Friday, August 16, 2019

Negative yield facts for the day

After a brief lull, negative interest rates are back in the news with a vengeance. This should make us sit up and wonder,
Bonds worth $15tn — roughly a quarter of the debt issued by governments and companies around the world — are currently trading with negative yields. That means prices are so high that investors are certain to get back less than they paid, via interest and principal, if they hold the bond to maturity. They are, in effect, paying someone to look after their money. 
In fact, yields on 10 year bonds of nine countries are now in the negative territory.
The spread of the negative yield phenomenon is a very good illustration of how interconnected and footloose global capital has become. What started out as a developed country phenomenon - low inflation and weak economic prospects - has driven capital into searching for yields thereby dragging down borrowing costs everywhere. In fact, yields on German bunds are trading below zero for upto 15 years.

It has created oddities everywhere,
Danish lender Jyske Bank last week issued a 10-year mortgage bond at an interest rate of minus 0.5 per cent, meaning homeowners are being paid to borrow. Meanwhile, Swiss bank UBS is planning to charge its super-rich clients for holding on to cash... Bonds issued by Poland, the Czech Republic and Hungary have joined the club.
Ananth points to the stunning inversion of logic from fact that Greek 5Y is 1.27% and US 5Y is 1.5%! Greece recently received orders of more than €13bn for the seven-year bonds, well above the €2.5bn on offer, at 1.9% below the 2.1% expected. Yields on even 10 year bonds of Greece breached the US level recently. As to the reasons, sample this,
The dramatic fall in Greece’s borrowing costs is a testament to how much it is now considered a stable member of the European Union, especially given that as recently as 2018, total Greek government debt was calculated at 181% of the country’s gross domestic product. It could also be a sign of desperate investors who are hungry for yield in a low-return world. Negative returns on core euro zone debt have pushed bond buyers to look at riskier sovereign debt from countries like Italy and Greece. Last Tuesday, Greece sold 2.5 billion euros of seven-year notes, attracting more than four times the bids needed to fulfil the sale.
Needless to say, the reason is most likely the latter. 

And underlining the lesson of traditionally very short investor memories and why this time is no different, Argentina, among the beneficiaries of the low-rate world, is bracing for its latest round of debt restructuring and/or default. The Peso tumbled by over 25% early this week and public debt has risen from 86% to 100% since 2018, 24 percentage points more than the 2019 IMF target as per the Fund's $56 bn restructuring program. Market participants expectations of a sovereign default over the next five years is put at a whopping 75%! The much hyped century bonds of the country is trading at a massive discount.
Clearly investors are betting on the very short-term when they are buying bonds at these yields. They are completely speculative search for yield bets. And the public resolve of governments and central banks to keep rates down only seems to anchor expectations among investors accordingly and keep inflating this bubble.

The only question is how much longer can the rates keep falling before investors and savers realise that the costs are simply unacceptable.

Wednesday, August 14, 2019

Public policy to promote Innovation

Noah Smith points to the new paper by Nick Bloom and Co on policies to promote innovation. In the context of the US, they explore the relative efficacy of various innovation policy levers - tax policies to favour R&D, government research grants, policies aimed at increasing the supply of human capital focused on innovation, intellectual property policies, and pro-competition policies. 

Their conclusion is in the form of table which they call "a toolkit for innovation policymakers",
In the short run, research and development tax credits and direct public funding seem the most effective, whereas increasing the supply of human capital (for example, through expanding university admissions in the areas of science, technology, engineering, and mathematics) is more effective in the long run. Encouraging skilled immigration has big effects even in the short run. Competition and open trade policies probably have benefits that are more modest for innovation, but they are cheap in financial terms and so also score highly. One difference is that R&D subsidies and open trade policies are likely to increase inequality, partly by increasing the demand for highly skilled labor and partly, in the case of trade, because some communities will endure the pain of trade adjustment and job loss. In contrast, increasing the supply of highly skilled labor is likely to reduce inequality by easing competition for scarce human capital.
The effect of immigration is very interesting
Immigrants make up 18 percent of the US labor force aged 25 and over but constitute 26 percent of the science, technology, engineering, and mathematics workforce. Immigrants also own 28 percent of higher-quality patents (as measured by those filed in patent offices of at least two countries) and hold 31 percent of all PhDs. A considerable body of research supports the idea that US immigrants, especially high-skilled immigrants, have boosted innovation. For example, Kerr and Lincoln (2010) exploit policy changes affecting the number of H1-B visas and argue that the positive effects come solely through the new migrants’ own innovation. Using state panel data from 1940 to 2000, Hunt and Gauthier-Loiselle (2010) document that a 1 percentage point increase in immigrant college graduates’ population share increases patents per capita by 9 to 18 percent, and they argue for a spillover effect to the rest of the population.
Their conclusion is to favour three policies - government funding, tax credits, and skilled immigration. Interesting how some of the staples of free-market ideology like intellectual property protection and pro-competition policies fall short on evidence of impact.

Saturday, August 10, 2019

Weekend reading links

1. Arguably the story of the week has been the Renminbi breaching the psychologically important 7 per dollar mark, for the first time since 2008. The decision to not intervene to prop up the currency, which has been over-valued for a long time now, is also a retaliation to President Trump's latest announcement slapping tariffs on another $300 bn worth Chinese exports. Further, with economic activity slowing down, the weaker currency will boost Chinese export competitiveness.

Incidentally, the Government also issued an order to state-owned companies to stop Chinese purchases of US agricultural products.

2. More from FT on the ongoing turmoil in the world of auditing, one of the most important watchdogs of capitalism. Sample this defence by Grant Thornton boss David Dunckley when probed by UK MPs on the firm's audit of scandal-hit cafe chain Patisserie Valerie,
“We are not giving a statement that the accounts are correct... We are saying they are reasonable... We are not looking for fraud.”
And about the egregious accounting misdemeanours of KPMG,
Accounting rules do not stop auditors signing off on numbers divorced from reality. They allowed Carillion to treat £1.6bn of goodwill from acquisitions as permanent assets — 35 per cent of its total — and not write down any of the value despite signs the businesses were struggling. One, Eaga, had its goodwill valued at an unchanged £329m even as losses mounted and it was only kept solvent by Carillion’s financial support. Similarly, accounting rules allowed too much contract revenue to be recognised, profit from partnerships and joint ventures to be consolidated as the company’s own and early payment facilities to inflate cash inflows while obscuring true levels of debt. Auditors’ roles still do not include challenging a company more strongly on its ability to continue operating — new proposals are only being worked on. Nor are auditors’ roles any more separate from their employers’ consulting arms, which can earn big fees from audit clients — again, removing these conflicts are still only proposals.
3. What if there is a trade-off between the effectiveness of the roll-out of 5G spectrum and the government's revenues maximisation policy from spectrum auctions? FT points to a very interesting angle to the global 5G race - cost of ownership of spectrum.
Chinese operators have picked them up for free — part of Beijing’s attempt to have a national rollout of 5G. Yet in parts of Europe recent auctions have been so expensive that at least one company has had to cut shareholder dividends. In the US — where President Donald Trump has declared that “the race to 5G is a race that America must win” — spectrum licences are being sold at historically low prices... For the telecoms operators the licences are the “ticket to ride” — access to the infrastructure that will be critical to their future success, even existence. For governments they are no less important yet some cash-strapped administrations have been sending out mixed signals over how to strike a balance between raising billions from a sector already straining to reduce costs while stimulating investment in the rapid deployment of 5G services... China granted its spectrum licences to the country’s telecoms networks in June rather than selling them off. The US then unveiled its biggest ever sale of spectrum in July boasting of a plan to auction off, by the end of the year, more airwaves than the country’s combined mobile industry currently employs. It has set the bidding for some of the very high frequency bandwidth at a value of one 10th of a cent per megahertz per capita making those airwaves some of the cheapest ever sold.
This has strong resonance in India where telecom operators are struggling to make investments on the face for an ultra-competitive market coupled with exorbitant prices paid for spectrum ownership. But it is unlikely to stop the government in India,
Other governments see spectrum — the airwaves used to carry mobile phone and other electromagnetic signals — as a cash cow. India’s telecoms regulator has just proposed selling blocks of spectrum for 5G at a price that is 40 per cent above what was charged in other Asian markets. Auctions in Italy and Germany have raised huge sums. Vodafone was forced to cut its dividend for the first time in its history following the German sale, amid industry warnings that the more they spend on spectrum, the less they have to spend on building the network via new masts, servers and base stations.
For a country whose telecoms sector is struggling, an expensive 5G spectrum auction can be one too far. But will the government, equally struggling to balance the fisc, realise this and exhibit some temperance?

4. Eswar Prasad has a very good article which summarises the costs of currency wars. For the US, it is hard to imagine any scenario where the US Dollar would end up depreciating,
The US has shown little interest in any fine distinctions between market-driven currency depreciations versus targeted policy-driven devaluations, viewing all currency depreciations relative to the dollar as hostile economic acts. A currency war would do little to boost US growth prospects. It is much harder for the US to push down the value of the dollar, ironically because of the currency’s dominant presence in global financial markets. It would be difficult to engage in unilateral intervention on a scale sufficiently large materially to affect the dollar’s value against other major currencies — especially if the Federal Reserve stayed on the sidelines in such an endeavour. Besides, such a move would incite a broader currency war, with other countries stepping up their own retaliatory intervention. The resulting turmoil in financial markets could actually firm up the dollar’s value if investors turn to it for safety.
5. Daron Acemoglu has the best summary of the case against UBI that I have read,
UBI, which is parachuted from above as a way of placating the discontented masses. It neither empowers nor even consults the people it aims to help. (Do workers who have lost their middle-class jobs want government transfers or an opportunity to get another job?) As such, UBI proposals have all the hallmarks of the “bread and circuses” used by the Roman and Byzantine Empires – handouts to defuse discontent and mollify the masses, rather than providing them with economic opportunities and political agency. By contrast, the modern social welfare state that has served developed countries so well was not handed down by tycoons and politicians. It aimed to provide both social insurance and opportunities to people. And it was the result of democratic politics. Ordinary people made demands, complained, protested, and got involved in policymaking, and the political system responded. The founding document of the British welfare state, the World War II-era Beveridge Report, was as much a response to political demands as to economic hardship. It sought to protect the disadvantaged and create opportunities, while encouraging civic engagement.
The whole argument in favour of ideas like UBI and (certain forms of) direct cash transfers is lazy, and borne out of ignorance, a naive belief in the value of efficiency over other considerations, and lack of any understanding of how the real world works. 

6. FT has this on rising elderly bankruptcy in the US,
The elderly are far more visible in US bankruptcy courts these days than in previous generations. Baby boomers aged 65 and older are racking up far higher levels of debt than their parents, who were raised during the Great Depression, and a growing minority are finding themselves tipping over from desperate financial trouble into bankruptcy. The culprits are vanishing pensions, soaring healthcare costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren... In 1991, over-65s made up only 2 per cent of bankruptcy filers, but by 2016 that had risen to more than 12 per cent... Over the same period, elders grew as a percentage of the US adult population too, but only from 17 per cent to 19.3 per cent... In 1989, only one in five Americans aged 75 or older were in debt; by 2016, almost half were, according to the most recent US Federal Reserve survey of consumer finances.
7. Finally, Noah Smith on how the rules of the game can be tweaked to bring greater role for workers in wage setting. Proposals include multi-employer or sectoral wage bargaining, wage councils or wage boards, German-style industry and regional level collective bargaining through worker's councils etc. 

Tuesday, August 6, 2019

US and China - the Trump re-set

Ananth points to the nice article by John Pomfret justifying a re-set in US-China policy from the conventional wisdom of co-operation and friendship (or "shape what China does") that has been followed for decades. He argues that such a policy disregards the underlying intentions of the Chinese Communist Party,
Since the financial crisis of 2008 and the rise of President Xi Jinping, China has stopped market-oriented economic reforms, launched a massive crackdown that has resulted in the incarceration of more than 1 million Uighurs in Xinjiang, ramped up efforts to steal Western technology, broken a promisemade to a U.S. president not to militarize the South China Sea and tried to export its system abroad. It has squeezed aspirations for democracy in Hong Kong and launched a campaign to undermine the democratic system in Taiwan.
And this is the nub of the matter and what is required,
The Trump administration is the first one in decades to tell China that the status quo is broken. What China watchers should be doing is building on that insight, and not returning to promises of a kinder, gentler policy that wouldn’t have worked in the 1940s and won’t work today.
The Scholar's Stage blog places the evidence on record about how US miscalculated on China and offers this summary,
The sad truth is that the Party has a say in its own fate. We moved. They countered. They took decisive measures, some quite costly, to ensure that the West's attempt to peacefully liberalize their regime would not succeed. They loudly proclaimed their intention to do this all the way back in 2008; this resolution was aggressively translated into policy between 2010 and 2014. The decision to tighten the screws under Hu Jintao and Xi Jinping was openly articulated as a direct response to Western attempts to change China and liberalize the Party... The tragedy of American policy making in the 2010s is that we refused to recognize what they were doing. Our politicians and pundits discoursed on the "choice" the Chinese faced before them long after they had made it. The gambit had failed. We were slow to recognize it. Eventually a rough national consensus that engagement was no longer a winning strategy came about, though it came seven years too late. Now that this consensus has been reached and a clearer-eyed vision of the Communist regime finally lies before us, panicked notes of the departed are heard again. "Trust us!," go their nervous murmurings. "This is how we wanted it to be!" 
From hindsight it is a compelling argument that the US committed the mistake of not engaging more actively with the Russia of Mikhail Gorbachev and Boris Yeltsin in the post-Cold War nineties and disbanding the NATO (or at the least not expanding NATO to include the Eastern Bloc nations). Clearly the scars of the Cold War were so strong that it was unrealistic to expect the US foreign policy establishment to be able to seize the moment and pivot in the opposite direction. When the raison d'être of too many parts of the establishment was anti-Soviet activities, it would have been foolish to expect them to do so. And in the absence of top quality political leadership, the status quo prevailed. This Keith Gessen essay is a revealing exploration of America's Russia policy.

In case of China, the miscalculation has similarly been on the other direction. While the post-USSR Russia policy of the US establishment was encumbered by the Cold War experiences, the China policy appears to have been excessively influenced by the post-Nixonian ideological consensus amplified by the economic partnerships that the US economic elites entered into with China in the globalisation era. Both proved impervious to history, facts and logic. 

For India, there is no denying the appeal of Trump's policy on China. This blog has consistently argued in favour of President Trump's policy on China, even with all the very frequent whimsical actions and flip-flops. 

Let me also clarify one thing to avoid any moralising on the issue. There is no point adjudicating on whether the US or the Chinese economic model is superior. Or even whether the US has been more benign that China will be - remember that for all of nineteenth and large parts of twentieth century, the US was hardly benign, and everything can suddenly appear benign after the "war" has been "won". China is perhaps only doing what any large emerging power would have done, though, as I have blogged earlier, the Xi Jinping turn is doing itself more harm than good. 

Sunday, August 4, 2019

Weekend reading links

1. Cash surpluses mount across corporate America. Berkshire Hathaway's cash pile jumped to $122 bn amidst the rising stock markets,
Mr Buffett has struggled to clinch a significant takeover in recent years. In a letter to shareholders in February he warned that prices for businesses were “sky-high” and that the group is likely to invest in stocks as it hopes for an “elephant-sized acquisition”... “The inability to identify attractive operating companies to acquire…that is a problem that has persisted for a long time,” James Shanahan, an analyst with Edward Jones said. “This cash balance growing out to a new record level is frustrating to a lot of investors, but they have been taught over decades to appreciate the management team will be cautious and wait for opportunities.”
Google's parent Alphabet has overtaken Apple to hold the largest cash pile in corporate America, touching $117 bn. Faced with pressure from activist investors, Apple has had to pare down its surplus to $102 bn from $163 bn at end of 2017. Google's rising pile is despite spending $25 bn last year, much of it on real estate - office holdings in cities and data centres. Since the end-2017 US tax reform lowering the tax rate on US companies' overseas cash reserves, 
Apple has responded to the change by spending $122bn on buying back stock and paying dividends in the past 18 months. Other companies to dig deep include Cisco Systems, which has cut its cash holdings from $35bn at the time of the new tax law to only $11bn. Alphabet’s stock buybacks, by contrast, have been paltry. In the nearly four years since it began repurchasing its own stock, it has spent an average of only $1.7bn a quarter.
2. Very good profile of Annagret Kramp-Karrenbauer, the Secretary General of the ruling Christian Democratic Union (CDU) in Germany and the new Defence Minister, and also the women tipped to replace Angela Merkel as German Chancellor.
“I don’t know what she stands for,” says Christoph Hartmann, a former liberal politician who was her deputy prime minister in Saarland. “[Former chancellor Helmut] Kohl stood for German reunification, [Gerhard] Schröder for welfare reform, [Willy] Brandt for rapprochement with the Soviet bloc. But AKK — she has no vision. She is like Merkel — a person without qualities.”
3. FT has a fascinating article at how Russia is using cutting-edge technology to track and tax transactions in real time, thereby dramatically lowering leakages in VAT,
To address the leakage, Russia built two huge data centres and legislated so that companies had to submit every invoice between businesses. It also mandated every retailer to buy new cash registers that were linked securely and directly to the data centres. In real time it can now check every invoice to ensure VAT refunds it pays are linked to invoices where companies have remitted the same money to the authorities. Then using artificial intelligence, it can quickly find patterns in the data and companies which have many broken links, allowing the authorities to target certain companies for a tax audit. Since everything is linked, it can also spot tax officials with a low collection rate from the companies for which they are responsible... The authorities receive the receipts of every transaction in Russia, from St Petersburg to Vladivostok, within 90 seconds... The 20 per cent VAT gap has now fallen to 1 per cent and, as collection has become more efficient, receipts have soared. Between 2014 and 2018, the money collected from VAT rose 64 per cent, compared with a 21 per cent increase in nominal household consumption over the same period...The VAT tax gap between revenue due and revenue collected was about 20 per cent in Russia before its reforms, according to Mr Mishustin, and in a mature economy such as the UK, HM Revenue & Customs estimated it at 9.1 per cent in 2017-18.
And Russia and other countries are using nudges to get tax-payers to comply,
The Russian authorities are seeking to extend technology-led tax collection into the informal economy... Those that sign up to a new smartphone app pay 4 per cent of turnover, deducted automatically from their bank account, on services. Take-up so far this year has exceeded expectations since compliance guarantees the authorities will not chase people further for unpaid tax... Portugal, an early adopter, added an extra incentive for shoppers to pay VAT and ensure retailers did the same. If consumers add their personal tax number to an electronic receipt, the number is added into a monthly lottery for a substantial prize, such as a new car... consumers in areas that have seen high VAT evasion, for example restaurants, can get a 15 per cent deduction on the VAT paid from their annual income tax assessment... In many Nordic countries, Mr Sanger says, the authorities have sufficient verified data that they can hand out pre-filled tax returns and ask individuals to simply approve them.
Quite apart from its role in plugging leakages, given this, technology, by helping screen and zoom into the real evaders, may well turn out to be a big contributor to limiting harassment by tax authorities. 

4. The bidding for third round of India's toll-operate-transfer (TOT) concessions for India's national highway roads has been flagged off, with 27 companies showing interest. The TOT bundle comprises 9 stretches covering 566.27 km across four states, and has a reserve price of Rs 4995.48 Cr.

The first round in February 2018 saw Macquarie offer Rs 9691 Cr against the expectation of Rs 6258 Cr for 700 km, while the second bundle over 584 km was cancelled due to bids being far below expectation.

5. Simon Kuper advocates abolishing undergraduate teaching at Oxford and Cambridge to break down elitism in England,
Oxbridge recruits more pupils from eight schools (six of which are thought to be fee-paying) than from 2,900 British state schools combined, and spits them out at the other end as the proto-ruling class... After all, Canada, Australia and Sweden have private schools, but they also have above-average social mobility... That’s partly because private school in these countries doesn’t lead to a world-beating university, since Canada, Australia and Sweden don’t have world-beating universities. They just have lots of good ones, none of which confers a life-changing advantage... It’s similar in Germany, the Netherlands and the other Nordic states. You get a decent education, then have to prove yourself on the job market. Interestingly, all these countries are wealthier and almost all have better state schools than Britain. They also avoid many British nightmares: no doors closed at 17 to everyone who doesn’t get the letter from Oxbridge. No bitterness as the excluded are slow-tracked through their careers, overseen by an Oxbridge Brahmin caste... And in countries without elite universities, it’s rare for one class to capture the national heights: careers are decided more in adulthood, by which time people’s trajectories depend slightly more on their achievements than on their parents.
6. Yet more evidence of how closed a group the elite consensus in the US is, this time from the educational backgrounds, in terms of where they studied, of newspaper interns in the US,
65% of summer interns from a group of publications including The New York Times, the Washington Post, the Wall Street Journal, NPR and Los Angeles Times, came from among very selective universities in the nation. The New York Times, The Washington Post and Wall Street Journal especially recruited from the top 1% of schools ranked by selectivity.
In Why Nations Fail we argue that it is indeed differences in economic institutions that explain the comparative development of the Koreas, and the rest of the world. We make a distinction between inclusive economic institutions; which create broad based economic incentives and opportunities; and extractive economic institutions, which do not. The source of these institutions is political. They are chosen collectively as a consequence of social choices which are heavily shaped by political institutions. A society gets inclusive economic institutions because itís political institutions generate them as an equilibrium phenomenon. We call institutions which do this inclusive political institutions which have two dimensions; a broad distribution of political power and a strong (or effective or capable) state. When either condition fails, when power is narrowly concentrated or when there is a weak or ineffective state, we say there are extractive political institutions. In a nutshell, poor countries have extractive economic institutions as a consequence of extractive political institutions. Rich countries have the opposite combination, inclusive economic institutions underpinned by inclusive political institutions.
If we accept this argument, then the biggest danger of widening inequality is that it can lead to capture of the political institutions and their becoming extractive in nature. It is then only a matter of time before the economic institutions too become extractive.

8. Finally, an India NBFC fact of the day which underlines their importance and the impact of a liquidity squeeze among them,
In India, NBFCs have in recent years helped fund nearly 55-60% of commercial vehicles both new and used, 30% of passenger cars and nearly 65% of the two-wheelers in the country, according to rating agency ICRA.

Thursday, August 1, 2019

The changed nature of infrastructure financing and its consequences

As we discussed in the oped, asset stripping has become a common feature of infrastructure PPPs. The story is same everywhere - water, railways, airports. It is true on both sides of the Atlantic, United Kingdom and United States. In fact, it is pervasive across the alternative investments world in general - Greybull Capital and British Steel, Carlyle and ManorCare nursing home chain, Thomas H Lee Partners and Simmons Bedding, Edward Lampert and Sears etc are only some of the recent examples.

It is instructive to look at the evolution of the global infrastructure financing market. Some time back, I had blogged describing its evolution,
The first phase was about simple long-term post-construction (with public finance) concessions, especially in countries like Latin America. Then countries like Australia, Canada, and England led with PPPs involving bundling of construction and O&M to initially construction contractors, then construction-cum-O&M consortiums, and finally finance-construction-O&M consortiums. The area of project finance and public bond issuances emerged to support PPPs. Then the likes of Macquarie created exit opportunities for construction contractors and a secondary market for infrastructure assets using privately raised infrastructure funds. Gradually, the private equity players found infrastructure assets a source of stable and reasonably attractive income stream, with ample opportunities for asset-stripping and pass-the-parcel game over the asset's long life-cycle. Now, there is a growing realisation in the developed economies, especially in Europe and the US that private participation is not only not cost-effective but also fraught with problems, and much greater public participation and strict regulation may be necessary in infrastructure projects. The full circle has been completed.
And in another context,
There is a growing trend of "pass-the-parcel" deal making (or secondary deals) in private equity space, where one PE firm sells stake to another. Last year the industry did a record 576 such deals. The trend has been associated with successive owners paying themselves large dividends, leveraging up, skimping on investments and maintenance, piling up unpaid pension obligations, and passing on to the next firm when they have squeezed out all the juice they can. In industry lingo, the existing owners "sweat" the asset as much as they can before passing it on.
There used to be a time when infrastructure projects were owned/operated by large infrastructure contractors/firms. They raised finance directly from banks and long-term or patient investors like pension funds and insurers who would subscribe to capital market issuances to finance infrastructure projects. The returns on these investments used to be moderate, the investments relatively illiquid, and the risk lower. Infrastructure was the boring, low-risk, and low-return area.

Then we had a period of financial innovation and engineering. When we look at PPPs in infrastructure today,  these assets are largely operated/owned not by infrastructure companies but by financial investors. The entities which operate/own and finance infrastructure investments are financial investors, alternate investment funds (AIFs) - infrastructure funds and private equity. The pension funds and insurance capital, instead of directly investing in bonds and the capital market, have come to channel their funds through the alternative investment vehicles.

This shift has had the perverse effect of distorting incentives in the market for infrastructure assets. By their very nature (and the examples from the mainstream PE world above illustrate this), the incentives of private equity etc are excessively aligned towards short-term and profiteering for their investors, and passing the parcel along.

Tuesday, July 30, 2019

Lessons for India from UK on PPPs

Here is my co-authored oped with Dr TV Somanathan which outlines the lessons for UK's PPP experience and offers some suggestions for India.

Update 1 (30.07.2019)

In the context of India, Ananth sends this Businessline editorial urging caution on the Railways decision to embrace PPPs. The global evidence on railways is voluminous and speaks very loudly. The government should avoid PPP for rail tracks - not only is there not even one example from anywhere that it has worked, there are plenty from everywhere that it unravels very quickly. 

But for rolling stock, PPPs offer promise. It is also a great opportunity for industrial policy - ensure that PPPs are single-mindedly aimed at attracting the best global players to "make in India"!