Thursday, February 20, 2020

Do energy audits to reduce distribution losses, not innovations and reforms

In an earlier post on my reflections about international development, I had written
... in development, the big challenges are more often than not, not about radical paradigm shifts or spectacular innovations, but plain simple good governance and straight-forward implementation of plain vanilla programs and public services.
The point is that in this age of tech-glitz and innovation-mania, doing the simple things right is somehow not chic or aspirational. Every one wants to innovate or do something different or new, out-of-the-box as they are called. It is almost as though smart people have to be seen to be doing something innovative or different. Doing the simple things are for the un-smart and ordinary. 

The suggestions for fixing the problems in electricity distribution from a new paper should be considered in this backdrop,
What is the way out? We offer a taxonomy of reform in four areas: explicit subsidy reform, changing social norms, better technology, and privatization.
This is a prescription for places like Bihar, where distribution losses are in the high-twenties, perhaps even thirties, and have been so for years! These are places with rampant theft, extremely weak state capacity, and hostile political environments. 

This is another example of a paper which misses the wood for the trees. 

Some observations

1. As any practitioner in the field will tell, given the very high commercial losses (the non-technical losses), the most obvious and simplest thing to do is plain simple rigorous feeder-wise energy audits. This can be prioritised by focusing on feeders with the highest energy distribution. I have blogged about this here.

In fact the graphic below has so many answers on the lower hanging fruits.
One, massive suppression of readings below 100 units consumption, most likely to stay within the lower tariff rate slab. Two, it is not the politically sensitive constituency of poor (or some large electoral constituency) consumers who are the biggest defaulters, but the highest consumption connections who are also likely to form a very small proportion of total consumer base. Both point to straight-forward governance failures. 

Neither does addressing them require innovation or reform, nor will any help. It calls for bureaucratic commitment at the highest levels and rigorous reviews of feeders every month at all levels on simple Excel sheets and enforce follow-up. It is about painstaking and persistent reviews. State capacity weakness is easily glossed over.

2. And it is not as though these insights are not well-known to the insiders. All the southern and western states which have lowered T&D losses, some even to single-digits, have done it not on the back of any of these "reforms" or technology solutions like GIS mapping or smart metering. They have done it by plain simple good governance involving painstaking feeder-wise energy audits. They have just excelled in the 'grunt' work.

3. This is especially true in cases where we are trying to move the system from a very low level of performance to an average level, and not from good to great. While the latter would need many of these "reforms", the former, most often (and especially so in this case), demands just doing the basic things right. 

4. Instead, the researchers jump into the most complex of solutions like subsidy-reform or behaviour change or technology or privatisation. This is a cautionary note on the use of technology, and this is the real story behind the "success" of privatisation in Delhi. We all know about the challenges with the first two.

In fact, each one of these "reforms" demand a level of state capacity, which if available, would not have left the discoms in this situation and necessitated such reforms. If the discom had the capability to effectively manage  behaviour change or privatisation, it is most likely that it would have done the simple energy audits and managed to reduce losses.

5. Related point is the less-discussed challenge of scaling apparently good ideas. How do we scale feeder incentivisation in systems where even simple energy audits are not being done?

In many respects, international development is an accountability-free space. People use public resources to research and engage on ideas with little regard for whether it can be implemented or not. No wonder that the landscape is littered with failed ideas or ideas which are still struggling to take root even after decades of trials.

6. Opinion formers don't talk about strengthening state capability, but go on about using nudges, incentives, IT, machine learning, blockchains and so on to address persistent development challenges. This chorus of opinion from the outside to do new things, glossing over the plain simple good governance aspects, has an unintended perverse effect. It relieves the government - politicians and bureaucratic leaders - from focusing on the plumbing and instead encourages them to try out some of these "reforms", especially the technology stuff. 

It serves their purpose well. For one, they know that "trying out something new" is good optics. Most often, as the perceptive ones will already know, little will come out of such efforts. This also means that vested interests too are happy. But the ribbon-cutting is very good 'progressive' politics and good for the bureaucrats image. For another, it helps them evade doing the simplest thing - whipping the system up into doing the basics right. That is painstaking and hard work. The CMD of the discom does not get an award for doing the simple things right. Further, such "reforms" also sets off procurements and the associated gravy train, from which everyone benefits. 

Btw, the paper itself has several first-order problems. All that can be said in brief is that it is a gross simplification to attribute the problems of electricity sector to "treating electricity as a right". In one sweep, it glosses over several other factors like the political economy surrounding free farm power, corruption, weak state capacity etc.

Wednesday, February 19, 2020

The distorted equity markets

Even as the economy stutters, the stock markets have been rising unabated in India. An important driver has been the liquidity glut, especially from domestic investors. Sample this from Anand Kalyanaraman,
The bellwether Sensex of 30 stocks scaled new highs in 2019 with 15 per cent plus gain... Nearly 80 per cent of the 2277 stocks quoting on the BSE since the last year have lost value in 2019; just about one in five have gained. The BSE Mid-cap index is down 3 per cent, while the BSE Small-cap index lost close to 8 per cent. About 1240 stocks, or more than have the listed universe, have slipped at least 25 per cent over the year, and about 480 - more than a fifth of the listed space - are down 50 per cent or more... In contrast, over the year, about 340 stocks (15 per cent of the listed stocks) gained 10 per cent or more, about 220 (less than 10 per cent of the total) rallied 25 per cent or more, and just 40 doubled or more. 
Or this from Arati Krishnan,
Analysis on the shareholding patterns of listed companies (Capitaline) shows that from end-2013 to end-2019, the market capitalisation of Indian stocks expanded from ₹70 lakh crore to ₹157 lakh crore fuelled both by new flows and rising stock prices. In this period, the share of FPIs in the free float market capitalisation rose marginally from 39 to 40 per cent, while insurance companies saw their shares dip from 12 per cent to 9 per cent. Direct public holdings were flat at 16 per cent. But mutual funds in this six-year span saw the market value of their equity bets jump more than fivefold from ₹2 lakh crore to about ₹11 lakh crore, doubling their share in the free float market cap from 7 per cent to over 15 per cent... by December 2019, nearly ₹8.5 lakh crore of MF equity assets were parked in the top 100 stocks and ₹1.9 lakh crore in the next 150 stocks, with just ₹0.60 lakh crore in small-caps. Effectively, between September 2017 and now, MFs have withdrawn money from the rest of the market to plough it into the top 250 stocks. A good 77 per cent of MF equity assets are now in large-caps...
A handful of Nifty50 stocks began to forge ahead of other large-caps from 2017 onwards, prompting many fund managers to further narrow their choices. As a result, of the ₹11 lakh crore equity assets managed by mutual funds in December 2019, Nifty stocks alone accounted for ₹7.4 lakh crore (68 per cent). This has climbed from ₹4 lakh crore (58 per cent) in September 2017. Pension fund investments in the indices have also added to this trend. Other institutional participants have also followed a similar playbook. FPIs from September 2017 to December 2019, raised their holdings in the top 250 stocks from ₹22 lakh crore to ₹27 lakh crore while pruning small-cap bets from ₹2.2 lakh crore to ₹0.76 lakh crore. Insurers have ₹6 lakh crore invested in the top 250 and just ₹0.10 lakh crore in the rest of the market.
How much of these numbers are due to re-allocation by fund managers and how much due to mere changes in the market valuations?

One big differentiator last year, apart from the improvement in liquidity, was the corporate tax cuts. They were the single biggest driver of market returns last year. “The Nifty 50 index’s entire return for 2019 has come after September 19," Kotak’s analysts said.
As to the beneficiaries from the corporate tax cut, see this from the latest Economic Survey, 
An analysis conducted by Tax Policy Research Unit (TPRU), based on income tax return (ITR) data of corporates for the financial year 2016-17, points out that most of the companies (99.1 per cent) have a gross turnover of below ` 400 crore (say small and medium companies) and are already taxed at the base CIT rate of 25 per cent. With surcharge and cess, their MMR varies from 26 per cent to 29.12 per cent. On the other hand, only 0.9 per cent of the companies i.e. 4,698 companies have gross turnover of over ` 400 crore (say large companies) and their MMR varies from 30.9 per cent to 34.61 per cent. Thus, the impact of CIT rate cut varies from gain of about 3.2 per cent to 13.5 per cent of the existing tax liability for small/medium companies to about 18.5 per cent to 27.3 per cent of the existing tax liability for large companies.
The equity markets are a major contributor to the widening of inequality in the developed countries. Nowhere is this more pronounced as in the US, where markets have been surmounting new peaks, despite all the gathering uncertainties. 

Sample some very interesting graphics from the Twitter feed of Robin Wigglesworth on a Goldman report on how the low interest rates induced asset prices is widening inequality. See this
Since 1990, the top 1% of Americans has bought $1.2 trillion of stocks, while the remaining 99% have sold $1 trillion, according to Goldman Sachs. Concentration of household equity ownership among the wealthiest households is also at an all-time high.
Equity allocations by the top 1% of households have been rising and are at their all-time highs...
While the top 1% wealthiest households allocate 61% of their assets to equities, the bottom 50th-90th percentile allocates just 12%.
The taxation structure on different categories of incomes is a great example of how widening inequality leads to political capture that sets rules of the game in the favour of the rich.

Monday, February 17, 2020

The seductive appeal of insurance for the poor

In the context of the interest within international development circles about using insurance (crop, health etc) and micro-pensions to help the poor, it is pertinent to point to the following.

1. In the US, 44% of households have wealth of less than $400 and will struggle to sustain themselves after retirement. Do we hear any one offering micro-pensions in the US? 

2. We have been implementing about crop-insurance in developing countries for decades. Why is it that there is not even one example of a commercially sustainable crop-insurance anywhere in a developing country? How is it that US, Europe and Japan prefers direct payments over crop insurance? 

3. Why is there not even one example of a developed country which has managed the health-insurance route to realising universal health coverage (UHC), rather than supplementing with insurance after good quality UHC has been achieved? Why is there not even one developing country (even a province within a country) which has managed to realise UHC through insurance? 

4. Finally, did any of these developed countries of today used insurance to mitigate the basic risks faced by the most vulnerable sections of their population at any stage in their development trajectory (though both health, property insurance for the broader population segment have been commonplace for decades)?

I have written earlier on micro-pensionsfintech, and financial engineering for the poor, highlighting their obvious limitations.

Certain narratives just endure no matter what. 

Consider any of these big problems - lack of savings among the poor, weather risk protection for farmers and small businesses, and protection against catastrophic medical episodes. If we take any geographical unit - country or province or city - and make an assessment of the average cost of damage suffered from the risk materialising each year, and the average premiums of a prospective plan to cover the same risk, we will realise that the former is far bigger, often multiples, of the latter. 

So developed countries address this by direct income transfers instead of crop insurance, social security instead of micro-pensions, and means-tested health insurance like Medicaid/NHS instead of  micro-health insurance. 

Just work backwards from the total money spent annually on direct income transfers to farmers, social security, and Medicaid/NHS and see how much it would translate into in terms of individual premiums on each if it were delivered as insurance. You will realise they are orders of magnitude off. 

Also remember that the risk-pools in all the three are among the riskiest among all insurable pools, thereby making their payout likelihood even more, thereby necessitating even more unaffordable premiums. Farmers completely vulnerable to the vagaries of weather whose incidence appears ever increasing, poor people who have very bad primary health care which in turn amplifies the likelihood of disease episodes.

Asking poor people who can barely eat three times a day to skimp on a quarter of their meal to save for a rainy day for a micro-pension (which in any case is most likely to be grossly insufficient at old age, given, among other things the high inflation rates) is not economically inefficient but plain unethical. 

In fact, instead of spending money on crop insurance, aid money could be more effectively used to help support drones and other technologies which help with making cheaper and faster assessments of crop-damages - this will help both governments (in their inevitable direct payments) and the broader insurance market itself.

Saturday, February 15, 2020

Weekend reading links

1. Tao Liu and Qiujie Shi have a paper on the Chinese hukou system, the registration permit given to urban migrants which helps them avail social and welfare benefits in the city. They point to two less-discussed issues - the localized (or city-specific) application requirements and evaluation criteria of the hukou transfer, and the inconsistencies and discrepancies between the stated requirements and real criteria.

In the context of their study of hukou practice of Beijing, they point to the state eligibility requirements,
The first one is regarding education. Before 2009, many documents issued by the Beijing Municipal Human Resources and Social Security Bureau stated that a bachelor’s degree was required to apply for a Beijing hukou. This requirement was then raised to a master’s degree in 2009... Second, it is advantageous to work in a sector that contributes towards the development of Beijing’s economy (and)... contributing to Beijing’s core priorities... The third guideline centres on residence. To guarantee that local hukou go to settlers rather than movers, a certain period of residence is always mandatory.
And their findings about the hukou system works in practice,
Decisive factors include having a university education, working in a key occupation, living in Beijing for more than five years and being located in a village. Migrants who best meet the city’s needs are also prioritized. In order to maintain its role as China’s political centre, the capital of a socialist country, the national centre for science and technology and economic centre for northern China, Beijing has a vested interest in attracting the best talent and to balance development across the municipality. As such, who is eligible for and who should be granted hukou are both decided locally in order to best meet the city’s core objectives. Eligibility is more often than not essential to being granted a hukou. Significant gaps between migrants, eligible applicants and hukou winners have been revealed. In 2010, most migrants in Beijing failed to meet the education and job requirements, and they did not live where Beijing wished them to live. Even among the limited number of qualified applicants, the chances of obtaining a hukou still varied. Those with a postgraduate education had a much higher chance than those with an undergraduate education, a bias rarely mentioned in official documents. Preference was also given to those who worked in the civil service over workers in other key sectors. This was also a “hidden” rule. Although the Beijing government clearly sets out the eligibility requirements for hukou, it is less clear about what is needed to actually obtain one.
Clearly, the hukou system is, like with so many other things Chinese, a heavily controlled rural to urban migration process.

2. The Economist has an article on the corporate executive search market. This is apposite,
A recent Conference Board survey of executives and corporate secretaries found that 73% thought there was no need for a firm with a strong internal candidate for ceo to conduct an outside search. There appears to be no shortage of such talent within. Last year almost four-fifths of new s&p 500 bosses came from inside the firm... Yet most large companies will continue to use search firms—even if they do not fully buy the science, or harbour other doubts. That is because external validation has a value all of its own. Recruiters can be crucial in helping build consensus when, as is so often the case, boards are split. It is as diplomats that the best headhunters earn their keep.
This explanation for hiring head-hunters is, most often, just as much relevant for hiring consultants. Very often they deliver little by way actionable and real long-term value which is not known to the insiders. It is just an external assessment, with the veneer of objectivity, is convenient for executives both to buy the credibility and organisational buy-in required to undertake hard reforms or make high profile hires and also a means to cover their backs if things go wrong.

3. The Economist has another article about the Euston station redevelopment plan in the context of its origination point for the HS2 project,
Last month Camden council, within whose boundaries the station wholly lies, published a draft planning brief, which envisages up to 3,800 new homes, a quarter of a million square metres of commercial space and as many as 14,000 new jobs in a project that has the potential to become not only a massive transport hub but also what the plan calls “a new piece of the city”... The plan imagines green spaces, housing, offices and retail above the new station, as well as building over exposed, below-street-level tracks that extend north for nearly a mile. It foresees bringing back the ancient street pattern to reconnect Somers Town and Regent’s Park with pedestrian and cycle routes over the roofs of the stations. Camden council has experience in such matters. The redevelopment of King’s Cross, a nearby station, transformed a huge chunk of derelict land into a vibrant quarter of the city. Google is building its London headquarters there.
A potential addition to London's growing list of transit-based transformations - King's Cross, Liverpool Street, London Bridge, Canary Wharf, Battersea etc. Also a lesson for urban planners in India to learn from.

How about a mandatory requirement that any new metro project should be associated with an area transformation project or some linkage with housing and commercial stock development and job creation around at least some of its stations?

4. Nice NYT feature on perhaps the new Ground Zero for water wars, the Grand Ethiopian  Renaissance Dam being constructed on Nile River by Ethiopia. An estimated 95% of Egyptians live along or inside the delta and the river provides 95% of the country's drinking water, all of which are now threatened by the upstream $4.5 bn project.

In some respects this is also about the upper riparians exercising their rights over a river which was hitherto mostly exploited by Egypt.

5. Pronab Sen makes this point about unemployment rate in India,
The unemployment rate in the country for 2017–18 was estimated at 6.1%, which was the highest in the 45 years for which such data have been collected.
Is the unemployment situation so worse as to be a half-century low? Do we smell signatures of such an exceptionally high unemployment rate? So what gives?

There are two surveys here. One, the NSSO used to do employment-unemployment survey (EUS) once every 3-4 years which was last done in 2011-12 and since discontinued. Two, the PLFS, which was initiated by this government in 2017-18 and is done annually. 

Sen has competed the data from the two on a historical basis. This is wrong and they are not comparable. There are several differences, like for example, the PLFS gives higher weights to educational status. This in turn gives it a bias towards unemployment among the more educated, a rate which has always been higher. If we are to do a true comparison, we need to get the raw data for PLFS and subject it to the same statistical treatment/formula as was being done for EUS and then make comparisons. 

I can understand the regular journalist being loose with such interpretations, but for a professional statistician, and a credible one at that, to make such a claim. Am I missing something here?

6. Good article by Nidheesh in Livemint (HT: Ananth) about the challenges faced by small enterprises in Coimbatore due to economic slowdown and policies like GST, 
The issues with GST go beyond the tax rate, and is more about the system’s inadequacy in understanding the ground realities of a small enterprise, explained J. Maheswaran, owner of pump-set manufacturer GV Industries. The small and medium businesses in Coimbatore are almost completely running on credit, said Maheswaran. A local vendor usually supplies some spare parts on credit to a company, with the assurance of payment when the final product gets sold. In a slowdown, as products pile with sales drying, the vendor naturally suffers payment delays. But in the meanwhile, he has to pay his GST by the 20th of each month. “If I have made a turnover of about ₹5 lakh, I have to pay about ₹90,000 per month as GST. I get the payment from the customer after a minimum of 90 days, that too, sometimes, partially. This has been the procedure in the market for years. But now, after you have made the bill, you have to pay the GST within 20 days... even before the full amount comes to you," explained Maheswaran. “If you fail to pay the GST, you will get fined. If you continue to fail for three months, the GST will be blocked. Your bank account also will get blocked. So, now, we are borrowing money from wherever we can to pay the GST until we get the payment," he added.
It will always remain a challenge when such reforms are introduced into largely informal economic systems where not all costs and benefits are monetised. In a formal market, in such cases, there would be a market for factoring receivables or the cost of locked-up receivables would be captured in some higher receivable. 

Assuming that there are, say 4-5 transactions, in a typical production-to-consumer chain, I guess only the 2-3 (the original manufacturer and the wholesaler) would be formal, and the rest mostly informal. Some mapping study of a few typical such transactions would be useful. 

So, to this effect, I guess, given the large share of informality, GST is as close as it can get to being a genuine disruption (without being judgemental on this, since the reform itself is desirable) to the economic system. The best that can perhaps be done to such shocks is to cushion them as much as possible and have policy respond iteratively. The new equilibrium where costs are monetised and internalised and associated eco-system (like factoring receivables) will take time to emerge.

The RERA too will surface similar problems since construction sector is largely informal and the working capital locked up is much higher. 
 
7. Nice data journalism on European club football.

8. The checks and balances on executive activism in the US are fast disappearing, as the US Attorney General starts acting as the private lawyer to the President.

9. A New Yorker essay which raises questions with the quest for perpetual prosperity and income growth,
Dietrich Vollrath, an economist at the University of Houston and the author of “Fully Grown: Why a Stagnant Economy Is a Sign of Success”... argues that slower growth is appropriate for a society as rich and industrially developed as ours. Unlike other growth skeptics, he doesn’t base his case on environmental concerns or rising inequality or the shortcomings of G.D.P. as a measurement... Vollrath offers a detailed decomposition of the sources of economic growth... The movement of women into the workplace provided a onetime boost to the labor supply; in its aftermath, other trends dragged down the growth curve. As countries like the United States have become richer and richer, Vollrath points out, their inhabitants have chosen to spend less time at work and to have smaller families—the result of higher wages and the advent of contraceptive pills. G.D.P. growth slows when the growth of the labor force declines. But this isn’t any sort of failure, in Vollrath’s view: it reflects “the advance of women’s rights and economic success.”

Vollrath estimates that about two-thirds of the recent slowdown in G.D.P. growth can be accounted for by the decline in the growth of labor inputs. He also cites a switch in spending patterns from tangible goods—such as clothes, cars, and furniture—to services, such as child care, health care, and spa treatments. In 1950, spending on services accounted for forty per cent of G.D.P.; today, the proportion is more than seventy per cent. And service industries, which tend to be labor-intensive, exhibit lower rates of productivity growth than goods-producing industries, which are often factory-based. (The person who cuts your hair isn’t getting more efficient; the plant that makes his or her scissors probably is.) Since rising productivity is a key component of G.D.P. growth, that growth will be further constrained by the expansion of the service sector. But, again, this isn’t necessarily a failure.



“In the end, that reallocation of economic activity away from goods and into services comes down to our success,” Vollrath writes. “We’ve gotten so productive at making goods that this has freed up our money to spend on services.” Taken together, slower growth in the labor force and the shift to services can explain almost all the recent slowdown, according to Vollrath. He’s unimpressed by many other explanations that have been offered, such as sluggish rates of capital investment, rising trade pressures, soaring inequality, shrinking technological possibilities, or an increase in monopoly power. In his account, it all flows from the choices we’ve made: “Slow growth, it turns out, is the optimal response to massive economic success.”
10. On sexual assault cases, some very shocking findings from the US,
Only 23 per cent of rape or sexual assault victims report the crime to the police, according to a US Department of Justice study. Within that group, only a fraction of these cases lead to a trial, and about 35 per cent of rape trials end in conviction, the DoJ found. Sexual assault cases are often difficult to prove and become a battle of credibility
11. FT review of an Adam Cohen book that highlights how since 1970 the US Supreme Court has continuously helped maintain the status-quo by privileging the interests of the rich and well-off over those of the poor and less well-off.

12. Finally, what is the real-world purpose of this paper, and that too with five Principal Investigators?

Thursday, February 13, 2020

Coronavirus response in China and Kerala - A study in contrast?

China's cover-up and reluctance to make public the full extent of the crisis at the early stages, which worsened the problem and allowed the epidemic to spread this fast and wide, is now widely acknowledged.
On January 18, roughly six weeks after China’s deadly coronavirus started to spread in Wuhan, the city’s Baibuting district was preparing for its annual mass banquet. On the 20th anniversary of the event, the organisers would be attempting to break a world record for the largest number of dishes served. Long tables in 10 locations were laid out with a total of 13,986 dishes, some bearing patriotic names such as Motherland in My Heart (cucumber and ham), and One Belt One Road (vegetable salad). The platters were prepared by members of some 40,000 families, according to media reports, with many of them showing up to eat the food and smile for the cameras... The district is now facing a rising toll of infected citizens. Notices saying “fever block” in red and black letters were pasted this week on 57 communal stairwells in the district... Piecing together the events in Wuhan shows that for at least three weeks before the banquet, city authorities had been informed about the virus spreading in their midst but issued orders to suppress the news. In effect, they engineered a cover-up that played down the seriousness of the outbreak, according to officials and medical professionals... 
The most fateful consequence of the official silence was that it facilitated the exodus of some 5m people in the weeks before the city was quarantined on January 22, thus helping to transport the virus all over the country and overseas... Just as with China’s Sars outbreak that killed 800 people worldwide in 2002-03, the central shortcomings in China’s response have derived from its rigidly hierarchical political system... In the current political atmosphere, which values obedience more than competence, local officials have an incentive to avoid taking responsibility.
See this about questions on the veracity of China's data.

Contrast this with Kerala's transparent and early action based handling of the corona virus,
A prime feature of the Kerala government’s response to calamities like the back-to-back floods or the Nipah crisis in 2018 that claimed 18 lives has been its transparency and openness. The tradition continues during the coronavirus outbreak as well. Top officials of the government have shown no reluctance in disclosing key information as and when required and allowing it to percolate down to the public. Press conferences have been routinely held, especially by the health minister herself, when positive cases of infection are reported. Daily bulletins are released on the government’s isolation and quarantine measures. At the same time, a clear hierarchy has been fixed with certain officials designated to speak to the press on the crisis. This ensures no one speaks out of line... As part of surveillance, a mammoth list of 2,239 people has been charted, all of whom arrived in Kerala from virus-affected countries and a majority of those who are studying to become medical professionals in Wuhan. While 84 of those have been admitted to select isolation facilities across the state, the rest, 2,155 persons, have been placed under home quarantine.
... when the WHO declaration on the severity of the virus came about, Kerala had already begun stacking up a line of defences to counter the outbreak. Preliminary screening procedures were put into place at the four international airports, beginning with Cochin, where returning travellers were handed over strict advisories on contacting medical officials in case of symptoms. If they showed symptoms at the airport itself, a sterilised ambulance was ready to ferry them to the nearest medical college where isolated wards were set up. Travellers were briefed on basic do’s and don’ts’ of home quarantine and their contact details were collected for subsequent surveillance.
A nice feature on KK Shailaja, the Kerala Health Minister.

Shades of Amartya Sen's argument about how democracies are better able to avoid the likes of famines? 

Monday, February 10, 2020

Corruption and bureaucratic efficiency in China

A fascinating research paper by Peng Wang and Xia Yan on the impact of corruption and anti-corruption actions of the Xi Jinping government on bureaucratic efficiency in developing the local economy.  

They point to a very distinct personalised nature of interactions (guanxi) between bureaucrats across different levels of the government, which creates patronage networks, is characterised by gift-giving and lavish hospitality, and which both enhances bureaucratic efficiency as well as creates opportunities for corruption.  
Personalized bureaucratic ties (patronage networks) are commonly used by local bureaucrats to mobilize resources for the growth of local economies. In patronage networks, the more powerful bureaucratic actor (patron) is able to offer protection and distribute state resources (for example, promotion opportunities and financial support) to the less powerful bureaucratic actor (client) who reciprocates by offering loyalty, bribes, personal services and political support to the patron. In other words, those at the top of the bureaucratic hierarchy generate resources that are channelled down through patronage networks, while political support, loyalty and bribes flow upwards. Bureaucratic ties are largely personalized through informal practices such as gift-giving and entertaining with expensive food and drink... Organizing banquets and giving gifts are important strategies for Chinese government officials seeking to build reciprocal relationships with others in order to mobilize resources, meet policy targets and develop the local economy. The acceptance of a banquet, gift or favour places the obligation to reciprocate on the recipient...
In order to cultivate and maintain reciprocal relationships with their superiors and with colleagues in other government agencies, Chinese bureaucrats spend a great deal of time and money eating and drinking together... Local governments also use official extravagance to show their respect and appreciation of investors. Extravagant consumption, although prohibited by Party regulations, has become a key means through which local states can pro- mote economic development within a Chinese bureaucracy characterized by centralized decision-making and resource allocation.
This is another reason,
Party chiefs and heads of governments at all levels are periodically rotated in order to reduce localism. However, frequent transfers lead to information asymmetry between superior and subordinate. In addition to formal channels and practices such as document flows, meetings, supervision and inspections, banqueting and socializing with subordinates has become a common way for superiors to adapt to a new job and grasp essential information, such as personnel arrangements and policy implementation, within a short period of time.
And another,
Interpersonal ties act as an important mechanism for superiors to mobilize their subordinates to “accomplish important but challenging governing tasks,” especially when the formal incentive structure is incomplete. Superiors throw official banquets for hardworking subordinates to demonstrate their appreciation. Although this practice increases public expenditure, it cultivates affective commitment among subordinates and motivates them to work. Furthermore, lower-level officials often demonstrate great attachment to their superiors in Chinese bureaucracy. Loyalty to superiors exerts a greater influence on subordinates’ behaviour than loyalty to the party-state.
And another,
Personal ties among bureaucrats also work to cover up wrongdoers and encourage innovative policy implementation. Given that the Chinese government has not established a fault-tolerant mechanism for policy implementation, government officials rely on the safety net of patronage networks for protection and to avoid punishment. The centralized nature of policymaking in China leads to uniformity in state policy, but policies are not always suited for every locality. Flexible or innovative local adaptation leads to “a better fit of policy goals and local conditions,” but this means that local governments have to deviate from the original policy design. In response to uncertainties in policy implementation, malfeasant local officials seek protection or leniency via their bureaucratic ties and ensure their political survival through the hosting of lavish official banquets... Although the protective network fuels corruption, to a certain extent it also encourages innovative implementation and promotes the growth of the local economy.
How does this arrangement impact the bureaucratic efficiency?
Corruption, in the form of extravagant position-related consumption and gift- giving, contributes positively to the efficiency of bureaucracy when it comes to implementing policies and furthering local economic growth... to further local economic development, a lower-level government (or agency) makes use of lavish official hospitality to foster patronage networks with its supervising government (or agency) in order to access resource distribution and gain support from supervising governments or agencies. At the same time, the supervising government or agency employs patronage networks to solve the problem of information asymmetry, coordinate bureaucratic interactions and ensure that policies are properly implemented... Extravagant position-related consumption has become a common way in which lower-level officials can please higher-level officials who have the discretionary power to allocate financial resources to their favoured subordinate units.
The impact of the anti-corruption drive has strong resonance with the problem of decision-paralysis in India. 
Government officials... are primarily “motivated to avoid blame and ensure their political survival” rather than to seek credit through taking the initiative. As a result, local officials prefer to reduce bureaucratic interactions and avoid providing official hospitality in order to protect themselves. Moreover, the Chinese government has introduced a lifelong accountability mechanism in many policy areas, such as environmental protection and economic development, in order to prevent government officials from making irresponsible decisions. The lifelong responsibility system makes public officials accountable for their administrative errors and the losses resulting from their decisions. An adaptive response from local officials, as China Daily reveals, is “trying to do as little as possible” because “the more work one does, the more chances there are for one to commit an error, which will possibly result in disciplinary penalties.”... dilemma for local officials: if they stick to the rules on official hospitality they risk offending their superiors; if they disregard the rules, they risk being investigated and punished. As a response, local government officials have reduced their interactions with different government departments in order to avoid this dilemma. This has directly led to the decline of the use of personalized bureaucratic ties in developing local economies.
This is the clincher, and spot-on for India's higher bureaucracy today,
“Not hoping for merit, just avoiding the risks” (buqiu yougong, danqiu wuguo 不求有功,但求无过) has become the survival strategy of Chinese bureaucrats in a highly uncertain political environment.
On local hospitality budget, this is so reminiscent of the dilemma faced by field officials in India,
The fact is that the formal hospitality standards set by the local government are unrealistically low and do not take into account how hospitality works. In 2013, a senior official from the county’s finance and economics bureau informed us that the standard allowance for catering for a provincial-level official was 60 yuan and 50 yuan for a prefecture-level official. Local officials viewed these allowances as rather low, so they felt they were unable to show proper respect and appreciation to those higher- level officials; what was even worse, higher-level officials might feel offended by the poor hospitality offered to them... The local government’s hospitality standards are unrealistic ... if the [formal] hospitality standards are strictly enforced, you will easily offend the leaders. If you offend the higher-level officer today, he might cut your project tomorrow.
This too is so true of India,
To be honest, the salaries of civil servants and cadres in the government are not high. What I mean by “not high” here is that the salary does not match public officials’ abilities and qualifications ... in fact, many local cadres, especially senior ones, are very capable of doing things [developing local economies] and building interpersonal connections. If they quit their current jobs and join private companies, they would receive very high salaries, maybe more than ten times higher than the salaries they get from the government.
Some observations.

1. So many things in this paper - local hospitality, within bureaucracy patronage networks, decision paralysis from anti-corruption drives, limited salaries etc - have strong resonance with India. 

2. Borrowing Mancur Olson, corruption can entrap systems in either the roving bandit or the stationary bandit modes. For long, the grease lubricated the Chinese system, encouraging local government officials to work towards local economic development. What determines this entrapment? Or are they merely happenstance, just the natural, unique, and unexplainable emergent dynamics associated with the evolution of such activities in complex systems? 

3. In systems with low remuneration, in particular disproportionately low for their abilities and their value addition (even if only for a small share of the total bureaucracy), the extravagant position-related consumption, lavish hospitality, and gift-giving should also be seen as a form of efficiency wage. This is one of the driving forces of corruption in Indian bureaucracy too, among the extremely competent bureaucrats who feel almost aggrieved by their very low salaries (compared to their private sector peers) given their qualifications, abilities, and track-record. 

4. The paper also highlights the value of good old ethnographies in understanding complex systems, an essential requirement to design an implementation model for any idea or program. Interesting that the authors are two sociologists. These ethnographies are critical to understanding how bureaucracies and systems work, itself critical to any meaningful diagnosis and prescriptions. 

5. Given that the insiders know all these dynamics, such papers are important for two reasons. One, it is valuable for outsiders who are trying to engage with the Chinese government. Two, they infuse public debates on the issue with an element of sophistication and nuance essential to generate a high quality of debates.

6. The argument in favour of corruption is that in systems with weak institutional strength and maturity, rents and bribes grease the system and enhances its efficiency. While this may have been the case in China for long, the rapid economic progress made in the last few decades and the associated increase in state capacity means that the case for tolerating such corruption may have become weaker.

Saturday, February 8, 2020

Weekend reading links

1. FT writes on the railway reforms in UK,
A rejig is sorely needed. More than 25 years after privatisation, passengers continue to be poorly served by a network structure that has encouraged short-termism and a lack of accountability among stakeholders. Regulated fares have risen at twice the rate of wages over the past decade. Several large franchises are struggling not only to operate a reliable service but also to make money. Northern Rail will be nationalised in March. It will be the second to be taken into state hands. Frustrated passengers want radical change; polls show the majority of the public favour wholesale nationalisation... What is often forgotten is that most railway operations have already returned to public ownership: the track, signalling, and major stations are all part of nationalised Network Rail. Adding the train operators would be a relatively small step... the franchising model has run out of steam. It was meant to lead to cheaper fares and more efficient railways. Instead, tightly controlled contract terms encouraged operators to make overambitious bids that could never be delivered, especially when passenger growth did not materialise as expected... The government is expected to replace franchises with “management contracts”. It will receive fare income directly and pay operators based on performance. A similar model has worked well on the London Overground suburban network where Transport for London, which runs the capital’s transport, sets fares and timetables and grants concessions to a single operator.
2. Alphaville points to the story of Southland Royalty, an oil and gas company, owned by private equity firm Encap, which recently filed for bankruptcy. It raises questions about the industry claims that PE offers diversification in so far as the value of its portfolio gyrates far less than in the public markets,
EnCap wrote down the value of its investment in Southland by 25 per cent in early 2019, according to the first person. The October investor report showed that the firm valued its investment in the company at $773.7 million at the end of September, nearly the same amount as the $775.5 million it had invested in the business until then. EnCap wrote down the investment to zero at the end of 2019, a person familiar with the matter said... How did an investment marked at 0.99 times its invested equity collapse so suddenly? It’s not the broader energy market. Since September 30, the Dow Jones US Energy Index is down 7.75 per cent, according to S&P Global Market Intelligence. Perhaps then, as some private equity critics have ventured, it’s that markings in private assets are more mark-to-myth than mark-to-model.
3. NYT has a story about the bankrupt shoe retailer, Payless, highlighting the problems associated with private equity managed companies. Sample this on asset stripping,
In the two-year period ending in January 2015, Payless generated $249 million in “Ebitda,” a common metric for operating profits; paid $352 million in one-time dividends to shareholders; and made $94 million in interest payments. For every dollar that came in the door of the company in that span, it paid out $1.41 to its owners and 38 cents to its lenders. That left the company with less of a financial cushion to ride out any future challenges.
Lack of industry experience by PE managers is another problem, exacerbated by excessive focus on cost-cutting and other short-term efficiency improvement measures which rebound badly in the long-run.

4. Nice visual summary of cognitive biases. The website has some great visualisations. This is a fascinating table of commodity returns since 2010. (HT: Ananth)

5. FT has an article that investigates the opaque power structures the govern Brookfield Asset Management (BAM), the $500 bn Canadian private equity giant,
To unpack the Canadian group’s accounts is to discover not so much a company as a giant, triangular jigsaw board that spreads across the world and covers assets worth $500bn. The pieces are hundreds of corporate entities, all locked together by elaborate contracts, which give 40 people at the top the right to rule huge sections of the puzzle almost as if it were their own. Those insiders wield such power that the companies below them could face risks similar to those of “pyramid control companies”, according to a draft investor disclosure that Brookfield filed with the Securities and Exchange Commission in 2013. (The final version warned instead of risks “associated with a separation of economic interest from control”.)... Yet in interviews, securities filings, litigation records and other documents, a picture emerges of an investment group that defies convention: highly secretive, seemingly obsessed with control and susceptible to family squabbles that have few parallels among its Wall Street peers.
Brookfield's ownership and controlling stakes are complex and opaque, with tight control exercised by Bruce Flatt, its CEO, and Jack Cockwell, who played an important role in turning BAM into what it is today,
BAM shareholders have earned compound annual returns of 18 per cent over the past 25 years. And even if that performance should falter, the two men would be difficult to dislodge, for they own a big piece of a lesser-known company named Partners Limited, which has the power to override the votes of every other Brookfield shareholder. “In form, Partners is a corporation,” explains a two-page memo sent in the mid-1990s to a handful of Peter Bronfman’s employees, and seen by the FT. In substance, it sounds like something else entirely: a routine of “weekly luncheon meetings” that comes with serious financial perks. Conceived as a way for executives to “become a financial partner with Mr Bronfman”, Partners today wields enormous power over Brookfield. Its 40 members own about one-fifth of BAM, but have enough votes to appoint nine of its 16 directors. A dual-class structure means they can also overrule shareholder motions even if they are supported by outside shareholders. The identity of some of those “partners” is not clear. Brookfield named only a handful in its 2018 public filings, although all are said to be current or former Brookfield executives.
This from Bruce Flatt, the CEO of Brookfield, has resonance with what "fixers" do,
'Our reputation is that if you have a large transaction, if you have a difficult transaction . . . go to Brookfield.'
The most disturbing manifestation of this opacity and all the questionable and corrupt practices it camouflages is the 2016 deal Brookfield struck to bailout Jared Kushner's Manhattan Fifth Avenue tower, which was it leased wholesale for $1.3 bn covering nearly a century of rent in advance. The article describes the complex financial transaction, involving transfers within the very opaque corporate structure of BAM, that was undertaken to support this purchase.
The Kushner deal was assembled from several pieces of the Brookfield empire. The lease was signed by a company named BSREP III Nero LLC, a possible allusion to the emperor who was blamed for the burning of Rome. That company is owned by a fund called BSREP III, which is managed by BAM and was, at the time, controlled by BPY — all of which placed the deal where global finance blends into geopolitics on the jigsaw. The known links between Qatar and Brookfield all converge on the investment group’s listed property fund BPY. About one-tenth of the fund’s assets are tied up in skyscrapers in Canary Wharf and Manhattan that are co-owned by Qatar, but the connection goes further. Through a sovereign wealth fund, Doha is one of BPY’s biggest investors, holding $1.8bn worth of BPY preferred equity... In the public accounts of BPY, the listed property fund that received Qatari investment, 666 Fifth Avenue has already all but disappeared. Last January, BPY lost control of BSREP III, the private vehicle that owns the building, after reducing its stake to $1bn. New investors piled in, each taking a piece of the Kushner tower, and lifting the private fund’s commitments to $15bn. That influx of cash has not made the tower’s ownership any more transparent. A handful of US pension funds have acknowledged their participation, but few other investors have been identified publicly. Knowledgeable people insist that no Qatari money is involved. Materials reviewed by the FT show that about $3bn of the fund’s total firepower comes from sovereign governments, although they do not specify which ones, and $2bn of it from the Middle East, although the document does not say exactly where. 
6. Ananth points to this excellent article from Simon Kuper on how Netherlands, most parts of which are below sea level or prone to flooding, has "learnt to manage flooding". Its Delta Works project, initiated in the aftermath of the 1953 floods which killed 1835 people, is a network of dams, dykes, sluices and storm barriers that is unmatched worldwide, and has ensured that not one person has died in floods since then!

There are two features of the Dutch model. One, a sense of co-operative management, whereby everyone got together to build dykes to protect the so-called polders, or land parcels below the sea level. The polder model means "to bring all groups together to hammer out a compromise". Two, investments in prevention, even if the incidence of the risk is very unlikely but damage extreme if it happened, and the maintenance of infrastructure created for this purpose.
Dutch prevention has long been a source of much pride among officialdom... Most of the time, though, the Dutch public live in happy complacency about the potential risk of flooding. Their defences have worked so well, at a relatively modest annual price, that most citizens have almost forgotten about them. The Netherlands has spread its spending on flood defences over seven centuries. About half the Delta Fund’s budget of €1.1bn for this year goes on protection against the water... Water boards can also raise local taxes to invest in flood defences, so altogether the Dutch spend about €1bn a year, or just over 0.1 per cent of gross domestic product, on what they call “dry-feet insurance”. Much of that money, as they always tell visiting foreigners, goes on maintenance. All this is cheaper than waiting for disaster and then rebuilding: the World Bank estimates that every dollar spent on flood defences yields returns of $7 to $10... Under the slogan “Room for the river”, it has created lakes, parks and even parking garages designed to flood when necessary so as to divert the waters from inhabited places.
The consensus required for such preventive investment is rare and very difficult to achieve,
Though the Maeslantkering was completed in 1997, foreign visitors often find it futuristic. It consists of two metal arms, each the size of an Eiffel Tower. It’s an open door: ships sail by every few minutes, into and out of Rotterdam. The barrier stands ready to close when the waters rise by three metres. That level hasn’t been reached since its construction... His team spend their days doing maintenance, training and exercise, and carrying pagers ready for the big moment. The door needs to close just once in its lifetime to earn its money: any flood that shuts Europe’s busiest harbour, Rotterdam, could cause hundreds of billions’ worth of damage, one official told me.
7. Good use of regulatory forbearance by the RBI to ease the stress faced by sectors like MSMEs and commercial real estate. Their loans can now be restructured by one year. Further, certain sectors will benefit from lower CRR requirements. These are welcome, if belated, measures.

Another important measure is the decision to go beyond the overnight repo operations and conduct 14-day, 1 and 3 year repo transactions for banks. Theoretically it significantly lowers the cost of borrowing for banks. But this is also effectively printing money.

8. Nice profile of Shiv Kishan Agarwal, the 79 year old Chairman of Haldiram, the Bhujia King.