Saturday, July 20, 2019

Weekend reading links

1. This is a long list of recommendations to reform the start-up eco-system in India. Two observations. One, the author seems to obsessed by reduction in taxes and provision of incentives. Almost all the proposals belong to either of these two categories. Two, the entire onus on creating start-ups is with the governments.

Reading articles like this, one almost gets the impression that start-ups are a new entrant into business landscape, start-ups are always about innovation, and economic growth is critically dependent on such innovative start-ups. This has almost become an entrenched narrative.

But in reality, all the three impressions are flawed. Business entry and exit are commonplace, and millions of new enterprises enter the market each year in India. The vast majority of them are not about any innovation, but plain simple trading, manufacturing, and services businesses, mostly self-employed or with a couple of employees. While these start-ups are critical for the long-term productivity trends in the economy, short- and medium-term economic growth is mostly about the plain vanilla economic activities.

2. Blackstone awaits an economic downturn in the winner takes all market,
The firm announced on Thursday that assets under management had reached a staggering $545bn, after taking in $150bn in the last 12 months. Firms like Blackstone do best when they can chase opportunities in an economic dislocation. In this respect, Blackstone may be eagerly awaiting a downturn... Blackstone’s fundraising haul once again reinforces the winner-take-all paradigm in alternative investments. It has raised money of late in private equity, credit, and real estate. The big pools of capital like sovereign wealth funds are putting more money in alternatives but working with fewer managers. One-stop-shops like Blackstone disproportionately benefit. In the past year, Blackstone took home $1.6bn in earnings from management fees before any incentive “carry” is accounted for. This year, Blackstone’s shares are up more than 50 per cent.
3. FT on why British civil service feels shaken by the politics surrounding Brexit. Brexiters feel that the civil service is putting up obstacles to an exit, and feel that it has become politicised. Surprising that a civil service often considered the touchstone for neutrality and has survived many such political cataclysms is becoming so embroiled in the Brexit politics.

4. Apollo Hospitals seeks foreign capital. As I have blogged earlier, this is in line with the trend of foreign capital entering India's tertiary care market with attendant undesirable commercialisation and profiteering in health care practices.

This intrigues me. In the landscape of economic activities, given the stage of India's economic development, tertiary health care has to be among the most promising of investment destinations. And Apollo is perhaps the leading healthcare brand in India. Why isn't Apollo able to attract Indian capital? Or do they want foreign capital for some reason? Or do the Indian investors realise that perhaps Apollo is not after all a good investment? Or does this convey the lack of depth of Indian capital available for investing in even areas like tertiary healthcare and a brand like Apollo? Or does this reflect corporate governance and management capabilities within Apollo itself?

5.  Nice article on the turmoil facing the US Federal Reserve.

6. Fascinating chronicle of the lives of millennial generation working-class people from different parts of the world in Bloomberg by Vauhini Vara - seamstress, street vendor, abalone poacher, marijuana grower care giver, warehouse picker, computer reseller, electronics maker, social media influencer, and call centre manager.
Decent jobs are flowing to big cities, with millions of workers leaving their ancestral towns in anxious pursuit, often slipping past national borders to do so. The internet is exposing people not only to opportunities that were once out of reach, but also to the unsettling knowledge that other people have many more. And the stories confirm that to be working class is, by and large, an insecure state. Superiors view labor as replaceable. Speaking publicly about one’s job can invite reprisal from an employer—or a government.
7. Global distribution of artificial intelligence talent shows India at third place, closely behind China.
8. Finally, ending with startups, Bloomberg compares the startup scenes in India and China. While China has 94 unicorns, India has just 19. The largest Chinese unicorns offers services with bitcoin, drones, and robots, whereas the four largest Indian unicorns are in consumer facing online payments, e-commerce, ride-hailing, and education. 
It’s not surprising, then, that nine of India’s top 10 unicorns by value are in the online-consumer space, according to data compiled by CB Insights. The outlier is ReNew Power, an independent wind and solar-energyproducer. In China, three of the top 10 are online consumer companies, two are bricks-and-mortar businesses, and the rest are a mix of hardware and B2B.

Thursday, July 18, 2019

The birth pangs of India's IBC continues

I had blogged earlier here, here, here, and here about the challenges facing the fledgling Insolvency and Bankruptcy Code (IBC) due to competitive litigation by competing creditors and buyers.

Last week the National Company Law Appellate Tribunal (NCLAT) dismissed a plea challenging Arcelor Mittal's elgibility to buy Essal Steel India Ltd. The latter had argued that the bid was ineligible under Section 29A of the IBC, whereby bidders cannot be connected to other defaulting parties. The NCLAT ruled that this was already settled by the Supreme Court earlier on 4 October, 2018 and therefore cannot be re-litigated.

It also ruled that its operational creditors, consisting of vendors and suppliers, were to be treated in an "equitable manner" with secured financial creditors at the time of settling claims. It ruled that lenders and operational creditors would get 60.7 per cent of their outstanding claims and proportionately share the Rs 42,000 crore that Arcelor Mittal has offered to pay. The resolution plan, approved by the Committee of Creditors (CoC) which does not contain the operational creditors, had proposed a small share to operational creditors and 92.5 per cent to financial creditors.

This ruling equating different creditors effectively makes secured, unsecured, and operational creditors on a par. Secured creditors have understandably expressed their concern and are planning to appeal before the Supreme Court. It also discourages banks from taking companies to IBC and prefer liquidation which would only destroy value. 

This interpretation by NCLAT is in keeping with the practice of imposing judges' subjective preferences and values in judicial pronouncements. Latha Venkatesh summarises the problem nicely. This on the IL&FS case,
In the IL&FS case, the NCLT has indicated that provident funds, even if they are not secured or senior creditors, should be given their dues at par with or even over secured creditors because the beneficiaries of these funds are more vulnerable due to their age. In the Essar Steel case, the NCLAT set aside the distribution that the committee of creditors (the CoC) put forth. The CoC, in keeping with clause 30 (2b) of the Insolvency Code, gave 10 percent to the operational creditors and kept 90 percent for themselves, i.e the secured creditors. The NCLAT cancelled this plan and ordered the CoC to give 40 percent to the operational creditors on the ground that the CoC and the NCLAT are bound by a higher law of fairness. The Clause 30 (2)(b) of the IBC says that operational creditors need to be given liquidation value, and once the CoC gives a plan that satisfies this clause the NCLT, under Section 31 “shall” accept the CoC’s plan.
Let us cut through the legalese, to where the two cases meet. The IBC and commercial law, in general, are predicated on the premise that those creditors, who have given loans in exchange for a collateral or security, should be paid before those who have given unsecured loans. The difference is reflected in the interest rates. World over, secured loans attract lower interest rates while unsecured loans bear a higher interest. This is because low risk in secured credit gets a low return, while unsecured loans are high risk and hence get a higher return. This fundamental principle of commercial law has gotten dislodged in the above two cases.
In the IL&FS case, the tribunal is moved by sentiment towards one group of lenders. But such a judgement can hurt the entire economy and cause untold misery to the entire country. If the fund manager of the provident fund has been reckless and subscribed to debentures that are substandard, while bankers have been smart enough to “secure” their credit, the mere fact that the PFs beneficiaries are more vulnerable cannot be used to override the rights of secured creditors. If this became law (as all precedents do), then the concept of secured credit will be undermined and all banks will give only unsecured credit and charge high rates to make up for the risk. Bankers may go a step further and even demand that if a project needs their loans, the borrower must promise never to take loans from provident funds.
And this on the Essar Steel case,
Here, the NCLAT has done two things which may upset the economic applecart.

1) The IBC has given more powers to the CoC to draw up a resolution plan since they are the biggest lenders and their help is needed for the future survival of the company. The CoC is directed by the IBC to follow a prescribed waterfall: first the legal dues to employees, then secured creditors after 10 percent liquidation value to operational creditors. The NCLT was intended to ensure the process has been followed, not substitute its commercial judgement in place of the CoC’s. By setting aside the position of the CoC, the Essar judgement can destroy the entire edifice of the IBC, since creditors and the resolution applicant will be willing to go ahead with a plan to rescue a company only if it makes commercial sense to them...
2) The Essar Steel judgement of the NCLAT also in a way gives almost as much importance to the operational creditors as to secured creditors. Like in the IL&FS case, this can jeopardise the entire credit system in the country, with all creditors preferring to give unsecured loans at high interest rates, thus grinding all economic activity to a halt. The law gives operational creditors liquidation value with a reason. An operational creditor is only exposed to one production cycle and, if not paid, the creditor stops supplying. The secured financial creditors, viz the bankers have taken a risk on the company for many years, betting its plant will be set up and bear profit over time. Commercial law, everywhere, gives such creditors more powers. Else, no one will fund expansion plans or greenfield projects. Some experts have argued that in many small companies operational creditors bear the entire risk in the form of suppliers credit and hence they need to be given a fair share when the stressed company is sold. They have a point which perhaps needs to be addressed. However, while addressing operational creditors, the law needs to note that in many cases operational creditors are related parties: In Essar Steels case, over 20 operational creditors are group companies. If the NCLATs order becomes law, then all promoters, who see their companies in danger of going into IBC, may quickly create bogus operational credits with group companies. The NCLAT's judgement can thus lead to perverse developments that hurt the larger good.
I had blogged earlier highlighting that among the biggest concerns about the success of the IBC came from the judiciary. This is only the latest example of how judicial activism or kritarchy of the wrong kind can have damaging consequences in distorting incentives and imperilling the effectiveness of public policy.

Fortunately, despite these intemperate decisions, like with the GST, the Ministry of Corporate Affairs seems to be swift in reacting effectively to such emergent scenarios. The Union Cabinet yesterday has passed several amendments to the IBC with the objective of addressing the problems that have emerged from the likes of Essar Steel case and attendant court judgements.

The amendments aimed at speeding the bankruptcy resolution process include enforcement of a strict 330-day timeline for the insolvency resolution process, including the time taken for legal challenges (the courts had started excluding this time in the 270 day time limit given under the Code for approval of the resolution plan); upholding secured creditors' priority right on the sale or liquidation proceeds; making clear the rights of financial (who have not voted in favour of a rescue plan) and operational creditors; specifying that the resolution arrived at the IBC is binding on central, state and local governments etc.

This is a good example of the iterative approach to ensuring effective implementation of complex regulations and commissioning of large projects. As I have written earlier, I am very impressed by the vigilance exercised by the Ministry of Corporate Affairs over the past two years of IBC and the swiftness with which it has stepped in on multiple occasions to address emergent failings/flaws exposed in the legislation and its regulations.

Someone should write a case study on the implementation of the IBC Act. It can be a rare good illustration of high quality state capacity, and yet another example of how corporate India loses no opportunity to game every new law that comes their way.

Tuesday, July 16, 2019

Oped on financialisation of world economy

Here my co-authored oped in Livemint today with Anantha on financialisation of the world economy, a short summary of the book, The Rise of Finance, itself.

Monday, July 15, 2019

The Wall Street tail wags the monetary policy dog

The Fed Chairman Jerome Powell's ill-advised testimony to the Congress early this week and the market's reaction reflects several features which characterise the Fed and Wall Street.

Despite signatures to the contrary (or atleast be less alarming), including a strong June Jobs report and a truce in the trade war with China, Mr Powell repeatedly said that the Fed was committed to preventing a slowdown in US expansion,
“Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the US economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.”
This is perhaps the most craven example of the Fed being bullied into submission by the President. It should put to rest all the talk about Fed's independence. Sad, since Powell started out with so much promise.

And, as has become typical of the markets in responding to such announcements, the yield curve dived dramatically,
Clearly, there is no reasonable explanation - theory or change in conditions - for this level of decline. It only re-affirms the unique psychology of the markets - overshoot and undershoot in response to transient news, and as the bubble inflates the magnitudes of these shifts only increases.

And, this excessive shift in turn hardens expectations and sets in motion another set of self-fulfilling dynamics. And the expectations from the next FOMC meeting end of this month naturally gets baked in. The result is that the Fed's monetary policy decision becomes a case of the dog wagging the tail. Sample the reactions from the market that highlights the shaped expectations,
“There is really no good excuse for cutting rates at all,” said David Kelly, chief global strategist at JPMorgan Asset Management. “They’re doing so to avoid a market meltdown.” Seema Shah at Principal Global Advisors said: “The Fed is cutting rates not in response to the economy, but in order to avoid a market fallout . . . The Fed put itself in a corner. We’ve had a run of stronger data which at any other time would not have led them to cut rates.”

Saturday, July 13, 2019

Weekend reading links

1. The disconnect between rising executive compensation and declining shareholder returns continued in 2018. WSJ writes,
The chiefs of banking and financial institutions in the S&P 500 received a median raise of 8.5% last year, compared with 5.6% for CEOs in the broader index, according to a Wall Street Journal analysis. Meanwhile, firms in the sector posted a median total shareholder return—or stock-price changes plus dividends—of negative 17% in 2018, while the median return for the index as a whole was negative 5.8%. Median pay for finance CEOs was $11.4 million for the year, $1 million below the overall S&P 500 median. The Journal analysis uses total compensation as specified by Securities and Exchange Commission regulations, which includes salary, annual bonuses, and long-term equity and cash incentives. It also includes perquisites and the value of pension gains and some increases in deferred compensation accounts.
2. Fascinating chronicles of the debt-driven growth and fall of self-made corporate empire builders in China. For decades, the scorching pace of economic growth masked the pitfalls of debt accumulation and aggressive expansion into over-crowded and unfamiliar sectors. The country's overall debt quadrupled over the past decade, with corporate debt forming two-thirds.
Corporate bonds outstanding has exploded from negligible baseline a decade back to $1.72 trillion outstanding as of end-2018, coming second to the US companies which carried $5.81 trillion. And since the government initiated measures to control excessive lending in 2017, including allowing companies to fail by asking lenders not to restructure, there has been a rise in corporate bankruptcies,
Now with the economy slowing and government taking steps to dial-down excessive lending, more stories like this are emerging,
When she was a teenager in the 1970s, Zhou Xiaoguang peddled trinkets city to city and slept on trains, a formative chapter in her creation of the world’s largest costume jeweler, Neoglory Holdings Group Co. Leveraging her empire of baubles, China’s “fashion-accessory queen” added hotels, offices and malls. The magnate took a seat in China’s national parliament, accepted business accolades, including Ernst & Young’s “Entrepreneur of the Year,” and erected the tallest skyscraper in Yiwu, a trading city south of Shanghai... Neoglory fueled its evolution into a conglomerate through expansive borrowings, which ballooned to $6.8 billion, even as financial filings show cash was tight and profits were weak. Behind the scenes, the company was taking on new risks to borrow, including ever-shorter payback schedules. The troubles burst into view in mid-September when Neoglory defaulted on a bond payment. Several more defaults followed... Neoglory said it embarked on a rollout of retail outlets when online selling was more promising, and it overbuilt real estate in undesirable locations...
Ms. Zhou has attributed her entrepreneurialism to a hardscrabble upbringing near Yiwu when the area was rural: Lacking shoes as a teen, she made a pair; to save money on trips to sell embroidery, she took night trains. She set up a sales booth in 1985 in Yiwu, and Neoglory began production in 1995. Inside a decade, Ms. Zhou was the richest woman in Zhejiang province and a symbol of the country’s breathtaking industrial rise. She and other exporters made Yiwu a global giant in low-price merchandise. The trading city is centered on a vast complex that snakes along 4 miles where wholesalers sell goods, from socks to Christmas ornaments. Neoglory necklaces and earrings sell around the world, including on Amazon.com Inc. and at J.C. Penney Co. in the U.S., often fitted with crystals from Austria’s Swarovski AG. Ms. Zhou built a massive factory compound that included apartments for her family and quarters for employees, at one point numbering 7,000. “The whole industry in Yiwu was brought up by her,” said Wang Wei, a former Neoglory employee who owns one of the 4,500 costume jewelry shops in the city’s wholesale center.
Such stories raise the question of whether such excesses and pain are inevitable accompaniments of spectacular growth episodes.

3. The future of retail check-outs being tried out by Tesco - swapping cashiers for cameras.
4. If you thought big-tech was about intangibles like intellectual property and less about hardware, think again. Bloomberg points to the physical infrastructure like computer networks and logistics machines that they command, which raises enormous entry barriers, or "moats",
For all the claims that Amazon copies hot-selling products sold on its websites, or unfairly uses data about shoppers’ purchases and searches for its own ends, it is Amazon’s network of warehouses and its ever-expanding logistics machine that give it an advantage few competitors can match... Amazon isn’t alone in widening its moat. Last week, Alphabet Inc.’s Google announced the latest privately funded undersea cable between Europe and Africa. That kind of infrastructure used to be built by consortia of telecommunications providers, but it has become common for Facebook, Microsoft Corp. and Google to go their own way. This year, Google has saidit will spend more than $13 billion just in the U.S. on data centers and other real estate... In the last 12 months, the five biggest U.S. technology companies recorded nearly $90 billion of combined capital spending — big-ticket item such as computer data centers, internet cables, specialized equipment to build computer chips, warehouses and other real estate.

5. UK accounting watchdog, Financial Reporting Council, is scathing in its indictment of the big auditors in its annual report in a year marked by high-profile accounting scandals at companies like Patisserie Valerie and Carillion,
The Financial Reporting Council warned of an “unsatisfactory” deterioration in inspection results for PwC’s audits of FTSE 350 clients over the past year, after only two out of three of the audits scrutinised met the watchdog’s standard of needing only limited improvement. That was a steep decline from the 84 per cent which passed the threshold the previous year. But the watchdog’s sharpest criticism was reserved for the Big Four’s smaller rival Grant Thornton, which served as the auditor for Patisserie Valerie when a multimillion-pound black hole was discovered in the cake shop’s accounts last year... Grant Thornton now faces heightened scrutiny from the watchdog after only 50 per cent of its audits were found to meet the FRC’s standard, down from 75 per cent in the previous round of inspections... None of the seven firms surveyed — which included BDO and Mazars as well as the Big Four and Grant Thornton — met the FRC’s standard for 90 per cent of their inspected audits to need only limited improvements. The FRC examined a sample of audits for each firm. In every firm, the watchdog found cases where auditors had failed to be tough enough in challenging management on questions of judgment.
6.  The case for private management of many infrastructure projects stands on questionable foundations,
Whereas EDF’s current nuke under way at Hinkley Point in Somerset requires a weighted average cost of capital of 9.3 per cent, if you permitted the EDF tax (known in polite society as the “regulated asset base” model) with the next one at Sizewell, then that could fall to 6 per cent. What it doesn’t do is beat state finance. The UK government’s cost of borrowing is less than 2 per cent. So why do it this way? 
One classic answer is that the state just cannot borrow all that money. Pile too much on the public sector borrowing requirement and there might be a gilt buyers’ strike. Another is that the private sector brings a magic ingredient: that of extra efficiency. Those dividends can all be afforded through the savings on capital and operational costs that entrepreneurial managers bring. Both claims are suspect. Let’s take the second first; the one about efficiency. It is difficult to find compelling evidence. For instance, England’s private water companies are no more efficient than Scotland’s state-owned one, according to a 2011 assessment by the regulator, Ofwat. That’s despite being privatised 30 years ago. As for finance, there’s surely a distinction between selling bonds to fund current spending, and doing so to create real assets with attached revenues. If you think about it logically, it’s hard to see why a properly constituted national infrastructure fund with its own balance sheet — backed by highly rated assets — couldn’t finance itself at fine rates.
This and this are a good summary of the sophistry and valuation gimmicks that the industry is resorting to in the backdrop of Labour's plans to renationalise water if elected to power. This is a very good case against the industry demand for market valuation and in favour of the regulated capital value (RCV).

7. An emerging natural resource scarcity is that involving sand,
Roughly 32 billion to 50 billion tonnes are used globally each year, mainly for making concrete, glass and electronics. This exceeds the pace of natural renewal such that by mid-century, demand might outstrip supply (see ‘Global scarcity’). A lack of knowledge and oversight is allowing this unsustainable exploitation... Desert sand grains are too smooth to be useful, and most of the angular sand that is suitable for industry comes from rivers (less than 1% of the world’s land)... Most of the trade in sand is undocumented. For example, between 2006 and 2016, less than 4% of the 80 million tonnes of sediment that Singapore reported having imported from Cambodia was confirmed as exported by the latter. Illegal sand mining is rife in around 70 countries, and hundreds of people have reportedly been killed in battles over sand in the past decade in countries including India and Kenya, among them local citizens, police officers and government officials.
This graphic of sand mining and attendant water flow patterns is striking.
8. Germany's debt-to-GDP ratio is set to drop below 60% this year, and that is a cause for concern regarding the supply of German bonds, bunds. 
If there are not enough of them around, banks could run short of high-quality collateral for lending, while the European Central Bank will struggle to find enough bonds to buy if it wants to revive its quantitative easing programme to combat a downturn... “By the mid-2030s there is a very plausible scenario where German government debt has almost entirely disappeared,” said Christopher Jeffery, a fixed-income strategist at Legal & General Investment Management... For markets, however, there are some uncomfortable implications. Banks rely on a ready supply of highly rated government debt to use as collateral for lending. But the amount of such debt shrank dramatically during the crisis, thanks to a slew of downgrades from credit rating agencies. According to a speech earlier this year by ECB executive board member Benoît Cœuré, triple A-rated sovereign debt in the eurozone amounts to just 10 per cent of GDP, compared with 70 per cent in the US.
9. Inculcating basic literacy and numeracy is just so hard. Sample this from American early grade classrooms,

American elementary education has been shaped by a theory that goes like this: Reading—a term used to mean not just matching letters to sounds but also comprehension—can be taught in a manner completely disconnected from content. Use simple texts to teach children how to find the main idea, make inferences, draw conclusions, and so on, and eventually they’ll be able to apply those skills to grasp the meaning of anything put in front of them. In the meantime, what children are reading doesn’t really matter—it’s better for them to acquire skills that will enable them to discover knowledge for themselves later on than for them to be given information directly, or so the thinking goes. That is, they need to spend their time “learning to read” before “reading to learn.” Science can wait; history, which is considered too abstract for young minds to grasp, must wait. Reading time is filled, instead, with a variety of short books and passages unconnected to one another except by the “comprehension skills” they’re meant to teach. 

As far back as 1977, early-elementary teachers spent more than twice as much time on reading as on science and social studies combined. But since 2001, when the federal No Child Left Behind legislation made standardized reading and math scores the yardstick for measuring progress, the time devoted to both subjects has only grown. In turn, the amount of time spent on social studies and science has plummeted—especially in schools where test scores are low. And yet, despite the enormous expenditure of time and resources on reading, American children haven’t become better readers. For the past 20 years, only about a third of students have scored at or above the “proficient” level on national tests. For low-income and minority kids, the picture is especially bleak: Their average test scores are far below those of their more affluent, largely white peers—a phenomenon usually referred to as the achievement gap. As this gap has grown wider, America’s standing in international literacy rankings, already mediocre, has fallen... All of which raises a disturbing question: What if the medicine we have been prescribing is only making matters worse, particularly for poor children? What if the best way to boost reading comprehension is not to drill kids on discrete skills but to teach them, as early as possible, the very things we’ve marginalized— including history, science, and other content that could build the knowledge and vocabulary they need to understand both written texts and the world around them?...
For a number of reasons, children from better-educated families—which also tend to have higher incomes—arrive at school with more knowledge and vocabulary... As the years go by, children of educated parents continue to acquire more knowledge and vocabulary outside school, making it easier for them to gain even more knowledge—because, like Velcro, knowledge sticks best to other, related knowledge. Meanwhile, their less fortunate peers fall further and further behind, especially if their schools aren’t providing them with knowledge. This snowballing has been dubbed “the Matthew effect,” after the passage in the Gospel according to Matthew about the rich getting richer and the poor getting poorer. Every year that the Matthew effect is allowed to continue, it becomes harder to reverse. So the earlier we start building children’s knowledge, the better our chances of narrowing the gap.

Thursday, July 11, 2019

The balance sheet of UK privatisations

Updating this, here is the latest balance sheet of English and Welsh 1988 water privatisation,
England handed regional water services to private monopolies in the late 1980s, free of debt and with a £1.5bn "green dowry" grant. Since then the companies have racked up £51bn of debt and paid out £56bn in dividends, according to an analysis of Ofwat’s accounts.
An earlier balance sheet from a University of Greenwich research study,
England is the only country to have fully privatised its water and sewerage system, with ownership transferred from the state to large regional monopolies in 1989. Investors paid £7.6bn for the water and sewerage companies in 1989 but the UK government took on the sector’s entire £4.9bn in debts and gave the new private corporations £1.5bn of public funds... The owners of the nine companies — many of which are overseas investors, including sovereign wealth funds — paid out £18.1bn in dividends in the 10 years to 2016, even though post-tax profits amounted to £18.8bn during the decade, according to the researchers’ analysis of their financial reports. Three companies — Anglian Water Group, Severn Trent Water and Yorkshire Water Services — have paid out more in dividends than their total pre-tax profits over the past decade... Greenwich researchers said the cost of maintaining and improving water and sewer infrastructure has been paid for almost entirely by an increase in debt, which has risen from almost zero at the time of privatisation to nearly £40bn in 2016. The interest payments on the debt are higher than what would be paid by the public sector, which can borrow more cheaply. Together, the £1.8bn in dividends and the extra £500m of debt interest payments each year pushed up bills for each of England’s 23m households by about £100 a year.
In fact, the Greenwich study finds that the companies could have funded all their capital expenses since privatisation 28 years back without taking on a single penny of debt, since the cash generated easily exceeded the investment requirements.
Since privatisation, the aggregate cash flow generated by the English and Welsh companies after operating costs was £36bn more than the £123bn they spent on fixed assets such as new pipes and network infrastructure (all in 2017-18 prices), the study found. This suggests their capital spending could all have been funded out of internal resources.
The balance sheet for England's water consumers,
The English water companies generated operating profits of about £3.5bn in 2016. At current 10-year rates of 1.6 per cent, the interest cost on £90bn of funding would be about £1.5bn annually — suggesting there could be a dividend for the public from state ownership. Research carried out by David Hall, visiting professor of the trades union-funded Public Services International Research Unit at the University of Greenwich, claims to have quantified the benefit to taxpayers. The water companies presently have £42bn of debt between them, and paid an average of £3.2bn a year in dividends and interest between 2007-2016. Refinancing all their equity and debt capital with public borrowings would reduce those costs by £2.3bn a year, the research estimates, by eliminating dividends and cutting debt service costs. That is equivalent to a saving of £100 on the average water bill of about £400.

The balance sheet of Thames Water, the largest among the ten (nine private) UK utilities (and this),
In the decade between 2006 and 2016, Macquarie paid itself and fellow investors £1.6bn in dividends, while Thames was loaded with £10.6bn of debt, ran up a £260m pension deficit and paid no UK corporation tax... Macquarie, for instance, received returns of between 15.9 per cent and 19 per cent during the 11 years it controlled Thames Water, according to Martin Blaiklock, an infrastructure consultant.
The question that should be asked is what were the regulators doing when such asset stripping was going on.

The balance sheet for railways,
The cost of running the UK’s railways is 40 per cent higher than it is in the rest of Europe, according to a 2011 government report by Sir Roy McNulty, the former boss of UK aviation group Short Brothers who has long experience in transport regulation... Since privatisation, the bill has mainly been shared between the taxpayer and the passenger. The contribution from the state has almost doubled from £2.3bn in 1996 to £4.2bn in real terms in 2016-17, despite a conscious decision in recent years to push more of the cost on to users’ shoulders. Ticket prices have risen: they are now 25 per cent higher in real terms than in 1995 and 30 per cent higher than in France, Holland, Sweden and Switzerland. The latest average rise in fares of 3.4 per cent, announced on New Year’s Day, was greeted with outrage... Despite the vastly expanded usage, the network’s costs have not obviously come down relative to its income. According to the 2011 report, unit costs per passenger kilometre were roughly 20p in 2010, much the same as they were in 1996... Critics argue that train operators are able to make returns, and pay themselves dividends, despite contributing very little in the way of risk capital. While operating margins of 3 per cent are not high, the train companies paid nearly all the £868m operating profits between 2012-13 and 2015/16 as dividends — £634m in the four year period.
Sample this (or this) for asset stripping
Three-quarters of UK's train operating companies in the 20 franchises are foreign state-owned firms, and everyone of them are now net recipients of public subsidy,
Britain’s railways are partly renationalised already with the infrastructure operator Network Rail, which controls 2,500 stations as well as tracks, tunnels and level crossings, already in the hands of the public sector and its £46bn debt on the government balance sheet. Those parts of the railways that are in private hands, such as the train operators, are heavily subsidised by government — a net £3.3bn in 2016/17, according to the Department for Transport. 
Finally, the balance sheet of UK's pioneering PFI in education and health (and this),
A National Audit Office report last month found schools built using the PFI are 40 per cent more expensive and hospitals cost 60 per cent more than the public sector alternative.
In terms of value for money of PFI projects in general,
The VfM assessment compares private finance costs with a government discount rate of 3.5%, which is 6.09% with inflation, known as the Social Time Preference Rate (STPR), which is higher than government’s actual borrowing costs. The higher the rate applied, the lower the present value of future payments. For example a payment of £100 in 12 years will have a present value of just £49 when discounted by the STPR. Discounting using a lower discount rate, which compares private finance with the actual cost of government borrowing, results in fewer private finance deals being assessed as VfM.
Talking about public sentiment,
A recent poll by the Legatum Institute found that 83 per cent of respondents favoured renationalising the water industry that Margaret Thatcher, then prime minister, sold in 1989. For energy and the railways, 77 per cent and 76 per cent respectively backed the reversal of their privatisations.
So, the UK Chancellor of Exchequer had this to say in the last budget speech,
I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the Private Finance Initiative does neither... I have never signed off a PFI contract as Chancellor... and I can confirm today that I never will. I can announce that the Government will abolish the use of PFI and PF2 for future projects.
Amen!

Wednesday, July 10, 2019

How economic clusters develop?

One of the major prongs of national industrial policy has revolved around efforts to develop special economic zones and industrial clusters. This has naturally raised the question of how such areas emerge? What public policy levers can help develop good SEZs and clusters?

In this context, an excellent article in FT about the transformation of Cambridge as an innovation hub, nicknamed Silicon Fen, and the fastest growing urban region in UK, 
The scientists and entrepreneurs based here are pushing boundaries in life sciences, agritech, computing and artificial intelligence, giving the city global influence. It has also created a centre of wealth, and over the past year had the fastest growing urban economy in the UK. A total of 4,700 knowledge-intensive companies employ 61,000 people with turnover close to $15bn. The tax generated by these companies is equal to nearly half the government budget for science, engineering and technology for all of the UK. Apple, Microsoft, Google have all moved into the area. AstraZeneca, the pharmaceutical company, made its global headquarters in the city after absorbing discoveries in the evolution of antibodies made by Cambridge-based Nobel Prize-winning scientist, Greg Winter. These helped to create Humira, the world’s top selling drug. Some 16 ‘unicorns’ — start-ups worth more than $1bn — have been created in the city. Two more are on the way. 
How did this emerge,
The transformation began in 1970 when Trinity college invested in what became Britain’s first science park, drawing in the businesses as well as research institutes. Since then, the initiatives have piled up to create a dynamic whole. Underpinning the area’s success are groups such as Cambridge Network, a membership organisation... that brings together hundreds of businesses and academics to exchange ideas. Another is Cambridge Angels, a club of 60 or so entrepreneurs connected to the city, who supported new spinouts to the tune of £28m last year. The university has itself encouraged the process with Cambridge Enterprise, an organisation formed in 2006 that facilitates collaboration and helps fund and advise academics with marketable ideas. Early connections with Silicon Valley, fostered by Hermann Hauser, an Austrian-born physicist behind many of the city’s most successful ventures, have also played a role.
And this, in my opinion, is spot on,
The overall effect... is similar to the philosophical concept of emergent properties, where an entity behaves in a way that is greater than the sum of its parts. “You look at individual molecules but they don’t tell you how rivers flow; an individual won’t tell you much about how the economy and society works,” said Mr Cleevely. “The components themselves sort it out.” Pahini Pandya, who is raising funds to turn a doctorate exploring the use of artificial intelligence in cancer testing into a start-up, said “serendipity” has been engineered into the equation. The concentration of brilliant minds all within a small, decentralised environment, facilitates “happy accidents”, she said. “One of the biggest reasons you come to Cambridge is the network you build,” she said.
The point is about creating the enabling conditions and seizing emergent opportunities, and not bother too much about how the dynamics play out. 

Monday, July 8, 2019

The business concentration and political capture story marches on

Noah Smith has another excellent article on how modern capitalism is draining value from the economy. He points to signatures - corporate profits take an increasingly greater share of the total output, stock valuations have risen faster than the profits or the output. 

He points to the work of economists Daniel Greenwald, Martin Lettau and Sydney Ludvigson built a model of the economy in which the value created by businesses could be arbitrarily reallocated between shareholders and workers. Their finding is stunning,
From the beginning of 1989 to the end of 2017, 23 trillion dollars of real equity wealth was created by the nonfinancial corporate sector. We estimate that 54% of this increase was attributable to a reallocation of rents to shareholders in a decelerating economy. Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%). From 1952 to 1988 less than half as much wealth was created, but economic growth accounted for 92% of it.
While cautioning about interpreting the magnitude, Noah points to how this is consistent with a long list of corroborative evidence - labour's share of income has declined world-over, business profits have increased much faster than the value of their own capital, low business dynamism since 2000 despite high profitability. This is a good summary.

He also points to the latest paper by German Guttierez and Thomas Philippon which studies the entry and exit of firms across US industries over the last 40 years and compares it with Tobin Q (Tobin Q, the ratio of the company's market to book values, which if high attracts new competitors),
The elasticity of entry with respect to Tobin’s Q was positive and significant until the late 1990s but declined to zero afterwards. Standard macroeconomic models suggest two potential explanations: rising entry costs or rising returns to scale. We find that neither returns to scale nor technological costs can explain the decline in the Q- elasticity of entry, but lobbying and regulations can. We reconcile conflicting results in the literature and show that regulations drive down the entry and growth of small firms relative to large ones, particularly in industries with high lobbying expenditures. We conclude that lobbying and regulations have caused free entry to fail.
Need more evidence?

Saturday, July 6, 2019

Weekend reading links

1. If banks had long-term assets and short-term liabilities, then it would be classified an asset-liability mismatch and be a matter of big concern. But WeWork, "which combines long-term leases on office buildings with shorter-term contracts with clients" is the next superstar start-up waiting for its IPO.

The $47 billion valuation company, with 485 locations, is the largest tenant in New York and one of the largest in London. But its valuation rests on the massive backstop from Masayoshi Son's Softbank. Sample these questionable foundations, 
Since 2016 it has racked up a deficit of more than $3bn; last year it accumulated losses to the tune of $220,000 every hour of every day. Those narrowed slightly in the first quarter of 2019, to just under $219,000 an hour in the 12 months to March.
Like some of the other totemic unicorn start-ups, WeWork too suffers from the unpredictable founder syndrome and there are deep questions about its management capacity.


3. The investment cycle recovery in India is still some time away. Livemint reports from latest CMIE data showing investment in new projects having touched a 15-year low in the Q2 2019. The new project announcement in the second quarter was 81% lower than what was announced in the first quarter, and 87% lower than the same period a year ago.
Further, the amount of stalled projects reached its highest ever peak of Rs 13 trillion.
4. A reappraisal of the dominant view that Chinese companies are rapacious, hire mostly Chinese workers, and so on. FT writes,
After four years of intensive fieldwork... led by the School of Oriental and African Studies, researchers compared Chinese and non-Chinese manufacturing and construction companies in Angola and Ethiopia, two of the top African destinations for Chinese direct investment. Fieldworkers studied 76 companies, 31 of them Chinese. Crucially, they also interviewed a total of 1,500 Angolan and Ethiopian workers. To state the conclusion first, the study finds that negative stories about Chinese companies are mostly untrue. Broadly, it shows they employ just as many local workers as non-Chinese companies, pay them more or less the same and train them to similar standards, though usually less formally.
5. The fifteen year sovereign bond yields of Switzerland and Germany continue at negative territory.
Since the beginning of the year, sovereign bond yields across have been declining, pointing to weak economic expectations.
Reflecting the depressed yields, Austria is about to issue 100 year debt at 1.2%, down from its 2017 100 year debt which was issued at 2.1%. Apart from weakening economic prospects and structural factors keeping inflation down, the search for yields may also have its basis in the scarcity for safe assets,
The yield on the 10-year bund last week hit minus-0.32%, its lowest ever. A year ago, it was 0.5%... There’s definitely a supply-demand crunch... You don’t have many opportunities of what to buy if you want to buy something safe... There are about €1.5 trillion ($1.7 trillion) of German government debt securities, compared with about $16 trillion from the U.S. federal government. Germany’s frugal government, which runs a budget surplus, has shrunk its debt to 59% of the size of the gross domestic product from 80% at the start of the decade. Over the past few years, the European Central Bank has gobbled up a huge chunk of bunds as part of its quantitative-easing program, reducing the supply available to investors... 
Portugal, which came close to going broke in the euro crisis of 2011, is a sudden beneficiary: Ten-year bond yields, which surpassed 18% at the height of the sovereign crisis, hit 0.51% last week, their lowest ever, down by nearly half since mid-May. “In a world where core markets provide no return, Portugal is the safest, riskiest bet,” said Jan Von Gerich, chief analyst at Finland-based Nordea Bank.
6. One interesting feature from the Indian Budget is the announcement that the country will break new ground and explore foreign currency denominated sovereign debt, something which India alone among major economies has refused to do. And there are good reasons for caution. Ajit Ranade captures some of them.

I am inclined to believe that the inherently risk-averse FinMin (including the RBI) establishment will hesitate on its implementation. The real push in that case will have to come from the political side.

7. Finally, a good summary of India's drought situation.

Thursday, July 4, 2019

The return of the generalist central banker?

If you were following public commentary surrounding the Reserve Bank of India in recent years one would have been excused for coming away with some or all of the following views.

1. Monetary policy is an exercise in arcane mathematical models and complicated econometrics - Taylor Rule, DSGE models, potential output etc. Monetary policy making is therefore an exercise in technocracy.

2. It is therefore best left to expert economists, more specifically monetary macroeconomists. And as a corollary, everyone else knows little about the arcane world of central banking. Generalist bureaucrats and politicians in general are the least preferred options.

3. In fact, even among the economists, we need "monetary policy hawks", purist economists who follow the textbook on targeting inflation and maintaining price stability. 

4. These experts are exceptional and deeply committed individuals, who can do no wrong technically and whose intentions are always right. It is the RBI and India's great good fortune to have these exceptional individuals. And as the counterpoint, government (and the Ministry of Finance) is always the exact opposite. 

5. Worse still, the government is always trying all possible means to exercise control over the central bank, and the experts from outside are valiantly trying their best to safeguard the central bank's independence.  

6. Furthermore, even as the RBI is trying to maintain macroeconomic stability and foster economic growth, the government is doing everything to destabilise growth with fiscal irresponsibility and not biting the bullet on big bang reforms. 

It is in this backdrop that three exhibits assume significance.

First, Daniel Moss in Bloomberg, is effusive in his praise for the current RBI Governor,
India is becoming the gold standard for monetary policy in Asia, if not the world. While global markets are giddy from hints that the Federal Reserve may cut interest rates, India’s central bank has been easing since February. Just as important, the Reserve Bank of India has been very consistent in its message: Borrowing costs need to come down to juice growth... The RBI's approach is correct. There’s no point targeting inflation if growth is waning and the very thing you’re aiming at is dormant... So give Governor Shaktikanta Das his due. The RBI's rate cut in February was risky – few economists anticipated it – but appropriate. The signaling power was immense. Officials followed that up with another reduction in April. The outlook has only deteriorated since then. Central banks in Malaysia, the Philippines, Australia and New Zealand concurred. India was, and still is, ahead of the curve – all the more remarkable given emerging markets tend to follow the Fed. Even the chaos surrounding the withdrawal of most banknotes from circulation in 2016 has slipped from the foreground... Das was drawn from the ranks of India’s bureaucracy rather than the central bank. It was clear the government didn't want any freelancing... Given Das’s success in monetary-policy development and execution, India would do well to keep him around.
This is a delicious irony. The exit of the previous Governor was not accompanied by the expected "wrath of the markets", flight of the confidence fairy, and mayhem on the financial markets. It is a different matter that ideologically captured commentators never learn. The premature exit of the present Deputy Governor has been met by similar prophecies of doom and question marks about central bank independence. This too will pass and the morning after the night before will remain no different.

Now comes the surprising announcement of another career politician/bureaucrat Christine Lagarde to be the President of European Central Bank, replacing economist Mario Draghi,
European leaders have agreed a deal to fill the EU’s most important jobs, backing Christine Lagarde to lead the European Central Bank and Ursula von der Leyen to be president of the European Commission... The selection of Ms Lagarde, not an economist or one of the front-runners to replace Mario Draghi, was unexpected. She has become a superstar of international finance after eight years as head of the IMF and four as French finance minister. But she has no direct experience of monetary policy which could prove a disadvantage as the ECB searches for new ways to combat weak inflation and boost the eurozone economy.
They join Haruhiko Kuroda, a bureaucrat, who heads the Bank of Japan and Jerome Powell, a lawyer, who heads the Federal Reserve. The BoJ under Kuroda has been acclaimed for being the trendsetter for the extraordinary monetary accommodation by central banks of developed countries by way of quantitative easing and negative interest rate. With Ms Lagarde's appointment, Mark Carney of Bank of England and Yi Gang at People's Bank of China remain the only economist Governors of the major central banks. 

I had blogged earlier highlighting the misguided nature of the debate on central bank independence.

Finally, in this context of fascination with experts, it is useful to quote Andres Velasco,
Conflicting motivations are probably a more important reason why citizens increasingly distrust experts. There is a misconception at work. Policy wonks think of themselves as unbiased purveyors of high-quality, evidence-based advice. Informed citizens reasonably fear that the wonk in question may be in thrall to a particular ideology or methodology; that the advice may be politically motivated; or that advisers may tailor their counsel to their own career concerns (how to get that plum job on Wall Street after leaving government, for example)... So, as with so many political issues nowadays, it comes down to a matter of identity: can voters identify with the expert or the politician whom the expert advises? Can voters sense that they belong to the same tribe and uphold the same values? Typically, the answer is no. And there lies the root of the problem. Policy gurus and politicians probably spend too much time with others like them – top civil servants, high-flying journalists, successful businesspeople – and too little time with ordinary voters. This undoubtedly shapes their worldview. As a Spanish-language saying goes “Tell me who your friends are and I’ll tell you who you are.” So how can experts regain citizens’ trust? The answer is paradoxical: by becoming intellectually more modest, less beholden to the rarified ways of the ivory tower and the lecture hall, and likelier to listen to people who do not have a PhD. If they could become “humble, competent people on a level with dentists,” as John Maynard Keynes once suggested, then there is at least a chance that voters will identify with the nerdy pointy-heads and find them trustworthy.
And this summary of the findings of Philipp Tetlock is instructive,
Experts who confidently believe in only one approach and view the world through a single conceptual lens are particularly bad at forecasting. By contrast, experts who recognize how little they know and therefore proceed by trial and error, constantly adapting their forecasts, are less likely to get it all wrong.
Who are the second type of experts referred to above? Politician or bureaucrat or anyone who is experienced in dealing with the real world and its messiness. There is nothing about being a central bank Governor that requires him/her to be an expert in macroeconomics. 

Apart from understanding the dynamics of the economy and the relevance of monetary policy, the central bank Governor should have the ability to listen and consolidate opinions from different stakeholders, especially democratically elected governments, distil them, and be able to exercise good practical judgement. The same ability to exercise good judgement is invaluable as a regulator. Prudence, arising from depth of experience. Besides, he/she should also be able to administer a large organisation like the RBI. The reality is that these unsexy and less discussed traits matter much more than pure wonkery.

I am inclined to think that recent experiences may have conclusively sealed one thing for the RBI. For the foreseeable future, it is very difficult to see any government choosing an expert as the RBI Governor. And that may not be a bad thing.

Wednesday, July 3, 2019

NIMBYism in US

Consider this example of a reprise of the Bootlegger and Baptist. One group of people (Baptists) oppose urban renewal by means of vertical development and densification on the grounds that it will cause gentrification and drive low income people further away from the cities. Some of them also argue that vertical growth is a scar on the urban form and erodes the city's character. Their preference is for more public housing programs to make housing affordable. Another group (Bootleggers) consisting predominantly of landowners fear that more construction will depress prices and erode their wealth. They find it convenient to hide behind the former and support the status quo.

The net result is a culture of NIMBYism that limits additions to the stock of housing supply in the largest cities. In the US, this trend is most acute in the West Coast Democrat-controlled cities. Immensely rich locals, all self-declared Liberals, hide behind the fig leaf of gentrification and lobby to maintain the status.

Sample this about San Francisco,
The San Francisco city council, acting unanimously, recently rejected a 63-unit housing complex because it would cast a shadow on an adjacent park. In nearby Berkeley zoning officers can deny new development that “would unreasonably obstruct sunlight, air or views.” Local residents in a posh part of the city have raised over $100,000 to contest plans for a new homeless shelter, claiming that the new “megashelter” will breed crime and violence (“drug users” and “pets, including those designated as ‘vicious’ will be allowed” they warn). These tactics, along with excessive environmental reviews, have hampered new development in the city. Since 1990 the city has averaged a mere 1,900 new housing units each year... West Coast cities, which are under near-total control of the leftiest Democrats around, rank among the least affordable for middle-class Americans and most inhospitable to the poor. Every morning traffic in the Bay Area is clogged by service-sector commuters, some of whom live far off in the state’s Central Valley and must make three-hour long treks in each direction. The smog from the cars settles in the valley, resulting in some of the worst air quality in the country.
City Journal has more on California, in the context of the State Senate's decision to shelve Bill 50 which would have eased restrictions on housing density along public-transit corridors and in job-rich areas,
Suburban homeowners were the real force behind SB 50’s demise... wealthy Los Angeles suburbs like La Cañada Flintridge... haven’t built a single apartment in decades. For all the disturbing media coverage of homelessness and displacement in the Bay Area and Los Angeles, the housing crisis has mostly been a boon for California homeowners. The planning-induced scarcity—coupled with soaring tech-sector salaries and a steady flow of billion-dollar IPOs—has sent house values skyrocketing. Even shacks now command bids well north of seven figures. Houses that might have sold for $40,000 in the 1970s can easily go for $2.5 million today. Compounding the trouble, California is constitutionally unable to tax much of this wealth. In most states, rising house values would mean higher property taxes. But California’s Proposition 13, a 1978 ballot initiative that sets real estate taxes at 1 percent of a property’s sale price and limits annual increases in to 2 percent per year, means that property-tax revenues don’t rise proportionately with home values. With house prices increasing many multiples since 1978, Prop 13 has produced one of America’s most arbitrary state tax systems. Its terms reset only when a home is sold or rebuilt, so it’s common for neighbors in identical houses to pay dramatically different tax bills. Property owners have no incentive to sell, downsize, or host additional housing units as costs rise.
This is a telling reflection of the elites. In the context of California above, we are not talking about the traditional landed or rich elites. While there are those too, we are mainly talking about the generation which has become wealthy on the back of technology and knowledge-based economy over the past quarter century. Incidentally, they are also vocal supporters of liberal causes. Many of them would even have philanthropies which seek to support public causes, including addressing the affordable housing challenge in developing countries and the US. The hypocrisy cannot be lost. 

Monday, July 1, 2019

A 'good' public servant

This framework follows from a discussion with a colleague. 

There are perhaps four requirements for a 'good' public servant

1. Integrity in terms of personal honesty
2. Commitment to the cause and a positive attitude 
3. Professional competence by way of adequate domain knowledge and understanding of the context
4. Effective in being able to get things done within the public system, conditional on the available resources

The first two are essentially inherent or cultivated personal attributes, and the last two are acquired knowledge and skills. 

But conventional wisdom generally focuses only on integrity and competence. The role of commitment and effectiveness is generally glossed over. This omission is important since the true test of a policy is its successful execution. And it is here that commitment and effectiveness assumes significance. In weak capacity environments and with complex policy challenges, where frustrations can build up quickly and ambiguities are rife, these two attributes are critical in realising success.

Commitment gives the energy to the official to plod on. Effectiveness is about navigating the complex system and extracting work from its resources. In fact, if an official gets to the starting line to meaningfully engage with a policy, one could argue that only commitment and effectiveness matters in his/her likelihood of being successful with execution. 

Ideally, a public servant, especially in leadership positions, should have all the four attributes. But in the real world, while there are honest and competent officials, there are very few who combine it with commitment and effectiveness. 

In fact, when faced with an acute scarcity of officials with all the attributes, I am inclined to identify and select committed and effective officials, even if that comes at an acceptable cost of integrity and competence. Dishonesty, especially if manageable and not rapacious, can perhaps be condoned in terms of efficiency wages (given low public sector wages) and less than required professional competence can be mitigated if the official has a team that can take care of the competence requirements and is willing to listen to their advice and act.

Update 1 (07.07.2019)

Rajendra Kondepati writes to me asking whether entrepreneurial (or risk taking ability to improve developmental outcomes) should be added to the list of the below four. He was referring to the need for bureaucrats to advocate and implement fresh ideas instead of merely tinkering with existing policies and programmes. 

I am sympathetic. Perhaps, a more relevant trait of being entrepreneurial is not just about adopting new ideas, but also about having the risk appetite to creatively and constructively interpret rules of the game to break moulds and push the boundaries of what is possible or doable. But this is perhaps also what a broader definition of effectiveness will entail. 

But to call out the specific points about being receptive to new ideas and willingness to push the boundaries of what can be done, it may well be worth adding a fifth trait around being entrepreneurial. 

Saturday, June 29, 2019

Weekend reading links

1. The global negative yielding debt rose to an all-time high of $12.5 trillion, up from $6 trillion last year.
The resultant search for yields by insurers, pension funds, and asset managers is keeping up both the equity markets and the alternative funds industry.

2. On how costs have fallen,
Since 1950 the real cost of new vehicles has fallen by half, that of new clothing by 75% and that of household appliances by 90%, even as quality has got better.
3. The Economist on HR promotions,
In a recent article for Voxeu, an online portal, the records of almost 40,000 salespeople across 131 firms were studied by Alan Benson, Danielle Li and Kelly Shue. They found that companies have a strong tendency to promote the best sales people. Convincing others to buy goods and services is a useful skill, requiring charisma and persistence. But, as the authors point out, these are not the same capabilities as the strategic planning and administrative competence needed to lead a sales team. The research then looked at what happened after these super-salespeople were promoted. Their previous sales performance was actually a negative indicator of managerial success. The sales growth of workers assigned to the star sellers was 7.5 percentage points lower than for those whose managers were previously weaker performers.
Scott Adams, the cartoonist, described this problem in his book, “The Dilbert Principle”. In his world, the least competent people get promoted because these are the people you don’t want to do the actual work. It is foolish to promote the best salesperson or computer programmer to a management role, since the company will then be deprived of unique skills. That is how the workers in the Dilbert cartoon strip end up being managed by the clueless “pointy-haired boss”.
4. Indian Express has a series of articles that point to the magnitude of the ground water depletion problem in India.

In Haryana,
One kg of rice requires 2,000-5,000 litres of water depending upon the paddy variety, soil type and the time of sowing. With paddy production jumping from 39.89 lakh tonnes in 2014 (is this figure correct?) to 45.16 lakh tonnes in 2018, the number of tubewells in the state also shot up from a few thousand to 8 lakh, resulting in overdrawing of groundwater... In the last two decades, the farmers have pumped out much as 74% of the groundwater reservoirs. 
With the weather department forecasting a delayed onset of monsoon, the state government has now deployed the highest ever number of water tankers — 6,597 as of June 10 — to meet the drinking water needs of parched regions. This is over three times the number of tankers deployed around this time last year (1,777)... Out of 17 major reservoirs listed by the Central Water Commission (CWC), with a total live capacity of 14.073 billion cubic metres, the live storage until June 6 is just 0.778 BCM, or 5.5%... The latest survey of the Groundwater Survey and Development Agency found that of Maharashtra’s 353 talukas, 279 have experienced depletion in ground water levels.  
5. This FT article by Amy Kazmin is among the most appalling and asinine articles I have read in recent times, so much so that it seriously undermines FT's credibility. The same cherry-picked portrait could have been strung together for any country. It really is the revealed mind, laid completely bare, of a very biased observer. 

6. The developments in Ethiopia highlights the challenges of bringing liberalism and democracy into societies without the conditions to embrace it. President Abiy Ahmed, a former military man, assumed leadership of Ethiopian People's Revolutionary Democratic Front (EPRDF), the part which has ruled the country since 1991, and became President of the country last year. He has abruptly embraced values of liberal democracy, freed up the press, unbanned political parties, released political prisoners, promised elections in 2020, and made peace with Eritrea. Being the first Oromo leader of the country, the largest ethnic tribe, he has made common cause with the second largest tribe  and traditional ruling class, Amhara.

Sample the latest developments,
Brigadier General Asaminew Tsige was released last year from a life sentence for plotting to overthrow Ethiopia’s government — one of tens of thousands of political prisoners to be freed by prime minister Abiy Ahmed. Last weekend, the brigadier was named as the alleged ringleader of another coup, this one aimed at toppling the regional government in Amhara. By Monday, security forces had shot him dead. Asaminew’s story encapsulates the high-wire act of Mr Abiy, who is attempting to turn one of Africa’s most authoritarian but effective states into a liberal democracy. The 42-year-old former army intelligence officer, the most exciting leader in Africa, may yet succeed. But this weekend’s events show the perils of his enterprise.
7. Facebook's announcement of the plans for a global digital currency Libra backed 1:1 with physical currency reserve is interesting on multiple counts. For a start, the timing of the announcement and that too by Facebook, given all that has happened in recent times around Facebook, is so questionable on multiple grounds. Two, despite all the concerns around Facebook and also issues about data security, the general commentary around this announcement has largely been surprisingly appreciative. Three, amidst all these discussions, there is little deep enough exploration of the idea's likely impact on the national and global financial system. In fact, the Libra white paper itself has nothing meaningful to say about the concerns that are likely with such an idea.

Martin Wolf, surprisingly, has a good cautionary note. As he says, this idea, even without Facebook, should not be allowed without serious exploration of the implications. Barry Eichengreen too raises concerns.

8. The transhipment route to skirt around the trade sanctions on China,
The Trump administration has for more than a year sought to weed out the practice known as transshipment, in which Chinese exports typically are minimally processed or altered during a brief stop in a third port and then re-exported as a product originating from the third port. Such circumvention threatens to crimp U.S. plans as it prepares to add tariffs on to $300 billion of Chinese exports, from toys to electronics, essentially covering all its China trade. The U.S. already has placed 25% tariffs on some $200 billion of Chinese exports. In the first five months this year, exports to Vietnam from China of electronics, computers, and machinery and other equipment have sharply increased compared with a year earlier. In turn, so have exports of such goods from Vietnam to the U.S., Vietnamese trade data show.
9. Ananth points to this detailed investigation of how AMD, in pursuit of corporate profits, transferred cutting-edge x86 chip technology to China by skirting around US regulations on transfer of such technologies.

Three things come out from this. One, capitalists elevate the pursuit of profits above all else, including patriotism and national interests. As the stakes go up and capitalism becomes more global in nature, this trend will get amplified. Two, as the manner in which the joint venture between AMD and Sugon Information Industry Co was engineered, the Chinese have been very strategically pursuing the model of "introduce a foreign technology to the market, absorb it, and then innovate to make China a leader". Three, the US government at various levels played along, even connived in the subversion of the Committee on Foreign Investment in the US (Cfius) which scrutinises foreign investments for national security issues. This is only to be expected given the pervasive institutional capture in the US by corporate interests.

10. Finally, a fascinating essay on the Indian monsoon in the Economist.