A Nudge carried too far?

I am a strong believer in the use of nudges in development. They are cute and simple. But the same cuteness and simplicity can blind us to the relevance of the specific nudge (in the specific context) as a serious enough development tool.

Martin Abel and Co have a paper which examines a nudge to increase the effectiveness of job search efforts by unemployed youth in S Africa. The youth are grouped with peers, encouraged to make daily job search plans, and are sent weekly SMS reminders. The youth in the treatment group (in the RCT evaluation) had 30% more job offers and were 27% more likely to get a job.

This is undoubtedly a really cute nudge, a useful addition to the body of knowledge on nudges in development. But is this something which would excites policy makers? Very very unlikely. Let me illustrate. 

The hypothesis is that nudging job seekers into being more effective with their job searches will increase their likelihood of getting jobs - more active searches, more offers, and greater likelihood of a placement. Given all these jobs will anyways be filled, the intervention will only add one more person (the one treated with this intervention) into the long line of active job seekers. We cannot claim any social return on investment (SROI) since for each person who is nudged ahead of his competitors to get the job, another equally deserving person (who ironically was enterprising on his own with the job search and did not need the nudge to be active with job search) is denied the job. 

In other words, the net partial equilibrium social impact of the intervention is virtually zero. 

In the general equilibrium, one can of course say it has contributed its tiny bit to improving the efficiency of labour market matching (for e.g., assuming the treated person was more capable than the one who would have otherwise got the job).

But should a deeply capacity constrained government get into such things, with the certainty of this activity displacing effort from something else more likely more important?

And we have not even talked about the state capacity challenge in implementing this with acceptable fidelity in these countries. Take this description of the treatment,

Study participants are randomly assigned to one of three treatment arms: Control (pure control), Workshop (workshop only), and Workshop Plus (workshop + plan making). A random subset of job seekers in the Workshop Plus group were additionally asked to identify a peer. Participants across the Workshop and Workshop Plus groups were further randomized to receive text-message reminders. 

This is not as simple as it appears. Making plans, weekly reminders, peer-support engagements etc in scale requires reasonably strong state capacity. It is inconceivable that this can be done in scale without being routinised by the implementing bureacracy to a degree that makes it ineffectual. Do we really think that the S African State (in any province) can do this in scale without significantly compromising the quality of implementation as to render it virtually ineffectual?

We are also talking about countries where for every decent job opening that becomes available, there are potentially thousands go job seekers. It is very unlikely that a job will remain unfilled because of lack of applicants or lack of awareness among job seekers (in any case with such cases the more appropriate intervention, by orders of magnitude, is to support placement agencies). For sure, some individual job seekers will be better off if they can be nudged into being more effective at jobs search (though at the cost of making some others, who would have got the job without this intervention, worse-off). 

The best that can be said about this is that, IF implemented in scale, it can very marginally (or more appropriately trivially, considering all the factors that constrain S African labour market and placing this intervention in perspective) increase the efficiency of S African labour market. And compare this with the competing areas for policy attention on the labour market side - education of kids, trainings to make the educated kids employable, facilitate job creation by businesses, enhancing productivity of those jobs, mechanism for efficient matching job seekers with jobs and so on.

Weekend reading links

1. Barry Ritholtz argues that the restrictive policies favoured by taxi cab owners in New York created the likes of Uber,

Consider, the number of licensed cabs was about 16,900 in 1937, when the city's population was more than 1 million lower than it is today. Today, there are fewer medallions than 80 years ago. There have been only about 1,800 new medallions issued since 1996. It is an artificially created monopoly, and monopolies tend to lead to terrible economic behaviors. Just consider one aspect of the appalling level of service on offer. In New York, many taxi drivers change shifts between 5 p.m. and 6 p.m., abandoning the city in the midst of rush hour, returning to the outer boroughs or even New Jersey for driver changes. Let a single drop of rain fall and it is almost impossible -- no, it is impossible -- to find a cab. The cars are often in bad shape, devoid of shock absorbers, and back seats that make me want a shower afterward. Yellow Cabs also have been known to illegally refuse to pick up the hails of African-Americans. Unlike London, where drivers have an almost tour guide-like knowledge of their city, New York cab drivers are often utterly ignorant of the city where they work.

And on Uber's effect on medallion prices, 

Bloomberg Businessweek reported that medallion prices, which peaked at $1.3 million in 2013, were already sliding, falling below $900,000 in 2013. Just two years later 2015, prices had fallen another 40 percent. And it got worse: By 2016, the lowest reported price was $250,000. Last year, medallions sold for as little as $241,000. They are still falling. Axios noted a recent transaction that went for just 8 percent of the peak value, or about $100,000. Other cities, such as Chicago, have seen similar declines in medallion prices.

2. David Bell has a scathing critique of Steven Pinker's new book, Enlightenment Now, which is a celebration of the progress made by human civilisation in the post-Enlightenment era thanks, in the main, to the scientific and technological advances that arose from Enlightenment's reasoning and scientific enquiry. He writes,

Enlightenment Now... is a dogmatic book that offers an oversimplified, excessively optimistic vision of human history and a starkly technocratic prescription for the human future. It also gives readers the spectacle of a professor at one of the world’s great universities treating serious thinkers with populist contempt. The genre it most closely resembles, with its breezy style, bite-size chapters, and impressive visuals, is not 18th-century philosophie so much as a genre in which Pinker has had copious experience: the TED Talk... It makes use of selective data, dubious history, and, when all else fails, a contempt for “intellectuals” straight out of Breitbart. Pinker might not have intended the book to do so, but it will bolster the claims of populist politicians against intellectuals and movements for social justice while justifying misguided, coldhearted policy choices in the name of supposedly irrefutable scientific rationality... When it comes to issues like “democracy” and “equal rights,” Pinker seems to believe that progress has occurred almost by itself, as a result of whole populations spontaneously turning more enlightened and tolerant. “There really is a mysterious arc bending toward justice,” he writes. Almost entirely absent from the 576 pages of Enlightenment Now are the social movements that for centuries fought for equal rights, an end to slavery, improved working conditions, a minimum wage, the right to organize, basic social protections, a cleaner environment, and a host of other progressive causes. The arc bending toward justice is no mystery: It bends because people force it to bend.

In some ways, like Nassim Nicholas Taleb and Richard Dawkins, Steven Pinker may be respresenting the era of pop-intellectualism. 

3. Ricardo Hausmann makes the point that has been a constant theme of this blog for more than a decade - private participation in infrastructure is best done by way of public finance of construction followed by private concession of operation and maintenance. 

But he glosses over the challenge with even the latter. As I blogged here in case of India's roads monetisation, private participation in O&M too is fraught with several risks.

4. I liked this Amartya Sen assessment of Karl Marx's legacy. Sample this,

I would place among the relatively neglected ideas Marx’s highly original concept of “objective illusion,” and related to that, his discussion of “false consciousness”. An objective illusion may arise from what we can see from our particular position — how things look from there (no matter how misleading). Consider the relative sizes of the sun and the moon, and the fact that from the earth they look to be about the same size. But to conclude from this observation that the sun and the moon are in fact of the same size in terms of mass or volume would be mistaken, and yet to deny that they do look to be about the same size from the earth would be a mistake too... The phenomenon of objective illusion helps to explain the widespread tendency of workers in an exploitative society to fail to see that there is any exploitation going on — an example that Marx did much to investigate, in the form of “false consciousness”...

In one of Eric Hobsbawm’s lesser known essays, called “Where Are British Historians Going?”, published in the Marxist Quarterly in 1955, he discussed how the Marxist pointer to the two-way relationship between ideas and material conditions offers very different lessons in the contemporary world than it had in the intellectual world that Marx himself saw around him, where the prevailing focus — for example by Hegel and Hegelians — was very much on highlighting the influence of ideas on material conditions. In contrast, the tendency of dominant schools of history in the mid-twentieth century... had come to embrace a type of materialism that saw human action as being almost entirely motivated by a simple kind of material interest, in particular narrowly defined self-interest. Given this completely different kind of bias (very far removed from the idealist traditions of Hegel and other influential thinkers in Marx’s own time), Hobsbawm argued that a balanced two-way view must demand that analysis in Marxian lines today must particularly emphasise the importance of ideas and their influence on material conditions... To Hobsbawm’s critique, it could be added that the so-called “rational choice theory” (so dominant in recent years in large parts of mainstream economics and political analysis) thrives on a single-minded focus on self-interest as the sole human motivation, thereby missing comprehensively the balance that Marx had argued for. 

5.  The Economist has a briefing on the global logistics market. This is interesting,

The industry’s backwardness can be seen in its thrall to paperwork. Systems based on e-tickets that say who is entitled to go where, and how, have been mandatory in air-passenger transport for ten years. But half of air cargo still travels with paper “bills of lading” rather than e-tickets. In the world of containerised shipping things are even worse: freight forwarders deal with shipping firms, airlines and hauliers mainly by fax. The cargo on each voyage of the Munich Maersk generates a library of documents—many of which then need to be sent to the ship’s destination by some other means. That secondary shipping is not foolproof, either: vessels and aircraft are often delayed in port because the paperwork has not caught up with the goods that they carry. The cost of all this is enormous. Removing administrative blockages and outdated practices would, by some accounts, do more to boost international trade than eliminating tariffs. The UN reckons that putting all the Asia-Pacific region’s trade-related paperwork online could slash the time it takes to export goods by up to 44%, cut the cost of doing so by up to 31%, and boost exports by as much as $257bn a year.

6. Putting Chinese foreign lending in perspective,

By the end of 2014, just two Chinese policy banks — the China Development Bank and Export-Import Bank of China had outstanding loans to foreign borrowers of nearly $700bn, much the same as the total outstanding lending of the World Bank and six regional development institutions... As a study from the Center for Global Development notes, 23 of the 68 countries potentially eligible for lending under the Belt and Road Initiative are vulnerable to debt distress. In eight of these countries — Pakistan, Djibouti, Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan — the lending associated with the Belt and Road Initiative will add substantially to the risks.

7. Fiscal incentives to attract businesses is arguably one of the largest examples of wasteful public policy. Eduardo Porter from the example of state and local governments in the US,

Research on a program of corporate tax breaks in Texas found that 85 to 90 percent of the projects benefiting from such incentives would have gone forward without them. Even when tax breaks work and spawn new jobs, local residents gain little if anything... State and local government spending on tax incentives like those offered by Wisconsin and New Jersey has increased sharply since 1990, to about $45 billion in 2015... It amounts to roughly all the money that state governments collect from corporate income taxes. Is this just about opportunistic politicians dipping into state coffers so they can be photographed cutting the ribbon at a spanking new factory? I wouldn’t doubt it. But I would also suggest another, more troublesome motivation: desperation. Fiscal incentives are one of few tools for cities like Racine and Newark to create jobs.

Much the same most likely applies to state governments in India competing with each other to attract investors.

8. International development's mindless obsession with RCTs has crowded out much more valuable ethnographic studies like this by Aditya Dasgupta and Devesh Kapur on the challenges faced by the frontline development bureaucracy in India. Nice documentation of a reality which is deeply internalised by those working within these systems but not amenable to any randomisable study. It also highlights the challenge of implementation validity that I blogged about here.

9. Vietnam may only be the latest example in the well established fact that many countries have achieved US levels of student learning outcomes in Math and Science at very low levels of income. 

10. An assessment of the progress made by China's One Belt One Road (OBOR) initiative in the Nikkei Asian Review. In particular, it finds that projects sometimes experience serious delays and resultant cost-escalation, ballooning debts in Pakistan, Sri Lank, Maldives, and Laos, sovereignty concerns, and lack of participation by local workers and local banks.

11. CityLab has a series of articles on the problems being faced by public buses in US cities. It writes,

Numbers released last month from the Federal Transit Administration’s National Transit Database show a 2.5 percent decline in total transit ridership from 2016 to 2017, with bus ridership leading the way with a 5 percent drop... Going back to 2014, ridership is down 7 percent, and bus ridership in 2017 was down almost 20 percent from its peak in 2008. During the same nine-year period, the Chicago Transit Authority alone lost more bus riders than all U.S. agencies with growing ridership gained.

And on the role of ride sharing services in this state of affairs,

2018 will be the first year that for-hire vehicle trips (including taxis, Uber, Lyft, and their peers) will outnumber bus trips in the U.S., transportation consultant Bruce Schaller forecasts. Research in New York, San Francisco, Boston, and nationally show that the rapid growth of ride-hailing is adding new vehicles to congested city streets. These services offer shared rides via “pooling” services, but they have seen limited uptake and cannot physically match the people-moving efficiency of city buses.

12. Keith Gessen has a fascinating exploration that rips off the veil shrouding what actually determines the US view of Russia and how its drives American policy towards that country. The essay explores the relationships through the lens of the worldview and prejudices of Russia hands in the Military and State Department who run the bilateral relationship.

The abiding mystery of American policy toward Russia over the past 25 years can be put this way: Each administration has come into office with a stated commitment to improving relations with its former Cold War adversary, and each has failed in remarkably similar ways. The Bill Clinton years ended with a near-catastrophic standoff over Kosovo, the George W. Bush years with the Russian bombing of Georgia and the Obama years with the Russian annexation of Crimea and the hacking operation to influence the American election. Some Russia observers argue that this pattern of failure is a result of Russian intransigence and revisionism. But others believe that the intransigent and unchanging one in the relationship is the United States — that the country has never gotten past the idea that it “won” the Cold War and therefore needs to spread, at all costs, the American way of life.

Sample this about the different world-views of American officials,

The longtime Russia hand Stephen Sestanovich, a veteran of the Reagan and Clinton administrations, says there are two kinds of Russia hands — those who came to Russia through political science and those who came to it through literature. The literature hands, he suggests, sometimes let their emotions get the best of them, while the political-science hands, like Sestanovich, are more cool and collected. Fried, who served in every administration from Carter to Obama, also thinks there are two kinds of Russia hands, though he draws a different dividing line: There are those, like himself, who “put Russia in context, held up against the light of outside standards and consequences.” These people tend to be tough on Russia. And then there are those “who take Russia on its own terms, attractive and wonderful but subject to romanticization.” These people tend to give Russia what Fried would consider a pass.

The false dawn of micro-pensions

There is a disturbing irony in encouraging poor people, who barely manage to make ends meet just for physical survival, to save for old-age and insure themselves against diseases. Self-financed micro-pensions and micro-insurance, aided by the allure of modern technologies, are a fad in international development and impact investing. It is flawed on both philosophical and financial considerations.

The fundamental assumption with micro-pensions is that it is both desirable and possible for informal workers (or poor and lower middle-class) to save money from their current income to finance their pensions. 

The desirability condition is, at best, a benign paternalistic concern of outsiders for the welfare of the poor and informal workers during their retirement. I will leave this at that. The possibility condition is contingent on another assumption. These people have the incomes to save long-term for their pensions, and it is human behavioural and cognitive failings that prevent them from doing so. 

This assumption flies against the near universal evidence on the difficulty impossibility of long-term financial savings (pensions or insurance) among the poor. Forget the poorest, even the typical rural and urban informal worker in a low income country lives a virtual hand-to-mouth existence, barely surviving from month to month on their meagre wages. 

India, for example, has a pension and health insurance scheme for all formal sector workers which requires mandatory deductions from worker’s salaries. The mandatory deductions amount to slightly above 30% of the worker’s salaries, including the employer contributions. This is actually counter-productive because it deprives the badly stretched worker off money he badly needs today to meet daily needs and forces him to borrow at much higher cost from local money lenders for those needs, thereby likely making him more indebted. While the logic of making this voluntary at least for workers with monthly wages below Rs 15000-20000 is clearly understood, its politics very challenging.  

It is also for this reason that almost all developed countries have either lower mandatory deductions or higher government contributions for low income workers. In fact, this was a major component of the acclaimed 2004 Hartz IV reforms of Germany, often claimed as the cornerstone of Germany’s recent economic success. In case of the poor, it is almost always completely public funded social safety nets that provide pensions and health insurance. 

It is ironical that international development entities promote self-financed pensions and insurance for the informal workers even though it is an idea that is not even considered for their arguably far better off (both in relative and absolute terms compared to others in their respective countries) counterparts in developed countries. 

How many countries have self-financed pension schemes for informal workers? Is there any country at all that has this creature of innovation? In fact, how many examples of micro-pension business is there in any developing country? Is there any self-financing (or non-subsidised by governments) micro-pension company which has say, 100,000 regularly paying informal worker subscribers? Is there any micro-pension company in any country which has been in existence for even 10 years? Do we have entrepreneurs offering micro-pensions to the legions of part-time or contractually (hourly-wages) employed workers (say, McDonalds and Walmart workers), who form a very big share of the labour force in the US? Do we have impact investors offering financing for such entrepreneurs? If not, why?

This is a bit like Lant Pritchett’s example of women in rural India asking him how the women Self Help Groups were in the US! 

Even if we set aside the philosophical objection, there is the question of its financial viability. In order to be sustainable, a micro-pensions entity has to overcome the following constraints.

1. The country should have deep enough long-term investment opportunities. Pension funds will have very strict and low regulatory limits on equity exposure and that too to highly rated ones too. But in low income countries the supply of such instruments which are not very risky and which can generate a significant return (to cover inflation, costs and returns) is likely to be limited.  

2. These micro-instrument agencies are unlikely to have the expertise to manage these funds internally in a manner as to generate the required returns, thereby necessitating outsourcing of funds management responsibilities to asset managers, with the attendant high management cost. This is a problem for even established microfinance NBFCs in mature markets like India. 

3. Since poor people are unlikely to be able to make certain in-payments for long periods (and in case of micro-pensions are also likely to withdraw money at the earliest opportunity), the entity offering such instruments may have to offer the product with flexible terms. This would seriously limit the flexibility of its investment options.

4. Minimise customer acquisition and retention costs, as well as ensure reasonable average savings inflows for each customer, and that too among the most financially vulnerable groups of people

5. Overcome the business longevity risk and remain a going concern for a long time, in the range of decades, a critical determinant for a business like insurance/pensions. It is also not for no reason that large legacy institutions are, for good or bad, the ones who have been successful with penetrating the insurance and pensions market in developing countries. Successful pension and insurance companies don’t suddenly emerge overnight and grow big. The entry barriers are very high. They have to piggyback on existing credible platforms. 

6. Finally, as discussed earlier, success of these instruments will have to overcome the large body of evidence on poor people being unable to accumulate large amounts in cash (as against physical assets like house, livestock, gold etc), even through small periodic cash savings, required to sustain a pension or insurance scheme. 

There are the following costs associated with these constraints and the final investment returns have to offset them

1. Cost of routine operations (acquiring, retaining pensioners etc)

2. Outsourced asset manager cost (even if done in-house, the costs can be prohibitive, in terms of attracting and retaining talent etc)

3. Costs due to uncertain inflows and outflows associated with the nature of customers 

4. Reasonable profits for the entity

5. Inflation – typically high in all low income countries

In a typical case, the first four alone will aggregate to 10-15% returns, if not more. Add in a 10% inflation rate, and we are looking upwards of 20-25% rate of return over a very long-term for this to be commercially viable as a micro-pension entity. Can we imagine the enormity of this challenge? How many such asset managers (or any kind, much less those dealing with low risk instruments/asset categories) are there in any developing country who can generate such returns? And all this out into the future? 

As an illustration of a micro-pension program, MicroSave has this nice illustration of the Abhaya Hastham program of the Government of Andhra Pradesh for women self-help group members, which pays out Rs 500-Rs 2200 per month (depending on the age of enrolment, and in today's nominal rupee) by saving Rs 1 per day (or Rs 365 per year). As the graphic below shows, when the program reached 4 million clients, it required very significant top-up by government required to make it sustainable. 

Whatever the wonders of technologies like digital money and blockchains, we cannot escape the bitter reality that poor people have hardly anything to save. It is a constraint which cannot be relaxed. I cannot imagine that we are helping the poor by making them cut back on their basic human necessities to save penurious amounts for their old age. And that too by asking them to trust a financial model which does not stand the test of even a cursory scrutiny. 

The micro-pensions fad is yet another example of the unfortunate digression away from serious  debates on important development challenges like, in this case, fiscally sustainable and incentive compatible social safety nets. 

The Mumbai DP - vertical development and population density are not the same!

The just approved Mumbai Development Plan 2034, while a mutilated version of the original ambitious proposal, does significantly increase the city's permissible Floor Space Index (FSI). It has also generated the usual debates about how deficient infrastructure would limit the gains from vertical growth. 

I have blogged about this on several occasions. This argument misses the point completely.

The issue is not at all about density. Among cities with population above 2.5 million, only Dhaka has a higher population density than Mumbai. 

The problem with Mumbai is not so much lack of density, but its very low per capita space availability - 4.5 sqm compared to 34 sqm in Shanghai! If we take the slums, the per capita space available is just 2.73 sqm, which makes those areas the densest urban habitation anywhere in the world at about 120,000 people per sqkm! Far from being the Maximum City, for its residents Mumbai is actually a Minimum City! The new DP aims to increase this to 18-20 sqm. 

In this scenario, vertical development is not going to increase the density significantly. In fact density could even fall. For, as height increases, the average size of each dwelling unit built upwards is likely to be much larger than the currently existing tiny single-storied and semi-permanent units that are a feature of the slums. To this extent, unless we go significantly upwards, the increased unit size is more likely to cause gentrification and, to thereby cause a decline in density. So, there is a logical likelihood that a small increase in FSI could actually tip over to a gentrification equilibrium which lowers density and makes housing less affordable for the less well-off. 

Infrastructure augmentation is important, but its deficiency is not as bad as is being made out, especially in the short to medium-term. In the long-run the likelihood of rising infrastructure investments may be more promising.

After all these same areas already have the world's second highest density. And they are less likely to have more people coming in. They have just about the carrying capacity - roads, mass transit, water and sewerage pipes, schools, hospitals etc - to support the existing population, though the quality of the provision is inferior, a concern not quite related to density itself.

Yes, we need  bigger water pipes and wider roads. But that, and the resultant increased service quality, depends on more city-wide water availability, more water and sewerage treatment facilities, more  and better mass transit options, better run schools and hospitals etc. This a felt-need irrespective of whether FSI remains the same or is increased. And the higher FSI does nothing to make it any more relevant.

Irrational Exuberance Redux?

There are no free lunches. Every time there is exuberance in any bidding for public contracts, it is prudent to step back and reflect. 

The aggressive bids based on over-optimistic traffic growth and low fuel price forecasts associated with road and power sector PPPs of the last decade, the get-at-any-cost bids in telecom 3G spectrum auctions, and the race to the bottom with solar tariffs are some recent examples from India. In each case, the triumphalism following the contracting and resource mobilisation proved short-lived and the longer term costs were considerable. The legacy of the first was over-leveraged infrastructure companies and banks with non-performing assets, that of the second telecom companies with no option but to skimp on capacity investments, and the third one is currently playing itself out. 

Last week the National Highways Authority of India (NHAI) signed a 30 year concession agreement with Macquarie Infrastructure and Real Assets (MIRA), world's largest infrastructure fund manager, to monetise a bundle of nine fully operational highways involving 648 km in Andhra Pradesh and Gujarat. This is the first concession under the Toll-Operate-Transfer (TOT) model which was approved by the Cabinet in 2016 to monetise 75 national highway stretches of 4500 km. MIRA will make an upfront payment of Rs 96.815 billion in return for maintenance of the highways and the 30 year toll collection rights. 

MIRA's bid was striking in its exuberance. Against the NHAI concession value of Rs 62.58 bn (assuming an IRR of 12-13%), MIRA bid Rs 96.815 bn, a premium of 55%. It was also 30% higher than the next highest bid.

It is of course possible that this first bundle had all great highway assets with very high traffic growth potential and MIRA was only betting on its realisation. But that does raise the question of how the government, which technically has more information than the concessionaire, came out on the other side of the information asymmetry and left money on the table with its low concession value. Or was it done strategically to tantalise market interest in light of the big pipeline of such offerings?

How do we assess such deals? Is it a case of MIRA sensing money of the table that nobody else saw? Or one where MIRA bid sensed several attractive medium-term exit options?

The table below captures the spectrum of choices that governments and concessionaires have with such contracts.

Clearly, the overall welfare maximising option (option IV) is to have the concessionaire making a commercially viable enough bid and government being able to realise a reasonable price for the asset. Given the information symmetries and uncertainties of a long-term contract, this is difficult to achieve in the real world. In the circumstances, options II and III are practical realities, and the objective should be to get as close as possible to option IV. 

Based on the experience of such projects from across the world, let us get a few practical considerations out of the way. One, 30 years is a long period and will encompass multiple business cycles and their respective downturns. Traffic flows and interest costs will accordingly vary widely. The upsides have to more than compensate for the downsides. Two, if the downsides persist and in case of doubts on medium-term commercial viability, the concessionaire will invariably seek renegotiations, and most likely get it. Three, MIRA may be the current owner, but can and will exit (presumably there is a lock-in period) in due course and there will be multiple ownership transfers over the concession period. The MIRA Fund from which resources were drawn to pay for the monetised highways would typically have a ten year life, after which it pays out and closes.

In the circumstances, there are two concerns. The first concerns the discount factor and the second over likelihood of asset stripping.

Let us examine the first. The two biggest drivers of commercial viability are traffic projections and interest rates used to discount the cash flow. One can assume that MIRA has made its offer based on its best assumptions of the traffic projections (based also on data made available by NHAI), and to that extent is completely accountable for the associated risks. 

But the interest rate used in discounting is determined by NHAI and can be just as critical. As Ajay Jain of Indusbridge Capital Advisors has written in Bloomberg Quint, the nominal interest rates in India since the millennium have varied between 14.5% and 4.25%. Getting this right can be the difference between winner's curse (for the concessionaire) and leaving money on the table (for the government).

If the discount rates are too low, then this would imply a higher estimate of the Net Present Value (NPV) of the cumulative life-cycle cash flows. This, while giving governments high revenues would also force bids which tread on commercially questionable terrains. But, as experience from across the world and across sectors shows, it is only a matter of time before the concessionaire throw up their hands and seek renegotiations. And again experience shows, the net outcome is always bad for the tax payers. On the other hand if the discount rate used is on the higher side, the NPV estimate would be lower. This would leave money on the table and generate a windfall for the concessionaire.

In this context, the Value for Money (VfM) analysis of UK's Private Finance Initiative (PFI) projects by the country's National Audit Office is instructive,

Making changes to the discount rate applied to future costs can also affect which financing route is assessed as VfM. The VfM assessment compares private finance costs with a government discount rate of 3.5%, which is 6.09% with inflation, known as the Social Time Preference Rate (STPR), which is higher than government’s actual borrowing costs. The higher the rate applied, the lower the present value of future payments. For example a payment of £100 in 12 years will have a present value of just £49 when discounted by the STPR. Discounting using a lower discount rate, which compares private finance with the actual cost of government borrowing, results in fewer private finance deals being assessed as VfM. Using a fixed discount rate, set in 2003, means that the VfM assessment does not reflect the additional cost of private finance above the prevailing cost of government borrowing. In the current low-interest-rate environment it is possible to privately finance projects below the 6.09% rate. When this is the case private finance will be assessed as costing less than public finance even though the actual long-term cash costs of debt servicing and repayment will be higher than government debt costs.

As the graphic below shows, the government's actual cost of borrowing has consistently and significantly been lower than the discount factor used in making VfM assessments of PFI projects.

In summary, if the government has used a lower discount factor, it has inflated the cash flows estimates, and set the stage for renegotiations. In contrast, a higher discount factor deflates the cash flows, and leaves money on the table. Only time will tell which of these two scenarios best fit the first round of TOT roads monetisation.

This brings us to the second, and more important concern, around asset stripping. This can arise through multiple pathways. One way, as the example of UK's water utility privatisation shows, can be by leveraging up to finance opex and maintenance, making disproportionately large payouts to the investors from profits accrued, gradually diluting equity, and finally selling off to the next buyer and exiting with handsome returns. Another option is to cut down on expenses by skimping on operational expenses, socialising externalities wherever possible, and stretching the boundaries on the interpretation of the pre-defined maintenance schedules. 

Both approaches are straight out of the playbook of Macquarie itself during its ownership of Thames Water, UK's largest water utility with more than 9 million consumers. In the 2006-17 period of its ownership of Thames Water, "Macquarie paid itself and fellow investors £1.6bn in dividends, while Thames Water was loaded with £10.6bn of debt, ran up a £260m pension deficit and paid no UK corporation tax". Macquarie exited by progressively selling off its stake to an emergent group of private equity, pension funds, and sovereign wealth funds. 

Consider this scorecard from the monetisation of UK's water utilities,

The owners of the nine companies — many of which are overseas investors, including sovereign wealth funds — paid out £18.1bn in dividends in the 10 years to 2016, even though post-tax profits amounted to £18.8bn during the decade, according to the Greenwich University researchers’ analysis of their financial reports... Consequently, almost all capital expenditure has been financed by adding to the companies’ debt piles. Collectively these now stand at a towering £42bn... Three companies — Anglian Water Group, Severn Trent Water and Yorkshire Water Services — have paid out more in dividends than their total pre-tax profits over the past decade... Greenwich researchers said the cost of maintaining and improving water and sewer infrastructure has been paid for almost entirely by an increase in debt, which has risen from almost zero at the time of privatisation to nearly £40bn in 2016. The interest payments on the debt are higher than what would be paid by the public sector, which can borrow more cheaply. Together, the £1.8bn in dividends and the extra £500m of debt interest payments each year pushed up bills for each of England’s 23m households by about £100 a year.

Now that asset monetisation is here to stay, what are the lessons? Some suggestions

1. For a start, it is important to attract the right kinds of investors in these assets. The financial logic of investing in such long-gestation assets is the relative stability and not the size of returns. Pension funds, insurers, sovereign wealth funds and so on, who value reasonable returns which are stable and long-term, are the most appropriate direct or indirect (through the likes of  infrastructure funds) investors in such assets. Private equity and other similar investors, who elevate returns over stability and tenor, are likely to have a different set of incentives with potential to engender distortions.

It is possible to encourage self-selection among investors by prioritising stability and tenor. Clarity in the principles of renegotiations, a very high likelihood event in long-term concessions and one fraught with significant uncertainties, can be an important signal to lower risk and promote stability. I had blogged earlier with a few suggestions on renegotiations. On the upside, it may also be useful to cap certain types of windfalls, like in the UK, by forcing the concessionaire share profits with the government. In simple terms, investments in operational infrastructure facilities should become a boring financial asset!

2. On a related note, the vast majority of capital for such monetised assets would and should come from domestic institutional investors and not foreign infrastructure funds. I have already blogged here, here, and here about the limited depth of dry powder among global infrastructure funds to invest in infrastructure in countries like India. More importantly, these assets generate revenues in rupee and it is only appropriate that they be financed by domestic capital, so as to avoid currency liability mismatches and the resultant higher cost of capital.

It is therefore an opportunity to deepen and broaden the financial markets, especially the pension and insurance businesses as well as the bond market. Complementary reforms to incentivise these market participants to absorb the supply of these instruments may be necessary. The promotion of Infrastructure Investment Trusts (InvITs), announced in the Union Budget 2018-19, is a step in the right direction. However, the government may need to walk the talk with this so as to ensure that this does not become one more in the long-list of less than effective reforms initiated over the last two decades to broaden and deepen the capital markets.

3. More specifically, given the experience of infrastructure privatisation and asset monetisation from across the developed world, the concession agreements should seek to build safeguards that explicitly guard against asset stripping. It may be useful to have clearly defined financial ratios and floors/thresholds to limit excessive debt accumulation and equity dilution, as well as maintain oversight on pension and other statutory payouts. 

4. It is never a good thing to base a 30 year contracting decision on a single discount factor. Given the impossibility of reliably predicting long-term rates, this is pretty much a lottery for both the government and the concessionaire. The longest credible enough measure of long-term interest rates are the 10 year Treasury bonds.

One option would be to do periodic discounting resets, say once in 7 years, based on the expected long-term interest rates (not the prevailing bank rates). The payouts could then be made as instalment bullet payments, which however may come in the way of meeting the government's fiscal requirements and may also not align life-cycle incentives. The other option would be to have the initial payment which is based on discounting with the rate for the ten-year T-Bonds and then adjust the initial payment every time the reset happens. The adjustment could be in the form of a one-off term payment (by either the government or the concessionaire) based on how the discount factor varies. 

Universal health coverage is not universal health insurance

The Economist has a survey on universal healthcare. Surprisingly for an Economist Survey, though predictably very rich on facts and descriptives, it comes out as being very sloppy and misleading in its analysis and prescriptions. The most striking being the casual substitution of universal health care coverage with universal health insurance. 

In fact, this article has clearly made up the mind that universal health coverage is possible only with the insurance approach, and that too one which involves the universal coverage of a basic minimum set of commonly afflicted medical conditions. Sample this about the Thailand's universal health coverage scheme,

Introduced in 2002, Thailand’s scheme has become a model for other countries trying to extend coverage. It shows that universal health care can be affordable if policymakers think carefully about how to spend scarce resources. And it demonstrates the power of health insurance to bring “the magic of averages to the aid of millions”, as Winston Churchill put it.

Really? The successful Thai health care system, as we see it today, far from being a simple health insurance scheme introduced in 2001, is the result of persistent efforts initiated in the seventies. In fact, it is not even a health insurance scheme, based on the conventional understanding of market-driven health insurance. It is built on a robust network of world-class government owned health care facilities, very streamlined gatekeeping referral system, and an incentive compatible capitation based budget spending. The last two are, in many ways, critically dependent on the first. The so-called insurance, is just a dressing up of all the aforementioned ingredients and universal application across all population categories, and predominantly publicly financed.

I have blogged on several times, including this most recently, about the impossibility of realising satisfactory enough universal health coverage without improving primary health care. I have also written here about the fiscal unsustainability of doubly universal health coverage - cover both population and medical conditions. 

But the Survey has several very striking factual snippets. A few samples. On the importance of health to economic growth,

A study found that in Britain as much as 30% of the growth in GDP between 1780 and 1979 may have been due to better health and nutrition. A paper by two leading economists, Dean Jamison and Lawrence Summers, found that 11% of the income gains in developing countries between 1970 and 2000 were attributable to lower adult-mortality rates.

On the general state of global health care

A study, in 2015, for the Lancet, a medical journal, estimated that 5bn people around the world cannot get basic surgery such as a caesarean section, a laparotomy (an incision into the abdominal wall) or a repair for a fractured bone. According to the paper from the World Bank and the WHO, 800m people spend more than 10% of their household budget on health care, and nearly 100m are pushed into extreme poverty (defined as having less than $1.90 a day to live on) every year by out-of-pocket health expenses. This chimes with smaller-scale studies. A survey last year of patients at a government hospital in Uganda discovered that 53% of their households had to borrow money to pay for treatment and 21% sold possessions. About 17% lost their job... In rural India, for example, 66% of the population does not have access to preventive medicines, and 33% must travel more than 30km to get treatment.

In case of tertiary care like surgery, it is understandably even worse,

Nine in ten people living in developing countries do not have access to “safe and affordable” surgical care, according to a report in 2015 by the Lancet (see map). About 60% of operations round the globe are concentrated in countries with only 15% of the world’s population. In rich countries a rough rule of thumb suggests there will be about 5,000 operations per 100,000 people every year. But according to the African Surgical Outcomes Study, a survey of 25 African countries, the median rate on that continent is just 212 per 100,000... The 25 countries in the African Surgical Outcomes Study had an average of 0.7 surgeons, obstetricians and anaesthetists per 100,000 people, compared with a typical figure of more than 40 in the rich world. Over half the district hospitals in one study of eight African countries had no anaesthesia machine. Often the kit is donated, and few locals know how to fix it. One survey suggests that 40% of donated surgical equipment in poor countries is out of service... In 2010, 17m lives were lost from conditions needing surgical care, dwarfing those from HIV/AIDS (1.5m), TB (1.2m) and malaria (also 1.2m). Roughly one-third of the global disease burden measured by DALYs is from conditions requiring surgery.

But the challenges are immense. On the sorry state of healthcare in Sierra Leone, a reminder that these countries need hard resources, human and capital. Innovations, howsoever cute, is only tinkering at the margins. 

Life expectancy was already just 50 years, and an eighth of children died before their fifth birthday... Before the outbreak the country had just one doctor for every 50,000 people. (America has one for about every 400; China one for 275.) Then 7% of Sierra Leone’s health workers died from Ebola during the epidemic.

On the pervasiveness of informal providers,

In many developing countries people get their health care mostly from informal private providers such as drug shops or unqualified practitioners. In India, informal providers account for three-quarters of all visits. The figures in other countries are similar, if mostly less extreme: 65-77% in Bangladesh, 36-49% in Nigeria and 33% in Kenya.

Quality in health care, unlike in case of education, is less discussed. But it may be even worse, with disastrous consequences,

In one Chinese study the average consultation time was a minute and a half. In India the average length was double that, but one-third of the visits lasted just one minute and featured a single question: “What is wrong with you?” Only 30% of consultations in India and 26% in China resulted in correct diagnoses, and patients were more likely to receive unnecessary or harmful treatment than the correct sort. Studies in Paraguay, Senegal and Tanzania have produced similar results... In a study in Delhi only 25% of providers asked parents whether there was blood or mucus in the child’s stool, a clear symptom of such disease.

But there are a few shining lights,

In both Chile and Costa Rica income per person is roughly 25% of that in the United States and health spending per person just 12%, but life expectancy in all three countries is about the same. Rwanda’s GDP per person is only $750, but its health scheme covers more than 90% of its population and infant mortality has halved in a decade.

Is Thailand the most impressive healthcare story of our times?

Costa Rica is another impressive exception,

Between 1995 and 2002 Costa Rica established more than 800 “Equipos Básicos de Atención Integral de Salud”, or integrated primary-health-care teams, each looking after 4,000-5,000 people. The teams are made up of a technical assistant, who visits patients at home; a clerk who keeps up-to-date records; a nurse; a doctor; and a pharmacist. The doctors have a lot of scope to run the teams the way they think best, but the health ministry holds them accountable for their patients’ outcomes. Before the programme was in place, just 25% of Costa Ricans had access to primary health care; by 2006 the share had risen to 93%. It was introduced in stages, which enabled researchers to assess its impact. A study in 2004 found that for every five years it was in place, child mortality declined by 13% and adult mortality by 4%, compared with areas not yet covered. Another study estimated that 75% of the gains in health outcomes resulted from the reforms.

And this too is impressive,

Ethiopia since 2004 has trained more than 38,000 “health extension workers”, rural high-school graduates who undergo a year’s training before being sent back to their local area. They have helped cut child and maternal mortality by 32% and 38% respectively. In Rwanda each village has to have three community health workers, elected by their peers, who offer basic services and make referrals. “People who have a minimum education can do a lot,” says Agnes Binagwaho, a former health minister.

But the lessons drawn from these successes may have far less relevance than we think,

One lesson from countries like Rwanda is that closing the gap between knowledge and action requires reforms far beyond the consultation room. Training helps, but so do incentives and accountability. When Rwandan health workers were paid to adhere to clinical guidelines, their performance improved. And when rural Ugandans were given more information about the quality of local health services, clinicians did a better job. When Rwandan health workers were paid to adhere to clinical guidelines, their performance improved. And when rural Ugandans were given more information about the quality of local health services, clinicians did a better job.

These lessons may appear very simple and hardly innovative. And they are undoubtedly the way forward. But unfortunately, thanks to very weak state capacity, it is very difficult to translate these lessons into action in scale with high fidelity. One more illustration of why instead of expending disproportionate energies chasing innovation and technology, the international development community should be striving to fix state capacity. The returns are orders of magnitude higher. And it is true of every sector!

International trade and internet commerce - why are their effects viewed differently?

The Economist has an article on the troubles of post offices as they compete with technology and new business models which threaten to upend their own business,

Their struggles are also due to delivery startups. Investors are pouring money into gig-economy couriers that use cheaper, self-employed drivers. BCG reckons that investment in such firms grew from $200m to nearly $4bn in 2014-16. Post offices, weighed down by strident unions, high labour costs and costly networks of sorting centres, struggle to compete... E-commerce giants may prove a greater threat... Amazon has already hit Britain’s Royal Mail hard by starting its own door-to-door deliveries. In California it has launched a grocery-delivery service as a way of gaining greater scale to deliver its own e-commerce parcels itself. The biggest threat of all may come from Amazon’s Chinese rival, Alibaba, which is injecting $15bn into its own delivery arm, Cainiao, and aims to expand beyond China. By doing their own deliveries in cities, where profits are juicier, these firms could leave less money on the table for post offices to cross-subsidise rural services, where costs are higher.

e-Commerce and sharing economy firms are doubtless more efficient than their brick and mortar counterparts. But an equal, if not greater, share of their competitiveness arises from regulatory arbitrage. By not adhering to the standards and safeguards applicable for brick and mortar companies, they let society bear the attendant negative social externalities. This applies across sectors, and post offices and delivery startups are no different.

This is a teachable moment in the way our worldviews inform our values.

Consider the example of two entities, A and B, who compete with each other for selling widgets. A claims that B is undercutting it by lax widget making standards in the widget factories which allows it to sell cheaper than B.

Now consider two scenarios. In the first, replace A with United States, B with India, widgets with cars, and widget making standards with labour and environmental benchmarks and safeguards in car industry. In general, the distinction would apply to developed and developing economies and the entire manufacturing sector. The latter gets a competitive advantage by their less onerous standards and lower wages, and the former demands a level playing field for their companies. 

In the second, replace A with a national Post Office, B with gig-economy couriers, widgets with delivering courier services, and widget making standards with labour protections. This would apply to a wide cross-section of sectors and their real economy and gig economy counterparts.

Why is it that the same commentators who loudly advocate global harmonisation of labour and environmental standards without batting an eyelid, stoutly oppose or at the least hesitate to endorse any regulation of the sharing economy firms?

Ironically, the same commentators were in the early nineties dismissing concerns of developing countries that the sudden global trade liberalisation and the arrival of deep-pocketed and massive multinational corporations and its products were destroying their domestic industries.

Forget the commentators, my guess is that even normal people would have the same contrasting appreciation of the two scenarios, despite their near exact similarities. 

Conventional wisdom would have had it that the cold economic logic dictated the thinking and commentary and opinions on such issues. But in the real world, our values and cognitive biases come to distort the way we view them.

Are we confusing the internet economy with efficiency, itself often perceived as an almost absolute superior attribute, and are blind to its diffuse and slowly evolving negative externalities? Are we biased towards the problems in our backyards than those of people distant to us (why should we even be asking this question, isn't it obvious!)?