harm in taking a few weeks getting to know the ropes.
2. Know your strategy. It may be, for example, that you want CFDs in order to hedge your stock exposure, or to take a position on particular asset classes you can’t normally get exposed to. But don’t just dip in and out like it’s a sweet shop: know what you want to do and execute it calmly.
3. Stop losses are great. It would be rash to use CFDs without them.
4. BUT, be careful where exactly you put that stop loss. On three separate occasions I took a position, which within a week was correct, but instead lost money because my stop loss was hit in the volatility.
5. Be sure your understanding of leverage, margin and exposure is correct. This is another thing I got wrong to my (theoretical) cost, taking a much more leveraged exposure on a foreign exchange position than I had intended to. No harm done in paper trading – that’s what it’s for, to iron out these mistakes before they matter – but you wouldn’t want to make an error like that in real life. Leverage on FX contracts can be very, very high.

Qantas The Australian Way, December 2011

In 1997, Arundhati Roy’s book, The God of Small Things, introduced the world to the southern Indian state of Kerala. In truth, it’s an odd sort of a cultural flag-bearer: it is a story whose key moments hinge on prejudice, betrayal and loss, and doesn’t always portray its community in a positive light. But its language is so evocative, from the “fatly baffled” bluebottles and the “nights, clear but suffused with sloth and sullen expectation” of the opening lines, that it has served as an incantation for millions of readers. Many have found it so seductive that they have come to see the place for themselves.

Today, the areas Roy wrote about scarcely need any help in attracting visitors. A few miles from the towns she described sits Kumarakom, where resorts are thriving to attract tourists to one of India’s most beautiful regions.

To see the article as it ran in Qantas: The Australian Way, click here: qa1211_Kerala.indd

Just two hours from the city of Kochi, which has direct flights from Singapore and the UK among other places, Kumarakom has become a leading place to enjoy one of southern India’s most compelling attractions: the Kuttanad backwaters.

It is impossible to discuss this place with anyone who has been here without the expression “god’s own country” turning up sooner or later – it’s part of state branding now –  but it is unarguably magnificent. On converted rice barges called kettuvallam, guests drift around a network of inland lakes and rivers, watching everyday life proceed on the banks: people bathing and washing clothes in the water; carpenters artfully chiseling Jesus and Virgin Mary statues for the Syrian Christian churches of the area; men standing in tiny boats and herding hundreds of ducklings up waterways toward dedicated farms.

The houseboat experience, while fully entrenched – around 500 of these boats ply the backwaters – is not (yet) ruinous or twee, and is simply one of the most relaxing and peaceful things one can do in India. Kumarakom, sitting on Lake Vembanad which connects to the backwaters, is perfect for exploring it: since the resorts back on to the lake, houseboats come straight to their door to collect them.

Kumarakom is also a starting point for boat trips through the more intricate and less visited networks of waterways that lead many miles inland between the paddy fields, where sometimes the rivers are all but invisible beneath the weight of surface duckweed covered with blossoming hyacinths. An hour or so in one of these boats will take you to Arundhati Roy’s home town, Ayemenem, in which most of the action of her book takes place; the house and factory are based on real locations (and the pickle factory is run by Roy’s uncle).

One Kumarakom location, the Vivanta, operated by the Taj group, is where the area’s tourist industry and Roy’s literature coincide. The resort’s centerpiece is a grand, 134-year-old house built by a missionary called George Baker, and housed four generations of his family before the last of them left in the 1970s, after which it passed first to the state, then to the Taj group. Fans of the book will know this as the secretive History House, in which the novel’s devastating climactic scenes take place; Baker, in the book, is kari saipu.  The resort has handled its heritage with some deference, and was strengthening the building’s roof and upper stories at the time of writing; it has built a limited number of guest villas between the house and the lake, among ponds designed to nurture local birdlife. Roy wrote of “cold stone floors and billowing, ship-shaped shadows on the walls, where waxy ancestors… with breath that smelled of yellow maps whispered papery whispers.” And, while it’s hard to feel that in the bars and hotels that sit in the former Baker family rooms, the place remains evocative and atmospherically decorated.

Roy was somewhat scathing about the tourist influx into Kerala. “Toy histories for rich tourists to play in,” she (or, more precisely, the book’s narrator) called it; “history and literature enlisted by commerce.” She bemoaned the compression of Keralan traditional kathakali performances, “collapsed and amputated”, and mocked the “old communists, who now worked as fawning bearers in colourful ethnic clothes, stooped slightly behind their trays of drinks.”

Nevertheless, Kerala and tourists do appear to have embraced rather well so far: the interaction is still friendly, the waves from the shore apparently genuine, the people engaging and not obviously cynical. As always, there’s a risk: in the backwaters, the impact of five hundred barges running daily on diesel cannot help but be felt eventually. And there are ever fewer children along the main byways who have not learned the ubiquitous: “One pen! One pen!” But tourism has been better planned along the backwaters than in many other places in India.

Kerala is a fascinating state, politically and culturally, and this too forms part of the texture of Roy’s book. Kerala and West Bengal are among the only places anywhere in the world to have democratically elected a Communist government, and both states have consistently voted them back in again ever since. Several side-effects of this are visible in the state today: high literacy; an orderly plotting of land; and, apparently, a higher representation of women in bureaucracy.

And, while local theatre and dance is no doubt compressed as Roy complained, it is at least made central to tourists in the resorts, along with many other local charms: the practice of ayurvedic medicine and massage, which thrives in the hotel spas as well as in local towns; and Keralan food, quite different to other Indian cuisines, with widespread use of the local bounty of coconut and mango.

Kumarakom is just going to get bigger. A Radisson has opened here now, and hoteliers report growing tourist numbers both domestic and foreign. British lead the charge, with Australians somewhat unrepresented: they tend to head further north. But not the least of Kerala’s attractions is that it offers the magnificence of India with a palpable dilution in the hassle involved in enjoying it. It’s a peaceful, calmer India, and those who overlook it for the tout-clogged riches of Rajasthan and Agra are missing a trick. There are certain places where you tell your closest friends to go there before it gets ruined, but you don’t tell everyone because you don’t want to be part of the ruining. This is one of those places.

BOX: Elsewhere in Kerala.

Kerala has it all. It is served by two international airports, in Kochi (Cochin) and Thiruvanathapuram (Trivandrum) – many travelers enter by one and leave by the other. Aside from the world-famous backwaters, attractions include:

• Kerala has some of India’s best beaches, although Australians will be disappointed by their cleanliness. Near Trivandrum, Kovalam is the most developed beach centre, with top-drawer resorts, though it has correspondingly lost much sense of local charm; those in search of a more Keralan experience instead head further north to Varkala, where the beach is flanked by laterite headlands and the hotels perch above it on a scenic cliff.
• Kerala also offers some of the best wildlife reserves in the south. Arguably the best, the Tholpetty and Muthanga reserves within the Wayanad Wildlife Sanctuary, take some getting to but offer wonderful scenery, good eco-resorts, and occasionally even sightings of tigers. Closer to the cities, Periyar, centred on an artificial lake, is a good place for spotting wild elephants; Thattekkad is a world-class bird sanctuary; and Eravikulam is famous for its antelopes.
• Munnar is a tea-growing town high in the hills with beautiful mountains and forests. It’s also close to the Eravikulam wildlife reserve.
• Of the cities, Kochi/Cochin is perhaps the most attractive, with a harbour and well-preserved colonial architecture embracing the Portuguese, Dutch and British eras. Its signature sight is the lines of Chinese fishing nets, a beautiful image at sunset.
• Kerala is the best state for experiencing Ayurveda – whether a massage or lengthy stays for holistic herbal treatments. It is also known for its kathakali theatre and the kalarippayattu martial arts. Kochi in particular offers a range of kathakali experiences, from a one hour introduction to (literally) all-nighters. One of the highlights, for many, is to get there early to watch the extravagant make-up being applied.

Lake Vostok is one of the largest freshwater lakes in the world: about the area of Lake Ontario, and much deeper. But you’ve never seen it. Neither has any other human being. That’s because it’s almost four kilometres under the East Antarctic Ice Sheet, kept liquid by the pressure of the ice above it. And it’s been in complete isolation from the rest of the world for millions of years – since before the evolution of mankind.

But we are probably just weeks away from penetrating this lake for the first time. In November a team of Russian scientists and engineers will return to Antarctica to take the last step in a decades-long effort to drill to the lake. They are just metres away already. And when they break through, the secrets of the most pristine and remote wilderness on earth will be revealed – a discovery that many in the scientific community wish could be left unmade.

To see this article as it ran in Discovery Channel Magazine, click here: 21. BIG DRILL

Vostok is so remote we only became certain of its existence after analysing satellite data in the 1990s, following curious British radar soundings 20 years earlier. It so happened that it was directly underneath Vostok Station, a facility the Russians had set up in the 1950s.

The Russians, without knowing there was a lake there, had been conducting deep drilling for ice cores since 1970, and continued towards the lake before stopping in 1999 amid concerns about contaminating the lake. Progress would be halted for eight years of debate with the international community, but drilling resumed in 2005 and last February reached 3,720 metres – probably about 50 metres from the surface. Then, tantalisingly close, they had to fly out on February 6 to get the last plane out before the winter set in.

So what do we know about Vostok? “We know this is the largest sub-glacial lake in the world,” says Valery Lukin, head of the Russian Antarctic Expedition. “We know the character of its coastline, the thickness of the ice sheet, the thickness of the water and the sedimentary rocks.” He says the lake has been untouched by any external force for “many millions of years. I believe the lake was formed before the glaciation epoch in the Antarctic – and that took place 35 million years ago.”

We don’t know, but can estimate, exactly what the water is like: Lukin believes there is an upper layer of fresh water, and beneath it a layer of mineralised water, with geothermal activity beneath it. “We assume the surface layer is very rich in strongly dissolved oxygen, which kills all living organisms.” But not the layer beneath. And that’s where things get interesting.

Ice cores taken from above the lake – so formed from frozen lake water below, not glaciations above – have shown some very strange findings. “In the cores we have detected bacteria – the same sort of bacteria which inhabits very hot water,” Lukin says. It’s similar, he says, to bacteria found in the geysers of Yellowstone national park, or the smoking underwater cones along the mid-Atlantic ridge. Not what one would expect here: Vostok Station is home to the lowest temperature ever recorded on earth, minus 89.2 ̊C.

Reaching the lake, and learning from it, brings together an eclectic cast of characters. Lukin, who has headed the Russian Antarctic Expedition for 21 years and has had direct involvement with Vostok since 1994, spent the first 20 years of his career as an oceanographer, once leading a landmark US-Russian expedition to the Weddell Sea that established a station on drifting ice. Today he is more of an administrator, co-ordinating matters from St Petersburg, and will not be at Vostok for the breakthrough.

The team on the ground is typically of 10 people, eight drillers and two glaciologists, who will work in shifts 24 hours a day on the drilling (if you stop, it freezes in the borehole). The man in charge of the drill, and of all operations on the ground, will be Nikolay Vasiliev – not a scientist or a polar explorer but a drilling specialist from the St Petersburg State Mining Institute. The two glaciologists assist the drillers with knowledge about the ice, and then examine the cores. “I make preliminary measurements to determine the total length of the ice core, and the depth of the borehole,” says Alexey Ekaykin of the Arctic and Antarctic Research Institute, one of the glaciologists who has served on previous teams and should go back in November. “Then I cut the ice core into samples, and measure properties such as electrical connectivity.”

Another key man, not on the ground in Vostok, is Sergey Bulat, a molecular biologist from the Petersburg Nuclear Physics Institute. Pulling bacteria out of an ice core is a treacherous business: there’s the constant risk of contamination from drilling fluid and from the handling of ice on the surface. Interesting things are often found in ice cores, but unless it can be proven that they are not caused by contaminants, they are not much use. Bulat created a database of contaminants so as to eliminate them; it’s through his approach that we know about the hot spring-like bacteria in the lake, suggesting hydrological activity and the likelihood of life. “If we find something, it will be a real discovery,” says Ekaykin. “On the other hand, we do not know of any ecosystem on our planet which does not contain any kind of life. So if we do not find anything in the lake, that’s also a great discovery.”

There are plenty who believe we shouldn’t be looking at all – or not yet. Claire Christian of the Antarctic and Southern Ocean Coalition acknowledges the great scientific merit in understanding Vostok. “However, because these lakes have been isolated from the outside world for so long, there is a real danger that the act of exploration itself will damage the very characteristics or organisms that researchers are most interested in,” she says. “There is no rush to penetrate any of the lakes.” Vostok is actually one of dozens of sub-Antarctic lakes, though by far the biggest; ASOC advocates technologies be tested on smaller lakes first. It also questions why Russia is using “an old dirty borehole” rather than a new one drilled with the latest technology.

There are four methods of deep drilling in the world: Russian, European, American and Japanese. The first two are more or less the same and use a mixture of kerosene and Freon as drilling fluids, whereas the US system uses hot water – the system ASOC would rather see used, citing US-led academic findings. Lukin disagrees. “I am certain hot water drilling is more harmful, and brings more contaminants, into the sub-glacial lake,” he says. He explains that when the drill finally breaks through to the water’s surface, it will immediately be withdrawn, and pressure will push lake water up the borehole. Since kerosene and Freon are lighter than water, and cannot mix with it, the contaminants will not enter the lake. Lukin cites the accidental breach of a sub-glacial lake in Greenland by Danish drillers, who were also using kerosene, as an illustration the technology works.

The drilling itself has got a lot more difficult at greater depth. “The properties of the ice are changing as the temperature changes and we approach melting point,” says Ekaykin. Lukin says crystals here can reach three metres in diameter. “Nobody in the world has faced crystals of such size,” he says. “It is very difficult.” Indeed, in an event that worries environmentalists, in October 2007, a drill was irretrievably lost, requiring a new divergent borehole to the sunk. That original drill’s still there, trapped in the ice.

So what’s next? In November the team of drillers and scientists will begin a long, long journey south from St Petersburg, first to Cape Town, then by plane or ship to Novolazarevskaya Station near the Antarctic Coast, then by small Canadian planes to Progress Station, and finally on to Vostok. “They will spend some time reactivating the borehole and install new instrumentation in the drill system,” says Lukin. “In the beginning of January we will start the drilling operations proper. We believe we will be successful this season.”

When the water rushes from the lake into the borehole, it will swiftly freeze. It will probably be the next season, 2012-13, before the team can go back, extract a core and learn about the lake’s secrets. The following season, the intention is to lower some measurement systems into the lake to learn more. That’s when we should discover if there’s life down there – possibly something we’ve never encountered before.

The team are trying to remain sanguine. “For me, I am not in a hurry,” says Ekaykin. “If we have one more year to prepare, that’s not a tragedy at all.” He also manages to make life at this most desolate of locations sound bearable. “It’s not that harsh in the summer. Minus 15-20 in the daytime, minus 25 at night. And it’s not very windy.” But there’s a palpable sense of expectation.

Arguments about the ethics of the program will rage long after breakthrough takes place, but the Russians are not cowed. “It is human nature that we want to explore unknown objects,” says Ekaykin. And Lukin has a different take. His interview has been conducted through a translator, but at the contamination question he grabs the phone and speaks in English. “Tell me,” he asks. “Did the Americans worry about contamination when they went to the moon? Please write this.”

SIDEBAR: How others do the drilling

The Russians are far from the only group to have tried drilling in Antarctica. Many recent initiatives have been led by New Zealand, which runs the Scott Base that supports much of the scientific research conducted in Antarctica during summer months.

One of the most significant is ANDRILL, for ANtarctic geological DRILLing, a collaboration between New Zealand, Germany, Italy, the UK and US involving more than 200 scientists and researchers so far. This project’s mission is to drill back in time: it extracts cores to reveal the history of glacial and interglacial changes that have taken place in Antarctica – and to help model scenarios of global warming for the future.

Antarctica New Zealand manages operations and logistics for Andrill, while the scientific research is coordinated through the University of Nebraska-Lincoln. In 2006 and 2007 near McMurdo Station it drilled through ice, water, sediment and rock to recover two cores of up to 1,200 metres, representing some 20 million years of geological history. Scientists have been analysing the cores ever since, and have learned that the West Antarctic Ice Sheet was much smaller during a period of warm global climate – “similar to those projected to occur within the next 50 to 100 years,” says Richard Levy, senior scientist and Andrill project leader. Andrill is now preparing to drill to ice and sediment reflecting conditions 24 to 45 million years ago at a new project called Coulman High, with drilling expected to begin in 2014-15.

One notable characteristic of the Andrill program is that is uses hot water drilling, as opposed to the kerosene and Freon mix used by Russian drillers. At Coulman High they will melt a hole through the 260 metre Ross Ice Shelf. “We melt snow to produce the initial water required to melt the hole through the ice shelf, and then pump sea water through the system to maintain an open hole once we have penetrated the bottom,” Levy says. They then lower a steel pipe through the hole down to the sea floor, to accommodate the drill.

Qantas The Australian Way, October 2011

Two South Korean soldiers stand facing north, fists bunched, in a taekwando stance, staring straight ahead. A few metres away a North Korean soldier looks straight back at them. More South Korean soldiers join their colleagues and glare with them, their intended sense of menace enhanced by sunglasses that leave only the rictus clench of their jaws from which to guess their expression. Time seems to stand still. But the moment passes; an everyday standoff.

And the 20 watching tourists file away.

Welcome to Panmunjom, also known as the Joint Security Area (JSA) – the border of North and South Korea. Bill Clinton once called this “the scariest place on earth,” and he was on to something: the tension is everywhere in this extraordinary location, the only place where you can see what’s left of the Cold War up close and personal. It’s a stark illustration of one of the most dangerous potential flashpoints on earth, a mental and sometimes physical conflict that has held fast for more than half a century. But it is also, improbably, the heart of a burgeoning tourist itinerary.

To see the article as it ran in the magazine, with photography, click here: qa1011_Korea indd

Three Seoul tourist operators – only three have been licensed – specialize in tours to both Panmunjom and the broader demilitarized zone (DMZ), a 4 kilometre wide, 241-kilometre long coast-to-coast no-man’s-land along the border that was the basis of the 1953 armistice at the end of the Korean war. And if it seems an absurd thing to do with a free day in Seoul, think again; it’s hard to think of a tour that could teach you more about the threat and tension that Koreans face every day.

A typical tour takes one of two approaches, or combines them into a single long day. DMZ tours focus on one of the four North Korean tunnels that have been discovered in the South’s territory since the 1970s, each one bigger and more sophisticated than the last. The third of them – the biggest and the closest to Seoul, having reached just 44 kilometres from the city – has been opened to tourists as an attraction, and a popular one too.

Donning a hard hat and heading down a slope 73 metres into the ground, visitors reach a dark tunnel that runs 1.6 kilometres, of which they can walk a few hundred yards. It is an extraordinary sight. Officially it’s two metres by two, although it never really feels that high; apparently that’s big enough to get a full infantry battalion through in an hour. At the end of the section that’s open is one of three concrete blockades, each protected by coiled razor wire. It is chilling to think what’s beyond them and what these tunnels were intended to do.

It also demonstrates the way that these tours combine the terrifying with the somewhat surreal. When South Korea discovered this tunnel by boring in 1978, the retreating northerners set about coating the walls in coal dust, so that they could claim they had been looking for coal; to this day, all you have to do is rub your finger against the wall and find your finger coated black but a solid block of coal-less granite behind. In fact, the whole idea is somehow preposterous: this instrument of invasion has been turned into a lucrative money-spinner for the South Korean state, which is nothing if not making the best of things. Guides say that the north has since, in all seriousness, asked for a share of the proceeds, since it put the effort into digging the tunnel in the first place.

The DMZ tours usually take in the Dora Observatory too, where there is a viewing platform with binoculars allowing a clear view into the North. From a distance, it looks surprisingly beautiful: a range of pleasing peaks, often covered in snow. From here one can clearly see two of the tallest flagpoles in the world, one on each side of the border, a game of one-upmanship eventually won by the North Koreans whose flag files some 160 metres high.

It’s no surprise that visits into places like these come with some eccentricities. Most nationalities (but not South Koreans, who must undergo a separate approval process) can do the tour, though you will have to sign a disclaimer warning of the “possibility of injury or death as a direct result of enemy action”. Photography is complicated too. At Dora, there is a painted yellow line some distance back from the viewing platform; you can’t take pictures any further forward, thus rendering any useful picture of the north impossible. (It may be, though, that this is to stop cameras being mistaken for weapons by alert snipers. “We had to close this observatory recently because you are a target for North Korean soldiers,” says our guide. “But I think it should be OK this week.”) Elsewhere, you can’t take a camera into the tunnel, but can buy a jigsaw of a photo of the tunnel in the gift shop, right next to the DMZ baseball caps and the officially endorsed DMZ barbed wire gift sets; and you can’t take a lens any bigger than 100mm into Panmunjom.

Still, the Panmunjom visit – the alternative to the DMZ tour – does illustrate clearly why tour guides take precautions. When one is facing North Korean soldiers with binoculars barely 50 metres away, it is best not to give them any reason to think you are armed. Photo-opportunities here are strictly moderated, and the trip is preceded by a detailed briefing at nearby Camp Bonifas – named, if a reminder of the gravity of the place was needed, after one of two US soldiers hacked to death with axes after attempting to cut down a poplar tree that was interfering with the view between two checkpoints.

There is, though, plenty to see here – far more than one might expect. The border is straddled by a series of blue UN buildings in which official meetings are still often held, and you can enter one. Since the border bisects the main table (upon which three microphones record every word that is spoken), this is the one place where one can wander unrestricted into North Korea, or at least a few metres of it. Next to the building, you can see a small concrete line that marks the border. Also in the JSA, you can see the so-called Bridge of No Return, one of two locations (the other being the Freedom Bridge at the south of the DMZ, covered on both tours) where prisoner exchanges have taken place over the years.

The whole area is full of surprises. There is a town practically on the border on the South Korean side, called Daesong-dong, and apart from the constant threat of imminent invasion it’s not such a bad place to live: there are no taxes, no national service, and the land is free, while farmers raise ginseng, rice and beans. Also, since nobody in their right mind (Daesong-dong apart) has built within the DMZ for more than 50 years, it has evolved into a wildlife reserve, with flocks of birdlife, and wild deer skipping within sight of the tour buses.

There is a hope that, when reunification comes, this will remain an environmental haven. But the truth is reunification is much further away now than it was eight or nine years ago. And for all the perplexing novelty of a border tour, it’s also a sober reminder of the brutality of the Korean War. They call it a fratricidal war: that is to say, brother against brother. A glimpse of the border in action provides both a reason for hope that it will never be repeated, and an illustration of the fear that it might.

BOX: You went where? Five destinations to brag about

1. North Korea. It’s actually not that hard to visit North Korea for real. The established experts are Koryo Tours, a westerner-staffed outfit in Beijing; in particular they specialize in getting people in to the stunning Mass Games, among the most remarkable things you will ever see. It’s safe, too – apart from the flight in.
2. Darvaza. In the 1950s, Soviet gas explorers accidently collapsed the roof of a cavern in the desert. Within, they smelled methane, so decided to burn it off before continuing exploration. They thought it would take a day or two; it’s still going after half a century. Now in Turkmenistan, camping next to this vast, flaming crater is like the gates of hell – which occurred to the locals too, since Darvaza means Gateway.
3. Chernobyl. Remarkably, Chernobyl is now a tourist attraction run by the Ukrainian government. The 30-mile exclusion zone is now open, although some areas are still considered too dangerous to visit.
4. Anthrax Island. Gruinard Island, off the magical Scottish highlands, has a sinister past as a hope for biological warfare testing  in 1942. But after decontamination – including the entire island being drenched with formaldehyde – it was declared clean in 1990 and is now openly promoted to tourists, as well as harbouring plenty of healthy sheep.
5. Everywhere else. When you think about it, the world is full of macabre attractions predicated on suffering of some form or another, from Alcatraz to the Tower of London, Changi prisoner of war camp to Mandela’s cell on Ryker Island. And if you think Australia’s different, just pop over to Sydney’s Pinchgut Island.

Euromoney, April 2011

Records are made to be broken, but you normally have a fair idea of the candidates for breaking them. Had you laid bets a year ago on what would replace Malaysia’s Petronas Chemicals as southeast Asia’s largest ever IPO, you might have plumped for an Indonesian resources play, or a Singaporean sovereign wealth fund spin-off, or even another arm of Petronas. You’d have had a lot of guesses before you came up with a port operator that isn’t based in southeast Asia, doesn’t have a single asset there, is owned by Hong Kong’s ultimate tycoon and has opted not to list as a company at all, but a trust.

But this is the curious case of HPH Trust, the owner of about 60% of Hong Kong’s Kwai Tsing container port, Shenzhen’s Yantian container port, and a few auxiliary assets. HPH Trust is sponsored by Hutchison Ports Holdings, by some measures the world’s top port operator; that, in turn, is owned by Hutchison Whampoa, the conglomerate controlled by Li Ka-Shing – the tycoon’s tycoon, as central and iconic to Hong Kong as the Bank of China building. Yet this two-port trust of Pearl River assets raised US$5.5 billion in a listing on the Singapore Exchange in March, breaking the southeast Asian IPO record by over US$1 billion.

So what was this jewel of Hong Kong doing seeking a listing in Singapore? For the Singaporeans, this is a coup to beat all coups. Attracting foreign listings has been a mainstay of the SGX’s approach to business for years: it calls it the Asian Gateway strategy, and by the end of 2010 it had resulted in 321 non-Singaporean companies accounting for 47% of the market’s overall capitalization. In a country – no more than a city state – too small to grow much further on homegrown listings, attracting foreigners is the future. But many of them have been Chinese private sector mid-caps of variable quality; few heavyweights, beyond Jardine Matheson and Noble Group, tend to opt for Singapore. Bringing in a multi-billion dollar IPO from a foreigner, and a Hong Kong conglomerate spin-off to boot, is more than they could have hoped for.

But there is really only one reason this prized Hutch asset has made its way to a Singapore listing rather than Hong Kong, and it has nothing much to do with the rivalry between the two Asian cities, or getting out of the way of Chinese state-owned listings in Hong Kong, or even valuations. It is all about a structure called the business trust.

The business trust structure was launched in Singapore in 2006 with the world’s first shipping trusts, Pacific Shipping Trust and Rickmers Maritime. It’s sort of a cross between a company and a real estate investment trust (REIT) – and Singapore is unarguably the ex-Japan Asia leader in REITs (it has 22 of them, worth US$27 billion). The idea of it is that it allows assets such as property or infrastructure to be monetised so that they pay their income distributions out of cash flows instead of accounting profits. For a business with stable cashflows and high initial capex, like a utility or an infrastructure business, a business trust structure gives it greater freedom in how it pays dividends.

It is, from the investor perspective, a yield play. “Our market participants and investors are familiar with such yield instruments,” says Lawrence Wong, head of listings at SGX. “The tax incentives and business friendly regulations have made Singapore the choice venue for the listing of such structures.”

When business trusts first came along, they were touted as an important new line of business alongside the REITs, but the truth is that until now they have been nothing like as impressive. Wong says SGX has nine business trusts with a combined market cap of US$11.9 billion, but US$8.8 billion of that is the post-IPO market capitalization of HPH Trust itself.

Instead, several businesses have struggled under the structure, including one of the first, Rickmers, which in 2010 received a report from its parent group’s independent auditor, PricewaterhouseCoopers, questioning its ability to survive owing to its debt load. Rickmers did stay afloat, but it – and, to a lesser extent, fellow shipping trusts First Ship Lease Trust and Pacific Shipping Trust – has struggled within the business trust model precisely because of being positioned as a dividend play. On one hand they are obliged to pay out as much of their operating cash flows as possible as dividends; but that doesn’t leave much margin for debt repayment or capital management, particularly when the shipping industry itself is under pressure. Even those trusts that have not struggled have been somewhat illiquid.

So why take this structure? After all, Hutch had considered a lot of alternatives for a listing venue. Those close to the deal say that it undertook feasibility studies for a listing in Hong Kong, the US, Australia and Europe besides Singapore, declining on first choice Hong Kong precisely because it lacked this seemingly underwhelming business trust structure.

It’s true that ports are the sort of operations that business trusts are pitched at: infrastructure with steady and reasonably predictable inflows. And Canning Fok, group managing director of Hutchison Whampoa, pointed this out when asked at a pre-listing press conference in Singapore about why he had chosen this route. “Why are we listing in Singapore instead of Hong Kong? If you look at the characteristics of our assets, most of the capex has been spent in the past, and in the next five to six years there is no significant capex that needs to be spent,” he said. “The business trust is welcomed by the investment community on this aspect, because then the cash flow generated by this business can be distributed.”

But then he added something else: “These two ports are important parts of our portfolio going forward. With our business trust structure, we can aim to avoid potential hostile situations with regards to our shareholders.”

And that, more than anything, is the point.

On page 71 of the vast, 600-page-plus prospectus, one finds this. “Under the Trust Deed and the Business Trusts Act, the Trustee-Manager may only be removed by Unitholders by way of an extraordinary resolution (that is, by the approval of not less than 75% of the voting rights of all Unitholders who vote on such resolution). Accordingly, a Unitholder who owns or controls more than 50% but less than 75% of the Units and has statutory control of HPH Trust may not be able to remove the Trustee-Manager.”

In other words, you could become a majority shareholder of this thing and still not have the right to change the trustee-manager, which in this case is Hutchison Port Holdings Management, and by extension Hutchison Whampoa. And there’s no special treatment been given to Hutch here to attract this listing: this is what Singapore’s business trust rules say for anyone who uses this structure.

Approached by Euromoney, Fok confirms that this was a key consideration. “It is an integral part of our strategy,” he says. “We don’t want somebody to end up in our door asking me to step aside. It is a central part of the strategy.”

People close to the deal confirm this was the clincher. “From an issuer perspective, if you own 25% of the company there’s no hostile takeover scenario that can happen,” says one. “For an issuer who’s not looking at a straight disposal but an extension of their business, which they want to keep running, it makes a lot of sense.”

While that’s great for the issuer, it has caused some consternation among corporate governance activists. David Webb, the Hong Kong-based independent analyst and thorn in the side of many a company and regulator, came out strongly – and uncharacteristically – in Hong Kong’s corner when the listing was announced. “There’s been much hand-wringing amongst legislators and media in Hong Kong about losing out to Singapore as a choice of listing,” he says. “We don’t think Hong Kong is losing out at all, and it would be a loss if Hong Kong were to lower its standards to attract such business.”He points out that Hutch plans to retain only 25% of the listed trust – a key number given the business trust rules (the precise number it ends up with will depend on the greenshoe, and it was not clear as Euromoney went to press if this would be exercised). “If HPH retains 25% plus one unit, then HPH Trust will be bid-proof. Even if HPH is prohibited from voting, it would be an uphill struggle to get the required majority,” he says.

“Short of that, unitholders will have very little say, except on connected transactions, because they will not be able to elect directors of HPH Management, unlike a listed company. In short, the only way to change the directors of a trustee-manager is to own the trustee-manager.” He also points out that under the structure of the deal, although Hutch’s interest in HPH will be reduced to 25%, it will still retain 100% of its operations and receive fee income for doing so. “Nice work if you can get it.”

“We can see no good reason for Hong Kong to emulate Singapore business trusts,” concludes Webb. “There’s no tax reason for doing so, and there are governance reasons why we shouldn’t. We should not race to the bottom just to win business from tycoons who are not willing to work with existing corporate governance standards.”

Hutch and its bookrunners take a different stance: that HPH works best with Hutch involved, so anything that blocks a potential takeover is good for investors rather than bad. “The company needs good management,” Fok tells Euromoney. “To raise this kind of money around the world, it can only be delivered, the business plan, with the support of HPH. That is very important. With the kind of shareholdings we have, 25%, we can deliver the result to the shareholders and the management is a crucial part of it.”

Bookrunners also say this didn’t turn up as much of an issue on the roadshow. “Investors are not concerned,” says Eng-Kwok Seat Moey, managing director and head of asset-backed structured products at DBS Bank. “In fact, investors view it as a sign of the sponsor’s commitment and see it as an alignment of interests. They would like the sponsor to provide continuity through managing the assets. For REITs , the sponsors’ stake is on the average about 30%.”

If Webb’s concerns were shared by institutional investors, it wasn’t immediately apparent as the three bookrunners – DBS, Deutsche Bank and Goldman Sachs – hit the road pre-marketing in pursuit of cornerstone investors. By the time the deal launched, they were able to announce eight cornerstones taking up US$1.62 billion of the deal. That would prove a vital anchor and vote of confidence in getting the rest of the deal away in record time.

The eight – Ally Holding, Aranda Investments, Capital Research and Management, Cathay Life Insurance, Lone Pine Capital, Metropolitan Financial Services, Paulson & Co and Seacrest FIR – make for a curious combination. On one hand there is some suitably steady or Singapore-linked money: Aranda, in for US$100 million, is owned by Temasek, the Singapore sovereign wealth fund; Cathay Life, from Taiwan and up for US$100 million too, is a natural holder of a yield-producing infrastructure asset. Capital Research, the biggest buyer with US$634 million, is also a natural holder. But Paulson & Co is John Paulson’s vehicle: a multi-strategy event arbitrage investor (a hedge fund manager, in other words). And at US$350 million, he made the second-biggest commitment of all the cornerstones. Lone Pine Capital, too, is not an obvious candidate; founded by Steven Mandel, it is also seen as a hedge fund group (it put in US$186 million). Ally and Seacrest are BVI companies, in Seacrest’s case representing Jenkin Hui, a Jardine Matheson director who runs Pointpiper Investments; and Metropolitan represents “various reputable individuals from the South-East Asia region” with “substantial stakes in both private and public companies in the natural resources sector,” according to the prospectus.

Those close to the deal say the diversity was intentional. “We were very selective in our cornerstones,” one says. “We wanted a wide range: long funds, hedge funds to provide liquidity, and also the family, high net worth investors.”

This eclectic gathering would represent 30% of the total deal. The rest of the deal was structured in four parts: a global offering, a public offering without listing (POWL) in Japan led by Daiwa and Mizuho Securities (the global offering plus the POWL eventually made up 88% of the base offer, cornerstones excepted), a Singapore public offering (just 3.4% of the deal) and a preferential offering to Hutchison Whampoa shareholders (8.6%). There were two roadshow teams, one led by Fok and the other by long-standing Hutchison Whampoa CFO Frank Sixt, in both cases alongside members of the Hutch Ports team.

The strength of the anchor book meant that when the roadshows started, they were able to get what they needed and stop pitching a day earlier than expected; this would prove crucial when the POWL in Japan ended on the morning of Friday, March 11, just hours before the earthquake and tsunami wrecked the country’s northeast.

Those who saw the roadshows say that governance issues rarely came up: questions focused much more on the growth profile of the ports, the ability to sustain cashflows, and on gearing. Fok says the global offer part, including the institutional book bar the cornerstones, was three times covered. Still, some institutions stayed away, fearing an operator as canny is Li Ka-Shing was selling his assets for top dollar at the top of emerging market buoyancy. “We let that one go through to the keeper,” says one fund manager. “A bit expensive, with other listed options more attractive.” In the end the deal priced in the middle of a US$0.91 to US$1.08 range, settling at US$1.01 per unit.

Business trust structures aside, there were some other reasons for the Singapore listing too. Hutchison Ports Holdings (the company not the trust) features PSA International, the Singapore state-owned port operator, as a 20% shareholder; PSA has bought assets from Hutch before.  Also, Singapore offers a tax break for trustee managers in offshore infrastructure: 10% for the first 10 years, assuming HPH Trust is deemed to qualify.

And there’s no denying that these are good and well-positioned businesses. Yantian is a play on Chinese export strength; Hong Kong, while clearly more mature, has become a regional transhipment hub. “Despite the global financial crisis, both assets achieved record throughput in 2010, both exceeding 10 million TEU each,” says Ivor Chow, CFO of the trustee-manager. He says growth over the last 10 to 15 years has been 10 to 15%, and that in future it is realistic to expect 8-10% throughput growth, driven not just by Chinese export growth but imports too, for which the trust owns the longest berths and largest yards with deepwater access in the region. “We have very long-term relationships with our customers with some spanning over 30 years,” Chow adds. Investors will go into the deal with an expected yield of 5.9%.

But it’s hard to shake the sense that HPH represented a great deal for Singapore, and a great deal for Hutch, without quite the same certainty that it will be a great deal for investors. Singapore gets a landmark upon which to base a whole new push for overseas infrastructure assets. Hutch gets a lot of money to pay down debt and invest in more ports. Investors get a play on Chinese exports, decent yield – and an unproven structure from which its managers could not be removed with gelignite. Time will tell if that’s a smart call.

Box: The big moment

Having won such a trophy, Singapore paraded it with pride. On the day HPH Trust began trading, March 18, newspapers – international as well as local – carried two full pages of ads apiece using the listing to promote Singapore as the “home of infrastructure companies tapping into Asian liquidity.” And the moment of listing was set at 2pm, the start of the afternoon session, rather than the morning bell in order to accommodate maximum participation at the listing ceremony.

These ceremonies come and go regularly at SGX on the second-floor foyer of the exchange’s Shenton Way building, but this attracted a particularly senior crowd. Ho Ching, chief executive of sovereign wealth fund Temasek, was there to greet the great and the good of the Hutch empire including Canning Fok, Frank Sixt and a host of executives from the port business and the new trust. Singapore Exchange had its top brass out: chairman Chew Choon Seng, president Gan Seow Ann, listings head Lawrence Wong – in fact everyone bar CEO Magnus Bocker, no doubt embroiled in SGX’s continuing tilt for the Australian Securities Exchange.

A screen had been erected behind the stage showing the bid and ask prices ahead of commencement of trading; in front of it, as the big moment approached, Chew and Fok made speeches. An SGX spokeswoman announced there would be a 10-second countdown to the start of trading. Then she started counting down to the countdown. It began to feel like a Space Shuttle Launch.

The crowd – and it was quite a crowd – obediently counted down to 1.59pm whereupon Fok, Chew and HPH group managing director John Meredith started hammering at a gong with mallets, a swirl of gold confetti filled the air and two dragons commenced a lion dance to a clash of cymbals. It was a perfect moment: except for the fact that, at that moment, on the big screens behind this exuberant melee, the stock opened 4% down on its listing price.

Nobody seemed to be looking in that direction.

If the whispers coming out of government this week are correct, then Singapore Exchange’s bid for the ASX is doomed. It will be a while before we know for sure – the Foreign Investment Review Board, just the first of many hurdles the bid must surmount, could potentially take months to make its recommendation even before the government makes a decision. But if true, it will represent an uncharacteristic setback for SGX’s chief executive, Magnus Bocker.

By Bocker’s own count, the ASX tilt is his 10^th merger; it could be the first he has failed to get over the line. The reason this will fail while all others have succeeded is because this bid took place in an environment wholly different from any other he has worked in – and presented new, insurmountable challenges.

Most of the mergers with which Bocker made his name took place in Scandinavia and the Baltic states, starting with the 2003 merger of OM Technology – the operator of Stockholm’s stock exchange – and HEX Integrated Markets, which ran the exchanges of Finland, Estonia and Latvia. Others would follow in Lithuania, Denmark, Iceland, Norway (a stake rather than a full merger) and Armenia.

Here’s the first difference. If you were a Finn or a Swede in 2003 then you were watching your continent being reshaped by the single currency of the euro, which had replaced the legacy currencies of 11 countries – Finland among them – between 1999 and 2002. You were witnessing a transformation in trade, in banking, in customs – in everything, really, but most particularly the capital markets. The nature of European liquidity, capital flows and the role of stock markets was changing beyond recognition. It took no leap of foresight to realize that there was just no need for Europe to host nearly 40 stock exchanges, as it did at the time.

Of course there were challenges and disagreements; Bocker says that every single merger he has worked on has involved at least some vigorous dissent. Stock exchanges are iconic, often housed in historic buildings, and everywhere in the world there is a sense of emotional attachment to them. But it didn’t take too much visionary zeal to help Swedes, Finns, Estonians and Latvians realize that there was a great risk of being marginalized and rendered irrelevant. It was unarguable. And so the momentum of the single currency pushed those deals through, even in markets which had not joined the euro but were nevertheless on the periphery of this historic period of change.

For Australians, there is no such momentous shift to explain why they should accept their own icon falling under the ownership of a distant foreigner. There is simply no comparable push for consolidation in the Asia Pacific region. Periodically people talk about a single Asian currency; it’s a challenge to find anyone who expects to see it within half a century. Instead, Asian capital is fractured and individual; there is the whole question of the internationalization of the Chinese renminbi to work through, for a start, and there is really no major equivalent of the Australian dollar in terms of its total freedom of movement and accessibility. If currency integration ever happens in Asia it will likely start with something common to the Asean (Association of Southeast Asian Nations) states such as Indonesia, Malaysia, Thailand and Vietnam, yet even there it is surely decades away.

Without that driver, it’s very hard to argue convincingly that Australia is going to be marginalized by remaining independent.

It’s true that every new merger announcement – London and Toronto, Deutsche Borse and NYSE Euronext, even Bocker’s previous deal between Nasdaq and OMX – reinforces the sense that exchange consolidation is going to continue. And at a professional level, many people see the merits in an ASX/SGX tie-up.

“My own personal view is I hope they [SGX] are successful in their bid for ASX, and that’s speaking as an Australian,” says Peter Sartori of Treasury Asia Asset Management – an Australian-domiciled fund, investing in Asia, which he runs from Singapore. “Hopefully the politics don’t get in the way. From a fund management point of view, if I can buy an Australian stock in Singapore, or Australian people can buy Singapore, that makes my job a bit easier. And it might improve liquidity.”

But people like Sartori are not the ones who need to be convinced, and it’s here that Bocker may have underestimated the challenge.

Bocker, who is a buoyant, energetic presence, is also a pragmatist. He believes in exchange mergers because, logically, they ought to happen to better serve their customers. “It never starts with the exchanges. It starts with the underlying capital markets,” he told the author in December. “A lot of my members, the banks and brokers, are trading here and also trading somewhere else. They say: can’t we have closer cooperation in order to streamline it? Money has started to go cross-border much faster than we as exchanges have helped it to do so.”

Bocker is a technology and systems man, who consistently rationalises exchange mergers in unemotional terms as being driven by efficiency. Everywhere he goes he upgrade systems: he did it soon after arrival in Singapore, and his job as president of Nasdaq OMX included responsibility for the market technology.

But the technological side of the ASX deal was never a problem, and that was not the argument that needed to be won (although there was some doubt about how much efficiency could be improved among two of the most technologically solid exchanges in the world – and, indeed, whether a merger of exchange holding companies, as opposed to exchanges themselves, really meant the single pool of liquidity that Bocker refers to in presentations about the bid). The reason the bid always looked dicey from the first day was purely political.

“I don’t doubt that Magnus did outstanding due diligence on the exchange, the systems, the numbers,” says one Australian advisor. “But did he do the political due diligence?” It’s inconceivable that he didn’t know that the bid would require a change in the law, and that effecting such a change through a government with the slimmest possible majority in parliament was always going to be a huge ask. But he seems to have believed that the logic of consolidation would be enough to surmount the challenges, and in that regard he may have erred.

It would certainly have helped if SGX had gone in with more of a ‘merger of equals’ structure than the takeover-styled bid at the outset, as Malcolm Turnbull remarked this week. The recent revisions to the bid, increasing the Australian board representation, would have been a much more palatable place to start; only reaching that concession as part of a negotiation may well have put politicians – and certainly the public – offside from the outset.

Bocker himself said in December that he was “absolutely not” surprised by the ferocity of Australian public and political response to the SGX bid, and in fact welcomed it as an essential part of the process. “It is very important that the question of national interest is raised,” he said. “If we cannot deliver more national interest by this merger we shouldn’t do it.” But it seems more and more likely that this is the crux of the argument he has failed to win.

On a rainswept January morning in Singapore, a listing ceremony is taking place in the Singapore Exchange’s second-floor event plaza. There’s a gong onstage to herald the company’s formal trading launch as the market opens at 9a.m., and a celebratory shower of coloured paper fills the air.

It’s an everyday SGX listing inauguration – all the more commonplace for the fact that the listing company is not Singaporean. Today, it’s a Thailand-based natural rubber processor called Sri Trang Agro-Industry, but had you come a week earlier you might have seen Zhongmin Baihui, a Chinese retail group that runs a department store in Xiamen; or a few days later, Malaysia Smelting Corporation, one of the world’s leading suppliers of tin. In fact, of the five Singapore IPOs that closed their books in January, only two were local, and it’s likely that the forthcoming listing of Hutchison Ports – another foreigner, and from arch-rival Hong Kong to boot – will be the biggest in Singapore all year.

This has been the pattern for Singapore for years, and it’s the way it’s going to stay. Today, 41% of the companies in Singapore are from outside the country; at the end of 2010 there were 321 of them and they accounted for 47% of market capitalization. At SGX, it’s a source of pride. “Fingers crossed, within a couple of years, we may be above 50%,” says Lawrence Wong, head of listings, and more than anyone the man whose job it is to pound the world’s pavements and bring foreigners to Singapore. “If you are an international exchange, you should not be worried about it.”

SGX calls this policy ‘Asian Gateway’, and from the local perspective it makes a lot of sense. Singapore has achieved a remarkable amount from modest means since its independence in 1965: with nothing to dig out of the ground, and no room for a meaningful crop or commodity industry, it has had to grow by hitching itself to trade from countries around it and further afield. And so it is with the exchange too: it can only grow so far on domestic companies and home-grown expansion, and has long sought to become a regional hub instead, to tap Asia’s vibrant economies. “We are a microscopic version of Singapore,” says Wong. “The exchange is no different from the economy.”

Fund managers in the region see the logic too. “I can understand where the ASX is coming from,” says Peter Sartori, founder of Treasury Asia Asset Management. “They are trying to grow as an exchange and remain relevant regionally, so they want to attract foreign companies. That all makes sense to me, and it is a positive thing for Asia, which in general is going to be dominated by Greater China. If they just relied on Singapore companies to list on their exchange, they would become marginalized.” And Singapore is thriving on this policy: Singapore’s 39 IPOs in 2010 represented a five-fold increase in new listing market cap on the previous year, with a commensurate hike in listing fee revenue.

But there’s a catch. Necessarily, as more and more of the listed companies come from outside of Singapore, it becomes harder and harder to supervise them. Consequently, the Singapore Inc brand – built on market-leading infrastructure, technology and best practice – risks being cheapened. “It’s always a little concerning,” says Hugh Young, Aberdeen Asset Management’s managing director for Asia. “It’s not just Singapore but London’s AIM, or Hong Kong Exchange. It’s inevitable, I fear, and applies to all exchanges, but especially to one with little hinterland.”

At one end, Singapore has clearly been enriched by the companies it attracts. Groups like Jardine Matheson and Noble Group choosing to list in Singapore are clear endorsements of the place and have been welcomed by the investor community from the retail to the institutional end. Singapore has, for example, built the region’s leading centre for real estate investment trusts (REITs) partly by being able to attract assets from around the continent.

At the other end, though, some unbecoming companies have made it to the Singapore boards – and the sector with the worst reputation by far is the so-called S-chip market. “There are some good companies, some bad: Jardine at one end, China S-chips at the other,” says Young. Another emerging market fund manager, based in London, is less polite. “We have a theory here for what the S stands for,” he says. “But I don’t think you’re going to be able to use it in your magazine.”

The theory of the S-chip market was that it gave a home to Chinese private sector companies that were being squeezed out of Hong Kong listings by the vast state-owned listings there. There was, surely, a treasure trove of opportunity here: young entrepreneurial mid-cap businesses needing more capital, a chance to get in on the ground floor of a future China titan. And, in fairness, there have been many successes: Cosco, China Fisheries and China Merchants Holdings are among them. But at least six have were delisted in the course of 2010, and at least 10 were suspended. It’s an increasingly lengthy roll call: FerroChina, which put out rosy quarterly results in 2008 and defaulted on loans a few weeks later; FibreChem Technologies, Oriental Century, Zhonghui Holdings, Sino-Environment (which also managed a default) and China Sun Bio-Chem, all caught for alleged accounting irregularities; Beauty China, Celestial and China Milk, all suspended for corporate governance or default issues. China Milk, as an illustrative example, is explored in detail in the box.

Wong defends Singapore’s structure for vetting new listings. “When a company comes to list, the army of people working over it is unbelievable,” he says. “And not just Singapore people working on it: a Singapore guy can never know a China company as well as a local person, so every time there is a home country professional involved.” Measures include requiring foreign companies to provide a private investors report, asking them to appoint a compliance advisor, getting an audit committee to report on it, appointing two independent directors who must be resident in Singapore, and insisting on a CFO who has been in place for at least six months pre-listing. While he acknowledges there have been problems in Chinese stocks, he says it is “a very small number, five to seven out of 150-plus.” He also says the local independent directors provide a level of leverage to ensure that things are fixed. But the fact is, in cases where companies have run into trouble, investors have rarely got money back. “We cannot act on behalf of shareholders, that’s for sure,” he says. “I don’t think any exchange has the power to go to a company and say: I sue, or launch a police complaint. But your rules must allow you to be able to go in and find out what is happening, and make certain people who are responsible do what they are supposed to do.”

Asked if the continued courting of foreign businesses raises a risk of reputational dilution, Wong says: “Companies will still fail. That’s a risk. That is beyond your control. We make sure we do our job, first to vet as much as possible, second to monitor and third to pursue – publicly. That is the best way to show people this is not a regime that does not know what it is doing, and that this is not a regime to sit back. That is the best protection against dilution.” Singaporean shareholders in delisted Chinese companies may wonder, though, just how much this sentiment is carried out in practice – because if a suspended company has its assets outside Singapore, there is simply nobody to pursue.

At the heart of this debate is a central point, one that is directly relevant to the proposed takeover of the Australian Stock Exchange. Stock exchanges being listed on themselves is no longer an unusual arrangement, but it does create a thorny issue if exchanges are expected to generate the best possible return to shareholders – partly through listing fees – yet at the same time are supposed to be the supervisor of companies on that exchange. Different places have dealt with this in different ways; Singapore has kept both commercial and supervisory functions within the same company.

“It is a conflict of interest to be a for-profit regulator in any field,” says David Webb, the Hong Kong-based commentator and governance advocate, speaking about exchanges generally. “There is a short-term incentive to lower standards to attract listings, and to cut regulatory costs to boost profits.” When the London Stock Exchange listed, he says, the regulatory function was moved out of it and put into the Financial Services Authority, a separation that neither Hong Kong nor Singapore’s exchanges conducted. Australia’s exchange has also moved some regulatory functions out of itself – which will be an interesting point of difference if the takeover completes.

For his part, Wong argues that the separation between church and state is sufficient. “I’m the guy who is doing the promotion,” he says. “But when I bring a company in, it is not me who says this company will list. It is my issuer regulation colleague, who after going through all the checks quite independently of me will say if this is a company good enough to be listed.” This part of the exchange, he says, has a link to the Monetary Authority of Singapore, which regulates SGX. “I can’t say: this is going to affect my bonus and your bonus so you’d better pass it. I have no power.” He says that this division does, in practice, often decline a company or ask for changes to be made before a listing.

The fear of dilution through foreign listings is not unique to Singapore: it’s arguably bigger still in Hong Kong, where a clear majority of market capitalization is made up of companies from outside Hong Kong, chiefly China. “The problem is that securities regulators have limited cross-border reach,” Webb says. “It depends on the level of co-operation received from counterpart regulators in the jurisdiction in which the listed company is based, and on extradition treaties between the two.” Such treaties are particularly unfeasible for Hong Kong and China given the one country two systems framework.

For companies themselves, Singapore has a huge amount to recommend it as a listing venue. Back at the listing ceremony, Kitichai Sincharoenkul, executive director of Sri Trang, is elated at his company’s new listing. “Most of the investors in this round [of fundraising] in Singapore are new investors,” he says. “We are very pleased to have those first tier investors who normally wouldn’t have invested in Thailand. Singapore is a very important centre for natural rubber trading; it’s good for us to be here.” (It should be stressed there is no indication that Sri Trang, an increasingly regional player, is anything other than a sound company.)

At the top of Singapore Exchange, new CEO Magnus Bocker is involved in a grander game: his proposed acquisition of the Australian Securities Exchange mirrors a remarkable sequence of mergers he oversaw in the Baltic and Nordic regions, culminating with a merger with Nasdaq. Since the ASX deal will be a merger of holding companies if approved, it’s a different theme again to the grass-roots regionalization of Singapore. But he’s been able to do it because of the profit-making heft SGX has built from foreign listings. And as globalization does inevitably come to Asian exchanges, it will be interesting to see if the norms of supervision and company vetting move with it.

BOX: China Milk

In 2006, a company called China Milk listed on the Singapore Exchange to widespread acclaim. It came with a simple premise: to revolutionize the Chinese dairy herd. Chinese cows produce three to four tons of milk per year, compared to eight to 10 for Canadian cows, yet each cow consumes the same amount of feed. So the company brought in a herd of Canadian Holstein cows and bulls – the champions of milk production in the bovine world – and set about building a business based on bull semen, cow embryos and raw milk. It was, to use an oil term, an attempt to redefine the upstream end of the Chinese milk industry.

At first the stock thrived: its management, particularly CFO Martin Choi, was impressive; they told a good story; and their glossy annual reports spoke of a strategy being well executed for the long term. Investors loved it as a play on the changing nature of the Chinese national diet. Revenues grew 186% annually between the 2003 and 2005 financial years; when the company floated, DBS Asset Management, JF Asset Management, Everest Capital and the Dubai Investment Group were anchor buyers.

Then, in January 2010, came a troubling announcement. China Milk had received valid put exercise notices from convertible bond holders seeking to make an early redemption on US$146 million in principal. Since the company hadn’t costed for this, expecting the bonds to be redeemed upon expiry some time later, they had a shortfall. “The board wishes to advise that the company is still currently awaiting clearance from the State Administration of Foreign Exchange… for the remittance out of the PRC of approximately US$170.56 million” to settle the bonds, it said. “The company believes the delay is administrative and procedural in nature and there is no legal obstacle to the remittance of the same.”

But on February 12 2010 its shares were suspended; one year on, they still are. Over the subsequent year, announcements – which at first focused on delays in coming out with annual results for the company – have become steadily more opaque and less useful and dried up altogether in October, when it told the market that despite being instructed by the exchange to appoint a quantity surveyor, it wasn’t going to do so. Since then the web site has been shut down. Go there now and one gets a maddening message saying simply: “…nothing here…” There was never an office in Singapore: the company is domiciled in the Cayman Islands and its assets are in far northeast China. True, its independent directors and company secretary, Ng Joo Khin, are in Singapore; but Mr Ng said he was “not in a position to comment” on Asiamoney’s written queries about China Milk, which begs the question, who is?

Few saw this coming. One fund manager, who asks not to be named, did sell out of China Milk before its suspension, having begun to doubt the management, but even he genuinely believed the problem was a temporary forex issue. “We’re scratching our heads here,” he says. “Was this fraud?”

On the Channelnewsasia talkboards frequented by Singaporean investors, the mood is miserable. “What is SGX going to do about it?” asks one. “These people are a bunch of #@#$%^$# crooks. How can SGX allow such companies to be listed here?” asks another.

Their frustration is understandable. The author is a shareholder in China Milk and wrote to the SGX as a shareholder in January, receiving this resplendently anodyne reply: “As the shares are being suspended, investors will not be allowed to trade until further notice. In the meantime, you may wish to enquire with the company directly if you have any queries.” But there is, of course, no way to “enquire” with the company: it doesn’t have so much as a desk in Singapore. Further correspondence brought a more detailed response saying that “the company has been repeatedly reminded and warned by SGX to comply with listing rules. The severity of these breaches has been noted and SGX will take targeted and appropriate actions.”

But what can SGX really do? It can shout and penalize all it likes, but there is not a single asset in town to seize or direct. And this is the risk that SGX takes: companies worldwide are attracted by its infrastructure, but that doesn’t mean the companies themselves are as attractive as they first appear to be.

Box: The ASX bid

When Magnus Bocker announced the SGX’s tilt for its Australian counterpart in October, it looked visionary. A few months on, it looks almost run-of-the-mill. The SGX-ASX bid may represent a landmark in Asia Pacific exchange consolidation, but the subsequent deals between the London Stock Exchange and Canada’s TMX Group, and between Deutsche Borse and NYSE Euronext, show that in global terms it’s just business as usual.

It is exactly this shifting of global exchange patterns that Bocker wants to lead by combining the liquidity, reach and infrastructure of Singapore and Australia’s exchanges. He should know: more than anyone else, he is closely associated with global exchange mergers, and says this attempt is his 10^th since being part of the team that put Sweden and Finland’s exchanges together in 2003. Bocker was, after all, Nasdaq OMX president after orchestrating the merger of those two groups; he knows plenty about consolidation.

At press time, though, there was still widespread doubt whether the SGX-ASX deal could go through. Of the major hurdles the deal must surmount to be approved, only one – approval from the competition regulator – had been achieved. The other three are to get the support of federal Treasurer Wayne Swan; the Foreign Investment Review Board; and perhaps most critically, a change of legislation that limits foreign ownership of the ASX to 15%. This last is particularly tricky since Australia’s parliament is divided with the slimmest of majorities – one that only exists at all because the ruling Labor party has aligned itself with a handful of independents – making it difficult to get any new legislation through, never mind something as controversial as selling the national exchange to a foreigner.

Recognising this, the terms of the bid have already been revised, turning it from a takeover to more of a merger of equals. On February 15 the two exchanges argued there would be an equal number of Australian and Singaporean citizens on the board alongside three international directors; the ASX and its subsidiaries would maintain boards with a majority of Australian directors; and senior management for the exchange would continue to be based in Australia. There is likely to be further tweaking on governance before Swan makes his final decision.

Those in the market tend to have no problem with the idea, recognising that the ASX will still look and behave much like it always did. “I would like to see them get something done,” says Sartori – who is Australian, running an Australia-based fund, but lives in Singapore and invests in Asia. “It’s good for both sides to get some scale, and to compete on technology in a very competitive landscape.” But it’s not professional opinion the SGX needs to convince: it’s political and public.

Euromoney, December 2010

It is the very definition of a behemoth: the headcount of a decent-sized western city, an affiliation of nine companies, covering 471 separate coal mines. It faces 4,000 different law suits, powerful unions, and the threat of Maoist rebels around many of its mines. Yet when the books closed on October 21, Coal India became the largest IPO in India’s history, in a $3.46 billion deal that shot up 40% on its first day of trading and attracted US$52.5 billion of demand – most of it international.

How did this happen? The reasons stem from what one banker calls a “perfect storm” of circumstances: thirst for emerging markets, even more thirst for resource companies, buoyant markets and a company which, unlike many other state-owned leviathans around the world, proved both well run and able to communicate its story worldwide.

See also: Coal India Fees Go Up In Smoke here:  http://www.chriswrightmedia.com/euromoney-coal-india-fees-go-up-in-smoke/

But when 16 shortlisted investment banks filed into the offices of the Ministry of Finance’s Department of Disinvestment in New Delhi for pitch meetings in early May, it was not obvious that the deal would be such a runaway success. A previous state sell-down, a US$2 billion follow-on for mining company NMDC in March, had barely got across the line, ignored by both international institutions and local retail and only saved by domestic institutions – at the bottom of the range. It had swiftly traded down upon launch. It was not what the government, amid a galvanized program of divestments intended to generate wealth creation among ordinary Indians and tackle the budget deficit, had had in mind. And the omens for Coal India looked scarcely better: as the banks went through their pitches, European sovereigns appeared on the edge of default, and a second round of the financial crisis looked likely.

Still, the six mandated bookrunners were sufficiently enthused about the prospects of the float that they accepted a resplendently absurd fee of 0.000001% of the deal proceeds to be on the deal (see separate article).  They did so because Coal India represented something extraordinary: the largest coal mining company in the world, with the largest reserves, and a global leader in its sector. “One of the most significant things was not that it was the largest IPO out of India, but the largest company in its sector in the world out of India,” says Saurabh Sonthalia, managing director and head of capital markets at DSP Merrill Lynch. “We haven’t seen that before.”

So the six swallowed the cost – including a host of additional burdens lumped on them by the government, including document printing costs – and set about dividing up leadership for the tasks ahead. Citi, which bid lowest, was given the job of leading the prospectus (“it’s traditional that the lowest bidder gets that job, in return for causing us all so much pain,” says one banker, half joking, at most); Deutsche developed investor presentations; Morgan Stanley books settlement; Merrill set up the roadshows; Kotak Mahindra covered approvals; and Enam Securities led retail marketing.

Three different parties were involved in the sale: Coal India itself, headed by chairman Partha Bhattacharyya (see box for interview); the Department of Disinvestment, headed by Secretary Sumit Bose; and Ministry of Coal, headed by Minister Sriprakash Jasiwal. While Bhattacharyaa, who famously knows everything it is possible to know about Coal India, was the repository of all information on the sector and the company, Bose and his team had the clearest sense of what the deal needed to achieve for the country.

“The idea of the disinvestment program basically revolves around people’s ownership,” Bose says. It intends to get all profitable unlisted companies on to the market, and to increase the free floats of those with historically thin listings up to 10%, as well as other follow-on raisings. Doing so should trim the deficit and fund infrastructure, but that’s only part of the goal. “In all of this retail is very important,” he says. “Our budget estimates for the fiscal year are abut Rs40,000 crore [US$8.9 billion] and 15,000 of that has come from Coal India, so it was important in that context, but also in broad basing the ownership of companies to the people, giving them a chance to buy the shares.”

So the department sent its banks on the road with a clear mandate: make this deal work for everyone, get retail in, and get the price right. Another poorly performing deal could have been catastrophic for the state: if institutions and retail were disappointed in this deal as well as previous ones, there would be no way of coaxing them back in for vital subsequent deals like the forthcoming raising by Indian Oil Corporation. “You can stretch valuations and still get the deal done, but give a reasonably priced deal to the market and it will serve you well for the entire disinvestment program,” says Ravi Kapoor, managing director and head of global banking for India at Citi.

There were a few procedural matters to deal with, particularly around the powerful unions, before work started in earnest. For example, in Indian IPOs shares can only be reserved for employees in the company that is being listed, not subsidiaries, whereas in Coal India all the employees are in the eight subsidiaries and none in the holding company that was being listed. An exemption had to be sought from the Securities and Exchange Board of India – which was uncommonly swift and accommodating throughout.

Other questions and challenges were swiftly pre-empted. The certifier of coal reserves in India was not one that was widely known outside, so a new reserve engineer was appointed; the sprawling accounts of eight subsidiaries were brought into a palatable form that international investors would be happy with; and the fabulous amount of outstanding litigation – there are 4,066 separate cases mentioned in the prospectus, plus about 9,000 land cases and service matters – categorized and sorted in a 61-page chunk of the prospectus. (That prospectus, incidentally, was completed in 60 days, considered something of a record given its complexity.) “The idea was to get them prepared and up to speed in terms of what it takes to do an IPO,” says Kapoor. “No restructuring was needed, we just needed to make sure the story was correctly articulated.”

The toughest part was collating the sheer scale of the enterprise into one document. As one bookrunner puts it: “It’s not easy to do due diligence on 471 mines.”

As the banks hit the road, first in informal pre-marketing with their clients through July and then on a global roadshow with the company in August, it would quickly become clear that demand was not going to be a problem. But there were a lot of questions to answer. Some were about pricing and margins: why does Coal India sell coal at about a 50% discount to international peers? Others were about the company’s vast cash holdings: US$8.4 billion on the balance sheet. Still others were environmental. The government has declared certain areas of coal reserves no-go because of dense forestry above them; through the marketing process, it was still not clear how much of the reserves would be covered by this restriction, with numbers cited from 10 to 40%. Indeed, that’s still not clear.

If that wasn’t enough, by August questions started arising about Maoist rebels. Many areas in which Coal India operates mines – including much of the untapped reserves that support future growth – are in areas with Maoist populations, and prone to strike action, if not violence.

But for every question, Bhattacharyya had an answer that was equal to it. “He is very articulate,” says Sonthalia. “He has been with the company all his life. He knows every aspect of it intimately and never needs to consult notes.” Washeries would be introduced to improve coal quality and boost margins, he said. Environmental issues were not a problem because the company had a track record of returning more forestry to the government than it took away in mining, he said. Maoist communities like us because we give them jobs and schools: when they strike, they don’t hit the mines, he said.

The fact that the strikes do hit the transportation that moves the coal from the mines was ignored; the fervour for the deal was so strong by now, and international investors so enthralled by the story of the company, the country and the sector, that it was clearly unstoppable by the end of the pre-deal roadshow.

Indeed, by the time the company was readying to get on the formal roadshow in October, there was a new problem: too much demand. For the previous year, most Indian deals had included an anchor tranche, and the prospect of one in Coal India had institutions clamouring to be involved. “Nobody said no to the anchor tranche,” says one bookrunner. “There were a couple of sovereign wealth funds, almost all of the top 10 long-only funds globally, and at least eight of the top 15 hedge funds globally. Everybody wanted to be an anchor.” It is understood that the Government of Singapore Investment Corporation and Norges Bank were among them.

And then the government axed that tranche.

“What does an anchor tranche do?” asks Sanjay Sharma, managing director, equity capital markets at Deutsche Bank in Mumbai. “It allows you to allocate stock to sensible investors you want to lock in, and it gives you an early indication of value. But in this case demand was very clear and people were indicating what their valuation intentions were upfront. So from marketing perspective it wasn’t required.”

More than that, the government didn’t like the way it looked. With all of its ambitions about broadening the ownership base to the people, it didn’t want to be guaranteeing allocation to some distant pension fund while clawing back allocations to its own retail base.

There was another reason, too: practically speaking, it looked near impossible to get the anchor tranche properly signed off in the timeframe that regulations require. “An anchor tranche opens and closes on the same day and allocations have to be announced almost immediately,” says Sharma. Realistically, that leaves a few hours for six banks to reach consensus and get approvals through three levels of government, the top one a senior group of ministers. It was never going to happen.

While the would-be-anchors were disappointed, they simply joined the scrum for the institutional tranche. When the books opened on October 18, they were covered in a day; the institutional book would eventually be about 25 times covered. Most significantly, more than half of the institutional demand was from overseas.

This was quite something given the headwinds that they had to overcome to get in at all. Coal India was the first big equity deal to be done under a new rule from SEBI. Previously, retail and HNI (a sort of high net worth category) investors had to provide 100% margin, meaning that whatever they bid for, they had to provide the full amount of cash in advance, even if they were clearly going to end up being scaled back in final allocation. Institutions had got away with a 10% requirement, but with Coal India, they were asked to pledge 100% as well. Since it was evident early on that all would be scaled back, most institutions made very heavy bids, and had to shift the full amount of cash into India. That created a foreign exchange risk that is neither easy nor cheap to hedge, as well as taking out of action a huge amount of capital that was never used: for all the money they sent, institutions only got 4% of it to go into the deal, and then had to remit the other 96% back home again. “Lots of investors have written to us saying it cost them 30 to 35 rupees per share just to hedge the currency, bring it in and take it out,” says S Subramanian, managing director of investment banking at Enam Securities.

There was still the crucial retail bid to get over the line. But that worked too. Bose says there were 1.8 million applications. If you’ve ever seen the newspaper-sized forms that retail have to fill in to participate in a deal like this, it becomes clear what a feat this was. But retail found a connection with the stock. “If you speak to the man on the street, they will tell you Coal India is gold,” says one bookrunner. “It is the largest coal company, it has $8 billion of cash; to them, it’s like a fixed deposit investment. They can put their money in and forget it. They earn dividends and sleep peacefully at night.”

With that kind of backing, aftermarket performance was always going to be good, but the 40% first day performance surprised even the bookrunners. It has led some to conclude the deal was priced too cheaply, but those close to the deal reject that. “I would say that had we even priced it 10 or 15 rupees higher the whole thing could have got into a negative rather than a positive cycle,” says one. “It’s psychological, at the end of the day.” Having priced at a modest discount to its only obvious comparable, China Shenhua Energy, it is now at a premium.

The deal gives cause for optimism for a host of other deals that will follow it: the IPO of Manganese Ore, divestments of Hindustan Copper and the steel authority SAIL, an issue from Indian Oil Corporation that could be bigger than Coal India, and a host of others. “The knock-on effect is that India can do larger, $3 billion-plus deals,” says Sonthalia. “We have the confidence now, and a new set of investors who have woken up to the fact that India is a good story.”

Box: Bhattacharyya and the Coal India story

In the Coal India head office above a swarming, heaving Kolkata street, chairman Partha Bhattacharyya lives and breathes the company he joined as a management trainee in 1977, just two years after its foundation. There’s nothing he can’t recall about it, rattling off profit numbers from 20 years ago without resorting to notes. He has risen steadily through the ranks since the 70s, and many of the skills that were useful in presenting Coal India to the world this year were honed in difficult times decades ago. Because financially, for most of the last 35 years, Coal India was a mess.

Coal India came about as a consequence of the oil price shocks in the early 1970s. The government set up a high-powered committee to examine its energy options, and decided that coal should be given the thrust of providing energy security in the country. The coal industry at the time was growing at about 2.2% a year, whereas the country was aspiring for national growth of around 5%; it was lagging because of a lack of investment because prices were not remunerative. But the government couldn’t simply increase prices. “In those days coal was a domestic fuel, just to be used in the kitchens of houses,” Bhattacharyya says. “So it was not a socially or politically feasible alternative to increase coal prices.” The government decided the answer was to nationalize the industry and boost it with public funds, and after some restructuring Coal India was created in 1975: a holding company with five wholly-owned subsidiaries, later increased to eight.

The new company had more than 600,000 workers (compared to 400,000 today), all of them paid absurdly low wages, so as a first step the government increased wages by 80%. But since the increase was not compensated for by price revisions, it rapidly started losing money. About 40% of the equity that was pumped into the company was lost, roughly Rs25 billion. And since half of the government money was provided as long term loans, they required loan and interest repayments, which were frequently missed. The overdue liabilities eventually totaled Rs 22 billion. The company met its production targets, but at the cost of a hopeless balance sheet too weak to approach the capital markets with.

It was 1987, when he became a technical secretary to the finance director, before Bhattacharyya was in a position to see how bad things were. “It was an eye-opening experience,” he says. “Questions started coming into my mind: why are we making losses? What is it that needs to be done? We realized the losses were basically a product of the way the company was conceived and brought into being.”

Then the rules changed: the government decided to phase out budgetary support over five years from 1991. “An arm’s length concept was introduced: it was decided that you have to fend for yourself.”

The decisions made then would define the company that has proven so popular with global investors in the last few months. First, the idea of opening new loss-making mines was axed. “Financial viability has to be the cornerstone. No project will be taken up until it achieves an internal rate of return of 16% at constant prices.” Government debt servicing would be made on the due dates, with no more deferment. And the habit of shifting money from one company to another, using profits from one to meet losses or salary at another, was ended and a firewall was created between profitable and loss-making companies – a tough policy which would strike him as ironic when, having been instrumental in implementing it, he was later put in charge of one of the worst loss-makers and asked to reform it.

“This was basically a massive change of mindset,” he recalls. “The managers who were there when it was born were used to circumstances that coal has to be produced at any cost. They had the feeling: we have to do what the country wants, that is why we were born and why we are here. And to tell them the country’s demand is the country’s problem, that you and the country should not identify with each other – this was a huge task.”

But reforms like this turned the company profitable and allowed it to approach the World Bank and the Japanese Bank for International Cooperation for a US$1 billion loan, which they agreed to in 1998, although only half was taken up. With this, Coal India developed 24 world-class new projects which Bhattacharyya still sees as “like gold pieces” today. The World Bank loan would prove important for other reasons too: for example, all the projects had to have an environmental and social mitigation project (ESMP) component. These practices, too, would later prove crucial in the float, which was eventually marketed to retail on a green theme with posters of replenished forestry.

Other headwinds followed: deregulation, which came in phases from 1996 to 2000, exposed India to international quality coal, with which Coal India’s unwashed coal could not compete. “For the consumer, inconsistency of quality is a major pain. Therefore we don’t have a case for pricing it along the lines of imported coal.” To this day, Coal India sells coal at a 30% discount to international prices in most of the country, and as much as 60% in the country’s heartland.

However, because of imports, consumers are familiar with the quality and price of washed coal. “This leaves us with a corollary: a situation where if we can produce coal that is of comparable quality and consistency, there is a strong case for price convergence.” And so Coal India is entering coal washing, setting up 20 plants; by 2017, by which time the company is projected to produce 647 million tons of coal per year, 300 million of it will be washed. And although it’s more expensive per calorie of energy for the consumer, the freight costs reduce at the same time, in a country in which on average coal moves 600 kilometres by rail to get to the user. “By washing coal my margins get doubled straight away,” he says.

It is only in 2007 that this strategy was put in place; had the IPO been attempted any earlier, the story that the world investor community embraced so vigorously would simply not have existed. This disparate collection of more than 400 mines and a workforce with a higher population than Liverpool took more than 30 years to become palatable for investors, but having got there, it is not looking back. It has $8.5 billion on the balance sheet, has brought its debt to total capital ratio from 60% to 6% in eight years, and the next stage is global acquisition. “That money has to be well spent,” says Bhattacharyya, who says he wants equity stakes in coal mining companies in Australia, Indonesia, South Africa or the US, with offtake agreements better than spot prices. Three proposals are already undergoing due diligence.

It all seems some distance from multi billion rupee losses, unpaid government debts and mines that were opened with every expectation of losing money. “This kind of story,” he says, “you don’t get too many of those.”