(EMAILWIRE.COM, January 26, 2001 ) A panel of economists and researchers brought together by PricewaterhouseCoopers Endowment for the Study of Transparency and Sustainability has created an analytical model correlating five key opacity factors to the cost of capital in 35 countries. In this study, opacity is defined as the lack of "clear, accurate, formal and widely accepted practices." Using this tool, policy makers and investors can identify the specific incremental borrowing costs imposed by opacity in the areas of: Legal protections for business Macro-economic policies Corporate reporting Corruption Government regulations The "O - Factor" a composite measure of these five factors, is a clear determinant, not only of the cost of capital but also of the obstacles to foreign direct investment in a country. Using the Opacity Index over time, government policy makers will have a clear picture of which system reforms will have the biggest potential impact on economic development. Using a subset of twenty countries for which sovereign bond issues information was available for 1998/99, the authors arrived at an aggregate opacity burden in this period alone of more than $160 billion in added borrowing costs. "Economists already understand that poor transparency in a number of key areas imposes a hidden drag on economic development," said James J. Schiro, Chief Executive Officer of PricewaterhouseCoopers. "The Opacity Index enables us to quantify this drag for the first time and identify which mix of "best practices" in business, economic and regulatory affairs can have the strongest impact on development." In the first report, published today, PricewaterhouseCoopers studied the O - Factor in 35 countries. The countries were chosen to be representative geographically but also to provide measurements for a sample of countries taken from the World Bank's economic tiers - Upper Income, Upper Middle Income, Lower Middle Income and Lower Income (see attached index for countries surveyed in this first report). Over the course of the next 18 months, the Index will be expanded to include most of the world's significant economies. The first Opacity Index report looks at the impact of opacity from two perspectives - firstly, its impact as a form of hidden corporate tax and secondly as a risk premium when countries borrow through sovereign bond issuance. Looked at from the tax perspective, for example, the impact of reducing Colombia's opacity score to the level of Singapore's would have the same effect on domestic and international investment as a 25 percent cut in corporate tax rates. "Many developing countries are eager to cut taxes to stimulate investment," added Schiro. "Ironically, these data suggest that, by instituting domestic reforms that reduce opacity, developing countries can obtain a significant boost to foreign direct investment without sacrificing tax revenues." Expressing opacity as a risk premium on sovereign borrowing is equally compelling since countries with more opaque practices generally need to reward investors by paying them a premium over what the United States (the benchmark) pays. According to the authors, a one-point increase in the O-Factor score leads to a 25.5 basis points increase in the interest rate that investors demand in order to purchase new-issue bonds originating in that country. For example, a Polish government bond issue of 4 billion zloty (approx. US$1 billion) would carry an opacity risk premium of 280 million zloty (US$70 million), an added cost that could be avoided by reducing Poland's opacity factor to the level of Singapore.* "These quantitative data measuring the costs imposed by opacity represent a significant addition to the tools available to government and international policy makers as they seek ways to stimulate economic development," said Schiro. "At the same time, the Opacity Index will help investors make more informed decisions about where they commit their resources and the return they can expect on their investments. While the Index is objective in its methodology, it clearly points to the benefits of increased transparency for nations, governments, businesses and the public at large." *In some instances, actual interest rates for countries borrowing internationally may be lower than the study suggests. This apparent anomaly is due to the fact that countries that borrow in international capital markets are often required to service their debt in hard currency such as US dollars. However, when the same countries float domestic bond issuances, the interest rates are typically much higher. Opacity contributes to the inability of some countries to borrow in their own currencies, which can cause economic instability. When domestic interest rates are lower than indicated in the study, this may well be caused by what economists term "financial repression." This occurs when governments crowd out private borrowing by means such as setting below-equilibrium interest rates. Here the hidden cost of opacity is borne by the saver who is unable to obtain the kind of return available in a financial system without repression. In effect, this is an involuntary subsidy by the saver to the government of that country. Note to Editors: A summary of the report, as well as a complete version including methodology, supplemental findings, appendices and bibliography can be found at www.opacityindex.com. PricewaterhouseCoopers (www.pwcglobal.com, the world's largest professional services organisation, helps its clients resolve complex business issues and measurably enhances their ability to build value, manage risk and improve performance in an Internet-enabled world. PricewaterhouseCoopers refers to the member firms of the worldwide PricewaterhouseCoopers organisation. -------------------Produced for PricewaterhouseCoopersContacts: Elizabeth Hunter PricewaterhouseCoopers 1 212 259 1031 Cell: 44 774 892 1399, Lisa Fels Porter Novelli 1 212 601 8013 -------------------

Contact Information:
PricewaterhouseCoopers
Joseph Nchor
Tel:
Email us


This is a press release. Press release distribution and press release services by EmailWire.Com: http://www.emailwire.com/us-press-release-distribution.php.