Lessons for India from UK on PPPs

Here is my co-authored oped with Dr TV Somanathan which outlines the lessons for UK's PPP experience and offers some suggestions for India.

Update 1 (30.07.2019)

In the context of India, Ananth sends this Businessline editorial urging caution on the Railways decision to embrace PPPs. The global evidence on railways is voluminous and speaks very loudly. The government should avoid PPP for rail tracks - not only is there not even one example from anywhere that it has worked, there are plenty from everywhere that it unravels very quickly. 

But for rolling stock, PPPs offer promise. It is also a great opportunity for industrial policy - ensure that PPPs are single-mindedly aimed at attracting the best global players to "make in India"!

The SoftBank bubble keeps inflating, as does WeWork

SoftBank has announced the launch of a second Vision Fund that will raise $108 bn from investors including Japanese financial groups, Foxconn, Microsoft and Apple to invest in technology start-ups. It would seek to accelerate “the AI revolution through investment in market-leading, tech-enabled growth companies”.

Its first fund of $97bn, 60% backed by governments of Saudi Arabia and Dubai and launched in May 2017, had disrupted the global VC market. SoftBank said it would contribute $38 bn to the new fund, which surprisingly does not yet have any investment commitment from the Middle Eastern governments. 

The first fund was structured for the participants to hold some of their contributions as equity and the majority as preferred debt, with SoftBank being the only pure equity investor. In the second fund, reflecting the risks, the preference appears more skewed towards preferred debt and even less of equity. 

This is very interesting and communicates the essence of the first Vision Fund,

The Vision Fund has made 29 per cent annual returns for investors from May 2017 through March this year, SoftBank said, based on the higher valuations of the portfolio companies. The fund is notable not only because of its massive size but also because of its unusual structure. The Vision Fund is heavily leveraged, relying on an unconventional structure where 40 per cent of its capital is preferred securities that pay an annual coupon of 7 per cent. It remains unclear how the new fund will be structured. SoftBank recently raised cash through at least $4bn in loans against stakes in Slack, Uber and Guardant Health, which could be used to pay dividends to the first Vision Fund.

In simple terms, borrow using rising shares/valuations (itself based on questionable assumptions, as the names in the graphic above would show), use that as equity, and leverage more to construct a Fund. And furthermore, borrow using shares to even pay the dividends for the existing investments. Any different from a Ponzi. The triumvirate of low interest rates, rising equity valuations, and leverage underpin the Vision Fund. Each of the three are intimately dependent on the other. A shock on one, and the whole pack could unravel very quickly. 

And then there is also the issue of investment opportunities to deploy the capital raised,

“They’re starting to run out of runway. The scale they’re trying to invest in, billions of dollars per unicorn (a start-up valued at $1bn) — there’s not many of those deals globally. They’ve already had big exposure to a handful of them, and so a lot of it is just going to have to continue to fund their own deals.”

It is in this context that the case study of WeWork assumes significance. Ananth points to the latest developments at WeWork, an entity whose valuation is effectively backstopped by SoftBank, and which has become poster child for no-tech start-ups (though it is vigorously trying to show that it is as much tech as its tech peers). The company rents in long-term spaces, renovates and divides the offices, and rents them out on a short-term basis, thereby owning few properties. 

Ahead of its impending IPO, contrary to normal practice and raising questions, the company's founder, Adam Neumann, has cashed out more than $700 m for himself through stock sales and by taking on debt against his shares. Apart from this, the company itself is raising upto $4 bn in debt, with the possibility of going upto $10 bn, to finance expansion and thereby keep boosting its valuation. The company plans to use the cash flow from its individual buildings to finance the debt. 

Despite its spectacular growth, the company, with offices at 485 locations, has been losing money continuously, losing $3.5 bn since 2016. Its 2018 revenues of $1.8 bn was outstripped by its losses of $1.9 bn. Reflecting the concerns, a plan by Softbank to invest $16 bn, including $10 bn to buy out early investors, fell apart early this year, after Softbank's investors could not agree on a valuation. Softbank ultimately invested $5 bn at $47 bn valuation in January. To put its losses in perspective,

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.

It is a reflection of what the market thinks of WeWork that its bonds were assigned junk ratings when it raised debt of $702 million last year at a high interest rate of 7.9%. And since then, those bonds have slid significantly, reflecting investor concerns. 

Interestingly, JPMorgan Chase has been helping him borrow personally against his WeWork stake as well as working with the company to structure the debt deal. 

While the exact stake is not known, Neumann's shareholding combined with the dual-class voting shares with owner's share having ten times the votes of the standard common stock means that he has voting control in the company. 

Neumann has been, separate from WeWork, personally accumulating properties. And in a very questionable practice which is pervasive in private equity, some of those properties have been leased to WeWork which is paying him millions a year in rent. After its IPO filing, in order to mitigate this conflict of interest, WeCompany, the parent company of WeWork, has announced that it would buy out from Neumann those properties of his where it is a tenant. Another exit pathway for the promoter?

Update 1 (23.08.2019)

Even as WeWork bleeds, sample the health of a competitor,

IWG, a landlord that has been renting flexible space to less groovy companies for decades, is on course to earn more revenue than WeWork this year and is profitable. Even so, it trades at about a tenth of WeWork’s private valuation.

Update 2 (03.11.2019)

NYT has this summary of the WeWork saga and excesses,

The last 80 days have seen an implosion unlike any other in the history of start-ups. WeWork filed for an initial public offering with a prospectus that was quickly ridiculed for its incoherence; investors learned of several red-flag financial arrangements by Mr. Neumann; the company’s valuation plummeted; Mr. Neumann was forced to resign; and the I.P.O. was withdrawn. Once estimated to be worth $47 billion, WeWork was reduced to $7 billion, after a rescue by the Japanese giant SoftBank. But WeWork’s astonishing downfall came with an even more astonishing exit package for Mr. Neumann: The 40-year-old could receive more than $1 billion after selling his shares to SoftBank and collecting a $185 million consulting fee. As the scope of the disaster comes into focus, the question on everyone’s mind... is how Mr. Neumann managed to fail up so spectacularly.

The answer has a lot to do with... an inexplicably persuasive charisma and a taste for risk... also had an uncanny ability to read people, from potential investors to reporters, gain their loyalty and then sell them on his vision of a “capitalist kibbutz” on a global scale... Crucially, Mr. Neumann was selling to an eager audience at the right time: WeWork’s rebranding of the office as an expansion of one’s personality made sense to a generation of the intermittently employed... It may have never reached the stratosphere, though, if Mr. Neumann had not found the perfect benefactor: SoftBank’s chief executive, Masayoshi Son.

And about the role of SoftBank funding,

Famously, in 2017, Mr. Neumann spent just 12 minutes walking Mr. Son around WeWork’s headquarters, prompting an investment of $4.4 billion...To WeWork insiders who know Mr. Neumann — most of whom spoke on the condition of anonymity because of nondisclosure agreements signed with the company — the SoftBank deal changed things precipitously. They talk about WeWork as existing pre- and post-Masa. The investment transformed the start-up from a mere unicorn into something with nearly unlimited ambition.

And interestingly,

Mr. Son and Mr. Neumann became acquainted in 2016 in India, during a gathering of start-up luminaries with Prime Minister Narendra Modi.

Update 3 (15.12.2019)

The realms of post-mortems about WeWork reveals that Adam Neumann excellent at selling dreams to investors and the company's Board. Now we all know that not only were those dreams were just that, dreams, and that he was also indulging in downright unethical corporate governance. Even ten years back, such a businessman would have been rightly called out as a con-man!

A good WSJ investigation about WeWork, and especially how its distinguished Board presided over one of the most spectacular corporate implosions.

This graphic of WeWork's heady valuation climb followed by even steeper downfall is instructive.

This graphic highlighting the divergence between WeWork's net income projects versus actuals is truly spectacular.

Update 4 (05.01.2020)

Matt Stoller describes WeWork as an example of counterfeit capitalism,

What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to *make* money. I’ve written about this problem before. Amazon has created a much less competitive and brittle retail sector. Netflix’s money-losing business is ruining Hollywood.

Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example. Another example was the Worldcom fraud in the late 1990s, which forced the rest of the U.S. telecom sector to over-invest into broadband. Competitors have to copy their fraudulent competitors. It’s a variant of Gresham’s Law, which says that "bad money drives out good.” If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity. That is what is happening in our economy writ large, a kind of counterfeit capitalism as ‘leaders’ like Neumann are celebrated and actual leaders who can make things and manage are treated like dogshit.

This kind of counterfeit capitalism is terrible for society as a whole. At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’ As euphoria in capital markets takes hold, predatory pricing scheme come to entirely wastes capital on money losing enterprises, and eventually these companies become Soviet-style generators of white elephants and self-dealing. The men and women who run them have to be charlatans, because they are storytellers justifying losses. Powerful men like Dimon are sucked in, consultants start explaining to old-line economy companies how they too can become like WeWork, and eventually more and more of the economy just adopts counterfeit capitalism.

Weekend reading links

1. Nice article on London's residential blue plaques which commemorate great people who lived in the same place. The scheme, founded in 1866, and administered by a society, English Heritage, fixes ceramic blue circular plaques on 12 residences, which are selected after a very competitive process of vetting by a committee of 12 eminent historians, artists, and other eminent people. Residents can make applications, and the subject must have died more than 20 years before and the surviving building must remain in a form that the commemorated person would have recognised and be visible from a public highway.

2. Megan Greene writes about the apparent decoupling of wages as a determinant of monetary policy.  Despite NAIRU being revised downwards multiple times and unemployment rate declining continuously, wage inflation remains elusive, pointing to a breakdown in the Phillips curve theory that trades-off inflation and unemployment. She points to the whole list of contributory factors,

Consumption patterns have shifted drastically over the past 70 years. In the 1950s Americans spent more on goods, and goods-producing sectors (manufacturing and construction) tend to be high-wage. Now a majority of our consumption is of services, and most services-producing sectors (such as retail, social assistance, and leisure and hospitality) are low-wage. A global oversupply of cheap labour also suppresses earnings. The fall of the Iron and Bamboo curtains roughly doubled the global work force over the course of two decades, a pattern that continues as other developing countries such as India and Indonesia urbanise and industrialise. The internet has only expanded globalisation. Other factors suppressing wages are more specific to this cycle. Workers in the gig economy usually earn less than those in full-time employment. And there has been a significant increase in market concentration over the past 10 years. As the late Alan Krueger pointed out last year at the Fed’s Jackson Hole conference, it is easier for companies to collude on suppressing wage growth when there are fewer companies competing for labour. Demographics play a role as well. Most economists focus on baby boomers retiring and being replaced by less experienced, cheaper workers. A number of business owners at the summit noted that the millennials they hire — the largest segment of the labour market — are more interested in the community and experience at work than in making as much money as possible. As with all things in economics, maybe the problem is partly one of measurement. The average hourly earnings data does not capture benefits such as days off or health insurance, nor the value employees put on things like flexible work hours or feeling a sense of purpose in a role.

3. FT points to a very informative MGI report on Latin America,

One reason why Latin America is lagging behind is that the region lacks a solid tier of midsized companies able to create productive jobs and a robust middle class of consumers whose spending and saving could propel demand and investment, according to a report by McKinsey Global Institute. Addressing these twin gaps could increase annual growth to 3.5 per cent by 2030, McKinsey estimated; that would boost Latin America’s gross domestic product by $1tn, an extra $1,000 a year per capita... When measured relative to their GDP, Argentina, Brazil, Chile and Mexico only have about half as many firms with revenues above $50m as 10 other leading emerging economies that McKinsey used as comparators.

This is compounded by a triple-whammy of slow GDP growth, low productivity growth, and unequal distribution of the gains of growth.

4. Profiling Mariana Mazzucato.

5. Is the Government e Marketplace (GeM) among the good example of public policy successes of this government?

6. Fascinating picture of the battle for the top place in India's telecoms market between Vodafone and Jio,

For starters, Vodafone Idea, with the largest user base, made a net loss of ₹4,874 crore in the June quarter, while Jio made a profit of ₹891 crore. Both companies have priced mobile services at almost similar levels... Despite more subscribers, Vodafone Idea, which posted revenue of 11,269.9 crore, lags behind Jio which posted revenues of ₹11,679 crore in the June quarter... Vodafone Idea had 84.8 million 4G subscribers as of 30 June. However, in comparison, Jio has 331.3 million 4G subscribers. Then again, Vodafone Idea’s subscriber base is a mix of 2G, 3G and 4G while Jio is a 4G-only operator... While Vodafone Idea’s average revenue per user is steadily climbing, Jio’s is dropping... After Vodafone Idea rolled rout monthly minimum recharge plans for subscribers to stay on its network, its shrinking subscriber base has led to an improvement in average revenue per user (Arpu) to ₹108 in the June quarter, from ₹104 in the March quarter, ₹89 in December and ₹88 in September... Jio, on the other hand, has shown the opposite trend for the last 6 quarters. Jio’s ARPU for the June 2019 quarter was at ₹122, down from ₹126.2 in the March 2019 quarter and ₹130 in the December 2018 quarter. It was at its peak of Rs154 in the December 2017 quarter.

7. Two interesting snapshots of India's district and subordinate courts, which take up nearly 90% of all judicial case load pending. Land and labour cases have the worst pendency rates

And nearly three-fourths of the delays are due to administrative issues - nearly half due to stay orders issued by higher courts, and the remaining due to trouble securing witnesses.

This is shining light on the dark under-belly of India's judicial system. I have blogged on multiple occasions about the curse of stay orders, without any sunset and which can run interminably and is widely abused by litigants. It would be useful to explore how seriously have previous attempts at judicial reform considered this factor. 

8. The above Livemint article references this 2012 paper by Matthieu Chemin which used the 2002 CPC amendment to show that "speedier courts, defined as those with lower workload, were associated with small firms suffering fewer breaches of contract, investing more, and enjoying better access to finance".

9. As airlines squeeze more out of their planes, Livemint writes in the context of Philippines' Cebu Air,

Cebu doubled down in June with a $6.8 billion order for Airbus jets that includes 16 higher-capacity A330neos. Airbus says the plane is designed to fit 260 to 300 passengers in a typical layout that has first-class, business and economy cabins. For “higher-density configurations" -- code for bare-bones economy -- the planes fit as many as 440, the manufacturer says. Cebu is planning for 460, once the layout is certified... Less legroom is now the industry norm. In the early-2000s, rows in economy used to be 34 inches (86 centimeters) to 35 inches apart; now 30 to 31 inches is typical, though 28 inches can be found on short flights, according to Washington D.C.-based advocacy group Flyers Rights. Seats have narrowed, too, from about 18.5 inches to 17 inches on average... Seats on the Cebu Air planes are just 16.5 inches wide, less than the width of two hand spans and short of the 18-inch minimum that the manufacturer, Airbus SE, says is comfortable.

As this scramble for space continues, is this the new fault-line in airline safety? Are regulators watching?

Trends in globalisation, trade, and global value chains

Gillian Tett points to an insightful presentation by BIS Chief Economist Hyun Song Shin which explores the reasons for the current global economic slowdown. Shin starts off by describing the changes in global value chains (GVCs), which along with MNCs underpinned the current wave of globalisation and growth in trade, especially with the arrival of China.

The snapshot of network structure of goods and services trade in 2000 and 2017, where the hub-and-spokes link two economies if one is the largest trading partner of the other or if one accounts for more than 25% of the trade for the other, is illuminating. 

China's emergence as a hub and as connector between Germany and the US is remarkable. Shin then points to the trends in gross exports to GDP ratio, the numerator of which increases with complexity of GVCs since they generate multiple export sales of intermediate goods, all of which add up. It rose 16% from 2001 to 2008 as GVCs exploded in complexity, only to collapse during the Great Recession and has since 2010, pre-dating the current protectionist trend, been on a secular decline. 

Clearly, just as the GVC activity boosted global trade in the noughties, its unravelling has pulled down trade this decade.

While the growing share of services in global trade and technological innovation like automation making in-shoring more cost-effective are important contributors to the current secular decline, Shin point to another intriguing possibility, finance. He writes, pointing to an uncanny resemblance of the graph above to the global banking cycle,

Building and sustaining GVCs are highly finance-intensive activities that make heavy demands on the working capital resources of firms. When the financial requirements go beyond the firm’s own resources, the necessary working capital is dependent on short-term bank credit. The financing requirement for GVCs arises because firms need to carry inventories of intermediate goods or carry accounts receivable on their balance sheet when selling to other firms along the supply chain... As supply chains grow longer and the time period between shipments becomes more extended, the marginal financing needs grow at an ever increasing rate, so that very long GVCs are viable only with very accommodative financing conditions.  

If you will excuse a colourful metaphor, firms enmeshed in global value chains could be compared to jugglers with many balls in the air at the same time. Long and intricate GVCs have many balls in the air, necessitating greater financial resources to knit the production process together. More accommodative financial conditions then act like weaker gravity for the juggler, who can throw many more balls into the air, including large balls that represent intermediate goods with large embedded value. However, when the shadow price of credit rises, the juggler has a more difficult time keeping all the balls in the air at once.

When financial conditions tighten, very long and elaborate GVCs will no longer be viable economically. A rationalisation of supply chains through “on-shoring” and “re-shoring” of activity towards domestic suppliers, or to suppliers that are closer geographically, will help reduce the credit costs of supporting long GVCs. In its 2014... around 35% of trade was financed by the banking system. The rest – around 65% – was financed by the firms themselves, either by the seller in the form of “open account financing” or by the buyer paying upfront in a “cash-in-advance” purchase. Crucially, the CGFS found that around 80% of bank trade financing was denominated in US dollars, reflecting the prevalence of dollar invoicing in world trade... Among the many indicators of the availability of dollar- denominated bank credit, the dollar exchange rate plays a particularly important role as a barometer of the dollar credit conditions faced by firms. Lending in dollars tends to grow faster when the dollar is weak, and lending in dollars is subdued or declines when the dollar is strong... When combined with the fact that GVC activity tracks dollar financing conditions, the upshot is that the fluctuations in the trade-to-GDP ratio plotted in Graph 4 closely track the strength of the dollar, with a stronger dollar associated with subdued GVC activity... During periods when the dollar is strong, trade is low relative to GDP. During periods when the dollar is weak, trade is high relative to GDP. 

He also argues that this inter-twined nature of finance and trade could explain the persistence of the strength of the dollar despite the monetary accommodation in the US,

The relationship between financial conditions and the dollar will reflect many forces operating in the economy, but among these may be balance sheet channels involving non-financial firms that are linked through GVCs. Strong corporate balance sheets enable firms to meet the heavy working capital needs of being part of GVCs. However, higher corporate debt combined with currency mismatches on the firm’s balance sheet can undermine the firm’s ability to finance working capital, especially when credit conditions tighten. Firms weighed down by currency mismatches and excessive leverage will need to reduce debt and rebuild capital. Globally, high corporate leverage has emerged as a source of vulnerability for growth. Corporate leverage has remained high even as profitability has declined sharply in some jurisdictions, such as China and especially among small and medium-sized enterprises in the manufacturing sector. Within this broad context, the continuing strength of the dollar may reflect, in part, efforts at balance sheet repair by such firms. A stronger dollar would increase the urgency of balance sheet repair, as it would sharpen the incentives to repay dollar debt. Perhaps for this reason, recent moves in the currency market have overturned the usual rule of thumb that looser monetary policy in the United States is associated with a weaker dollar. The dollar has remained strong, especially against emerging market currencies.

On GVCs, this report by MGI is very informative,

Trade rose rapidly within nearly all global value chains from 1995 to 2007. More recently, trade intensity (that is, the ratio of gross exports to gross output) in almost all goods-producing value chains has fallen. Trade is still growing in absolute terms, but the share of output moving across the world’s borders has fallen from 28.1 percent in 2007 to 22.5 percent in 2017... The decline in trade intensity is especially pronounced in the most complex and highly traded value chains... In 2017, gross trade in services totaled $5.1 trillion, a figure dwarfed by the $17.3 trillion global goods trade. But trade in services has grown more than 60 percent faster than goods trade over the past decade. Some subsectors, including telecom and IT services, business services, and intellectual property charges, are growing two to three times faster... counter to popular perceptions, today only 18 percent of goods trade is based on labor-cost arbitrage (defined as exports from countries whose GDP per capita is one-fifth or less than that of the importing country)... Moreover, the share of trade based on labor-cost arbitrage has been declining in some value chains, especially labor-intensive goods manufacturing (where it dropped from 55 percent in 2005 to 43 percent in 2017)... In all value chains, capitalized spending on R&D and intangible assets such as brands, software, and intellectual property (IP) is growing as a share of revenue. Overall, it rose from 5.4 percent of revenue in 2000 to 13.1 percent in 2016... The share of trade in goods between countries within the same region (as opposed to trade between more far-flung buyers and sellers) declined from 51 percent in 2000 to 45 percent in 2012. That trend has begun to reverse in recent years. The intraregional share of global goods trade has increased by 2.7 percentage points since 2013, partially reflecting the rise of emerging-market consumption... Regionalization is most apparent in global innovations value chains, given their need to closely integrate many suppliers for just-in-time sequencing. 

As to the drivers of these trends,

The map of global demand, once heavily tilted toward advanced economies, is being redrawn—and value chains are reconfiguring as companies decide how to compete in the many major consumer markets that are now dotted worldwide... By 2030, developing countries are projected to account for more than half of all global consumption... The biggest wave of growth has been happening in China... by 2030, they are projected to account for 12 cents of every $1 of worldwide urban consumption... In 2016, 40 percent more cars were sold in China than in all of Europe, and China also accounts for 40 percent of global textiles and apparel consumption... Within the industry value chains we studied, China exported 17 percent of what it produced in 2007. By 2017, the share of exports was down to 9 percent. This is on a par with the share in the United States but is far lower than the shares in Germany (34 percent), South Korea (28 percent), and Japan (14 percent)... In 2002, India, for example, exported 35 percent of its final output in apparel, but by 2017, that share had fallen by half, to 17 percent, as Indian consumers stepped up purchases... The rise of domestic supply chains in China and other emerging economies has also decreased global trade intensity... As a group, emerging Asia has become less reliant on imported intermediate inputs for the production of goods than the rest of the developing world (8.3 percent versus 15.1 percent in 2017)... The decline in trade intensity reflects growing industrial maturity in emerging economies. Over time, their production capabilities and consumption are gradually converging with those of advanced economies... New technologies are changing costs across global value chains... Instant and low-cost digital communication has had one clear effect: lowering transaction costs and enabling more trade flows... the next wave of technology could dampen global goods trade while continuing to fuel service flows... 

In goods-producing value chains, logistics costs can be substantial. Companies often lose time and money to customs processing or delays in international payments. Three sets of technologies will continue to reduce these frictions in the years ahead. Digital platforms can bring together far-flung participants, making cross-border search and coordination more efficient. E-commerce marketplaces have already enabled significant cross-border flows by aggregating huge selections and making pricing and comparisons more transparent... Logistics technologies also continue to improve. The IoT can make delivery services more efficient by tracking shipments in real time, and AI can route trucks based on current road conditions. Automated document processing can speed goods through customs. At ports, autonomous vehicles can unload, stack, and reload containers faster and with fewer errors. Blockchain shipping solutions can reduce transit times and speed payments. We calculate that new logistics technologies could reduce shipping and customs processing times by 16 to 28 percent... 

Automation and additive manufacturing change production processes and the relative importance of inputs... The growing adoption of automation and advanced robotics in manufacturing makes proximity to consumer markets, access to resources, workforce skills, and infrastructure quality assume more importance as companies decide where to produce goods. Service processes can also be automated by artificial intelligence (AI) and virtual agents. The addition of machine learning to these virtual assistants means they can perform a growing range of tasks. Companies in advanced economies are already automating some customer support services rather than offshoring them. This could reduce the $160 billion global market for business process outsourcing (BPO), now one of the most heavily traded service sectors... Overall, we estimate that automation, AI, and additive manufacturing could reduce global goods trade by up to 10 percent by 2030, as compared to the baseline...

New goods and services enabled by technology will impact trade flows. Technology can transform some products and services, altering the content and volume of trade flows in the process. For example, McKinsey’s automotive practice estimates that electric vehicles will make up some 17 percent of total car sales globally by 2030, up from 1 percent in 2017. This could reduce trade in vehicle parts by up to 10 percent (since EVs have many fewer moving parts than traditional models) while also dampening oil imports. The shift from physical to digital flows that started years ago with individual movies, albums, and games is now evolving once again with streaming and subscription models... The advent of ultra-fast 5G wireless networks opens new possibilities for delivering services. Remote surgery, for example, may become more viable as networks transmit sharp images without any delays and robots respond more precisely to remote manipulation. In industrial plants, 5G can support augmented and virtual reality–based maintenance from remote locations, creating new service and data flows.

On the same topic, Economist has survey on GVCs which draws heavily from the MGI report. It writes,

The biggest declines in trade intensity were observed in the most heavily traded and complex gvcs, such as those in clothing, cars and electronics... talking to many firms in three industries reveals different patterns of fragmentation. The clothing sector is globally footloose; the car industry is coalescing around regional hubs; and the electronics business remains rooted in China.

This about the challenges facing India's ability to benefit from the disruption to GVCs caused by President Trump's actions on China is illuminating,

Mr Trump’s tariffs on China have pushed Big Auto’s supply chains to become even more regional. “We’re finally ready to leave China,” says a senior supply-chain executive at a global car maker. His firm is looking seriously at shifting its sourcing for the global market from China to India, but finds Indian vendors “unreliable”. It thought about dividing between India and Mexico, but saw that its supply base would lose economies of scale. The winner will be Mexico, he says.

This is a fascinating examination of how innovations by Amazon and Alibaba are contributing to shortening and expediting the GVCs,

China is leapfrogging from ropey logistics to supercharged supply chains, just as it did with e-commerce and mobile payments, in which it went from laggard to world-beater... Amazon leads in the use of ai-powered robots in logistics, but China’s entrepreneurs have the edge in speed. Mainland innovators are capable of cutting-edge inventions, for example in facial-recognition software. However, they are also good at frugal engineering, throwing together cheap solutions that can get to market faster than the gold-plated ones favoured by Western innovators.

Elite capture of rule-making institutions

My oped with Ananth in Mint on the elite capture of rule-making institutions, one of the takeaways from our joint work, The Rise of Finance. 

India urban real estate facts of the day

Real estate speculation is among the greatest macroeconomic risks that developing countries like India should watch out for. Episodes of economic growth and credit booms are invariably accompanied by real estate booms, especially in developing countries. And financial market deregulation only exacerbates the risks. 

Joe Studwell's excellent book on Asia chronicles the South East Asian experience with real estate resource misallocation and how it adversely impacted economic growth and exposed those countries to macroeconomic instability from both internal and external sources.  

Sample a few snippets from an FT article on India,

30 per cent of real estate projects and half of all built-up space in Mumbai is under litigation, according to a 2019 Brookings India report, with projects taking an average of eight and a half years to complete.

And this is only the latest in inventory pile-up that has been a feature of India's metro property market for years now,

Property consultancy Anarock estimates that half of the luxury real estate in Mumbai’s downtown alone is unsold: 11,000 properties worth a total Rs590bn... Unsold inventory in the city rose 14 per cent in the first half of 2019 from the same time a year earlier, according to Knight Frank.

And the role of shadow banks,

Shadow banks grew to account for a fifth of all new credit last year, and became the largest source of funding for real estate thanks to loan growth of more than 20 per cent a year between 2013 and 2018.

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.

9. Finally, very good article on Novak Djokovic.

Novak Djokovic has a way of winning even when he’s losing. He has a way of patiently absorbing his opponent’s most devastating play, doing just enough to stay alive, and choosing precisely the right moment to strike back. He’ll lose a spectacular rally and then, while the commentators are still gushing about the other player, unspectacularly win the next point.. He’s as capable of spectacular dominance as any player who’s ever lived... He can hit shots that make you think your TV is a liar. But it’s that other mode, his dark mode of tactical endurance, that makes him the most fearsome tennis player of the past decade and possibly the most fearsome of all time. He’s a genius at operating within bad runs in such a way as to give himself the best chance of seizing key moments... In just about every category imaginable, Federer was the better player, and he lost... Federer dominated the game of runs but couldn’t keep Djokovic from seizing control of the game of moments... It was tight, brutal, unpoetic tennis with no margin for error, and he pulled it off.

This comparison of Federer and Djokovic,

Everywhere Federer goes, the crowd adores him; he’s played out the whole endless twilight of his career with a permanent home-court advantage such as no other player before him has ever experienced. When he’s winning, the crowd shares and magnifies his joy; when he’s losing, fans will him to come back. There’s a net under him as well as across from him; he plays every match with a buffer of emotional support. Now consider how things are for Djokovic. He wants that kind of love, and almost never gets it. When he wins Wimbledon, and struts forward, smirking, to make the crowd watch his excruciating grass-eating bit, the applause is … polite. Before then, nearly everyone in the stadium, and nearly everyone watching at home, millions of people around the world, were praying for him to lose. The player who most covets affection is the player from whom the crowd most stubbornly withholds its affection... He knows how to stay calm and play smart when he’s being outplayed because he’s used to feeling that things aren’t going his way. He knows how to capitalize on a match’s moments of crisis because he is in a perpetual state of micro-crisis. He’s learned to rely on himself because he can’t rely on the crowd.

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 and the judiciary loses no opportunity to distort every new law that comes their way.

Update 1 (15.11.2019)

The Supreme Court appears to have brought a closure to the litigation surrounding Arcelor Mittal's purchase of Essar Steel for $5.8 bn. Livemint reports,

The Supreme Court allowed Arcelor to pay creditors for Essar Steel India Ltd. and scrapped a bankruptcy appellate tribunal’s order that had given secured and unsecured lenders equal right over the sale proceeds, a three-judge bench headed by Justice Rohinton F. Nariman ruled Friday. “There is no principal of equality between secured and unsecured creditors," Justice Nariman said while reading out the judgment in court. Bankruptcy courts don’t have a say in deciding the distribution of funds between creditors. They can only examine the legality of the resolution plan approved by the panel of lenders of an insolvent company, the court ruled.

The case was admitted into the NCLT in August 2017. In October 2018, the Committee of Creditors approved Arcelor Mittal's bid. The NCLT too approved it in March 2019. However, the NCLAT ruled that secured and unsecured creditors have equal rights. This is a good summary.

Update 2 (23.11.2019)

Ishan Bakshi makes the argument that IBC should be the preferred option for resolution of bad loans, and not the last resort, and makes some suggestions in that regard,

For one, the provisioning norms for bad loans should be made more stringent to ensure banks have strong incentives to take companies through this process and not postpone the decision, hoping to restructure the loan outside IBC. Second, relaxing the 330-day deadline will further dampen enthusiasm. The idea of having a time-bound process was to put pressure on the CoC to ensure speedy resolution. Delays in either taking the company to NCLT or in the resolution process destroys enterprise value. This decision must be reviewed. Third, the government should establish the supremacy of IBC to ensure that assets are not allowed to be attached once they have been admitted. Under Section 53 of the law, amounts due to the central government rank below those of secured and unsecured creditors. This hierarchy needs to be respected.  

There also needs to be clarity on the role of promoters. While barring all promoters from bidding was a harsh step, there needs to be consistency of approach. Allowing them to participate in liquidation but not in the resolution process would be inconsistent. Unless, of course, there has been a considered view that promoters, barring wilful defaulters, should be allowed back in, although now it is possible only through the backdoor. Addressing these issues would go a long way in ensuring that IBC is the preferred option for dealing with bad loans rather than being the last resort.

This on delays is a reason why creditors are losing their hope with IBC,

Of the 1,497 cases that are currently going through the resolution process, 36 per cent have crossed 270 days, while another 22 per cent have crossed 180 days. As a time-bound resolution process was one of the most appealing aspects of IBC, such delays create little incentive for stakeholders to opt for this process.

Update 3 (28.11.2019)

Soumya Kanti Ghosh has this analysis of the IBC where he suggests raising the threshold for applicability of IBC, limiting liquidation etc.

Update 4 (16.12.2019)

Aravind Panagariya and Rajeev Mantri write,

According to ratings agency Crisil, during 2018-19, financial creditors recovered 42.8% of the Rs 2.53 trillion amount claimed under IBC. This represents a marked improvement over the dwindling pre-IBC recovery rates of 31%, 24%, 22% and 18% in 2010-11, 2011-12, 2012-13 and 2013-14 respectively. Critically, Crisil reported that the average time taken for resolution has declined from 3.5-4 years to 326 days for the 94 cases resolved under IBC as of March 31, 2019.

And the latest on the progress of IBC,

Of the 2,542 corporate insolvency cases filed between December 1, 2016 and September 30, 2019, about 156 have ended in approval of resolution plans — a mere 15 per cent, according to latest data released by the Insolvency and Bankruptcy Board of India (IBBI). In the current fiscal, as many as 1,037 cases of corporate insolvency have been admitted by various benches of National Company Law Tribunal (NCLT) across India until September 30 — an increase of 51.6 per cent over the corresponding period last year. However, a meagre 76 resolution plans have been approved in the current fiscal, while the number of companies which have either been liquidated or are headed at liquidation stands at 351 — which is one-third of the total number of insolvency cases filed until September 30... In the past three years, the number of companies which have been sent for liquidation — either due to lack of feasible resolution plans or absence of any resolution plans whatsoever — stand at 587. These include big ticket names such as Adhunik Metaliks, Khaitan Electricals, and Orchid Health Care Private, among others. The IBBI, however, defended the number in its latest data newsletter and said that nearly 427 of the companies which underwent liquidation were earlier with the BIFR and or defunct.

As of September 2019, 535 companies have spent more than 270 days, waiting to get resolved. In August this year, the Centre had introduced an amendment to increase the deadline to 330 days, but said that the corporate insolvency resolution process (CIRP) shall mandatorily be completed within this time. “This would include extension of time as well as any exclusion of time on account of legal proceedings,” the government had then said. The Supreme Court, however, while delivering the judgment in the Essar Steel insolvency case, relaxed the criteria of “mandatorily” resolving the CIRP within 330 day, allowing the possibility of extending it beyond even that if need be.

More here on the strain faced by the NCLT benches.

Update 5 (24.12.2019)

Very good account of the early days of the IBC.

Update 6 (14.03.2020)

MS Sahoo critiques the critics of IBC and puts its performance in perspective,

Two hundred companies had been rescued till December 2019 through resolution plans. They owed Rs 4 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore. The IBC maximises the value of the existing assets, not of the assets which do not exist. Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 per cent of the realisable value of these companies. Hypothetically, any other option of recovery or liquidation would have recovered, at best, Rs 100 minus the cost of recovery/liquidation, while the creditors recovered Rs 200 under IBC. The excess recovery of Rs100 is a bonus from the IBC. Despite the recovery of 200 per cent of the realisable value, the financial creditors had to take a haircut of 57 per cent as compared to their claims. This only reflects the extent of value erosion that had taken place when the companies entered the IBC process. Nevertheless, as compared to other options, bank are recovering much better through IBC, as per RBI data.

On liquidation being the norm,

There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation. The number of companies getting into liquidation is thus four times that of the companies being rescued. Numbers, however, to be seen in context. The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process. Thus, in value terms, assets that have been rescued are four times those sent for liquidation. It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.

The point he makes about companies waiting till the last moment before availing IBC as a reason for many liquidations is important.

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.

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.”

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.