Monday, December 11, 2017

Eco-system as a constraint on outcomes-based policies

I have blogged earlier here about the under-appreciated difficulties with targeting outcomes. Apart from the three challenges raised in that post, there is another equally important challenge. This concerns ecosystem constraints.

It is commonly assumed that the existing ecosystem can be disciplined to achieve the desired outcomes through efficiency improvements, by getting human and physical capital to work more and better. What if this is not at all true?

This post gives three examples of how outputs or outcomes-focused technology or process interventions disrupted entrenched equilibriums and raised difficult administrative challenges. 

Consider school education. We have no clear idea of how much of learning outcomes realisation is a function of early childhood education, classroom instruction, remedial support in classroom, peer-engagement, off-school hours engagement at home, and the grade-appropriate competency levels themselves. What are their relative weights? How do those vary across socio-cultural contexts?  What if the competency standards are too ambitious? Or what if home engagement is critical?

Consider primary health care. This study found that doctors spend limited time and asked very few questions (as against what the medical protocol dictates) when treating patients. And it is pervasive across developing world, though nowhere as bad as in India. While unambiguously accepting the larger point about apathy and incompetence, it is also important to highlight the plumbing reality - the Out Patient load, when doctor is available, in PHCs can be far higher than what any systems can deal. Once this becomes the norm, a newly recruited doctor, over a few years, deeply internalise the challenge and forms a response that instead of treating the patient only tries to get done with the long-que of patients before lunch! Just imagine a GP in UK dealing with 30 patients turning up over a two-hour window with just one nurse for assistance. 

Nowhere is this more relevant than with state capacity. It is unrealistic to expect public systems as they exist now to deliver sectoral outcomes in scale and anywhere close to the defined benchmarks. Right now, these systems are entrapped in a low-level equilibrium of low human and physical resource allocations, unfavourable socio-economic conditions, and tolerance for and expectations of sub-par outcomes. Even the most incentive compatible financing strategy cannot be expected to have anything other than marginal effect on the system.  

Fundamentally, this should have been simple. Development is hard. The resolution of complex problems demand multi-dimensional policies that directly and proactively address deep structural failings, and persistent effort in their implementation. So to expect outcomes-targeting to magically deliver the result is plain naive.

But that we still fall prey to the lure of such apparently neat and simple solutions can be blamed on our psychological urges. We want to do something quickly about these complex problems. We find the logic of outcomes-based policies irresistible. So we seek refuge in them.

But they will not work!

Monday, December 4, 2017

The alternative assets universe and India

The latest quarterly update of infrastructure funds from Preqin shows that the total dry powder held by unlisted infrastructure funds has reached a record high of $154bn as at September 2017. Most of this is routed to N America and Europe, with just $20 bn earmarked for all of Asia, including China and Japan. 
As regards India, the total dry powder currently available aimed at investing in India is just $3 bn. The vast majority of this comes from overseas funds, rather than domestic fund raising. In fact, India forms just 7% of the $65 bn unlisted infrastructure assets in the Asia-Pacific region. 
As to the entire alternative investment funds industry - private equity, venture capital, real estate, infrastructure, private debt etc - the total assets under management (AUM) as of December 2016 was $598 bn. India's share was $42 bn, of which $13.5 bn was the dry powder.
The major share of the AUM in India went into PE/VC funds. The PE sector has been boosted by the pick-up in exits, $10 bn in each of 2015 and 2016, and $7 bn to date this year.
While $7 bn of the $23.6 bn in the PE/VC sector is dry-powder available for deployment, a very small proportion of this is currently earmarked for buyouts. This allocation is contrast to elsewhere, including in Asia, where buyouts form the dominant share. 
Two observations

1. The government has planned infrastructure investments in the range of $700-1000 bn over the coming five years. It is estimated that a significant share of the investments will come from foreign investors. But, as these numbers show, we would be happy if even 10% of these investments come from abroad. Therefore, expectations of the National Infrastructure Investment Fund (NIIF) being able to leverage its $3bn corpus ten-fold etc are simply unrealistic.

One approach to attracting more infrastructure funds is by selling commissioned assets where revenue streams are predictable. Entities like NTPC and NHAI should consider divesting certain existing assets both attract infrastructure funds as well as mobilise resources to finance newer projects.

2. The new Bankruptcy Code and the resultant wave of distressed assets sales promises to flood the Indian market with massive buyout opportunities. The domestic market may not be deep enough to absorb anything beyond the first few sales. Foreign buyout funds would be essential for the fair price discovery required to make these sales sustainable, both commercially (for banks) and politically. 

While the currently earmarked amounts India-focused buyout funds is negligible, this distressed asset sales present a great opportunity to attract a big volume of such funds and deepen India's alternative assets market. This may require more strategic approaches to some of these sales, including bundling assets into groups so as to make it large enough to be commercially attractive.

As to the distressed assets sales themselves, two articles in Mint point to the challenges that are likely to be faced going ahead. One concerns the 26 GW of thermal power assets without any power purchase agreements, which makes them risky even after write-downs and restructuring. In these cases, as I have argued earlier, it may have to fall on NTPC to become a buyer of last resort.

The other one relates to steel sector, where the problems are worse still and massive haircuts may be necessary. And, unlike with power assets, it may be very bad idea of have an inefficient SAIL buy them up. In this case, strategic sales by bundling assets assume relevance.