A practical power distribution sector reform agenda

It is often said that sectoral reforms have a very non-linear path. Electricity in India is a good example. The central challenges identified were inadequate generation capacity, high distribution losses, and free (and, in case of many states, unmetered) farm power. 

The first generation of power reforms, initiated at the turn of the century, involved unbundling integrated utilities by separating generation, transmission, and distribution. This, coupled with a series of regulations mandating competitive power purchases by distribution companies, attracted private investment into generation and installed capacity rose dramatically. Discoms had to purchase power from the market at competitive prices and also had to make immediate payments (and not run up dues) for those purchases. Often times, especially in the summers, the prices of spot purchases rose by multiples, leaving discoms with even bigger gap between cost of services and revenue recovery. 

This disciplining constraints on the cost-side forced the discoms to get their acts together on the revenues side or figure out ways to bridge the gap. But addressing the revenues side meant lowering technical and commercial losses. Given pervasive theft of supply, billing and collection deficiencies, and unmetered (and free) agriculture supply the latter was 2-4 times the former. This required addressing challenges on state capacity (in billing and collection), political economy (free farm power), and a combination of both (theft of supply). 

Now these challenges are not easily addressed. So discoms came to rely on a combination of strategies to bridge the deficit. Primarily, they resorted to large-scale rationing of supply and suppression of demand, through what are called load-shedding or power-cuts. In fact, in India, “peak demand” is deceptive since it only conveys demand of the discoms and not of the consumers. Across vast swathes of North India, consumers are off-grid more hours than they have supply. Rural areas bear the brunt of these power cuts. 

Another strategy was to finance the deficit with government subsidies (to the extent of government policy mandated subsidised supply, mainly to farmers) and borrowings. In many states, the government subsidies while sanctioned were never disbursed, forcing the discoms to borrow even more and continuously rolling them over. The Government of India periodically undertook discom debt restructuring schemes with ostensibly strict conditions on loss reduction. They, including the latest one, have been like band-aid on gangrene, merely kicking the can down the road. It also did not help the discoms that the share of purchases from state government generators (Gencos), whose dues could often be rolled-over, declined and that from independent power producers rose. 

Compounding the problem, political considerations meant that tariff increases were mostly off-table. In fact, in many states, household tariffs remained unchanged for years, sometimes nearly a decade. With raising tariffs for household and farm consumers a no-go, discoms relied on industrial and commercial consumers to bear the brunt of tariff increases. An inverted tariff structure emerged, whereby industrial tariffs rose to become much higher than household tariffs. Already struggling with power cuts and poor quality of supply, the tariff inversion only added to problem of industrial competitiveness.

As a result of all these, the objective of discoms degenerated into mere provision of power during the scheduled supply timings and avoid unscheduled interruptions. In the rural areas, it meant limiting to basic lighting supply during the night (which was also generally the time for farm supply). Since farm supply did not fetch any revenues and the supply on most rural feeders was very small (as a share of the total supply), the discom anyways had limited incentive to carry out maintenance works on rural distribution network and focus on the quality of supply. For the discoms, rural supply was nothing more than a necessary evil.

In fact, the need to limit farm usage beyond the period stipulated under the respective state’s free-farm power policy (typically 7-10 hours varying across states) meant that discoms restricted to single-phase supply after that period. This effectively meant that economic activities that required the use of motors etc became prohibitive. Such enterprises had to draw three-phase lines directly from the 33/11 kV substation, a very expensive proposition, often comparable to the capex required for the business itself. While states tried to overcome this by segregating agriculture feeders, its high capital investments and practical challenges (not to speak of higher technical losses due to additional network) meant that this has had limited coverage. 

All these had the discoms incentives accordingly aligned. Struggling with a hand-to-mouth existence, the discoms had limited incentive or resources to invest in maintenance of the distribution network. In the absence of adequate maintenance, reclining poles, sagging conductors, recurrent transformer failures, burnt insulators and failed switches, unreplaced fixtures and so on became commonplace. The result was frequent interruptions, pervasive voltage fluctuations, high technical losses, and accidents with large-scale human casualties. 

So what’s the way out?Clearly only the first challenge of enhancing capacity generation, by attracting private investment into generation, has been addressed. There too, the failures on the other parts of the sector threaten to undermine the successes. The issue of high distribution losses and free farm power have remained unresolved. 

Privatisation of distribution has been the oft-repeated solution. But experience of private participation in power distribution has been mixed. The limited successes have been in areas with favourable load mix and disciplined consumers, and with none of the underlying problems addressed. Also, unlike generation, political economy factors are relevant at the consumer facing distribution sector.

There is no avoiding the reality that any sustainable solution has to involve addressing the underlying financing problem of the discoms. This requires tariff increases that allow for cost recovery, metering and pricing of farm power, and strict billing and collection. There are no short-term or one-time legislative or regulatory solutions for these. This needs political attention and that too urgently. The house is almost burnt down.

In the meantime, a good and practical bureaucratic starting point would be to appropriately leverage technology to measure and audit supply, and localise and highlight the source of losses. Automatic meter reading (AMR) devices and smart meters now make it possible to easily monitor these in real-time, bill and even control supply to consumers. But given the constraints and the complex challenge, this needs to be done gradually and with great attention.

Fortunately, the very configuration of electricity distribution offers an opportunity to monitor in a gradually cascading manner. Electricity is transmitted from the generators through a cascade of substations. Distribution side starts with the 11kV feeders emanating from each 33/11 KV sub-stations (typically 3-8 feeders with each substation), each feeder in turn servicing several smaller distribution transformers, each of which in turn has several consumers depending on their total load. 

There is no dearth of efforts to leverage technology to address the distribution side problems. In fact, there have been programs for several years. The Government of India has had programs to install smart meters upto transformers. Some discoms have expanded it to certain types of consumers. Many have been implementing GIS mapping of feeders and some even supervisory control and data acquisition (SCADA) systems for a part or the entire distribution network.

Unfortunately, the scope of all these projects are excessively ambitious, beyond the capabilities of discoms to execute with any reasonable degree of satisfaction. Neither is such ambition necessary at this point in time. These technology solutions require significant efforts to just stabilise and generate practical and actionable information relevant to officials at different levels, much less the challenge of getting them to act on the information. 

For example, just stabilising the installed AMR and smart meters is far from a non-trivial challenge. Even when data becomes available continuously, and at very high frequency and in massive volumes, meaningful analysis of the same, much less acting on the information is far from easy. One-time GIS mapping of the network without systems to capture the constant changes in downstream distribution network (due to new connections, load distribution shifts etc) and keep the map updated will only leave us with maps which become badly dated in just a few years. SCADA systems too face formidableinsurmountable challenges. In fact, a handful of the best discoms in the country, in the South, have struggled with all of these for years.

Instead a more manageable endeavour would be to have all the 11 KV feeders installed with AMR devices (or even smart meters), map the feeders physically, and then initiate a practical enough monthly energy audit. For example, prioritise attention on the feeders with the biggest cost-recovery deficits (which is unlikely to be the politically sensitive or theft pervasive slum or rural feeders, but those which service the not-so-poor areas). This has to be complemented on the revenue side with credible and appropriately incentivised technology-intermediated spot-billing of all consumers. The discoms will also have to get their act together in ensuring that meters are working and a system to replace burnt and defunct meters at the earliest. Most importantly, the most egregious discrepancies and exceptions that emerge from both supply and revenue sides will have to be investigated and deviations and violations enforced strictly. 

An appropriate performance management system built on this has to be put in place for the discom officials. This whole initiative could be adapted, calibrated and phased-in as gradually as possible. But there is just no short-cut to this painstaking work.

Simultaneously the discom should introduce an initiative to publicise the monthly feeder-wise information about supply and revenue collection, and the associated cost-recovery gap. This could be accompanied with a program to incentivise feeders with higher payment compliance by both increasing their supply duration as well as ensuring greater quality. This could also perhaps trigger the hitherto absent demand-side pressures on quality and make this a salient political good. 

On the free farm power side, the endeavour should be to first ensure all farm services are metered, even if unbilled. This is the first step to any meaningful engagement to address the problem. 

Another intervention would be to introduce direct benefits transfer (DBT) cash subsidy for free-farm power. Farmers can be offered an equivalent (or higher) units of free supply in return for having all farm connections metered and agriculture tariffs fixed. Each farmer would pay his monthly electricity bill, whereupon he would be reimbursed the previous month’s bill to the extent of the free units consumable. Further, the farmer can be incentivized to reduce consumption by reimbursing an amount proportional to his unconsumed units (from the free power unit allotted each month). The introduction of meters will help measure and audit rural supply. The incentives will encourage farmers to optimize consumption. It will also ensure that farmers can now use three-phase supply beyond the 7-10 hours. Besides, it will also boost non-farm economic growth. 

These two efforts, on the energy audit and billing as well as free-farm power sides, are practical starting points to engage meaningfully with the problem. It has to be noted that they are not just about some technology interventions or a cash transfer innovation, but about using technology interventions as practical and credible decision-support for discom officials which they then need to then act upon. These interventions can shine light on the problem, identify and quantify leakages, localise and apportion costs, and thereby align incentives for further action. 

I have not talked about the political challenges that need to be addressed. They include annual tariff assessments and increases accordingly, allowing discom officials enforce on theft of supply and non-payment of bills, and gradually shift from free and unmetered farm supply to some basic pricing. Equally important is that the demand for continuous and good quality of supply should become an electoral good that would in turn make the aforesaid issues an imperative for the political leaders. 

Weekend reading links

1. Nice historical examination of the trends in public debt over the past 150 years by Barry Eichengreen et al. Interesting examples of debt consolidation by running primary surpluses, Great Britain between 1815-1914, and US between 1867-1917. The rise in advanced country debt since mid-seventies has been stunning.

2. This article about Airbus's decision to stop production of its jumbo A380 by end of 2021 is classic hindsight analysis. Launched in 2000, the 555 seater aircraft has so far cost $17 bn in development costs and would have sold just 251 aircrafts, far fewer than the 750 that were promised to have been delivered by end of 2019. Sample this,

The world’s largest passenger plane exposed dysfunction inside the European aerospace company and now offers a textbook case of a company misjudging its market and losing big... How did some of the world’s best engineers get their numbers so wrong? Airbus misjudged market trends and underestimated emerging technologies. It compounded the error by justifying its decision with emotion and European pride, some former Airbus officials have said. Then its production system, organized for politics more than efficiency, failed... Steven Udvar-Házy, a pioneer of aircraft-leasing (says)... “The technological achievement was formidable, but the A380’s “commercial viability was always dubious.”... With the A380, Airbus planners bet prevailing market conditions would persist. They assumed airlines would keep using big, increasingly congested hub airports to transfer passengers between connecting flights, and need to fly large, four-engine jetliners on very long routes. Both changed around the time A380s started flying. Not long after Airbus began developing the A380, Boeing in 2003 embarked on its smaller, hyper-efficient twin-engine 787 Dreamliner. It quickly became a best seller. Only in 2006 did Airbus respond with a big two-engine model, the A350. Together, the twins rewrote the economics of long-haul flying, hurting the A380.

If only it were so simple and the experts and journalists could have predicted with such smug definitiveness that the airline market would turn out very different from what was the dominant paradigm when Airbus launched A380 - the hub-and-spokes model with smaller aircrafts relaying passengers to hubs from where large aircrafts took over. 

Further, even today, it is difficult to claim with any confidence that the age of large aircraft is beyond us. For example, a prolonged period of low fuel prices or shifts in location/patterns of long-distance travel or emergence of 3-4 Emirates type hub-based airlines could take us back to the hub-and-spokes model with demand for bigger aircrafts. 

3. FT has a profile of the new darling of Africa, President Abiy Ahmed of Ethiopia who has had several successes in just 10 months. Sample this,

He has made peace with Eritrea; freed 60,000 political prisoners, including every journalist previously detained; unbanned opposition groups once deemed terrorist organisations; and appointed women to half his cabinet. He has pledged free elections in 2020 and made a prominent opposition activist head of the electoral commission. In a country where government spies were ubiquitous, people feel free to express opinions that a year ago would have had them clapped in jail.

In many respects, Abiy is reaping the benefits of the economic growth foundations laid by the late Meles Zenawi. The real challenge will be managing the tension between political liberalisation and the stability required to sustain economic growth in one of Africa's most heterogeneous of countries. While it is easy to advocate that leaders in these countries liberalise and provide political freedoms, unqualified actions in this regard is most often likely to become counter-productive.

What is perhaps required as an objective is policies that can contribute to political and economic stability. Economic and political liberalisation cannot become the end in itself, as is the case in international development debates. 

4. I would have been surprised if the World Bank's $320 million "pandemic bonds" had turned out any different,

It was a way of “leveraging our capital market expertise,” said then-president Jim Yong Kim, “to serve the world’s poorest people”. Just a year later, a severe attack of Ebola hit the Democratic Republic of Congo. So far it has claimed almost 500 lives and become the second-largest outbreak ever recorded, according to Médecins Sans Frontières. Yet the bonds have yet to pay out a penny. A linked emergency cash facility at the World Bank has paid the DRC more than $11m and is preparing to disburse more. But the lack of support so far from the pandemic bonds, which mature in July 2020, has prompted questions about the limits of financial innovation... The pandemic bonds came in two classes: one covering diseases such as influenza, which pays investors a coupon of 6.5 per cent over Libor, and the other, which covers Ebola and other diseases, paying 11.1 per cent over Libor. The coupons are paid by donor nations Germany and Japan. If the bonds mature without paying out, investors get their money back, plus the chunky coupons. The pandemic bonds are just one example of a wider trend: investors have also bought into vaccine bonds, while the growing market for catastrophe bonds is another example of how private finance is being tapped to replace traditional funding structures such as disaster aid. The aim of the pandemic bonds, according to the World Bank, is to tackle social ills through private investment.

Supporters rationalise this apparent failure to "bad design",

The bonds’ criteria include the requirement that a disease must spread across an international border before the affected nation can receive the cash — which has so far not been the case with the DRC and Ebola.

Well this may be so. But such design flaws are unlikely to ever end. If the cross-border condition is the problem this time, it will most likely be something else another time, and so on. 

5. Atal Gawande offers a cautionary tale on the impact of computerisation and electronic medical records on the doctors in the US,

My hospital had, over the years, computerized many records and processes, but the new system would give us one platform for doing almost everything health professionals needed—recording and communicating our medical observations, sending prescriptions to a patient’s pharmacy, ordering tests and scans, viewing results, scheduling surgery, sending insurance bills. With Epic, paper lab-order slips, vital-signs charts, and hospital-ward records would disappear. We’d be greener, faster, better. But three years later I’ve come to feel that a system that promised to increase my mastery over my work has, instead, increased my work’s mastery over me. I’m not the only one. A 2016 study found that physicians spent about two hours doing computer work for every hour spent face to face with a patient—whatever the brand of medical software. In the examination room, physicians devoted half of their patient time facing the screen to do electronic tasks. And these tasks were spilling over after hours. The University of Wisconsin found that the average workday for its family physicians had grown to eleven and a half hours. The result has been epidemic levels of burnout among clinicians. Forty per cent screen positive for depression, and seven per cent report suicidal thinking—almost double the rate of the general working population. Something’s gone terribly wrong. Doctors are among the most technology-avid people in society; computerization has simplified tasks in many industries. Yet somehow we’ve reached a point where people in the medical profession actively, viscerally, volubly hate their computers.

And this,

The I.B.M. software engineer Frederick Brooks, in his classic 1975 book, “The Mythical Man-Month,” called this final state the Tar Pit. There is, he said, a predictable progression from a cool program (built, say, by a few nerds for a few of their nerd friends) to a bigger, less cool program product (to deliver the same function to more people, with different computer systems and different levels of ability) to an even bigger, very uncool program system (for even more people, with many different needs in many kinds of work)... People initially embraced new programs and new capabilities with joy, then came to depend on them, then found themselves subject to a system that controlled their lives... As a program adapts and serves more people and more functions, it naturally requires tighter regulation. Software systems govern how we interact as groups, and that makes them unavoidably bureaucratic in nature. There will always be those who want to maintain the system and those who want to push the system’s boundaries. Conservatives and liberals emerge... The Tar Pit has trapped a great many of us: clinicians, scientists, police, salespeople—all of us hunched over our screens, spending more time dealing with constraints on how we do our jobs and less time simply doing them.

So how have doctors been responding?

We force at least a certain amount of mutation, even when systems resist. Consider that, in recent years, one of the fastest-growing occupations in health care has been medical-scribe work, a field that hardly existed before electronic medical records. Medical scribes are trained assistants who work alongside physicians to take computer-related tasks off their hands. This fix is, admittedly, a little ridiculous. We replaced paper with computers because paper was inefficient. Now computers have become inefficient, so we’re hiring more humans. And it sort of works... Scribes aren’t a perfect solution. Underpaid and minimally trained, they learn mostly on the go, and turn over rapidly (most within months). Research has found error rates between twenty-four and fifty per cent in recording key data. 

And a new form of off-shoring,

During the past year, Massachusetts General Hospital has been trying out a “virtual scribe” service, in which India-based doctors do the documentation based on digitally recorded patient visits. Compared with “live scribing,” this system is purportedly more accurate—since the scribes tend to be fully credentialled doctors, not aspiring med students—for the same price or cheaper. IKS Health, which provides the service, currently has four hundred physicians on staff in Mumbai giving support to thousands of patient visits a day in clinics across the United States. The company expects to employ more than a thousand doctors in the coming year, and it has competitors taking the same approach... Yet can it really be sustainable to have an additional personal assistant—a fully trained doctor in India, no less—for every doctor with a computer?

6. For all talk of the eclipse of the dollar and rise of renminbi, the reality has been very different.

The renminbi makes up just 2% of global reserves.

7. From The Economist on tax avoidance,

The oecd reckons that exchequers worldwide lose $100bn-240bn a year to corporate tax avoidance. An imf study in 2016 suggested that the total could be over $600bn—equivalent to a quarter of all corporate tax collected globally. Avoidance has grown in line with intangible assets, such as intellectual property, which are easier to shift to tax havens than physical assets. An analysis of American multinationals and their international subsidiaries in 2017 found that the share of profits declared elsewhere for tax purposes had risen from 5-10% in the 1990s to 25%. Poor countries are hit hardest because they rely more on corporate tax revenues than rich countries, and because international tax rules, originally crafted to suit advanced economies, are stacked against them.

The "billions to trillions" folks could spend their energies many times more effectively if they get behind the campaign to curb tax avoidance and bring in transparency to cross-border capital flows.

More evidence on superstars and business concentration

German Gutierrez and Thomas Philippon study the evolution of superstar firms in the US over the past 60 years and find that this time is no different and the current super stars are not exceptional. Not only are they are not becoming larger and more productive, but their share of aggregate US productivity has fallen by a third since 2000.

As to an explanation for this, 

We do not have a definite answer but it is clear that something changed around 2000. Perhaps ideas are becoming harder to find. Or perhaps declining competition and rising barriers to entry have allowed incumbents to cut investment and innovation. Or barriers to entry arise from excessively complex regulations. Indeed, we find that the free entry condition starts to break down around 2000. The elasticity of entry with respect to profits and/or Tobin’s Q has declined over the past 30 years and is now zero. We find rising barriers to entry from lobbying and regulations that seems to benefit large firms. Facing less competition, their incentives to invest and innovate decrease. The investment rate of large and profitable firms has remained surprisingly low as their payout rate (dividends and stock buybacks) has increased. This is presumably part of the explanation.

Ernest Liu, Atif Mian and Amir Sufi construct a model that shows reduction in long-term interest rates can increase business concentration. They write,

A reduction in long-term interest rates tends to make market structure less competitive within an industry. The reason is that while both the leader and follower within an industry increase their investment in response to a reduction in interest rates, the increase in investment is always stronger for the leader. As a result, the gap between the leader and follower increases as interest rates decline, making an industry less competitive and more concentrated. When interest rates are already low, this negative effect of lower interest rates on industry competition tends to lower growth and overwhelms the traditional positive effect of lower interest rates on growth. This produces a hump-shaped inverted-U production-side relationship between growth and interest rates... This paper introduces the possibility of low interest rates as the common global “factor” that drives the slowdown in productivity growth. The mechanism that the theory postulates delivers a number of important predictions that are supported by empirical evidence. A reduction in long term interest rates increases market concentration and market power in the model. A fall in the interest rate also makes industry leadership and monopoly power more persistent. There is empirical support for these predictions in the data, both in aggregate time series as well as in firm-level panel data sets.

The empirical evidence on firm operating surplus and market concentration ratio show that both increase with lower interest rates.

And similarly business dynamism - both in terms of entry and exit - declines with lower rates.

Finally, John Mauldin consolidates the evidence on business concentration and monopoly capitalism in the US, 

In industry after industry, they can only purchase from local monopolies or oligopolies that can tacitly collude. The US now has many industries with only three or four competitors controlling entire markets... Here are other examples: Two corporations control 90 percent of the beer Americans drink. Five banks control about half of the nation’s banking assets. Many states have health insurance markets where the top two insurers have an 80 percent to 90 percent market share. For example, in Alabama one company, Blue Cross Blue Shield, has an 84 percent market share and in Hawaii it has 65 percent market share. When it comes to high-speed internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider. Four players control the entire US beef market and have carved up the country. After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the US corn-seed market.

The list of industries with dominant players is endless. It gets even worse when you look at the world of technology. Laws are outdated to deal with the extreme winner-takes-all dynamics online. Google completely dominates internet searches with an almost 90 percent market share. Facebook has an almost 80 percent share of social networks. Both have a duopoly in advertising with no credible competition or regulation. Amazon is crushing retailers and faces conflicts of interest as both the dominant e-commerce seller and the leading online platform for third-party sellers. It can determine what products can and cannot sell on its platform, and it competes with any customer that encounters success. Apple’s iPhone and Google’s Android completely control the mobile app market in a duopoly, and they determine whether businesses can reach their customers and on what terms. Existing laws were not even written with digital platforms in mind.

And this is the critical point, 

Broken markets create broken politics. Economic and political power is becoming concentrated in the hands of distant monopolists. The stronger companies become, the greater their stranglehold on regulators and legislators becomes via the political process. This is not the essence of capitalism.

It is surprising that faced with such overwhelming evidence the academics dispute over technical minutiae and the liberals look the other way or suggest token palliatives.

Global fund raising summary

The summary of unlisted infrastructure fund raising in 2012-18

There were 67 unlisted infrastructure funds which closed in 2018 raising a combined $85 bn, a record capital raise. Of them 22 N America focused funds raised $44bn and 33 Europe-focused ones raised $35bn. The average fund raise was $1.3 bn, with 71% which closed this  year exceeded their targets. Four funds raised more than $5 bn, of which each of Brookfield Infrastructure Fund IV and Global Infrastructure Partners IV are targeting $20bn,. With this, the total dry powder available is at a new record $172 bn as at December 2018. In early 2019, there are 208 funds raising $193 bn.

Of the 2454 infrastructure deals in 2018, Asia accounted for just 12.1%. Further, US, Europe and China form the vast majority of infrastructure deals. And 64% were secondary market deals. 

The summary of global annual PE fund raising for 2012-18.

There were 1175 PE funds which raised $426 bn, down from $552 bn in 2017. Of them, funds focused on N America raised $240 bn, Europe $90 bn, and Asia $80 bn. The average fund size was $363 mn, with the largest fund closed being a $18.5 bn by Carlyle Partners VII. The dry powder available was $1.2 trillion as on end-December 2018. Beginning 2019, there are 3750 PE funds seeking a total of $977 bn.

The global alternative assets under management stood at $8.8 trillion in end-2017 and is expected to touch $14 trillion by 2023. 

The global VC industry, at 21% of global PE, was $660 bn in 2017. US, Europe, and China dominate the global VC industry.

In 2018, alternative assets raised $757 bn.

China uses technology in judicial reforms

Among all the arms of the government in India, perhaps the one most antiquated, both in terms of use of technology and application of process re-engineering, is the judiciary. In fact, very little of the "information revolution" that has touched all other aspects of life has influenced the country's legal system. And the result is an almost antediluvian system which fails to deliver on its objectives. And very little discussion about serious reforms.

For lessons, it needs to look no far than what neighbour China has done. 

China has livestreamed more than 2.4m trials since introducing the technology in 2016. It also has three online courts, in Hangzhou and Beijing, which have opened in the past two years, while another court in Shanghai has an online mediation platform to resolve disputes before they go to trial. There is also a “central” online mediation platform, with more than 1,400 Chinese courts listed... “You [can] just turn on a computer to complete an entire legal procedure,” he said. “You don’t have to have internet-based evidence notarised any more ... for example, if you find a pirated copy of a movie online, you only need to [screenshot] the page.” On the other hand, livestreamed hearings and trials were intended as a way of educating the public, he added. “By showing how [judges] rule on one case, it tells the public what the court’s attitude is towards those types of case.”... China is forging ahead with applications that are replacing lawyers’ functions and even assisting judges. “Many courts are using smart ruling systems [that] categorise and analyse previous cases to help judges draft their verdicts,” said Mr Zhang. For similar, repetitive types of case, some of those systems can be “very reliable”.

And it seems to have done this by channeling private enterprise,

According to new figures from Thomson Reuters, the number of patents related to legal technology, or “lawtech”, filed globally has risen more than fourfold over the past five years, from 202 in 2013 to 933 last year. More than half — 51 per cent — were filed in China last year, while 23 per cent were filed in the US and 11 per cent in South Korea. Western law firms and other legal service providers tend to concentrate on how to automate their operations in the name of efficiency and cost savings, not least because their biggest clients — corporate legal departments — are insisting on lower bills. By contrast, Chinese innovators are more focused on ordinary citizens, with courts now livestreaming trials — from traffic incidents and small financial disputes to drug offences and theft — and enabling claimants to file cases, submit evidence and resolve disputes online. More sensitive issues, including anything deemed to involve national security, are kept away from public scrutiny.

Clearly this is a very impressive achievement. Like with other areas, the impressive achievement is with figuring out solutions, their effective execution within a finite time, and with channeling private entrepreneurship. 

There are perhaps two ways of engaging on this. One is public production of solutions - government agencies make the solutions and implement them. The other option is publicly co-ordinated private production - co-ordinate the market to engage with them problem and develop a solution eco-system.  

The exemplar of the former was the erstwhile Soviet Union. Most developed countries of today addressed many of their basic plumbing challenges largely through public production. China is clearly an example of the latter. It appears to have perfected the use of industrial policy to co-ordinate private enterprise even into some of the most difficult areas for private engagement. This is the case of industrial policy to both address a critical plumbing issue as well as catalysing a market. And this is what makes its achievement exceptional.

Weekend reading

1. Talk about likely Cheshire cats and Uber edition, as the company prepares for its IPO,

Excluding certain one-time items, including the sale of some of its businesses, Uber’s losses for the quarter rose 88 percent from the previous year, to $842 million. The losses were a result of Uber’s increasing its spending as it tries to outmuscle competitors, many of which have intensified their efforts to add riders and drivers. Uber has responded by offering bigger incentives and more promotions to fend off rivals like DoorDash, Lyft and other ride-hailing and food-delivery services... Some of the company’s losses have been overshadowed by its explosive growth. In 2018, Uber increased its total bookings — what it charges customers for rides and food delivery — to $50 billion, up 45 percent from 2017. Net revenue was $11.3 billion, a 43 percent increase... But Uber’s profit margins have declined as it cut prices to match competitors and spent money on expanding its food-delivery business, Uber Eats. The margins are also smaller on Uber Eats orders because the company pays commissions to restaurants as well as delivery drivers.

Despite this the company is valued at $70 bn, with investment bankers suggesting even $120 bn.

More likely this is a pricing of Uber than its valuation. When asked about Uber's astronomical 'valuation', valuation guru Aswath Damodaran had this to say,

Pricing. It’s a pricing issue. The reason people pay $60 Billion for Uber is because they think that when it goes public it will be worth $100 Billion. There doesn’t need to be a fundamental rationale for value. All you need in the pricing game is someone else willing to pay a higher price for the company. As long as momentum is on their side, it’ll keep pushing the pricing up. It’s got very little to do with fundamentals, and everything to do with “is there somebody else out there who will pay me a higher price for this company”.

Btw, Aswath Damodaran values Uber at between $25 bn and $35 bn. 

Ahem!

2. So Amazon has pulled the plug on its Queens second head quarters which promised 25000 new jobs and $3bn in local tax concessions. What does it say about modern capitalism that its favourite corporate brand is forced to abandon its plans to establish its second headquarters in a city which is perhaps the capital of modern capitalism?

Now what happens to the vast trove of data that Amazon has accumulated about cities during the bidding process?

3. Special economic zones (SEZs) come in several forms, and there is little to suggest that, in general, they offer value for money. Consider this about 'opportunity zones' in the US, 

Based on recommendations from state governments, the United States Treasury has designated more than 8,700 eligible census tracts in urban, suburban and rural areas across the country. The opportunity funds are the vehicles for investing in these zones. The idea is that investors get federal tax breaks, while the neighborhoods get new businesses and upgraded properties, like apartment buildings, retail shops and hotels... Opportunity funds let investors postpone federal taxes on recent capital gains until the end of 2026; they can also reduce the taxable portion of those gains by as much as 15 percent, after seven years. Further, investors can eliminate taxes on additional gains from investing in the fund itself, if they hold the investment for 10 years. So, if you have investments that have appreciated, you can defer capital gains taxes by selling the investment and reinvesting the money into an opportunity fund within six months. Almost any sort of capital gain qualifies, whether from the sale of stocks or mutual funds, or other investments, including the sale of real estate or a business. Just the gains on an investment — rather than the entire proceeds of a sale — must be reinvested in the opportunity fund.

But the zones, notified last year, are already there are serious question marks about whether many of the notified zones deserved to get any fiscal concessions since they were already gentrifying. 

4. Leveraged loans, borrowings by those with relatively high debt, which has more than doubled to over $1 trillion since 2010, have for some time been signalling red. 

Highly leveraged loan deals (when debt is more than five times earnings before interest, tax, depreciation and amortisation) account for about half of new US corporate debt. That growth is partly a result of securitisation. Roughly half of investor demand today comes from packaging loans into collateralised loan obligations, or CLOs, and slicing them into different tranches of risk. Rising demand has shifted the balance of power from investors to borrowers, and contributed to a watering down of covenants embedded in loan agreements that traditionally protect investors. According to Moody’s, about 25 per cent of the leveraged loan market was considered “covenant-lite” before the global financial crisis. Now that figure is 80 per cent. The implications in a downturn could be severe. Covenant-lite lending is like swimming without the ability to spot seals (where there are seals, there are sharks looking to feed). Stricter covenants improve transparency and help investors identify underlying problems with borrowers; now some covenants are so weak that nothing short of insolvency will trigger a default. If problems finally show up, investors will stampede out of the asset class, creating a systemic liquidity crunch... Leveraged loans probably won’t spark the next recession, but they will almost certainly deepen it, because they are an important source of corporate funding for deals and share buybacks.

5. The debate about the merits and distortions associated with universal basic income (UBI) is likely an endless one. And it is also an activity that is likely to keep academics busy for generations. The present stage of evidence generation is focused on its efficacy, and given the need to tease out general equilibrium effects, this is the likely agenda for at least the coming decade. The evidence is likely, as is mostly the case with such problems, to be mixed. The next stage of debate will move to what is the right amount, then what is the right amount for a particular context, and so on.

Echoing this, a new paper for UBI in advanced countries finds,

A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.

6. It is a well-known fact that infrastructure contractors bid aggressively to bag the contract since they are confident that they can come back and renegotiate the contract. There is a massive body of literature on this. The latest addition is on the renegotiations in power generation contracts in India. 

7. What if users of Facebook were shut off from accessing the social media site? An RCT evaluation of the welfare effects of US Facebook users show,

Using a suite of outcomes from both surveys and direct measurement, we show that Facebook deactivation (i) reduced online activity, including other social media, while increasing offline activities such as watching TV alone and socializing with family and friends; (ii) reduced both factual news knowledge and political polarization; (iii) increased subjective well-being; and (iv) caused a large persistent reduction in Facebook use after the experiment.

8. Finally nice article by Pilita Clark bemoaning the disappearance of (now politically incorrect) bluntness in offices, and the mistaking of bluntness for unacceptable behaviour. 

Tax avoidance fact of the day

This about Alphabet is reflection of the extent of tax avoidance,

Google’s parent company Alphabet paid $5.1bn in EU fines in 2018 compared with $4.2bn in worldwide tax, or 11 per cent of pre-tax income.

The company's 2018 revenues stood at $136.8 bn. 

The Japanese model in Railways

FT has a nice article on the Japanese Shinkansen railway network. Since its privatisation starting in the mid-eighties, Japanese railway network has come to be managed as a super-efficient system and with no subsidy for the bulk of the network.

1. And despite the lack of subsidy, prices have rarely been increased over the past three decades.

2. The big difference in the models of privatisation,

In Britain, the tracks were split from the trains, and the rolling stock was split from railway operations. Today, the tracks are publicly owned by Network Rail. Companies regularly compete for franchise areas such as the West Midlands, leasing their rolling stock from another company. In Japan, however, the former Japan National Railways was split up along regional lines and then everything was sold together. JR East, centred on the city of Tokyo, owns its tracks, its trains and its stations outright. A private JR Central operates from Nagoya and JR West from Osaka, but the unprofitable JR Hokkaido, which operates many rural lines on Japan’s northernmost island, is still 100 per cent publicly owned... 

Perhaps even more important than the difficulty of managing operations, however, are the effects this system has on investment. Network Rail, as a publicly-owned infrastructure company, does not gain directly if passenger revenue goes up. Nor does it face direct commercial pressure to keep down costs. The rail franchises, meanwhile, have a declining incentive to invest as the period of their 10-year franchise runs out... Japan’s famous shinkansen high-speed railways actually operate on something close to the UK system: the tracks are built and owned by a government fund. However, the government hands them over to the JR companies to operate on fixed-price, 30-year leases, so the companies treat them as their own. However, Britain split up its system for a reason, and that reason was competition.

3. The ideological underpinnings are important,

“The basis of railway companies in Japan is they think they will contribute forever. They feel they have a responsibility to local societies,” says Hironori Kato, a professor of civil engineering at the University of Tokyo. “This kind of mindset is quite important to make a successful railway business.”... One... feature of Japan’s railways is noteworthy: the ability of rivals to co-operate. Touch-and-go payment cards work interchangeably across the country. In Tokyo, suburban trains now run straight into subway tunnels and out the other side of the city; a single journey may use the tracks of five different railway companies. Even then, the companies do not run rival trains, but share rolling stock and run a fully integrated service. The motivation for each company is adding value to its own stretch of railway, helped by some robust pressure from the transport ministry... Britain, meanwhile, had an ideological goal in mind: competition. The vision of those who privatised the service was not just to introduce a profit motive, but for different companies to run trains on the same tracks, competing for customers. It was hoped that the regular fight for franchises would drive down costs. 

A powerful reminder to those who view profit maximising self-interest and competition as the driving force behind effective markets.

4. As also the importance of strong regulation, especially important given the monopoly status of each rail operator in their areas,

The ministry collects detailed information on costs from all of Japan’s private railways. Based on that information, the ministry sets an upper limit on fares. “How do we determine the upper limit? It’s set based on an appropriate profit and appropriate costs under efficient management,” he says. If a company can cut costs and run itself more efficiently than rivals it can earn greater profits: this is known as yardstick competition. One important consequence is ruling out the complicated fare structures found in the UK. Since prices cannot go above the cap, even for last minute booking or at the height of the rush hour, companies instead operate a simple, distance-based fare.

5. And competition,

Japan’s railways may be organised along geographical lines, but they are not a series of regional monopolies. Rather, many companies run lines in the same area, interlaced with each other, which sometimes offers a choice. For example, between Tokyo and Yokohama there are three competing routes, as there are between Osaka and Kobe. For an individual traveller, one operator is usually more convenient, but higher prices are noticed. There is a third, more abstract, but still crucial form of competition. Every line radiating out of a city such as Tokyo serves a particular slice of suburbs — and those suburbs compete. Since new construction is much easier in Japan than in the UK, the rivalry is fierce, especially as the population starts to drop. Overprice or underinvest in your railway and passengers will ultimately move elsewhere.

6. The revenue streams from integrated rail and property development,

This competition between railway areas is linked to another vital part of the business model for Japanese railways: real estate. “The railway is about one-third of our total sales,” says Mr Shiroishi. “By name we’re a railway company but that’s just one of our functions.” Another one-third of revenues comes from real estate development along the Tokyu lines, especially at its Shibuya terminus. The final third comes from services to passengers such as supermarkets, convenience stores and hotels. These other arms allow the railways to capture some of the land value that their passengers create. Every station in Japan is a real estate opportunity and many have a shopping mall built above or below them.

7. Finally, the equivalence with road transport,

Another economic strength of Japan’s railways, particularly the shinkansen, is a level playing field with roads. A one-way shinkansen ticket from Tokyo to Osaka costs ¥13,620 ($124) but the motorway toll is similar. It is unlikely Japan could run profitable high-speed rail if the state provided free roads as an alternative. There are no urban congestion charges but parking is all off-street and formidably expensive. Added to the sheer density of Japan’s population, the result is ample demand for railways, letting them run frequent trains and cover their costs at reasonable prices.

Poverty graphics of the day

I had been thinking about how to get a graphic that captures the underlying point being made here - poor people have multiple livelihoods. This CGD essay has the graphic on the median number of livelihoods of poor people in different countries.

And its variability across the year is very high.

The article itself, like with a lot of CGD stuff (apart from a few affiliated scholars) which tries to straddle the divide between academia and practice, is off-the mark on several counts.

The case for business development services

Forget tax incentives and input subsidies, supporting business development services is perhaps the most effective jobs-creation and productivity enhancing intervention that governments can do. I have blogged earlier making the case here. 

Dani Rodrik points to a recent analysis of private-sector jobs growth by Timothy J Bartik of the 105 manufacturing-intensive labour markets in the US with a population of over 200,000 for the 2000-15 period makes for interesting reading. 

It finds “no evidence that job growth in these areas is significantly spurred by cutting business taxes or increasing business tax incentives”. Instead, it finds significant boost to job growth from “customised job training programs” and “customised manufacturing extension services”. The latter delivered “small and medium-sized manufacturers with consulting advice on improving technology, product design, and marketing”. These manufacturing extension services were offered by public agencies through a mix of subsidies and client fees, in co-operation with university and private sector.

My analysis measures an area’s intensity of manufacturing extension services by the job creation or retention due to manufacturing extension, as reported in client surveys. Reported extension-induced job creation or retention is a significant predictor of an area’s overall job growth, holding constant other growth determinants.

In terms of cost-effectiveness too, such customised business development services trump conventional industrial policy interventions like fiscal concessions and input subsidies.

Clearly the time has come for governments to embrace business development support as a priority industrial policy lever. 

Weekend reading links

1. FT points to 'fauxtomation', coined by Canadian activist Astra Taylor, the gulf between the myth of workless future and reality,

Take McDonald’s. I can now order my burger using giant touch screens, pay for it on the contactless card reader and then saunter up to the counter to collect it. This could be thought of as automating the work of a waiter; in reality, though, the company has convinced me to become an unpaid member of staff. The tasks I do — inputting an order into the system, sorting payment and then collecting the food from the kitchen — are all jobs that would normally be done by someone earning at least minimum wage. It’s the same when I use a self-service checkout at the supermarket, or check myself in and print out my own ticket for a flight. Technology has facilitated a shift in who is working, not eradicated it... Technology, Taylor argues, contributes to an illusion that human effort can be simply substituted by machines — like the famous “ Mechanical Turk” machine that could supposedly play chess but in reality contained a hidden chess master, or the dumbwaiters in Thomas Jefferson’s mansion that relied on hidden slaves.

And its impact on measured productivity,

“Fauxtomation” fits into a tradition of unpaid work being overlooked — work such as caring for the elderly or children, often done by women, that does not appear in official measures of economic output. The economist Diane Coyle argues that some of the extraordinary economic growth in the middle of the past century was probably due to women doing more paid work and less unpaid; if the latter had been valued properly in the first place, the postwar boom would not have been as large as it appears in the official figures. Similarly, the recent slowdown in productivity growth may be due to a move the other way, as everyone starts producing more outside working hours, whether on laptops at home or at supermarket checkouts. And then there’s what Coyle calls “do-it-yourself digital intermediation” — online platforms acting as our bank tellers, estate agents and insurance brokers. The benefits of these services getting cheaper ought to be reflected in higher spending elsewhere. But, Coyle argues, official measures of economic output are missing the value of our unpaid work, meaning the slowdown in productivity growth may not be as bad as it appears.

2. The collapse of the tailing dam in southeastern Brazil owned by mining giant Vale which killed at least 157 people, with 182 missing, is a classic case of socialising costs and privatising the benefits and one where criminal culpability should be traced right up to the top of the mining behemoth.

Vale knows that it can contain its costs by avoiding the construction of strong tailing dams and relying on shoe-string mud structures. The costs can be externalised and the savings can be appropriated privately. And when you add up several such externalities, it all begins to assume significant proportions. In simple terms, Vale, and other multinationals know that it can get away with a mud-dam and its attendant risks. 

What can be easily predicted is what will follow. There will be righteous indignation everywhere for the coming few weeks. Some junior employees on government and Vale's side will be sacrificed. And then everyone will forget and go on with life till the next incident happens. Incidentally, a similar accident on a tailing dam co-owned by Vale killed 19 people in 2015!

3. Some snippets about unemployment trends in India,

Instead of dropping out at a very early age, the percentage of women in the education system is very high until the age of 23-24. Earlier, it used to be only up to 17 years. So, there is a five-year shift; these people are no more in the labour force because they are still in the colleges. So that will reduce the labour force to some extent because they are out of the labour force. And earlier, the unemployment used to start at 20 onwards, now basically it is 24 onwards, so 20-24 they are in colleges and all that. So there’s a shift in the employment pattern from the report. Once they come out from the colleges, they are no more prepared to work on their father’s farm or looking after something and then get married and become housewives... This immediately will pick up the unemployment ratio because they are not showing up in the unemployment-numerator.

4. Livemint graphic on the unemployment problem among the educated,

A recent report by the Centre for Sustainable Employment at Azim Premji University, State Of Working India 2018, noted that unemployment among the well-educated is thrice the national average. There are roughly 55 million people in the labour force who hold at least a graduate degree, and about 9 million of them are estimated to be unemployed, the report added.

5. Nice Economist article on the extra-territorial reach of American policies that seek to penalise global companies for violating American domestic rules. 

Since the turn of the century, America has ramped up judicial programmes whose reach is not restricted by its borders. Focused on enforcing its sanctions, reducing corruption in poor countries and fighting money-laundering and terrorism financing, it has found ways of prosecuting companies and their executives far beyond its shores... Most of the companies caught in its legal net are foreign, often European. Some come from countries in which doing business with Iran, for example, would be no problem were it not for America’s stance... There are instances where America’s long legal reach may have given an edge to its own firms over foreign rivals, as in the case of General Electric’s purchase of Alstom of France in 2014... 

Several elements tie together America’s various legal forays abroad. The first is their creeping extraterritoriality. American law starts with a presumption against application of its statutes beyond its borders. But prosecutors have wide authority over how the laws are interpreted. They have adopted an ever-more-expansive interpretation of who is subject to American law, lawyers say. A banking transaction that ultimately passes through New York—as many do, given the centrality of American dollars to global trade—can give prosecutors a toehold to inspect it. If two executives outside America use Google’s Gmail to communicate about a bribe, say, American prosecutors can claim that the Americanness of the email provider can make it their business. The global banking system also gives America an advantage. Lenders have been hit hard by American prosecutors, notably BNP Paribas, a French lender walloped in 2014 with an $8.9bn fine for facilitating trade with Sudan, Cuba and Iran. Deutsche Bank was fined $425m in 2017 for helping launder $10bn from Russia...

It seems plain to foreign critics that America disproportionately targets foreign companies. Over three-quarters of the $25bn it has exacted in fines for money-laundering, sanctions-busting and related offences has been against European banks, 15 of which have paid over $100m each, according to Fenergo, a consultancy. American banks have been fined less than $5bn over such misdeeds. Anti-corruption probes also fall disproportionately on foreign firms. Of the ten biggest FCPA fines, only two have fallen on American companies.

6. Finally, an article on the decline of bus commuters across UK,  

Since 2009 the number of bus journeys in Manchester has fallen by 14%. Austerity has played a role. Councils in England and Wales have slashed bus subsidies by 45% since 2010, resulting in 3,347 routes being cut back or closed... The average delay caused by congestion in Britain’s cities has increased by 14% in the past three decades... Manchester is badly affected: the 43 bus now takes nearly 80% longer to cover its route in rush hour than it did 30 years ago. The average speed of Stagecoach’s buses fell by 4.9% in 2014-16; one route which took just nine minutes seven years ago now takes 27, according to the company.

Are the current unicorns actually only Cheshire Cats?

Innovations backed by venture capital has come to become the touchstone for entrepreneurship. But how credible is this trend? Martin Kenney and John Zysman calls this to question in an excellent paper.

Sample this,

In recent years, the amount of capital available to private firms has grown immeasurably, allowing firms such as Uber, Spotify, and Dropbox to continue to lose money and remain private far longer than previously – in the hopes apparently of going public or being acquired at even greater valuations. As a result, money-losing firms can continue operating and undercutting incumbents for far longer than previously – effectively creating disruption without generating profit. Arguably, these firms are destroying economic value. This new dynamic has social consequences, and in particular, a drive toward disruption without social benefit. Indeed, in some cases, they may be destroying social value while also devaluing labor and work in the enterprise.

And this about the emergent 'proto-monopolies' of winner take all (WTA) markets involving platform companies,

In each case, the dominant firm captured nearly the entire market and had become very difficult to dislodge. The start-up process in such WTA environments assumes that the startup will initially be cash-flow negative as it grows and competes against other startups and incumbents that are also seeking to restructure the new business space that the technology’s progress has made possible. Such startups begin by “bleeding” money: Investors are wagering upon the firm establishing a powerful market position—or what could be termed a “proto-monopoly.” These firms are not expected to win via early and sustained operating profit, but by absorbing operating losses during their growth phase financed by venture investment with the aim of driving incumbents and other new entrants out of the market. Investors are increasingly comfortable with absorbing the exceptional losses, if convinced that it will be possible to lock in a position to generate quasi-monopolistic profits and, by extension, enormous capital gains. The current technological and financial environment has created remarkable dynamics. For any given platform or Internet-related idea, low-entry cost and plentiful capital results in very low entry barriers. As a result, there are an enormous number of entrants. Because of this and because many of these markets will have WTA characteristics, the competition ignites an equity-capital consuming race to establish market leadership. The result is that ever-increasing amounts of capital must be raised. With the WTA opportunity beckoning, these startups have been able to raise ever-larger amounts of money at ever higher private valuations. The result is the “unicorn” phenomenon – private companies valued in excess of $1B in their last funding round. This growth-at-all-costs dynamic is reinforced at each stage of the capital-raising process (post-seed) for venture-backed companies because the metrics used by each investment stage to determine investment potential is growth – growth in users, engagement, and conversion for consumer-focused startups or monthly growth in customer acquisition and revenues. As long as the growth metrics are accepted by investors as proxies for value, then valuations can increase. Paradoxically, a sustainable business may not be the objective and may not matter, if earlier investors, founders, and management can sell their stakes in the business at higher valuation multiples to later-stage investors or through an IPO or trade sale before the actual unit economics and profit-generating potential of a company are clarified through repeated performance. The present entrepreneurial finance logic with low startup costs, emphasizes on disruption that will result in a new WTA industrial organization and abundance of finance, that not just encourages, but demands, a drive to breakneck expansion. In fact, a startup that does not grow as quickly as possible is soon overwhelmed by the startup with more capital and more reckless investment.

Some observations.

1. It has become an entrenched narrative that the success of technology solution companies is attributed to the exceptional genius of geeky entrepreneurs. Then there is also the story from the Silicon Valley folklore of college drop-outs in garages founding remarkable companies (though they were exceptional exceptions than any norm). This overlooks the reality that the present winners were the luckiest among a group of entrepreneurs who were at the right place at the right moment in time to be able to exploit the low-hanging fruits from an emerging technology wave and benefit from the inherent dynamic of network effects which privileges the first-movers. 

In terms of sheer sharpness of intellect required, one could just as well objectively argue that designing a massive civil engineering structure is at least as much challenging, if not much more, as developing a complicated software solution.

2. The facts do not support the conventional wisdom that these start-ups have been leading the innovation-edge in areas like nano-technology, robotics, artificial intelligence, facial and speech recognition, bio-technology, digital IDs, driverless vehicles etc. Of the 290 unicorns which have attracted $980 bn, less than a tenth are working on truly innovative solutions. Most of the cutting edge innovation work is happening in well-funded government-financed laboratories and universities and large and established companies who have the deep-pockets to support such innovations.

3. The most disappointing feature of the tech-entrepreneurship world has been the lack of success with innovations which have made a meaningful impact on persistent development challenges. Despite all its promise, areas like tele-medicine, Edtech, Agtech, and Fintech remain almost completely hype without any substance. Instead the landscape in developing countries is littered with me-too solutions which are straight copies of versions in developed countries.

4. It is not a stretch to argue that the entire unicorn world is like the man riding the tiger who cannot afford to dismount for fear of being eaten up by it. The unicorns have raised vastly inflated expectations as reflected on their valuations, and investors desperately want to at least preserve their mark-to-market share valuations. The only way to do this is to keep growing. And in most cases, since growth is built on bleeding capital to acquire customers, just to grow requires more capital, attracting which makes the story of rising valuations even more important.

5. Finally, this time is no different from previous times. Including the infamous tulip mania, history is replete with examples from previous eras of new arrival and innovation disruptions which led to such irrational exuberance. The paper talks about the bubble in optic fibre cables. Similar bubbles have been associated with every major large scale general purpose technology from railroads to electricity to automobiles to Internet.

The 'experience' discount in development

Knowledge about a subject is of two types - theoretical and experiential. 

The former is accumulated through reading, observing, and discussing the issue or thing (learnt knowledge). You could learn about traffic congestion, including its relationship with network theory etc at say, Massachusetts Institute of Technology or Madras Institute of Technology. Here a logic or hypothesis or theory is used to draw inferences about a problem or a situation. This application of deductive logic or positivism is also what characterises a computer.

The latter is accumulated by doing the thing in question (lived career) and/or being part of the thing itself (lived life). You experience traffic congestion either as a daily commuter or as a practitioner trying to resolve traffic congestion in a particular place/city. This accumulation is the experience of what one comes across in daily life. Here priors arising from countless empirical observations is used to draw inferences about a problem or a situation. This application of inductive reasoning is also what characterises a human being.

In the world of impact investing and innovation-focused development, one comes across very smart people, with limited or no experiential knowledge (nor even reference to priors), trying to draw inferences about a problem (and its solutions) using purely deductive logic.

So, the wonder App which gives information (weather, agronomy, market etc) to farmers can boost farm productivity and incomes. The adaptive learning solution can transform the learning outcomes of students in public schools. The fintech solution can cut transaction costs and increase the savings of the poor or provide micro-pensions and micro-insurance products. The blockchain solution can address the problem of poor land records in developing countries. The smart meter or GIS mapping or SCADA can cut the persistent distribution losses in water and electricity utilities. The nifty labour market matching solution can connect households with cooks, housemaids, and drivers. 

This approach glosses over the context as well as the complex practical challenges associated with the actual realisation of impact. It is motivated by the neatness of logical reasoning. In other words, it overlooks priors or experiential knowledge. It overlooks the reality that the theory of change to realise impact in each of the aforementioned examples is very complex. In simple terms, it is the deductive analysis of a computer for a problem which requires inductive analysis. 

So, theory says that farm productivity is constrained by informational factors. Relax them, and you have increases in farm incomes. Theory informs that children have differential learning trajectories. So an algorithm can customise instruction to the specific needs of each child and lead the child up the most optimal learning trajectory. But in practice, the pathway from theory to realisation of impact is filled with numerous risks and uncertainties.

The academic trends of our times exacerbate the problem. Consider the example of RCTs. It gives power to the appealing belief that one could juxtapose a solution against the business as usual counterfactual and establish efficacy without any consideration for the priors, experience, and history surrounding that intervention. So you could publish an RCT study in a reputed journal about the efficacy of an Agtech App which ostensibly delivers agriculture extension services, without any exploration of the rich history of the programmatic delivery of such extension services (and its failures/struggles) and the associated priors.

This also parallels the general marginalisation of the study of economic history and philosophy in development economics courses of the day and the elevation of data analysis using statistical techniques. It manifests in the form of important debates on critical issues that face us today like inequality (which Thomas Pikkety triggered off with his book in 2014) being reduced to technical debates on an inequality or the relative importance of different contributory variables. 

This also has the effect of distorting the debate in other ways. Consider the exploration of whether rural roads and rural electrification provides value for money. Some researchers have come out in the negative, even suggesting that the expenditure could have been better made on some of the more fashionable 'kinky' development initiatives. Leaving aside its morality, it is astonishing that well into the 21st century, we are debating the merits of all-weather roads and three-phase electricity, the two basic requirements to be able to meaningfully engage with modern civilisation, and are debating making choices between them and 'kinky' stuff like cash transfers or providing chicken or kicking Soccket balls!!!