Tuesday, August 29, 2017

Weekend reading links

1. If you thought Microsoft is an American company, then atleast its tax filings do not indicate that. Consider this about Microsoft's latest tax filing,
Microsoft’s latest annual report, released earlier this week, shows that over the past two years, the company enjoyed worldwide income of almost $43 billion. It claims to have earned just 0.3 percent of that—$128 million—in the United States... The company now discloses a total of $142 billion in “permanently reinvested” foreign earnings—an increase of $18 billion in the last year—and reports it would pay a tax rate of 31.7 percent if these profits were repatriated. This means that the company is currently avoiding a stunning $45 billion in taxes by holding its money offshore... Foreign profits are subject to the 35 percent federal corporate tax rate minus any taxes paid to foreign governments. This means Microsoft has paid a foreign tax rate of just over 3 percent on these offshore earnings... Collectively, corporations have at least $2.6 trillion stashed offshore. If these profits were repatriated under current tax rules, it could mean $700 billion in tax revenue.
What more evidence do you need to address such egregious tax evasion (it has long since crossed the line of avoidance)? Examples like these and the absence of even one criminal indictment of a Wall Street executive for the sub-prime mortgage crisis seriously erode the credibility of modern capitalism. 

2. The India-China stand-off at Doklam is finally over. The Ministry of External Affairs has put out a statement that conveys mutual disengagement and its verification. But the Chinese statements appear contradictory. I guess, there is intense logic-splitting here. 

As I have blogged earlier, a mutual disengagement should be taken as a victory for India. So if as the MEA statement is true, then the Chinese statements should be taken as understandable grandstanding for domestic audience. Did the forthcoming BRICS summit at Xiamen and the Chinese host anxiety to clear the ground help India push this settlement through? If this is true, it is a very significant victory for Indian diplomacy. 

3. The decision by the Railway Ministry in India to ask three very high ranking officials - Railway Board Chairman, General Manager, and Divisional Railway Manager - to go on leave for the derailment of the Puri-Haridwar Utkal Express at Khatauli in UP which killed 21 people, is a huge signal. But is this likely to have any of its intended effects? 

In brief, as the newspapers report, the derailment happened due to track maintenance work involving replacement of a small strip being done without having taken clearance from the station master. 

Now, this is evidently a very basic lapse, and accountability will have to be fixed and action initiated, among officials at the local level. And it has to go beyond mere suspension, with disciplinary proceedings done quickly and strong enough punishment meted out. But I struggle to find out how the DRM, much less the GM, and even much less the Railway Board Chairman should be accountable enough to be asked to go on leave.

At such senior levels, given the nature of the lapse, there can only be moral accountability and not functional accountability. And I am not for a moment saying there should not be moral accountability. But the question is who is the best positioned to assume moral responsibility and do so in a powerful enough manner? 

Without in any way condoning such lapses on first order requirements, we need to also appreciate the chronic conditions under which these things are done in India. While standards and protocols for everything may be clearly laid out, its compliance would require some basic requirements - adequate manpower, basic work materials, maintenance time slots, and so on. When these basic requirements are off by orders of magnitude, then it is not uncommon to see such omissions and lapses. Deaths of linemen in electricity discoms due to electrocution arising from undertaking line repairs (most often in case of emergencies or due to sudden interruptions) is another example. 

4. Nice article in FT which examines the request by new entrant Reliance Jio to the Telecom Regulatory Authority of India (TRAI) to lower interconnection charges.
Now Jio is pushing the government to slash the mobile termination charge — the fee that India’s mobile operators charge to offset the cost of handling incoming calls, which is paid by the caller’s network operator. A reduction would benefit Jio, largely because it has offered free calls to all subscribers, pushing up its ratio of outgoing calls to incoming ones... the hit to revenues would be a blow to other operators that had invested in infrastructure in the countryside, “because traffic is largely from urban to rural, with little call origination revenue in rural areas”. Jio’s subscriber base is “more urban-centric” than rivals’, according to analysts at India Ratings and Research... In a presentation to regulators last month, Jio claimed that the mobile termination charges have been kept unduly high for years, inflating sector revenues by more than Rs15tn ($235bn) over the past five years. “Incumbent operators are trying to coerce a rent from smaller operators due to their inefficiencies and lack of investment with flawed arguments,” Jio wrote in the presentation... the current mobile termination charge of Rs0.14 is already below the cost of handling incoming calls.
This is going to be one very interesting decision. TRAI will have to balance the interests of consumers and operators, by weighing the benefits of further lowering what are already one of the lowest telecom tariffs anywhere in the world against the costs inflicted on chronically indebted operators in an ultra-low margin business. I am inclined to the view that this may be one example where lower price is not always good for the long-term health of the sector.

5. If we thought India with 58 million entrepreneurs had too many of them, you haven't heard of Nigeria's,
In 2013 the National Bureau of Statistics found that Nigeria has nearly 37m firms employing fewer than ten people (most of them unregistered sole traders). Just 4,670 employed 50-199 staff. 
I suspect much the same holds true of other low income countries. The problem is not too little entrepreneurs, but too many of them, and the overwhelming majority of the wrong kind. These aspiring entrepreneurs should instead be encouraged to spend efforts acquiring skills that can help them access productive jobs. 

6. This blog has consistently urged caution on India's solar boom. The spectacular declines in tariffs over just a couple of years defied all business sense. Even in the most optimistic scenarios and with the cheap Chinese modules, it would have made sense only if none of the risks surfaced. And then too, only with the smallest of margins. 

Now those risks are surfacing one by one, and all even before the projects have been commissioned. First, faced with "buyer's remorse", State government distribution companies have started renegotiating on the initial rounds of higher tariff solar contracts. The surprising absence of any compensation for cancellation has encouraged state governments to pressure developers. A recent revision of the model contract document addresses this anomaly. 

Now comes news of rising Chinese module prices. Sample this,
Several developers and analysts Mint spoke to said that the record low tariff of Rs2.44 per per kilowatt hour (kWh) at the auction of 500 megawatts (MW) of capacity at the Bhadla solar park in Rajasthan in May was quoted assuming module prices will fall to around 23 cents per watt. With the module prices currently around 32 cents and the August delivery quoted at around 34 cents, developers are wary about the future tariff trajectory. Modules account for nearly 60% of a solar power project’s total cost and their prices fell by about 26% in 2016 alone. Module prices have, however, firmed up with China extending the feed-in tariff regime, which ensures a fixed price for power producers, for the third quarter and US developers placing advance orders to shore up cell and module supplies amid demands for a cap in prices of cheap imports to the US.
Suppliers realise that the operators are locked into long-term power purchase agreements with discoms and have deadlines looming, and therefore cannot afford to delay commissioning. They have been using this leverage to renegotiate higher module prices. 

With domestic manufacturers making up just 10.6% of the modules market, Indian developers are heavily dependent on the dominant Chinese suppliers.  

And we still have not seen the operational risks surface. And there are likely to be many of them ranging from uncertainty about realised output to maintenance and replacements!

7. Finally, The Economist has an interesting analysis of the impact of recent trends on airport operators. Globally, non-aeronautical revenues from shops, airport parking, car rental and so on formed two-fifths of airport operator revenues of $152 bn in 2015. But these revenues have been showing declining trends. This may be due to the ubiquity of nearly identical duty-free and luxury shopping at airports, the shifting demographics of passengers (who have less money to spend), increasingly better public transit connectivity of airports with city centres, and the popularity of ride-hailing companies.  
At the start of the year, AĆ©roports de Paris, Frankfurt airport and Schiphol airport, in Amsterdam, announced drops in spending per passenger in 2016 of around 4-8%.
These trends pose challenges for countries like India which have only recently set out on a path to develop airports on PPPs. 

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