Mid-week reading links

1. David Pilling writes about Aliko Dangote's $12 bn new refinery being built just outside Lagos,

When it is up and running — if it gets up and running — it will process 650,000 barrels of oil a day, a third of every drop Nigeria produces and approaching 1 per cent of planetary production. That will make it the biggest oil refinery of its type in the world. As a sort of side concern, it will pump out all the plastic Nigeria’s 190m people need (or imagine they need), plus 3m tonnes of fertiliser a year, more than all its farmers currently sprinkle on their fields. To make things more interesting, Dangote is building the whole thing on a swamp. (It’s a tax-friendly swamp, at least.) That requires sinking 120,000 piles, on average 25 metres in length. No port in Nigeria is big enough to take delivery of the massive equipment, which includes a distillation tower the height of a 30-storey building, and no road is strong enough to bear its weight. Dangote has had to build both, including a jetty for which he has dredged the seabed for 65m cubic metres of sand. There is not enough industrial gas in the whole country to weld everything together, so Dangote will build his own industrial gas plant. There aren’t enough trucks, so he’s producing those in a joint venture with a Chinese company. The plant will need 480 megawatts of power, about one-tenth of the total that electricity-starved Nigeria can muster. You guessed it. Dangote is building his own power plant too.

2.  FT's Person of the Year, George Soros makes this very pertinent point about the European project,

“The EU was built by visionaries who knew the weaknesses of what they were doing but had reason to believe that when the moment comes the political will can be summoned to take the next step forward.”

3. While nominally EM currencies have lost value, in a reaffirmation of the Balassa-Samuelson effect, adjusted for interest rate and inflation differentials, borrowing in developed country currencies (equal amounts of dollar, euro, sterling, and yen) and going long on an equal-weighted basket of twenty most liquid developing country currencies may be a good long-term bet,

Using this measure, EM currencies have actually strengthened, by 28 per cent since 1997, while the real interest rate differential has added 47 per cent.

4. A NYT investigation sheds light on McKinsey's consulting work which has burnished the image of governments in China, Saudi Arabia, Malaysia, Russia, Ukraine, and South Africa,

At a time when democracies and their basic values are increasingly under attack, the iconic American company has helped raise the stature of authoritarian and corrupt governments across the globe, sometimes in ways that counter American interests... In China, it has advised at least 22 of the 100 biggest state-owned companies — the ones carrying out some of the government’s most strategic and divisive initiatives, according to a review of Chinese-language material by The Times... McKinsey helped polish the battered image of Mr. Yanukovych and pitch him as something else: a forward-thinking leader with an economic vision of a better future for all Ukrainians.

Its roles in the $13 bn East Coast Rail Link project in Malaysia which had China Communications Construction Company, which had been black-listed by the World Bank, as the contractor was rife with conflicts of interest,

In 2015, as China Communications was building the artificial islands and still under World Bank sanctions, McKinsey signed it on as a client, advising it on strategy. Months later, McKinsey won another contract: this one with the Malaysian government, to review the feasibility of the rail line. In a confidential PowerPoint report, McKinsey told Malaysian officials that the rail line could increase economic growth in parts of the country by as much as 1.5 percent. It was a figure that the prime minister at the time, Najib Razak, who now has been charged with corruption, liked to cite. In bullet points, McKinsey also said the project would help improve ties with China — “build the nation-to-nation relationship” — because of its importance in China’s Belt and Road Initiative. And McKinsey endorsed the idea of heavy borrowing from China, referring to it as a “game changer” elsewhere in the region.

And its role in unabashedly promoting the Belt and Road Initiative,

Dominic Barton, McKinsey’s managing partner at the time, made Belt and Road the theme of a keynote address in Beijing in 2015. McKinsey’s in-house research group, the McKinsey Global Institute, sprang into action, producing reports — widely cited in the Chinese state news media — extolling the benefits of the Belt and Road Initiative... “The world is waiting for the ‘One Belt, One Road’ grand blueprint to move from dream to reality,” Mr. Barton and his colleagues wrote in a report published on the company’s Chinese website in May 2015, expressing McKinsey’s enthusiasm to work on it... Nine of the top 20 Belt-and-Road contractors are or have been McKinsey clients, according to research by The Times and figures from RWR Advisory Group, which tracks such projects.

5. Manish Sabharwal and Sandeep Agrawal have this excellent compilation of India's "regulatory cholesterol"

The recommendations for easing business environment, especially for SMEs is very welcome,

India’s next wave of EODB should have three vectors—rationalization (cutting down the number of laws), simplification (cutting down the number of compliances and filings) and digitization (architecting for true paperless, presence-less and cashless). Rationalization could start with clustering our 44 labour laws into a single labour code and should include reviewing levels (do we really need the peak goods and services tax or GST rate and payroll confiscation of 45% for low-salary levels) and increasing competition (the lowest-hanging fruit is competition for mandatory employer payroll deduction monopolies like provident fund and Employee’s State Insurance that offer expensive products and treat customers badly). Simplification would include replacing our 25-plus different numbers issued by various government arms to every employer with a unique enterprise number (an Aadhaar for enterprises). Finally, we must move away from the current approach to digitization as a website, where you log in with a password and upload files (the equivalent of an ATM machine with a teller physically sitting behind the façade and handing out cash) and shift to open architecture-based API frameworks, where multiple players compete in providing services to employers (GST Network is a good template).

6. Srinivas Thuruvadanthai makes the perceptive observation that the crisis of 1991 was caused less by burgeoning fiscal deficit than by "a confluence of negative developments, which led to a decline in investor confidence and capital flight".

7. Ananth points to more tax-terrorism, this time on domestic firms,

Proposal to treat banks’ free services as taxable service income by imputing a value to them and to levy tax on them. A ruling by ‘Authority for Advance Ruling’ that back-office operations of IT companies will be deemed domestic service and not exports and subject to GST of 18%. This boggles the mind. Some of the proposals are so stunning that one wonders if they are aimed at neutralising the government’s economic agenda.

He also has a set of very practical recommendations.

8. Finally, this mid-term evaluation of UDAY, the power distribution sector debt rescheduling plan in return for commitment to lower distribution losses, is along expected lines,

Using UDAY portal data, we find that the average AT&C (Aggregate Technical and Commercial) losses that should have been 15% for all the participating states by 2018-19, presently, on average, stand at 25.41%. Yet another financial indicator, ACS-ARR gap (the gap between Average Cost and Average Revenue) has also widened for many UDAY participating states. The power tariff revisions have also not been implemented in the States - due to political economy reasons - and the operational parameters in our analysis indicate widening inefficiencies across States in power infrastructure.

Financial engineering is no substitute to resolve problems that demand deep and long-drawn engagement.