Sunday, June 28, 2015

Financing smart cities

Smart cities need smart financing. The investments planned under the Government of India program on smart cities would presumably be concentrated on small areas within a city on focused interventions to improve the quality of life. The resultant impact on property prices can be substantial. Given the public nature of these investments, it is only appropriate that a share of the incremental value (by way of higher property prices) be captured by the Government, if only to finance the expansion of the smart city to other parts of the city. In other words, the public investment made under the Smart City program would be the seed capital to catalyze smart city interventions across the city.

One way to do this is to define each smart city area as a tax-increment financing (TIF) district. The tax-increment can be escrowed and used to initiate the project in another part of the city and so on. The practical implementation challenge would be in discovering property prices and overcoming the political economy of an additional tax. The former can be somewhat mitigated, especially in larger cities, by accessing property transaction databases of banks and real-estate developers. If nothing at all, the guidance value increase can be taken as the measure of value increment. 

The political economy can potentially be addressed through the same City Challenge competition being proposed for the selection of the Smart City itself. How about a Challenge competition among localities or wards or Residents Welfare Associations to select the preferred location for the smart city investments on the condition that it would have to be a TIF district? This would take the sting out of the political argument that taxes were being forcibly imposed on the locality. Further, this would also ensure program ownership and make it a real people's competition. 

Friday, June 26, 2015

The IoT potential

Impressive new report from the MGI on the potential of Internet of Things (IoT), defined as "sensors and actuators connected by networks to computing systems". It analysed more than 150 use cases in nine 'settings' and estimates its total potential economic impact at $3.9 trillion to $11.1 trillion annually by 2025, with the upper estimate contributing to a value addition of 11% of the global economy.

As always with MGI reports, the findings from its summary are summarized with nifty graphics, some of which have been extracted below. The summary of findings from the study,
The report identifies nine 'settings' where IoT offers impressive value creation opportunities.
The value creation opportunities are far higher in the developed economies.
An illustrative list of important applications is as follows.
The opportunities in improving efficiency of existing systems is evidently enormous. The report also draws attention to a few important considerations necessary for the realization of full value from IoT applications like the realization of interoperability between IoT systems, using information from IoT not just to detect and control anomalies but mainly for optimization and prediction etc.

While the IoT offers interesting opportunities and undoubted efficiency improvements, its impact on the work-force may not be benign. The knowledge-workers will naturally find new opportunities and their base will expand. For less skilled workforce involved in terminal health care, shop-floor retail, maintenance and repair facilities, large factory floors, logistics management etc, the potential for shrinkage is considerable. It is also not surprising that the two 'settings' with the highest potential and likely impact in developing countries from IoT, factories and worksites, are also the two largest employers of the middle and lower skilled workers. 

Wednesday, June 24, 2015

Implementing smart cities

Smart city is the latest buzz-word in urban development. Conferences and seminars on smart cities abound. The Government of India (GoI) have committed to the development of 100 smart cities across the country as satellite towns of large cities and by modernizing the existing mid-size cities. The government have also allocated over Rs 7000 Cr in the last Union Budget for kick-starting smart cities.

Stripped off all jargon, a smart city is one which uses the latest technologies, progressive urban planning, and proactive civic engagement to create a highly liveable urban environment. It deploys citizen-centric and sustainable policies and the latest information and communication technologies to improve the quality of life of its citizens and public service delivery. Its immediate attraction comes from certain technology interventions that have the potential to dramatically improve urban governance capabilities. 

Intelligent traffic management systems, which integrate the feeds from all existing hardware - cameras, signal lights, GPS devices in various vehicles, wireless and other police communication systems etc - can be a powerful force multiplier in traffic and law and order management. Real-time monitoring of electricity feeders and reservoir fillings can help improve the reliability of electricity and water supply besides lowering leakages. Geo-tagged dumper bins and location tracking devices on vehicles can improve solid waste management. Ambient light sensors can help optimize on energy consumption in streetlights. Street parking slots can be sold using parking meters and status of parking locations made available on smart phone applications.

Lidar and biometric technologies can help improve the monitoring of engineering works and attendance respectively. Finally, smart data analytics coupled with cognitively striking visualization, like that in many developed country cities, can help city governments use the vast amounts of information accumulated by its departments as decision-support to more effectively manage civic services, reduce wastage and increase revenues, and limit accidents and crime.

All these have the potential to both improve operational efficiency and enhance consumer satisfaction. In fact, the biggest contribution of such applications would be to improve the capability of municipal governments to deliver public services.

But implementing these technology applications raises three challenges – identifying interventions, standardizing protocols, and scaling up interventions. The first requires demand-side engagement. Cities need to elicit this information through focused engagement with its citizens and utility managers. Given scarce available resources, we need applications that are likely to yield the greatest bang for the buck in a particular city or its part.  

Even after the intervention is identified, there is nothing available in the market to be purchased and deployed with minimal customization to meet some or all of the aforementioned applications. Further, where available, those applications are made for developed country environments, with vastly different challenges, and most unlikely to succeed in India even with significant modifications. 

In the circumstances, we have a classic co-ordination failure. The market needs the platform of a city to develop and refine a smart city applications suite. Businesses, especially the larger ones, rarely have the appetite to risk huge money upfront to develop a new product with several risks and uncertain commercial prospects, and that too in a market where governments are the biggest customers. On the other side, governments are naturally unwilling to embrace a completely new and untested product and have limited patience to wait out the time required to realize its benefits.

Such co-ordination failures are most likely to be mitigated through concerted public policies. Traditional procurement strategies are off the table. A few pilot projects in certain geographically distinct pockets within cities, involving close collaboration of governments with technology providers and system integrators, preferably smaller and emerging entrepreneurial firms, looks the best bet forward.  

As a first step, a Detailed Project Report (DPR) of the aforementioned applications will have to be prepared, outlining the specifications of the devices, connectivity, and software solution. The DPR will emerge after pilot field-testing of various alternative hardware and network technologies for each application. It will study existing process and outline how these smart city devices and applications can be seamlessly plugged into the municipal government systems. It will also undertake a cost-benefits analysis, duly arriving at the financial and economic rate of returns for the project. The specifications should help define inter-operability standards and mandate open-standards based software solutions. This would help create an eco-system where app developers can plug their software and enrich the smart city project.

This pilot project would require atleast 6-9 months to develop a robust, versatile, and user-friendly solutions suite. It will have to emerge through a process of continuous iteration, involving tight feedback loops managed by the selected implementing agency, working in close collaboration with the municipal government and citizens. Once the solutions suite and DPR is developed, it can be scaled up elsewhere.

As a note of caution, we need to avoid the temptation to implement glamorous first-best solutions involving latest sensor technologies and devices designed for vastly different environments. Atleast in the first phase, solutions have to be decidedly second-best, designed with the objective of realizing the low-hanging fruits from improvements in administrative efficiency and citizen satisfaction. We should also learn from the experience of some of these applications which have been implemented, with varying success, in cities across the country.

More important than the devices themselves, the software suite that integrates all these devices have to be robust, versatile, and extremely user-friendly. A software suite that integrates all these different applications into a single platform and renders information in a cognitively striking visualization dashboard can be a force multiplier for public officials. If made available on different devices including smart phones, this can be powerful decision-support for municipal field functionaries and help dramatically improve their execution and supervision bandwidths.

Such technology interventions have to be complemented with more fundamental policy initiatives. Policies that permit higher Floor Area Ratios (FAR) along important transit corridors and near transit stations promote transit-oriented growth which reduces traffic congestion. Densified mixed-use developments with adequate public spaces, especially in larger plots and green-field locations, promote walkable work-life environments. Higher FAR and property tax concessions, complemented with affordable housing mandates, encourage urban renewal through re-development of blighted areas. 

As with all buzz-words, there is the danger of hype overtaking substance. Amidst all the hype, we would do well to bear in mind that India’s urban development imperative is not so much smart cities as decently governed cities. Numerous studies have highlighted that the governance systems that drive the engines of India’s economic growth are woeful, even dysfunctional. 

Monday, June 22, 2015

The transactional challenge with increasing pulse production

India has an agriculture crop misallocation problem. There is surplus production of water-intensive paddy and deficit of pulses, which is largely a rain-fed crop. Prevailing policy encourages more paddy production - free farm power, high import tariffs, ever increasing Minimum Support Price (MSP). So last week the Government of India announced a policy to partially re-align the incentives - lower MSP increase for paddy and much higher for pulses.

But if history is any evidence (pulses production has remained stagnant despite a 50% increase in price of pulses over the past five years), this is unlikely to make any dent on the crop mis-allocation problem. Experts like Ashok Gulati claim that solving the problem requires crop-neutral incentive structure. In other words, reverse the entire incentive structure from paddy to pulses - do every thing currently being done to encourage paddy for pulses. I am not sure whether even this is likely to have much impact.

This is a well-trodden path. Apart from being the primary source of family income, people also grow paddy because it gives them their food staple, fodder for cattle, maybe dung for fuel, and also because they have always grown paddy. It is not easy to design incentives that can encourage such changes, they may need deeper behavioural shifts. Incentives, while essential in the long-run for mitigating the mis-allocation problem and enabling the transition, can only get you so far in the short to medium-term. Incentives will plant the seeds for gradual change, which however will happen only when the process gathers enough momentum and tips-over through, most often, changes in life-style or livelihood patterns or something causes a critical mass of people to shift their cropping habits.

Most economy or society-wide changes are always hard. Incentives help, and are even necessary, though not sufficient. They are necessary to get to the starting line, but not the finish line. They can only get you so far. Most often the reform required to get you to the starting line is decisional - change rules, deregulate, re-align incentives etc. But those required to get to the finish line are transactional - involving long-drawn engagement with stakeholders or dynamics generated by the initial decisional reforms which culminate in tipping-points or seamless transitions.  

Thursday, June 18, 2015

Peak free-trade and the undesirable quest for policy harmonization

In the context of the debate surrounding the TPP, Larry Summers has a brilliant oped where he makes this candid observation (all the four points raised are deeply insightful),
The era of agreements that achieve freer trade in the classical sense is over. The world’s remaining tariff and quota barriers are small, and often result from deeply held cultural values, such as Japan’s attachment to rice farming. What we call trade agreements are in fact deals on the protection of investment and on achieving regulatory harmonisation and establishment of standards in areas such as intellectual property. There may be substantial potential gains from such agreements, but their merits must be considered case by case. No reflexive presumption in favour of free trade should be used to justify further agreements.
Market endorsement of the diminished importance of such trade deals today comes from the fact that the equity markets reacted indifferently to the failure of President Obama to get fast-track trade promotion authority from the Congress last week.

Both the TPP and Trans-Atlantic Trade and Investment Partnership (TTIP) have important non-trade concerns. The TPP is expected to impose tighter intellectual property rules on members, while the TTIP would reduce non-tariff barriers and both have a provision for "an Investor-State Dispute Settlement mechanism which would establish a separate judicial track, outside a country's own legal system, that would allow firms to sue governments for apparent violations under trade treaties". Dani Rodrik has rightly described both TPP and TTIP as more about corporate capture than liberalism. 

All this goes back to the rising momentum in favor of policy harmonization on issues as varied as labor markets, taxation, investment protection, intellectual property rights, environmental standards etc. Add to this calls for provisions in trade agreements to prevent alleged currency manipulation, and the slippery slope becomes evident. In all these cases, there are very compelling political economy and economic efficiency arguments that would militate against such harmonization.

Such harmonization, by limiting the legitimate sphere of action of national governments not only circumscribes genuine national interest but also undermines democracy itself. By the same yardstick, in light of the risks generated by the massive flood of cross-border capital flows engendered by it, emerging economies should have had a veto on the US quantitative easing policy on grounds of global monetary policy harmonization. In areas like exchange rate valuations, there are not even reliable measures of alleged manipulation.

There is no single standard on any of these issues which can be universally applied to all the countries of the world, independent of their stage of development. In fact, most often, such policy stances are likely to conflict with each other. Instead of selectively pursuing harmonization where is suits you, nation states must adapt, as they have always done, to such situations. Democratic pluralism should underpin international institutional architecture as much as it does domestic ones. 

Tuesday, June 16, 2015

The successes and failings of India's bureaucracy

The Indian states’ struggles with getting stuff done are well documented. Even when programs are apparently well designed, they generally stumble at implementation. This implementation deficit has become a reflection of weak state capability.

This malaise afflicts government agencies at all levels and across states in varying degrees. It is as much applicable to service delivery with welfare programs as it is to the large-scale regulatory failures and resultant corruption scandals that dominate headline news.   

So how it is that Indian bureaucracy delivers spectacularly with programs like Pulse Polio, elections, and Kumbh Mela? What explains the handful of outstanding examples of successes with improving maternal and child health outcomes, or women’s empowerment, or increasing access to sanitation that occasionally come from various corners of India? There are two possible answers.  

One, and relevant to the first question, is that our state is exceptional at doing things that have short duration and clearly defined destination. A common thread that goes through all these activities is meticulous planning which maps functionaries to task and time, simple and clearly defined monitoring goals, rigorous supervision, and insulation from political influence. This is generally achieved through a massive mobilization of the entire local administration, often augmented with external manpower. It helps that the short duration of these activities allows for such cross-departmental mobilization. All this is underpinned by a strong political and bureaucratic commitment at the highest levels to achieve the objective. 

The success with these activities stand in stark contrast to the egregious failure with implementation of regular government programs in the same area by the same personnel. It shines light on the sources of their implementation failure. An apolitical, adequately staffed and appropriately trained bureaucracy, when monitored rigorously gets things done. It is no surprise that all these ingredients are deficient in regular administration of government programs.  

The other examples of success are, most often, a result of individual initiative. A few fiercely committed officers bring great passion and effort into planning and implementing programs. Their energy and leadership masks the chronic deficiencies in state capability and results in the positive deviance.

There are a few features that inform the actions of all such successful officials. They make detailed plans, with clearly defined intermediate milestones and final outcomes with timelines, all of which can be monitored.  
  
They rely on some improvised information reporting system to rigorously monitor compliance. Some of the more tech-savvy among them use computer applications for internet-based reporting. Others rely on brute force reviews, done with unfailing regularity. These reviews are generally done personally at a painstaking level of granularity, to identify weaknesses and poor performers, which are then followed-up and addressed. It is no accident that their reporting systems are generally at variance from the ineffectual routine state or nation-wide reporting systems for the same program or activity.  

Another prong of their monitoring is intensive field inspections, most often done randomly and without intimation so as to validate the information from the aforementioned reports. Such personal inspections, which are often followed up with strong and certain disciplinary action on errant officials, are a strong deterrent against slacking. But given the large geographical jurisdictions, such personal inspections take up a disproportionately large amount of time and effort, and involve unfavorable work trade-offs.

A handful of motivated and sincere sub-ordinates are co-opted as internal champions in these efforts. In a few cases, committed local non-profits become important partners. The smarter among them keep open active feedback channels - through inspections and interactions with field functionaries, citizens, and political representatives - that reliably convey information on the actual implementation.
Though all these are the physical ingredients of routine bureaucratic implementation, its actual realization in a typical bureaucratic environment is unfortunately very infrequent. It is commonplace that officials are severely handicapped by an enfeebled administrative machinery, whose weaknesses are exacerbated by inadequate, poorly trained, and dis-illusioned staff. Most often, they are left to fend for themselves, in completely unknown terrain, with just a handful of people for support.

The positive deviance is due to the extraordinary level of direct personal involvement of the official. It requires huge mental bandwidth for information processing and monitoring, the ability and commitment for which is understandably possessed by only a handful of very sincere and energetic officials. Their success is despite grave deficiencies in state capability and a triumph over extreme adversity. But this triumph is, most often, a pyrrhic victory. Reflecting the deeply personal nature of such interventions, all such successes are most likely to be short-lived, failing to outlive the officials themselves.

It is therefore no surprise that mundane activities like running mid-day meal kitchens or distributing old age pensions to beneficiaries or delivering ante-natal services to pregnant women appear insurmountable systemic challenges. All these activities fail the test of routinized impersonal administration, and require the dominant presence of an exceptional bureaucrat.

Though the main focus here is on the role of All India Service (AIS) officers, much the same applies to other non-AIS officials of the state government. The successful among them overcome much greater adversity than a similar AIS officer. The point of this post is as much to highlight why things sometimes appear to work in certain places as to why its systemic replication may be difficult given our current state capability.

A bureaucracy is an impersonal rules-based organization of a group of people who work together to achieve certain defined outcomes. Bureaucracies therefore have to work on their systemic strengths rather than the personal initiative of individual bureaucrats. A capable bureaucracy is one which delivers outcomes when administered by the average bureaucrat, rather than being reliant on the serendipitous presence of an exceptional bureaucrat. The typical Indian bureaucracy, at all levels, is most likely to end up short on this test.   

Monday, June 15, 2015

Generating bang for the buck from housing subsidies

A recent FT article had these facts about affordable housing subsidies in UK,
The UK paid £24bn in rent subsidies in 2013-14, double the amount a decade ago and the equivalent of £1bn in every £4bn in Britain's budget deficit. the average UK home now costs a first-time buyer five times their income, up from 2.8 times in the early 1980s. That has in turn fuelled demand for rented accommodation, pushing up the costs and eating up increasing amounts of state subsidy... According to the Office for Budget Responsibility, last year the UK spent more than £25bn on rent and home ownership subsidies but ended up with just 141,000 new houses being built — at least 40 per cent below the level some economists argue it needs... Social landlords build about a fifth of 
The article points to the dilemma between public spending to boost supply (through public housing projects and fiscal incentives to developers) and support demand (through home ownership and rental subsidies), and the overwhelming preference towards the latter in UK,
Despite spending £1.4bn a year on home ownership subsidies, funding for social housebuilding was cut in the last parliament from £2.3bn to £1.1bn a year... But campaigners argue that the money currently being spent on subsidising demand for housing through rents and ownership schemes — £115bn between 2010 and 2014 — should instead be spent on new housebuilding. The money would be enough to build 6.8m new state-backed homes at current average rates of subsidy: enough to house the country’s growing population for 31 years... Around a third of households in any developed economy need some form of financial help with their housing costs, experts say. In 1975 more than 80 per cent of UK government involvement in housing was focused on increasing supply — building new homes. But by 2000 the vast majority of Britain’s housing market subsidies went towards supporting demand, rather than supply.
In contrast, in India, affordable housing subsidy is almost completely spent on supply-side interventions - public housing projects, construction grants to developers, and affordable housing mandates. Rental housing subsidy is virtually absent and interest subvention subsidy initiatives remain still-born as the target group can rarely ever access mortgages. Even on the supply-side, the magnitude of support remains abysmally limited. While some amount of spending on public housing projects is essential, given its high percapita funding requirement, it can make only a marginal dent on the housing market. In contrast, demand-side measures like interest and rental subsidies, which require small percapita annual spending, can have a far larger impact.

The Union Budget 2015-16 allocated just Rs 14000 Cr (£1.43bn) for urban and rural housing. Assuming the state governments would add another Rs 6000 Cr, the total public spending on housing across the country would be about £2 bnTo put this in perspective, India would be trying to meet atleast twenty times UK's housing demand with a twelfth of its public spending. Worse still, the nature of the country's public spending on housing - the major share of resources go into public housing projects instead of demand side support measures - severely limits the bang for the buck from this meager public spending. 

The article also points to this financing route for affordable housing programs,
In the UK a plot of land becomes available to build on when planning authorities give permission for a change of use — from farmland, industrial or commercial use. In places with high house prices, such approval can significantly increase the value of the land. It is possible for the state to acquire land for homes and then sell it on to developers, pocketing the difference in value. That money can then be used to subsidise more housebuilding. South Korea, Singapore, Hong Kong and Taiwan all use national development corporations in this way.
Unfortunately, given the poor enforcement of zoning regulations, the premium associated with land conversion is far lower in countries like India, thereby limiting their ability to capture value from this option.