Monday, April 29, 2019

China infrastructure and debt facts of the day

From The Economist, on the scale of Chinese infrastructure building,
China aims to build 3,200km of high-speed rail lines this year. That is nearly as much as Spain, the country with the second-largest high-speed rail network, has in total; for China, though, it is down from an average of 3,600km annually over the past five years.
And despite all the talk of reining in debt financing,
Total social financing, a measure that consists mainly of bank loans and bond issuance, hit 8.2trn yuan ($1.2trn) in the first quarter, up by 40% from the same period last year, well above most forecasts. A quarter of the financing has been short-term corporate loans. In China that is usually a sign that pliant state-owned banks are heeding the government’s call to pump out credit, ahead of demand from borrowers.

Sunday, April 28, 2019

Analysing Trump - missing the woods for the trees?

In his recent interviews (this, this, and this), the outgoing French Ambassador from Washington Gerard Araud has pulled no punches in describing Trump and Trumpland. 

This is perhaps the most apt description of the punditry and discussions around Trump,
“I’m using the Chinese saying, ‘When the finger is showing the moon, the fool is looking at the finger and the wise man at the moon.’ In a sense, Trump is the finger. I do think Washington, D.C., is much too obsessed by the finger and should look at the crisis” revealed by the 2016 election... “The press, to be frank, is so anti-Trump that I do understand that the natural reaction of Trump is to go over the head of the press,” he said.
And this,
That Trump, for all his flaws, is asking legitimate questions, Araud said. That the Republican president saw the world “shifting, in a sense, to a new era” and that his “genius” was understanding the “malaise” in the United States. It’s a malaise, Araud is quick to add, that is leading people to embrace populism and nationalism in France and other countries, too. “We have to address the concerns of these people,” he said. “It’s a serious crisis of our democracy.”... He also argued that although some of the questions Trump asks might seem odd at first glance, they are nonetheless fair game. For instance, Trump has wondered why the United States should go to war to protect the tiny nation of Montenegro if it were attacked. To foreign policy types, the answer is obvious: Montenegro is a NATO member and the military alliance is built on the idea of collective defense. Araud, though, pointed out that many ordinary Americans would pose the same question if the scenario ever arose. By raising the point, Trump is exposing the fact that not everyone is automatically on board with the views of foreign policy elites in places like Washington.
This excerpts some very candid views. 

Wednesday, April 24, 2019

When competition causes market failures

The grounding and possible bankruptcy of one of India's biggest airline, Jet Airways, in the world's fastest growing airline market for the last seven years and 54 months of double-digit growth is a great irony. And this comes on top of the bankruptcy at the start of the boom, in 2012, of another major airline, Kingfisher. So what is it about India's airline sector that healthy aggregate growth and mega failures (and weak bottom-lines in general) go together?

This also raises an interesting question about Indian capitalism itself, since this feature is not unique to airline industry. What is it about the Indian market's failure to balance competition with quality and sustainability?

Along with telecommunications, airlines sector is often held out as the two shining examples of the superiority of private sector over the public sector. Deregulation and the entry of private participants have dramatically improved the quality of service delivery. Simultaneously, even as demand has soared, both sectors have witnessed the entry of several service providers and intense competition among them. In both sectors, India has among the largest number of service providers, with fierce competition among them. 

Econ 101 tells us that a market characterised by soaring demand and a good number of suppliers should generate efficient competition. Suppliers would compete intensely to improve their service quality so as to differentiate themselves and thereby capture the rising demand. And the competition would also reduce prices to an efficient equilibrium, one without any rents. 

Instead what has happened in both sectors has been a competitive race to the bottom on pricing. This in turn squeezed their bottom-lines, and made them skimp heavily on investments to improve quality. The result has been deteriorating or stagnant quality. This is an example of how competition can perversely enough lead to market failures. 

It is true that there are policy issues like lowering the tax on Aviation Turbine Fuel (ATF) which the airlines have been demanding. But these apply just as well to all airlines operating in India. And given their behaviours, it would be most likely the case that lower ATF too would be competed away in a race to bottom on price. Further, the airline industry ought to have benefited from the relatively long period of lower and stable fuel prices, which makes up a significant share of the operating costs.

The race to the bottom with pricing has been a constant feature of the Indian telecoms and airline market for a long time. Sample this analysis by Andy Mukherjee from mid-2018,
It’s unclear as to why pricing should behave as if India’s aviation industry is saddled with huge overcapacity. Unable to pay interest and wages, Kingfisher Airlines Ltd. went belly up in late 2012. In almost every month since then, revenue passenger kilometers (a measure of demand) have grown faster than available seat kilometers (a unit of supply), according to the International Air Transport Association. Even in June 2018, when the industry was crashing, domestic air travel grew by 17.6 percent. Not only was it the fastest growth of any major market including China, it was nearly 2 percentage points quicker than India’s own demand expansion in the same month last year. Yet desperate carriers are pampering fliers with promotions they can ill-afford. Jet, for instance, is currently offering a 30 percent discount on base fares to international destinations. This is when its cost of flying one passenger-kilometer, excluding fuel, was 3.17 rupees last fiscal year, according to SBICAP Securities Ltd., compared with 2.53 rupees for SpiceJet and 2.04 rupees for IndiGo. Revenue per available seat kilometer has exceeded all-in costs in just three of the past 14 quarters.
And this,
With the entry of budget carriers such as IndiGo and SpiceJet Ltd. since the mid-2000’s, full-service carriers like Jet Airways that have higher overhead costs -- for in-flight meals and entertainment -- have been forced to offer discounts to passengers looking for a great bargain. For instance, in 2015, SpiceJet offered base fares of as low as 2 cents. Average ticket prices for New Delhi to Mumbai, the world’s third-busiest route, fell 15 percent to 3,334 rupees in July-August from the previous year, according to online travel agent Yatra.com. Fares are down 40 percent from 2014, according to Sanjiv Kapoor, the chief commercial officer of Vistara, Singapore Air’s local venture. That compares with a premium rail service for the same route at 4,075 rupees.
Cyclical factors and rapid expansion have been able to paper over some of the debilitating effects of rock-bottom prices. Even the run-away industry leader Indigo may be one shock away from hitting air turbulence.

The market dynamics itself apart, the promoter of Jet Airways has been just as much culpable of reckless business expansion decisions as that of Kingfisher. In fact Jet had been losing money in nine out of the past eleven years. It speaks something about the very narrow and deeply price sensitive Indian market itself that two of the three large full-service airlines have now gone under, and the third, Air India, is surviving only through public subsidy. It is a testament to the inability of these full-service carriers to have figured out a business model required to differentiate themselves from their low-cost counterparts. Should Jet (and Kingfisher) have charted a path very different from the various low-cost airlines, focusing on specific routes and quality of service, and associated calibrated expansion and maintenance of higher prices? 

In telecoms too there has been similar race to the bottom, with Indian operators having among the lowest Average Revenue Per Users (ARPUs) and struggling to mobilise resources for capex. Compounding problems this comes on top of the top-collar winner's curse payouts to acquire spectrum. The result is minimal investments in capacity expansion and technology up-gradation, and being very poorly positioned to transition to the 5G technology.

And this is not confined to just airlines and telecoms. In fact, the same market failure could be generalised to most infrastructure sectors. The power generators and road contractors have never been averse to bidding recklessly and being stuck with contracts which they soon realise they are unable to service sustainably. Besides, they also create piles of non-performing assets for their lenders and attendant need for loan restructurings and tax-payer financed bank recapitalisations. The lenders too do not learn from past experience and repeat their mistakes - the latest bubble in lending to solar renewables generators should show up as NPAs in the coming years.

Clearly the orthodox playbook of Econ 101 does not stand the test of reality. One way of looking at such recurrent crises is to acknowledge it as true "capitalism with exit" and welcome it. Such bankruptcies are to be seen as a cost of a more efficient capitalism. The other way is to view this is as market failure which imposes significant long-term costs on the economy and explore ways to mitigate it.

One response to such market failure is to encourage consolidation and hope for a market with 3-4 (or even 2-3) large players. But this can emerge only through market dynamics and very difficult to be realised through policy actions. The other response is to resort to specific public policy levers to address the contributors to the market failure. But mitigation by way of such policy action runs the risk of incentive distortions, politicisation, and corruption. 

Even with these risks, I am personally inclined to policy response approach. Accordingly, in case of the airlines, there may be a case for the regulators to closely watch the ticket price trends and intervene to pre-empt price wars. Given that a regulator has the responsibility for ensuring the welfare of all market participants, there is perhaps a compelling case for regulators intervening not just in case of price gouging (or price ceilings) but also in case of competitive race to the bottom (or price floors). Even at the risk of incentive distortions and not getting things right, an objective and clearly defined set of principles and guidelines on price floors appears to be a superior alternative to the laissez faire competition approach.   

Similarly the Case II bids for power generation plants should not have given the option of fixed fuel price and should have had mandatory fuel price pass-through - remember the aggressive fixed price bids for the UMPPs which unravelled when the imported coal prices soared. Or there should be some restriction on the number of projects one developer can bid for in any set of tenders - remember the Reliance bids for UMPPs and the recent Adani bids for airports. Or roads sector bids (or even power generation levellized tariffs) which are very significantly off the mark from the internal cost benchmarks should be scrutinised more closely or even rejected. Or should spectrum auctions be structured to explicitly limit revenues mobilisation objectives and keep in mind life-cycle service costs.

Tuesday, April 23, 2019

The Rise of Finance is now available

The Rise of Finance is now available for purchase on Amazon. Also see the blurbs, including by past three Governors of the Reserve Bank of India.

Monday, April 22, 2019

Judicial activism and the IBC

The argument in favour of having Tribunals is that they offer a specialised and dedicated forum for settling specific categories of disputes which are otherwise likely to get stuck in the regular judicial channels. But this assumption holds only if the regular judiciary exercises restraint and does not insert itself into the proceedings pending before Tribunals. 

Unfortunately, this assumption is deeply questionable given the pervasive tendency of Indian Courts to interfere indiscriminately with the work of Tribunals. In the circumstances, the Tribunals (with their appellate level) becomes two additional layers of litigation.

The example of the latest Supreme Court order staying the the sale of Essar Steel, one of the first of the twelve cases taken up under the new Insolvency and Bankruptcy Code (IBC), is a case in point.

In October, 2018, after following the due process of inviting bids, the Committee of Creditors (CoC) had accepted the resolution plan submitted by ArcelorMittal SA, the highest bidder at Rs 420 billion. The approved plan had proposed providing financial creditors Rs 419.87 bn out of their total dues of Rs 493.95 bn and Rs 2.14 bn out of Rs 49.76 bn to operational creditors. The apportionment of the payouts between the operational and financial creditors under the resolution plan was disputed by the largest of the operational creditors, Standard Chartered Bank. It said that it was receiving just 1.7% of its dues, whereas the financial creditors were receiving over 85% of their dues. 

The takeover of Essar Steel by ArcelorMittal SA was then approved by the NCLT on March 8, 2019. However, the NCLT order also asked ArcelorMittal and the COC to consider giving a higher 15% of the upfront cash settlement (of Rs 420 bn) to the operational creditors. The decision itself came after the resolution of a protracted series of allegations of ineligible criterion under Section 29(c) of IBC on related party defaults involving Essar, Numetal, and Arcelor.

On being approached by Standard Chartered Bank on appeal, the NCLAT too, on March 19, 2019, while approving the takeover plan had also ruled that the apportionment among different creditors will be decided separately. It had also directed the CoC to meet and decide on the apportionment. Further, the Insolvency and Bankruptcy Board of India (IBBI) submitted before the NCLAT that in the 88 successfully resolved IBC cases till date, the financial creditors and operational creditors have received 48.24% and 48.41% respectively. Subsequently, on April 9, 2019, the NCLAT also asked all creditors to filed their claims and had posted the case for April 23, 2019. 

Also, it was reported that internal discussions were afoot among the financial creditors to offer more to the operational creditors, so as to expedite the bankruptcy sale. However, while the proposed payouts may appear unfavourable to the operational creditors, the financial creditors point out that the former have already benefited over the last two years in receiving payouts whereas they had not received any repayments. And in any case, the Courts cannot have no jurisdiction over the commercial aspects of such apportionment taken by the CoC, and can adjudicate only on the procedural and legal aspects. 

In fact, based on the NCLT orders, ArcelorMittal initiated the process to recruit a team to manage Essar Steel. While the matter stood, Standard Chartered approached the Supreme Court. On April 13, 2019, the Supreme Court stopped ArcelorMittal from making any payment to lenders to buy Essar Steel, and also ordered status quo on the resolution plan. It directed the bankruptcy appellate tribunal to expeditiously decide on the appeals. 

The Supreme Court's intervention and status quo order may have set an unhealthy precedent to the bankruptcy process, besides undermining the market confidence in the institutional strength and credibility of the IBC and the Tribunals.

For a start, the main issue, one of apportioning the payments among creditors, was already under the consideration of the NCLAT and the matter was posted for next hearing on April 23rd. The Supreme Court could have allowed the Tribunal proceedings to be exhausted before inserting itself. Second, even if it had to intervene, it could have legally separated the matter of Essar Steel's takeover by ArcelorMittal from that of apportionment of the payments. The former could have gone ahead without the latter, which could have been decided in due course.

Finally, the Supreme Court's directive to the NCLAT to decide on the apportionment of the dues among the different types of creditors may actually be a lever (mis)used in future by Tribunals or Courts themselves in expanding their jurisdiction to cover what are essentially commercial decisions taken by creditors based on certain defined principles and guidelines.

This was a good opportunity to exercise judicial restraint and increase the credibility of the nascent bankruptcy regime. Unfortunately, instead business as usual has taken precedence. 

Saturday, April 20, 2019

Weekend reading links

1. Height (or panoramic view) premium associated with residential units overlooking Central Park in New York City,
A 95th floor condominium at 432 Park Avenue sold in December for $30.7 million, or about $7,592 a square foot. That same month, a unit about halfway down the building sold for $4,216 a square foot.
When such premiums exist, developers find a way, as with 432 Park Avenue,
The building and nearby towers are able to push high into the sky because of a loophole in the city’s labyrinthine zoning laws. Floors reserved for structural and mechanical equipment, no matter how much, do not count against a building’s maximum size under the laws, so developers explicitly use them to make buildings far higher than would otherwise be permitted. 
2. Some achievements of technology enabled transformations in service delivery in India,
Getting or renewing a passport used to be a total nightmare a decade back. Enter private sector plus technology and the average time it takes for the passport application process is 30 minutes to under 4 hours. The passport reaches home by courier in a couple of days. At every stage, you get an SMS informing you what will happen next. In a country this large, there will be anecdotes of mis-service, but the average experience is now ahead of global standards. Take another area full of rent-seeking, long waits, harassment and bribes—getting a driving licence. At least in Delhi, the process is mostly painless—online form filling, and 30 minutes to three hours of time in the local office. The licence reaches home in just a few days. Property registration used to be a nightmare. That again is a breeze. Again a mix of technology and processes has reduced transaction time and pain hugely.
And this in banking,
Mr Puri says HDFC can now process a personal loan and put money in an account in 11 seconds.
3. The much-awaited IPO season has kicked-off with a whimper, as Lyft has tanked nearly a quarter from its listing price. An even bigger story, one much more disturbing but perfectly in line with what to expect from Wall Street, is Lyft's accusation that the lead underwriter of its IPO, Morgan Stanley, supported short-selling of Lyft shares. Lyft has formally written to Morgan Stanley questioning it about sale of certain short-selling products to Lyft's pre-IPO investors which would allow them to hedge against price falls by short-selling Lyft shares in violation of lock-up agreements. 

If true, this may well turn out to be Morgan Stanley's Abacus moment!

4. A very detailed explanation of Modern Monetary Theory.

5. Pitfalls of relying excessively on experts in legal matters. Upshot writes,
Another prominent factor in wrongful convictions across the country was misleading forensic evidence. A close look at these cases reveals how experts in fields like hair analysis, bite marks and DNA analysis have used exaggerated statistical claims to bolster unscientific assertions... “A lot of the problem with forensic testimony is that the diagnosticity is overstated,” said Barbara O’Brien, a professor at the Michigan State University College of Law and author of the report. A hair sample at the crime scene that resembles a suspect’s hair “gets dressed up with this scientific certainty that isn’t justified,” she said.
6. Times points to a new study which highlights the striking concentration of land ownership in England,
Less than 1 percent of the population — including aristocrats, royals and wealthy investors — owns about half of the land, according to “Who Owns England,” a book that is to be published in May. And many of them inherited the property as members of families that have held it for generations — even centuries. In the book, the author, Guy Shrubsole, an environmental activist and writer, identifies many of the owners and compiles data gathered by peppering public bodies with freedom of information requests and combing through the 25 million title records in the government’s Land Registry. He reached a striking conclusion — that in England, home to about 56 million people, half the country belongs to just 25,000 landowners, some of them corporations... Real estate prices in England are among the highest in Europe and have soared over the last generation. Mr. Shrubsole’s book documents ownership, maps unregistered land and argues that the concentration of ownership helps keep available land scarce and expensive. Houses, stores, office buildings, schools and farms are often held under long-term leases, paying a steady stream of rents — directly or through intermediate leaseholders — to major landowners.
7. The scary world of facial recognition developers, who may well be unbeknownst to you scraping your images and building up databases to fine-tune facial recognition technology,
The biggest technical obstacle to achieving accurate facial recognition thus far has been the inability of machines to identify human faces when they are only partially visible, shrouded in shadow or covered by clothing, as opposed to the high-resolution, front-facing portrait photos the computers were trained on. To teach a machine how to better read and recognise a human face in these conditions, it has to be trained using hundreds of thousands of faces of all shapes, sizes, colours, ages and genders. The more natural, varied and unposed the faces are, the better they simulate real-life scenarios in which surveillance might take place, and the more accurate the resulting models for facial recognition. In order to feed this hungry system, a plethora of face repositories — such as IJB-C — have sprung up, containing images manually culled and bound together from sources as varied as university campuses, town squares, markets, caf├ęs, mugshots and social-media sites such as Flickr, Instagram and YouTube... The images... are used to train and benchmark algorithms that serve a variety of biometric-related purposes — recognising faces at passport control, crowd surveillance, automated driving, robotics, even emotion analysis for advertising.
8. Finally, Ananth points to this interview of the outgoing French Ambassador in Washington, Gerard Araud. It has several refreshingly candid and insightful thoughts. Sample this on the Arab-Israel policy, 
The problem is that the disproportion of power is such between the two sides that the strongest may conclude that they have no interest to make concessions. And also the fact that the status quo is extremely comfortable for Israel. Because they [can] have the cake and eat it. They have the West Bank, but at the same time they don’t have to make the painful decision about the Palestinians, really making them really, totally stateless or making them citizens of Israel. They won’t make them citizens of Israel. So they will have to make it official, which is we know the situation, which is an apartheid. There will be officially an apartheid state. They are in fact already.
This on the China relationship and trade,
Let’s look at the dogma of the previous period. For instance, free trade. It’s over. Trump is doing it in his own way. Brutal, a bit primitive, but in a sense he’s right. What he’s doing with China should have been done, maybe in a different way, but should have been done before. Trump has felt Americans’ fatigue, but [Barack] Obama also did. The role of the United States as a policeman of the world, it’s over. Obama started, Trump really pursued it. You saw it in Ukraine. You are seeing it every day in Syria. People here faint when you discuss NATO, but when he said, “Why should we defend Montenegro?,” it’s a genuine question. I know that people at Brookings or the Atlantic Council will faint again, but really yes, why, why should you? These are the questions which are being put on the table in a brutal and a bit primitive way by Trump, but they are real questions.
This on the election of Trump and the attendant reactions is so spot on,
It was so shocking to have Trump elected that basically [Democrats’] conclusion was either the Russians are responsible or she was a very bad candidate. The case of Trump for me, it’s not so much Donald Trump, it’s not so much a person, but it’s a political phenomenon.
And the parallels with France,
The “yellow vest” demonstrations against Macron are basically the demonstrators who, more or less, voted for Trump here. It’s people coming from small cities, from rural areas, lower-middle-class, saying, “We have been left behind.” And, on the right, our conservative party is moving in the same direction as the Republicans are here. Suddenly this party which was traditionally conservative is becoming really protectionist, obsessed by immigration, and obsessed by questions of identity. You know: “France is a Judeo-Christian country,” which means basically anti-Muslim. There is a uniformity in the crisis, and you see it also in Brexit. It’s not by chance that your president has been elected by Pennsylvania, Wisconsin, and Michigan, while our Rust Belt, in the north of France, has elected five or six members of Parliament on the far-right.
This should count as the leader to be the interview of the year!!! 

The unicorns bubble

The Economist has a very good article that evaluates the numbers behind the current set of unicorns. It examined the numbers for a dozen of the leading unicorns and found,
The IPO valuations the companies in our panel have received or are apparently looking for add up to $350bn. Based on a discounted cashflow model, in aggregate the dozen firms will need to increase their sales by a compound annual rate of 49% for ten years to justify that valuation. That is the same as the average growth of Amazon, Alphabet and Facebook in the decades after their IPOs. In other words, these firms have to be as likely to outperform the very best of the previous crop as to underperform them. But that is not enough. Justifying the valuation means not just staggering increases in sales, but also a very large improvement in margins. In aggregate these would have to increase by 34 percentage points. That would be truly unprecedented. The average for Amazon, Facebook and Google was only 19 percentage points.
While these unicorns have a valuation of more than a third of a trillion dollars, they have just $6 bn of fixed assets and not too many staff. Further, eleven out of twelve have no profits. In fact operating margins were minus 30%. 
And this on some of the features of the current unicorn bubble,
Today, according to Jay Ritter of the University of Florida, 84% of companies pursuing IPOs have no profits. That is remarkably high. Ten years ago, the proportion was just 33%. To see profitlessness as rampant as today’s you have to go back to the peak of the dotcom boom in 2000. Back then the promise (one soon and spectacularly broken) was that profits would follow once the companies grew. This time round, though, the profit-free companies have already grown. Indeed our panel has burned through $47bn doing so; its companies got through $14bn in 2018 alone. This is profligate even by the standards of Amazon, which before and after its ipowas seen as a particularly profit-averse company; it had cumulative losses of $3bn between 1995 and 2002. Uber lost almost $4bn just last year, excluding exceptional items...
The three ingredients which facilitated the explosion of unicorns,
Smartphones let the companies distribute what they offer at home and abroad, social media let them market it and cloud computing lets them ramp up as demand grows.

Thursday, April 18, 2019

The real Uber IPO prospectus?

The comment below on this FT article on Uber's IPO filing should perhaps be the real IPO prospectus! 
(HT: @meandmarkets)

American foreign policy snapshot

A reflection of US foreign policy priorities, more specifically lack of relevance, is this map of countries never visited by a serving US President.
(HT: @amazingmap)

Tuesday, April 16, 2019

Law of unintended consequences squared - Bangladesh drinking water edition!

Sample this, from Vox, on the law of unintended consequences striking twice sequentially on two well-intentioned development interventions in Bangladesh,
In the 1970s, Western development agencies helped poor people in Bangladesh build 8.6 million tube wells — wells made by boring a steel tube into the ground — for clean drinking water. It was a large-scale development effort, and it eventually became one of the most famous stories of aid gone wrong: It turned out the wells were contaminated with arsenic.

Starting in 1999, shortly after the arsenic was discovered, researchers and Bangladesh’s government launched a massive public health campaign warning people not to use the wells after all. In development circles, the episode became a major example of how unhelpful development organizations can make things worse for the people they’re trying to help. But a new paper from the National Bureau of Economic Research says things are actually more complicated than that narrative.
Yes, there was arsenic in Bangladesh’s wells, and it may have posed a health threat. But in areas where people were encouraged to switch away from the wells, child mortality jumped by a horrifying 45 percent — and adult mortality increased too. It turns out that the alternatives to the wells, for most people in Bangladesh, were all worse — surface water contaminated with waterborne diseases, or extended storage of water in the home, which is also a major disease risk.
Is that worse than well water laced with low levels of arsenic? The paper reviews the complex, often contradictory literature around the effects of chronic low-level arsenic exposure and finds that it does increase your risk of cancer in old age. The authors conclude that risks seem to accumulate with more exposure, but the effects are still small next to the effects of unclean drinking water. That means that, in encouraging people to switch away from the wells, development agencies swapped out a fairly limited risk for a much larger risk — and people died as a result... The researchers found that one factor determined how sharply child mortality would jump when people abandoned their wells: the distance to the nearest “deep tubewell,” which provided a source of safe, clean water. Even slight increases in distance had drastic effects on child mortality.
Reinforcement of two well-known lessons.

One, there are almost always unintended effects with development interventions. The only practical response is to be vigilant in the early stages of implementation and look out for emergent problems. This makes a gradual roll-out of any new and large intervention an essential requirement.

Two, again almost always, development is about trade-offs between two competing choices, neither of which are likely to be ideal. The choice has to be based on both technical costs-benefits and social and political economy considerations.   

Monday, April 15, 2019

PPPs for social protection?

Killing off bad ideas is important. Uncharacteristically Ejaz Ghani gets this on the relevance of PPPs in social protection for India wrong big time.

The article's premise is just so plain wrong (empirically),
Targeted credit, livelihood interventions, crop insurance, new healthcare facilities, education, and low-income targeted public housing are examples where social protection can be scaled up through increased PPP.
This blog has several posts exploring each of these and showing why they would require public provisioning. This is perhaps one of the best illustrations of how narratives and reality diverge big time, 
The PPP model transfers operational risks from the state body to the private partner and forces the private sector to take a long-term social view of the project... There is a huge potential for maximising finance for social protection through increased public and private partnerships (PPPs), as it broadens the pool of potential financing to maximise social protection.
Really! Whether we like it or not, you cannot escape the reality of hard fiscal requirements and hoping that private sector can bear the burden is not supported by any evidence. In fact, the latter is equivalent to transferring certain basic welfare services, education and healthcare, and social safety nets to the citizens themselves. 

How many developed countries of today have any of these done through PPPs, much less successfully at that, during their early stage of development or even today? 

In fact, on social safety nets, I think the present government has done a decent job. The JDY and the three pension/insurance programs, Pradhan Mantri Shram Yogi Maandhan pension scheme for unorganized sector workers, Ayushman Bharat scheme, PMFBY etc are all very good steps in the direction of laying the foundations of a robust social safety net. Going forward the administration of these programs should be more integrated (using Aadhaar etc) and perhaps try to capture the set of benefits each household is drawing on education scholarships, health insurance, pensions, life insurance, NREGS, other DBT cash transfers etc. That would be the starting point for rationalising  these individual programs and making the social safety net more targeted and effective.

Friday, April 12, 2019

The Rise of Finance - publication

More promotionals of my co-authored book with V Ananthanageswaran, The Rise of Finance : Causes, Consequences, and Cures.
This is the publisher, Cambridge University Press's page. This is the Amazon page. This is the publisher's twitter link. The book's flyer is here.

How much growth is enough?

How much economic growth is sufficient? Do we need to grow as fast as being suggested? Should 3-4% economic growth in developed economies be the norm which should guide policy making? 

Ruchir Sharma makes the point which has been made in this blog a few times earlier,
Even during the Industrial Revolution, in the 19th century, the world economy rarely grew faster than 2.5 percent a year, until the post-World War II baby boom began to rapidly expand the labor force. After 1950, the combination of more workers and more output per worker lifted the pace of global growth to 4 percent. Economists came to think 4 percent was “normal.” Yet by last decade, the baby boom had faded out from Europe to Japan and China. Even in the United States, younger and faster-growing than most developed countries, growth in the working-age population slowed to a mere 0.2 percent last year from 1.2 percent in the early 2000s. Because fewer workers correlates directly with slower growth, that decrease implied a 1-point drop in economic growth.
Roughly, economists should have expected that United States economic growth would slow to 2 percent from 3 percent — and it has. This is the new normal for the American economy. Stimulus measures like the Trump tax cuts can lift growth above this path, but at best temporarily, at the risk of higher deficits and debt.

For political leaders, the new age of slow growth is not a problem to solve; it’s a reality they need to accept and explain to the public. Because it’s just not that bad.

When populations are growing slowly, the economy doesn’t need to grow as fast to keep incomes high. Thus in the United States this decade, growth in gross domestic product per capita has slowed much more gradually than the overall economy, by half a point, to an average of 1.4 percent... In a rich country, that is fast enough to satisfy most people: Indeed, surveys show that Americans have rarely been more confident about the economy...
Growth in the economy is driven by growth in the number of workers and in output per worker, or productivity. But since the postwar surges of 1950s and 60s, productivity growth has slowed, also defying government efforts to lift it. For a time, the global economy kept motoring along anyway, fueled by a surge in debt. In the 1980s, central banks began winning the war on inflation, which allowed them to drop interest rates sharply. Lower borrowing costs unleashed a worldwide binge that saw debt surging from 100 percent of global gross domestic product in the late 1980s to 300 percent by 2008. Then the global financial crisis hit, ruining many private borrowers and lenders, many of whom are still wary of taking on new debt. After growing faster than the economy for three decades, debt growth in many countries, including the United States, has fallen back in line with economic growth... So the postwar miracle is over... Yet because economists continue to base forecasts on miracle rates of growth — 4 percent for the world, 3 percent for the United States — policymakers keep fighting to hit these targets. 
The problem lies with the interests that have captured policy making within both the Government and the Fed in the US. Slower growth and rising rates are simply unacceptable because of their adverse impact on the confidence fairy and stock markets thereon.

Thanks to excessive financialisation, we are in the world where Wall Street's welfare is driving fiscal and monetary policies.

Postscript 1 (12.04.2019)

Bloomberg has this very good essay on how Japan, despite three decades of low growth (rates which would be considered catastrophic in the US) has managed to remain a place of remarkable economic, social, and political stability.

Besides it has managed some of the most difficult challenges - ageing and related demographic shifts, low inflation bordering on deflation, large debts, and weak demand - with remarkable success. So much so, the country is perhaps the fastest growing developed economy in per capita terms. And it has managed to realise paradigm shifts like increasing the share of working women, immigration, robots etc with little of the disruption that such changes carry with them in case of other developed economies.

Thursday, April 11, 2019

More thoughts on privatisation of public goods

FT appears to have thrown in the towel on privatisation or outsourcing of prison services,
In prisons, the government needs to shake off a single-minded focus on cost savings and unyielding faith in private sector efficiency... Proponents of prison privatisation argue that competition keeps costs down, introduces innovation and brings market discipline through strict performance targets. Since there is only a handful of providers, however, competition is limited. Innovation is also difficult given the tight rules the government sets for prisons. Cost savings have not always been delivered, or have come at a price... The government should also accept that there are limits to the innovation and efficiency gains alternative providers can bring to prisons. Some of the same issues affecting the sector will persist whether facilities are run by the public or private sector. The UK’s prisons are overcrowded and underfunded. Running them will severely test any operator.
A more concise summary of the failings of privatisation of prisons could not have been possible. 

But even as these things play itself out across the world, the folks at Marginal Revolution are not convinced, drawing attention to "private" roads in some parts of Scandinavia. This is fascinating and a great example of the value of community management.
Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs. While most Swedish private roads do not experience a high level of traffic, the delegation of roads to the private sector helps the government offset costs. Government works in conjunction with road owners and associations to subsidize the costs of repair and maintenance. Around 24,000 PRAs receive government subsidies. The costs of upkeep are divided among members of the association. PRAs that do not accept government subsidies can prohibit traffic at their discretion. Those that receive subsidies must allow all vehicles to travel on their roads. Regardless of whether they receive funding, however, the associations may not ban horses, bicycles, and pedestrians from using the roads. Private ownership by PRAs has proven to be a cost-effective measure for operating roads according to the the Swedish government. In 2001, a government-commissioned evaluation found PRAs could run their roads at about half the cost as for the national.

Finland employs a similar system. Many private roads are managed by local cooperatives. Finland has 78,000 kilometers (about 48,500 miles) of public roads and 280,000 kilometers (about 174,000 miles) of private roads. Of the 5 million people who live in Finland, around 700,000 of them reside near a private road. Like Swedish PRAs, Finnish cooperatives are made up of homeowners who live proximate to private roads. These homeowners collectively maintain their local roads and are eligible to receive subsidies from the federal government to cover a portion of their expenses. The Finnish government determines the subsidy amount based on the amount of traffic that a road bears and the number of houses it serves. The geographic location and average income of the area also figure into its consideration. The shift in road management to the community ensures that roads are taken care of on a regular basis. This makes for a more efficient and democratic system of road maintenance because community members, unlike government officials from far away, are distinctly aware of the needs of their roads.
In a classic case of transplanting best-practices, they suggest implementing the Scandinavian model in the US. Several issues here. For a start, there is a world of difference between "community" roads and (so-called) "private" roads. The incentives and other factors that drive "community management" are far superior (in realising desired outcomes) to the incentive incompatibilities that are rife with the conventional PPPs. Second, management of community assets by co-operative associations has a long history and is widely followed in several parts of the world. Most of them are sui generis, having emerged over a long period due to their unique circumstances. Third, therefore the replication of these models which draw on social capital and community co-operation have rarely been successful. In fact, highly individualised rural communities in the US are as far as it can get culturally and politically from the cohesive and collectivist communities of rural Scandinavia.

Monday, April 8, 2019

The challenge with policy implementation - the case of urban development

Formulating policy is hard, but perhaps easier when compared to implementing initiatives flowing from the policy. The problem is that so much can be lost in translation between the intent of the policy and the version that is actually implemented. This also highlights the folly of resting on the laurels of a good policy. As the example discussed below shows, good policy can be implemented in a manner that makes no dent on the problem.

The Government of India has promulgated policies on metro railways, transit-oriented development (TOD), and land value capture (LVC). A handful of state governments have in turn formulated their own policies and issued certain regulations thereon, especially on TOD and LVC. Karnataka is apparently a pioneer in the implementation of integrated metro rail, TOD, and LVC policies. But a new study of the regulations issued by the State government draws attention to several implementation failings. 

In particular, I can think of four broad categories of deficiencies that prevent effective implementation of policies.

1. Policy design failing - The details are very important in any policy. For example, consider the sale price of FAR or the magnitude of the cess/development charge. Typically the development authorities are inclined to err on the side of revenues maximisation and discount the primary objective of increasing the stock of supply or built-up space in the notified areas. In fact, in case of Bangalore and Mumbai too, there are reasons to believe that the introduction of the concept of base FAR and premium purchasable FAR may have actually lowered the free FAR available since the earlier available free FAR was much higher. It does not help that generalist bureaucrats who take decisions on such matters have shorter time horizons and their resource maximisation preferences dominate over long-term planning considerations. This in turn defeats the very purpose of the intervention. Furthermore, it ends up causing unintended effects like gentrification with its long-term distortions. There may be a Laffer curve type relationship between revenue extraction and FAR rates. 

Or consider the small amount of purchasable FAR (4 and 150 m around stations) or the restrictions/difficulties around availing the additional FAR (minimum plot-size, road width etc). There were just 260 properties around Indira Nagar station, the busiest metro station in Bangalore, which could avail the additional FAR, with half of them being less than 250 sqm. Given restrictions on road width, the actual number of eligible plots may be even lower. Further the FAR of 4 within 150 m of the station will cover only about 1% of the Bangalore city area. Further the CBD and central areas of city remain off-limits for higher FAR and TOD. In simple terms, even the proposed FAR and TOD implementation, leave aside those already implemented, covers a negligible area of the city as to have only a very marginal effect. 

2. Implementation failing - Many policies while in place take inordinate time for operationalisation by way of appropriate rules for its implementation. For example, in Karnataka, the actual operationalisation of the TOD, Metrorail, and LVC policies (compared to the full potential) have been limited. Enabling regulations on set backs, height, parking, open space, road width etc are not promulgated even where additional FAR is allowed, thereby leaving implementation still-born. Often even exact delineation and notification of the ToD areas are not done. It is as though everyone relaxes after a policy is announced, not realising that a policy without enabling regulations is meaningless. 

3. Administrative failing - LVC/TOD policies are often viewed in terms of promulgate-and-forget. But in reality, effective implementation of LVC/TOD requires dynamic engagement to address emergent bottlenecks and revise/refine enabling regulations. And there are likely to be several and unanticipated emergent challenges. For example, the issue of Premium FAR depressing the demand for TDRs is an issue which may require some tweaks to the existing regulations. Or emergent gentrification concerns, always likely, have to be met with appropriate responses. 

4. Co-ordination failures - Finally, with most complex issues, co-ordination among different entities, mainly (in this case) the metro rail corporations, municipality and the Urban Development Authority (UDA) is critical. For example, infrastructure investments should start as soon as TOD/FAR/LVC regulations are put in place. Typically it takes several years before infrastructure investments start - eg. betterment levies being collected for several years after the regulations are in place and LVC is collected. In general, the municipality (and the UDA too) often has the least proximate stake (at least for its officials and councillors) in the metro rail and its sustainability - they don't feel the need to show urgency with utilising their share of funds devolving from the LVC policy. In practice, the money gets diverted to other more pressing concerns.

In many ways these are all to be expected given the priorities of municipal commissioners/mayors, weak state capacity at municipal level, narrow and old-fashioned views of planners, revenues maximisation bias of LVC policy etc. In simple terms, the failing is not with the concept of LVC and TOD, but the manner of its implementation. And I am inclined to think that it will be the same with other states and cities too.

Sunday, April 7, 2019

Weekend reading links

1. Bloomberg has this on the ratio of out-bound to in-bound foreign capital in developing countries,
On China and Thailand, this is important,
When political institutions fail to act as pressure valves, capital wants to escape before it gets trapped.
2. Bloomberg has a very good article on how Narayana Hrudalaya is trying to drive down surgery costs, and Modicare may be a contributing factor. Sample this on cost-cutting without compromising anything on safety,
Shetty’s philosophy of thrift is everywhere. The surgical gowns are procured from a local company for about a third of the cost of international suppliers. The tubes that carry blood to heart-and-lung machines are sterilized and reused after each surgery; in the West, they’re thrown away. The machines themselves, along with devices such as CT and MRI scanners, are used well past their warranties, kept running by a team of in-house mechanics. The operating rooms, pieces of real estate so expensive that many hospitals bill for their use by the minute, are also part of the assembly line. Whereas preparing a U.S. surgical theater for the next patient can take 30 minutes or more, Narayana has gotten the process down to less than 15, in part by keeping turnaround teams with fresh instruments, drapes, and other supplies on immediate standby, ready to roll the moment a room is available. Even patients’ families are part of the upskilling model. Narayana trains them to bathe patients and change bandages in the hospital, as they’ll do when they get home. This allows paid staff to focus on more challenging work. Through all these methods and more, Narayana has been able to get the retail cost of a heart bypass, its most common operation, down to $2,000, about 98 percent less than the U.S. average.
3. A third Bloomberg article points to the declining current account surplus of China, and the prospect of the country competing with other emerging economies for cross-border capital inflows.

Sample this,
Contrary to President Donald Trump’s perception, China is no longer a frugal nation that sells a lot abroad and buys little in return. The country’s middle class is now traveling and swiping plastic overseas. Last year, more than 160 million Chinese visited foreign countries, spending $237 billion on everything from rice cookers in Japan to Gucci loafers in Italy. As a result, China’s current account surplus has collapsed. Edging dangerously close to twin deficits – both fiscal and current account – Beijing is now keen to attract foreign portfolio inflows to balance its external accounts. That’s why, all of a sudden, China is opening its financial-services industry, allowing global investment banks to take majority control of their local brokerage joint ventures.
4. Nice article in Indian Express on how Indore managed to become India's cleanest city for three years in a row. The investments in personnel, bins, equipments, vehicles, infrastructure etc to cover the entire city is impressive in itself. A testament to the government's commitment to the issue, and attendant willingness to commit resources, and the Corporation's ability to execute these initiatives in finite time. But the bigger achievement is with the behaviour change, essential for sustainability. Or is the story over-stating what has been achieved?

5. The Economist points to the breakdown of traditional safeguards involving regulation, litigation, and competition, which may have been responsible for rise in corporate scandals in the US,
Take regulation first. The system is a strange blend: there are pockets of laissez-faire attitudes here, thickets of rules there and lobbying everywhere. It is variously prone to laxity, capture and incompetence... Second, litigation may no longer be quite the deterrent it once was. Criminal cases leading to jail terms for top executives are as rare as socialists at Goldman Sachs. And civil law has lost its bite. America has long used class-action suits to punish firms and compensate consumers. Tort costs born by firms are equivalent to about 2% of gdp a year, higher than in other countries. Nonetheless, life has got easier for firms. Arbitration clauses, in which customers and staff forfeit the right to pursue class actions, have become more common. Firms are more likely to extend cases to appeal, which can take up to a decade... The final constraint is competition. It can drive firms to cut corners but in the long run should act to discipline careless or badly behaved firms, because customers shun them... But across the economy incumbent firms have got more powerful over the past 20 years, making it harder for customers to switch.
6. Revisiting this illustration of inequality,
Mr Piketty, Emmanuel Saez and Gabriel Zucman found that between 1980 and 2014 the bottom 50% of post-tax incomes in America increased by just 21%, compared with 113% for the top 10%. But the top 1% rose even more—by 194%—while the top 0.001% rose by 617%.
7. Bloomberg article on Chinese engagement in Djibouti. This tiny, but strategically important, country looks a Chinese colony in all but name.

8. Finally, this story about Blue Apron, the ingredient-and-recipe meal kit service, is another cautionary note on the modern start-up ambition and valuations, important as the flow of start-up IPOs planned for 2019 have begun with Lyft. The company's shares are trading 90% below its June 2017 IPO price. In fact the share price halved within just two months of the IPO. Sample this,
The company’s founders and their Wall Street bankers convinced stock investors, a group well represented in coastal cities, that the business was worth $3.2 billion in part based on the idea that they were going to expand operations all across the country. The goal, according to the IPO prospectus, was to eventually be able to sell meals to 99 percent of Americans. “Blue Apron’s mission is to make incredible home cooking accessible to everyone,” it said in the prospectus. But with a two-person meal that requires about 30 minutes of preparation in the kitchen costing about $23 with shipping, it’s not clear how realistic that ever was. As it turns out, the company is even struggling to maintain its current roster of clients on the two coasts... Blue Apron hasn’t posted a single profitable quarter. Neither has Lyft or Uber, which could be valued at as much as $120 billion.

Tuesday, April 2, 2019

Solving "other people's problems"?

A friend recently pointed to this article where Courtney Martin brilliantly captures the motivations and dynamics of international development,
If you asked a 22-year-old American about gun control in this country, she would probably tell you that it’s a lot more complicated than taking some workshops on social entrepreneurship and starting a non-profit. She might tell her counterpart from Kampala about the intractable nature of our legislative branch, the long history of gun culture in this country and its passionate defenders, the complexity of mental illness and its treatment. She would perhaps mention the added complication of agitating for change as an outsider. But if you ask that same 22-year-old American about some of the most pressing problems in a place like Uganda — rural hunger or girl’s secondary education or homophobia — she might see them as solvable. Maybe even easily solvable. I’ve begun to think about this trend as the reductive seduction of other people’s problems... 
If you’re young, privileged, and interested in creating a life of meaning, of course you’d be attracted to solving problems that seem urgent and readily solvable. Of course you’d want to apply for prestigious fellowships that mark you as an ambitious altruist among your peers. Of course you’d want to fly on planes to exotic locations with, importantly, exotic problems. There is a whole “industry” set up to nurture these desires and delusions — most notably, the 1.5 million nonprofit organizations registered in the U.S., many of them focused on helping people abroad. In other words, the young American ego doesn’t appear in a vacuum. Its hubris is encouraged through job and internship opportunities, conferences galore, and cultural propaganda — encompassed so fully in the patronizing, dangerously simple phrase “save the world.”
This is spot on. It goes to the heart of one of the biggest problems with international development, both on the academic and on the foreign entrepreneurship sides - the complete marginalisation of priors and complementary elevation of logic and technical expertise, and the belief that serious exploration for solutions starts with their own work overlooking all local efforts in that direction.