IBC status report

The Insolvency and Bankruptcy Code (IBC) is one of the bigger reforms in recent years. Given the paradigm shift ushered in by the regime change, its adoption was naturally not expected to be smooth. 

The biggest obstacle to effective implementation of the IBC have not been weak institutional capacity, but the repeated transgressions of the law and spirit of the Code by the judiciary, both the Tribunals and the Courts. Promoters and bidders have left no stone unturned to use the NCLT/NCLAT and Courts to subvert the implementation of IBC, and the latter have on many occasions shown limited maturity and restraint in ultra-vires interventions. 

The latest two examples involve the resolution processes of Jaypee Infratech and Dewan Housing Finance Limited (DHFL).

Consider the case of DHFL, whose promoter is currently in jail on serious charges of money laundering and diversion of funds. In fact, given the nature of the fraud, DHFL was referred to NCLT by the regulator, RBI, itself. In a recent decision, the NCLT directed the Committee of Creditors (CoC) to consider again a plan from the promoters which had been rejected by them. These are the two choices,

Wadhawan had reiterated his offer to pay the entire outstanding principal of Rs 91,158 crore to creditors — an upfront payment of Rs 9,000 crore and the remainder in the form of debt-to-equity conversion across 7-8 years. According to Piramal’s plan (which has been accepted), recovery for lenders would total Rs 35,250 crore, with upfront cash of Rs 12,700 crore.

The promoters offer had been considered and rejected, and the CoC had agreed in favour of the Piramal's plan.  

Business Standard writes,

DHFL was referred to the NCLT in November 2019 after it failed to service its debt. Subsequent investigations revealed a gap worth about Rs 15,000 crore on its books. Despite Mr Wadhawan’s offer, the lenders chose to opt for the Piramal group after an intense bidding war with three other entities. Given this background, the NCLT should have rejected the erstwhile promoter’s plea and avoided an unnecessary delay in the final resolution. Section 29A of the Insolvency and Bankruptcy Code (IBC) anyway prohibits the erstwhile promoters from participating in the resolution process... The Companies Act does enable promoters to make compromise arrangements with creditors but it will require withdrawal of the resolution process.

This is a good summary of confusion-creating last minute offer attempts by promoters intent on derailing the resolution process. It's been commendable that the government has largely stayed away from influencing this process. However, as the latest instance of NCLT reference on DHFL shows, the same cannot be said about the role of judicial agencies. 

The subversionary role of promoters go beyond such formal actions to less edifying acts to intimidate Resolution Professionals,

RPs face a peculiar set of problems. As no promoter wants to let go of his/her company, the resolution professional is seen as an outsider trying to grab control. That leads to non-cooperation and even harassment in some cases. As of 30 September, there were 3,182 insolvency professionals who have passed a specific test and got themselves registered to act as turnaround specialists. Despite being appointed by a tribunal, these professionals are often left at the mercy of frivolous intimidation tactics by irked workers of the company whose debt is being resolved or, as seen in a recent case, by uniformed policemen... problems faced by the resolution professionals include threats of assault, allegations, complaints, litigations pursued by different stakeholders. To be sure, these are in addition to the regular problems that crop up in the process of resolving the stressed debt. 

Consider the case of Jaypee Infratech, which remains locked in resolution and litigation nearly four years after the company went into IBC resolution process.  

As can be seen, the case has moved back and forth between the three judicial institutions - NCLT, NCLAT, and Supreme Court. 

Given the pervasive corruption and crony capitalism, it's unrealistic to expect any institution from being immune from these corrosive influences. In the circumstances, it is imperative that Courts stay away from adjudicating on the substantive merits of resolution proposals nor being influenced in their procedural pronouncements by their subjective assessments of the substantive merits of resolution proposals. It's among the most difficult Chinese walls to maintain. 

Update 1 (13.07.2021)

Tamal Bandopadhyay highlights how crony capitalism may be subverting the IBC processes. 

Lenders to the Videocon Industries Ltd and its group companies, with a total claim of Rs 64,838.63 crore, will get just Rs 2,962.02 crore. Anil Agarwal’s Vedanta Group will have Videocon Industries and the group companies in its fold. In another development, lenders have entertained a one-time settlement proposal of Siva Industries and Holdings Ltd for Rs 318 crore, with an upfront payment of Rs 5 crore — a minuscule percentage of the company’s total dues of Rs 4,863 crore... a nexus between the rogue promoters and the community of bankers, and also between the promoters and the winning bidders for the defaulting companies who are fronting the promoters... 

Between then and March 2021, proceedings have been initiated against 4,376 companies. Of these, going by the data of the Insolvency and Bankruptcy Board of India, 2,653 cases have been closed. Only 348 cases of the closed cases have been resolved. Among the rest, 617 have been closed on appeal or review or settled; 411 have been withdrawn, and 1,277 have gone for liquidation. The average realisation by the lenders was 45.96 per cent of their claims until March 2020. By March 2021, this had dropped to a little over 39 per cent.

How does it compare with other markets? Japan, which introduced a bankruptcy law in 2004, takes six months to settle a case and the recovery rate is close to 93 per cent. The UK introduced a new bankruptcy law in 2002. Here, the recovery rate is 88.6 per cent and settlement is normally within a year. The US, where insolvency law is more than four decades old, takes 18 months to settle such cases with a recovery rate of 80.4 per cent. A World Bank estimate says that in India, it used to take an average of 4.3 years to resolve insolvency and recovery was 25.7 cents for every dollar — implying an average haircut of over 74 per cent for every creditor. 

Update 2 (19.08.2021)

MS Sahoo makes an important point about how to view the haircuts on the cases that have been resolved through the IBC.

If the company has been sick for years, and its assets have depleted significantly, the IBC process may yield a huge haircut or even liquidation. The companies, which have been rescued through IBC till March 2021, had assets valued at, on average, 22 per cent of the amount due to creditors when they entered the IBC process. This means that the creditors were staring at a haircut of 78 per cent to begin with. One third of these were not even going concerns. The IBC process not only rescued these companies, but also reduced the haircut to 61 per cent for financial creditors. 

A haircut is typically the total claims minus the amount of realisation/amount of the claims. But this formulation may not tell the complete story. The realisation often does not include the amount that would be realised from equity holding post-resolution, and through the reversal of avoidance transactions and the insolvency resolution of guarantors — personal and corporate. It also does not include realisations made in other accounts (recovery of about Rs 8,000 crore incidental to resolution of Essar). The amount of claim often includes NPA, which may be completely written off, and the interest on such NPA. It may include loans as well as the guarantee against such loans. These understate the numerator and overstate the denominator, projecting a higher haircut.

If Mr Sahoo is right, the haircuts should decline in the years ahead. And the haircuts should have been lower than those through other processes. The former remains to be seen, and the later, while lower, is not significantly so. 

Based on a recent report of the Parliamentary Standing Committee, this article calls for a Code of Conduct for the Committee of Creditors, and this draws attention to the problems with the quality and integrity of Resolution Professionals. Both compromise the quality of resolution process. 

Update 3 (21.08.2021)

TT Rammohan writes about the findings of the Parliamentary Standing Committee that examined the working of the India Bankruptcy Code (IBC). 

In India, creditors decide the future of an insolvent firm with the help of an administrator called the Resolution Professional (RP). The National Company Law Tribunal (NCLT) is the adjudicating authority. The idea is that with banks having messed up in a big way, it is better to carry out resolution under the auspices of independent authorities. Alas, it turns out that the RP is a weak link in the chain. The Parliamentary Committee has scathing observations to make about RPs. Many are graduates. The regulatory authorities have pursued disciplinary actions against 123 RPs in a total of 203 inspections carried out so far. The Committee wants a self-regulatory body to oversee professional standards for RPs akin to the Institute of Chartered Accountants of India. As for the NCLT, its processes are plagued by delays. There are delays of over 180 days in 71 per cent of cases. The NCLT takes a long time to admit cases in the first place —the Committee wants cases to be admitted within 30 days. One reason for that is, as in the judiciary, several positions on the NCLT bench remain unfilled. The NCLT is 34 members short of the sanctioned strength of 62 members.

On the critical issue of haircuts, he argues for some reforms,

It is more important to get the estimate of liquidation value right and to get as many parties to bid as possible. Let there be an independent evaluation of a sample of liquidation values and auction processes. Were the estimated liquidation values appropriate? Was every effort made to open up the auction to a large number of bidders? The answers will shed light on the effectiveness of the IBC process and help address infirmities. It may be useful to create an Office of Independent Evaluation at the Insolvency and Bankruptcy Board of India (IBBI) similar to the one that obtains at the International Monetary Fund.

Update 4 (22.08.2021)

Andy Mukherjee on the over-burdened NCLT,

Across the country, 27 tribunals are being run by 29 judges; at least 25 short of what’s required. Many have no experience in financial matters. One judge, M.B. Gosavi, sits on four benches. Cases from Noida, a suburb of Delhi where big builders have defaulted to homebuyers, land before a single tribunal member 300 miles away. The insolvency courts also adjudicate unrelated matters under the Companies Act, overwhelming an already strained system.

Weekend reading links

1. Fed monetary accommodation fact of the day,

Fed bought around half of Treasury issues last year, and owns 40 per cent of all of the outstanding 10-year plus maturity treasuries.

Good interview with Glenn Hubbard, former CEA of George Bush. He is not too much worried about inflation, but feels that the American Jobs Act and American Families Plan are really "a remaking of the size of the government". He favours carbon tax, as against subsidies proposed by Biden administration, to promote green investments. In general, he also prefers a higher tax on consumption, say a VAT, than raising taxes on capital (corporate and capital gains tax increases). 

He goes on to call the Biden tax plans as "anti-investment". This is the narrative of low corporate and capital gain tax as necessary to incentivise investment surfacing. There is no empirical evidence on this. Even if there are some older studies which point to a negative correlation or a Laffer curve, there is nothing to say that the rates are currently on the downward sloping side. 

He has a re-think on neoliberalism of Reagan era, and favours a "liberalism with small L", which would abandon protectionism and focus on competition. 

2. FT long read on Bitcoin mining and its energy consumption implications. 

Some statistics,

“Bitcoin alone consumes as much electricity as a medium-sized European country,” says Professor Brian Lucey at Trinity College Dublin... In a paper earlier this month, Italy’s central bank said the eurozone’s payments system, Tips, had a carbon footprint 40,000 times smaller than that of bitcoin in 2019... The latest calculation from Cambridge university’s Bitcoin Electricity Consumption index suggests that bitcoin mining consumes 133.68 terawatt hours a year of electricity — a best-guess tally that has risen consistently for the past five years. That places it just above Sweden, at 131.8TWh of electricity usage in 2020, and just below Malaysia, at 147.21TWh... a rising bitcoin price attracts new miners, and also means that mining with older, less efficient equipment, makes financial sense. The higher price also means the machines producing bitcoin are forced to complete ever-tougher puzzles in search of their quarry. At the upper limit, bitcoin’s electricity consumption would be about 500TWh a year. The UK consumes 300TWh. About 65 per cent of the crypto mining comes from China, where coal makes up around 60 per cent of the energy mix.

3. The world's largest contract manufacturer Foxconn is moving into electric cars, with a "complete software and hardware platform for making electric cars". It has mobilised a consortium of more than 1200 companies, MIH, that intends to offer the product. It also makes it easier for Apple to enter electric vehicle manufacturing. In some sense, Foxconn expects to leverage its experience of mobile phones manufacturing and become a system integrator for the supply chain for electric vehicle manufacturing. 

It's also banking on the differences between the electronics and auto manufacturing industries and the importance of systems integration,

If an internal combustion engine is mostly made up of hardware today, then software and content such as in-car entertainment and connected services are expected to account for a majority in battery-powered vehicles... Historically, the car industry has been driven by mechanical capabilities. Its production cycles are several years long and its products have been highly customised to appeal to consumers ranging from families to wealthy race car lovers. By contrast large parts of the electronics industry, such as the consumer segment which Foxconn comes from, are increasingly commoditised and churn out new models every few months. In addition to high safety and reliability standards, Japanese carmakers have long argued that the art of manufacturing vehicles cannot be easily replicated by new entrants because it involves a complex process of tailoring each of the 30,000 components inside a car to function seamlessly. Known as suriawase or tuning technology, the high-precision manufacturing sets cars apart from smartphones and laptops that can be assembled by putting parts together in the same way. That is changing. “The number of components is expected to decline from 30,000 in an internal combustion engine car to 20,000 in an electric vehicle,” says Akihiko Shido, chair of Yorozu, a parts supplier for Nissan... 

Industry experts say two big trends are set to transform the auto industry: the different form and structure of EV components, which simplify car design; and vehicles’ growing computing content, which requires a consolidation of functions that have traditionally been scattered among different suppliers. “The main part under the hood is the battery. Due to its size and weight, it makes sense to put it as low as possible to the bottom of the car for stability purposes and the driving experience,” says Michael Schallehn, a partner in the Silicon Valley office of Bain & Company, the consultancy. “The other factor is that the electric motor is super small and closer to the wheels. So that allows you to put the drivetrain [the components that drive the wheels] and the chassis very low into the car and dedicate the rest of the space to the passengers.” This structure has given rise to the development of a skateboard-like architecture, a standard flat bottom structure containing all the key components which can be easily modified for different models. “If you fast-forward that trend, it takes a lot of the complexity away from the established automotive supply chain,” Schallehn says. He adds that the evolution of in-car computing, from infotainment systems and the dashboard to today when they cover every automotive function, has made integration more pressing. This will become even more urgent when the industry moves to self-driving vehicles that rely on software that needs to be continually updated. This, says Schallehn, could make it beneficial to have all software development in the hands of one producer rather than a smattering of suppliers, as it is now.

4. Good example of how trade lobbies work. The Government of India last month banned the import of mosquito killer rackets which are priced below Rs 121, under pressure from manufacturers lobby. This summary makes the point,

Should the government policy benefit a few manufacturers through protection from imports or a large number of people through easier access to cheaper devices that help reduce chances of contracting diseases? Manufacturers are better organised to present their case for protection whereas ordinary people are not so well organised. So, the government has an obligation to weigh the options carefully.

5. FT explores the surprisingly poor performance of Asian countries with vaccinations. It points to the absence of large pharmaceutical companies who can quickly mobilise resources, manpower, supply linkages, and finances to make vaccines at large scale at short notice.

6. Contrary to fears, Australian exporters appear to have diversified away and nicely weathered the sanctions and punitive tariffs imposed by China. 

and this point to rapid diversification.

It's also a reminder to China about the limits of such trade bullying. 

7. The orders are reserved in the battle between Apple and Epic Games on the former's 30% commission on all transactions done through iPhone App Store. This is a good summary of the issues under consideration before the judge and how the trial went.

8. Last year Novak Djokovic mobilised a group of tennis players and started the Professional Tennis Players Association with the objective of giving the players a greater share of the $2 billion the game generates annually. Another objective was to ensure that tennis players outside the top 50 rankings break even from their lives as professionals. As the Times reports, it has achieved little till date.

There is a rich irony in this. As another Times reports writes,

Professional tennis may be the most economically top-heavy sport in the world. The best players are fabulously wealthy, in part because of lavish endorsement deals, and any player ranked in the top 30 lives very well. For those ranked between roughly 40th and 70th, a bad few months can cause serious problems. Life for those outside the top 80, and especially outside the top 100, can be precarious.

If Novak Djokovic were to put his mouth where his money is, he would have to acknowledge that a major part of the change will have to come from limiting the concentration of prize money at the top of the rankings. In simple terms, Novak and others are the top ranks have to forego at least a small share of their disproportionately high incomes and accommodate the less fortunate journey men players down the rankings. 

9. Fantastic interactive graphical account in NYT of the 1921 race massacre in the black neighbourhood of Greenwod in Tulsa, Oklahoma which killed hundreds of black residents, burned down more than 1250 homes, and erased years of black success. 

Greenwood was so promising, so vibrant that it became home to what was known as America’s Black Wall Street. But what took years to build was erased in less than 24 hours by racial violence — sending the dead into mass graves and forever altering family trees. Hundreds of Greenwood residents were brutally killed, their homes and businesses wiped out. They were casualties of a furious and heavily armed white mob of looters and arsonists. One factor that drove the violence: resentment toward the Black prosperity found in block after block of Greenwood.

10. Priyanka Pulla has a very good investigative account of the problems associated with Covaxin's regulatory approvals process (HT:Ananth). From an already low baseline, the credibility of the national drugs regulator, Drugs Controller General of India (DCGI), the Indian Council for Medical Research (ICMR), and the local vaccine manufacturer, have all fallen further still.

The credibility of even the Pharma industry will be hit by premature approvals of certain drugs,

Apart from Covaxin, the years 2020 and 2021 saw a slew of ill-considered approvals of locally tested or developed drugs. Among them was a drug called itolizumab, developed by the Bengaluru-based Biocon and licensed by the DCGI in July 2020, based on a trial of 32 patients. Approving a drug based on such a small trial is unheard of, and was widely criticized by clinical research experts. This was followed by the approval of favipiravir, an antiviral from Mumbai-firm Glenmark, based on a trial whose results didn’t fulfil its primary criterion of success. Subsequently, two more drugs, Zydus Cadila’s pegylated interferon 2g and the Defence Research & Development Organisation’s (DRDO) 2-deoxy-d-glucose have come under fire for approval based on small, poorly designed and as-yet-unpublished trials.

11. Goutam Das in Livemint has a story on India's white collar workers,

White-collar professions who engage in tasks that require higher-order skills—the likes of engineers, doctors, accountants, teachers, marketing professionals, and BPO workers, among others—make up just 4% of India’s estimated workforce of 390 million (as of April 2021)... In April 2020, India had about 18.1 million white-collar workers. By April 2021, the number had plummeted to 13.8 million, according to an estimate made by Mitali Nikore, an economist and the founder of Nikore Associates, a think tank.

12. India private ports fact of the day,

Abhishek Nigam, associate director at India Ratings and Research, says, “Private ports are cannibalising traffic away from major ports. Private operators offer more mechanisation, faster turnaround times and better rail and road connectivity to the hinterland, so customers can evacuate cargo quickly. Major ports take as long as 23 hours sometimes to process imports and up to 77 hours for exports. Private port operators are able to turn around both at under 10 hours."...While road and rail speeds for freight are comparable with global averages, the average turnaround time for freight at Indian ports is 12 times slower than world leaders like Hong Kong and Singapore. An Indian port, on average, takes 84 hours to move export/import cargo, against the global hub average of seven hours. In that difference of 77 hours lies opportunity. And private players—like Adani—have begun to diligently chase it.

13. From an article in The Indian Express on the surging IPO boom,

(T)he equity on offer from a large number of companies is a mix of some fresh equity and mostly offer for sale (OFS) by existing investors or promoters... Data sourced from Prime Database shows that over the last eight years, of the total issue amount of Rs 1.94 lakh crore that was raised by 160 IPOs, more than 75% (Rs 1.46 lakh crore) was raised through offer for sale. Around Rs 48,000 crore was raised through fresh equity. While money raised by offering fresh equity in an IPO goes to the company for its expansion and growth, money raised through OFS goes to the investor offering his equity for sale. Experts say this is a sign of a maturing capital market.

On the one hand, high OFS share is a sign of exit opportunities for private equity investors, on the other hand it also shows that investment capital raising continues subdued.  

14. Livemint has a status report on vaccination rates across countries from April 1 to May 26.

15. Scott Galloway has a nice illustration of corporate value destruction by some of the leading corporate executives. He writes about Marissa Meyer and Adam Neumann,

When Mayer took over, Yahoo (not including a 20% ownership stake in Alibaba) was valued at $14.4 billion. In July 2016 the company sold itself to Verizon for $4.5 billion, and Mayer was gone. That’s $9.9 billion turned to ash in four years (or 13.5 Burj Khalifas), for a Daily Benjamin Burn (DBB) of $6.8 million. Mayer’s compensation began with a $30 million signing bonus and went up from there, totaling an estimated $365 million, giving her a $250,000-per-day commission for destroying $7 million per day of other people’s money. That’s an (Earn to Burn Ratio) EBR of 3.7%. Shocking, sure, but not the gold standard.

Adam Neumann founded WeWork in 2010, but he didn’t start burning Benjamins at epic scale until SoftBank began shoveling billions into the WeWork furnace in August 2017. By the time Neumann was fired in September 2019, SoftBank had invested $10.3 billion; a few months later it wrote off $9.2 billion of that. That’s a $13.1 million DBB on SoftBank’s money alone... Neumann’s compensation for this value destruction was complicated by his ouster and a subsequent lawsuit, but we estimate he made off with around $1.02 billion, most of it coming out of SoftBank’s deep pockets. That’s $1.5 million per day during those two years: an EBR of 11.1%.

16. Finally, The Economist highlights the issue of decision fatigue among over-worked or distracted employees. 

In a new paper for Royal Society Open Finance, “Quantifying the cost of decision fatigue: suboptimal risk decisions in finance”, Tobias Baer and Simone Schnall examine the credit decisions of loan officers at a leading bank over the course of their working day. The academics write that decision fatigue “typically involves a tendency to revert to the ‘default’ option, namely whatever choice involves relatively little mental effort”. In other words, as you become tired, you get mentally lazy.

The study looked at proposals to restructure loans, with each credit officer analysing 46 requests per day. The approval rate was around 40%, so the default decision was rejection. Officers tended to start work between 8am and 10am, took lunch between 1pm and 3pm, and tended to leave at 6pm. The researchers found that the approval rate declined significantly between 11am and 2pm, as lunch approached, then picked up again after 3pm before declining in the last two hours of work. The applications were distributed to credit officers by the bank’s automated system, so they were in effect allocated randomly. There is no sign that the loans assessed at lunchtime were of a different quality from those in the rest of the day. What makes this study ingenious is that the authors were able to see whether or not the loans were subsequently paid back. They found that rejecting a restructuring request made it less likely that the loan would be repaid. So they calculated that decision fatigue, by causing more rejections, actually cost the bank money; around $500,000 over the course of a single month.

Similar patterns have been seen in other situations. A much-cited study of Israeli judges found they were less likely to grant parole as lunch approached, but became more lenient once their stomachs were full again. Other research found that doctors grew steadily more likely to prescribe antibiotics, even when these might not be necessary, over the course of their shift. In some areas of work, breaks are seen as a vital matter of safety. In the EU, lorry drivers are expected to take a 45-minute break after 4 hours 30 minutes behind the wheel.

The point highlights the importance of small breaks in ensuring the quality of work output.

An excess of incentives and institutions in development

One of the problems with modern development discourse is its dissonance with both history and reality. One example of this is the idea of using incentives to generate development outcomes. So, if people don't vaccinate, then incentivise them with payment (or lentils). If you want children to do homework, incentivise them with payment. If people don't quit smoking, pay them to quit. And so on. In general, if you want to get people to do something, incentivise them with conditional cash transfers. 

The body of work on getting people to do stuff which advances development causes revolves almost completely around rewards/incentives and nudges. There is an asymmetricity in policy response to such problems in so far as in contrast to incentives, there is little by way of plain vanilla stuff like just making people abide by rules and enforcing those rules.

In this context, in a recent paper, Edward Glaeser points to how nineteenth century New York got people to connect to water and sewerage networks. He writes on the role of mandates and their enforcement in utilisation of infrastructure,

In 1842, New York City opened its Croton Aqueduct, which brought clean water into the city. This engineering achievement did not, however, end New York City’s Cholera problem. Somewhat surprisingly, the city would continue to suffer from cholera outbreaks for another 24 years. The persistence of cholera was not a puzzle to Dr. Stephen Smith, who led a team of doctors during the 1860s that trooped through the city and produced the 1865 “Report of the Council of Hygiene and Public Health of the Citizen's Association of New York Upon the Sanitary Conditions of the City.”

New York City had piped water, but water connections were expensive and tenement owners avoided the expense. Poorer renters lacked both resources and the incentive to internalize the wider health benefits of sanitation. New York City even had about 2,300 hydrants that dispensed free water, but using hydrants requires carrying water significant distances. Consequently, poorer New Yorkers continued to use shallow wells and pit latrines and they continued to die from cholera.

Smith’s report then produced the legislation that created New York City’s Board of Health, and Smith became its first leader. He began a system of inspections and fines that pushed tenement owners to connect to the water system. The Board’s inspection service was independent of the corrupt police force controlled by the Tammany Hall Machine. The doctors who set atop the Board’s leadership seemed to have been reputable men, like Smith, whose preferences (and reputations) kept them from striking corrupt bargains with those property owners who preferred not to pay for clean water.

This has resonance with all cities across developing countries. Even when water lines or underground sewerage systems are laid, very few households take the connections. The incentive-compatible approach that development economics advocates revolves around finance (and now nudges) - pay people to take connections, lotteries, lower connection charges, amortise connection charges with bills (pay-as-you-go) etc. 

I am inclined to argue that these are logically neat and theoretically robust. Besides they are amenable to guilt-free and elegant field experiments and research publications. In short, this is all fine for armchair theorising. Nothing beyond that. 

Let me layout a conceptual framework on thinking about this issue. 

Social contracts are two-sided. Citizens and governments agree to a contract. Citizens demand certain public goods and services and pay taxes for it. Governments use the taxpayer money to produce/provision those public goods and services. There is often a gap, for whatever reasons (including poverty and access), between delivery of those goods/services and their utilisation or uptake. Even when access has been provided, utilisation often remains elusive. In such cases, citizens have to be made to utilise the good/service offered. 

This process of making citizens utilise what is offered is a combination of rules/regulations/mandates (or exercise of state capability) and incentives. As the example of water and sewerage in New York shows, on most development issues and from historical examples of developed countries, ensuring utilisation has been largely about rules/regulations/mandates and their enforcement. Incentives have mostly been marginal contributors, relevant mainly in mopping up the few holdouts. This holds just as much to vaccination or school enrolment, as it does to taking water/sewerage connections. 

In the case of most public goods/services, history points to rules/regulations (in the form of exercising state capability) as the preferred choice to ensure utilisation. Development economics, on the other hand, is blind to rules/regulations and is focused on rewards/incentives, and in recent times on overcoming human psychological biases (the nudge factor).  

In simple terms, on the issue of utilisation of public goods/services (and more) development economics skirts around the difficult to grasp and even more difficult to implement issue of state capability and settles down on the comforting and logically neat ideas of measurable and testable incentives and nudges. 

In many developing country cities, utility connections have less than 20% households coverage in streets with water and sewerage connections, especially with latter, even in the middle class colonies. In low income areas with public taps, water connections uptake is similarly very low (even when connection charges are low). Unlike a case where just 10-20% of households are holdouts, and would perhaps need some incentives or subsidies, a case where just 10-20% have taken connections demands enforcement of rules. 

This World Bank working paper is a good example of a study that lists out as reasons (see the table in page 12) for low coverage of water and sewerage connections everything except the simple fact that many people just don't want to change the status quo and take a connection. And they don't face significant cost in maintaining the status quo. It's a teachable exhibit - it uses the word 'incentives' 36 times and the words 'enforcement' and 'rules' just six times each! Its 128 pages is also a classic example of over analysis in the context of development problems. Incidentally, it's also replete with several examples from developing countries on successful experiments with increasing utilisation through the likes of incentives, but none from developed countries about how they achieved the same. 

Incidentally, this is a very rare experimental study on the effectiveness of disconnections in ensuring utility bill payments. 

This is an unfortunate distortion, a deep negative externality imposed by excessively theoretical and deeply disconnected discourse that dominates international development and aid agencies. It has crowded-out serious engagement with hard issues of state capability improvements and crowded-in massive aid spending into mostly marginal and even silly ideas tailored around financial incentives and nudges. 

None of the above is an advocacy for strict penalties and hard enforcement, and avoiding incentives. But the reality is that when the baseline of compliance is so low, even among those who can afford to comply, then the first line of engagement should be enforcement. We can get to incentives and subsidies when we come to those who clearly cannot afford.

The anecdote about New York is also important for another aspect. It highlights the importance of individual agency. The personal initiative and role of Dr Stephen Smith in bringing forth the legislation and also working to enforce its implementation was critical in New York's success in delivering clean water. 

In the 18th Brumaire, Marx pointed to the limitations of individual human beings and the importance of circumstances and legacies. Extending that logic, development theories focus excessively on institutions - organisations and systems - and somewhat less on contexts/circumstances and historical paths (path dependencies). But it more or less marginalises the role of individuals. 

There is very little systematic research on the importance of individual (mostly non-political) bureaucratic or technocratic leaders in transformational development. This is surprising. History is replete with names like Stephen Smith, Robert Moses, Joseph Bazalgette, Baron Haussmann etc whose contributions were immense. Or the numerous Latin American mayors in cities like Mexico City, Sao Paulo, Curitiba, Medellin, Bogota etc who left indelible marks on their cities. Each country has their heroes among bureaucrats and technocrats.

Closer home, India has its names - KL Rao, E Sreedharan etc. There are several IAS officers who have played remarkable roles in transforming their terrains. It's common place for institutions and districts/corporations to be meandering along for years, only to be galvanised by the arrival of a dynamic officer who undertakes far reaching reforms and implements them with militant discipline and commitment, and for the system to revert back to its initial somnolence once the same officer departs. There cannot be anymore definitive evidence of human agency. And India's development history is full of such instances across geographical jurisdictions, Departments of state and centre, and state and central public sector entities.

Metro railway graphics - India and the world

I pulled out some India-specific data from Alon Levy and Co's Transit Costs project which has an excellent international comparison of the costs of metro railway projects.

This table summarises the basic details of all the metro railway lines in 11 Indian cities.  

The graphic captures the average cost and the percentage share of tunnels in these cities.

Here is the international comparison of metro-railway projects from across the world.

Clearly, the Indian metro project costs are on the higher side compared to their global peers. In fact, aside of the US and Chinese projects, and those inside the largest European metropolises, the Indian projects are among the most expensive. 

This triggers a need for introspection. Given that the high metro rail projects are caused by over-engineering and over-construction involving the likes of tunnels, elevations, underground stations etc, it may be appropriate for government of India to undertake a comprehensive study of the experience of metro railway constructions in India and identify some takeaways with the objective of reducing time over-runs and limiting costs. This post examines some of the issues on cost reduction. 

Weekend reading links

1. Ananth send this excerpt from a new book, Meltdown by Chris Clearfield and Andras Tilcsik, that explores the reasons for failures and what can be done to avoid them. 

It points to the likelihood of conformity being a biological default option for human beings,

In one experiment, scientists used functional magnetic resonance imaging (fMRI) to see how our brains react when we hold an opinion that deviates from our group’s consensus. It turns out that two things happen when we go against the grain. First, a brain region involved in error detection becomes very active. The nervous system notices a mistake and triggers an error message. It’s as though your brain is saying: Hey, you’re doing something wrong! You need to make changes! At the same time, an area of the brain that anticipates rewards slows down. Your brain says: Don’t expect that you’ll be rewarded! This won’t work out well for you!

“We show that a deviation from the group opinion is regarded by the brain as a punishment,” said the study’s lead author, Vasily Klucharev. And the error message combined with a dampened reward signal produces a brain impulse indicating that we should adjust our opinion to match the consensus. Interestingly, this process occurs even if there is no reason for us to expect any punishment from the group. As Klucharev put it, “This is likely an automatic process in which people form their own opinion, hear the group view, and then quickly shift their opinion to make it more compliant with the group view.”

... And when people went against the group, there was a surge in activity in brain regions involved in the processing of emotionally charged events. This was the emotional cost of standing up for one’s beliefs; the researchers called it “the pain of independence.” When we shift our opinions to conform, we’re not lying. We may not even be conscious that we’re giving in to others. What’s happening is something much deeper, something unconscious and uncalculated: our brain lets us avoid the pain of standing alone.

And this about the natural inclinations when in positions of authority or power,

Research shows that when people are in a position of power, or even just have a sense of power, they are more likely to misunderstand and dismiss others’ opinions, more likely to interrupt others and speak out of turn during discussions, and less willing to accept advice — even from experts. In fact, having power is a bit like having brain damage. As Keltner put it, “people with power tend to behave like patients who have damaged their brain’s orbitofrontal lobes,” a condition that can cause insensitive and overly impulsive behaviour. When we are in charge, we ignore the perspectives of others. This is a dangerous tendency because more authority does not necessarily equal better insights. A complex system might reveal clues that a failure looms, but those warning signs don’t respect hierarchy. They often reveal themselves to folks on the ground rather than to higher-ups in the corner office.

This is a fascinating illustration of the problems with authority (how it stifles dissent) and how small tweaks can help overcome the problem.

Since the 1970s, a series of fatal accidents have forced changes in the airline industry. In the bad old days, the captain was the infallible king of the cockpit, not to be challenged by anyone. First officers usually kept their concerns to themselves, and even when they did speak, they would only hint at problems... Captains and first officers usually alternate flying the airplane. The flying pilot manipulates the primary controls. The non-flying pilot talks on the radio, runs through checklists, and is expected to challenge the flying pilot’s mistakes. About half of the time, the captain is the flying pilot, and the first officer is the non-flying pilot. In the other half, the roles are switched. So, statistically, roughly 50 per cent of accidents should happen when the captain is flying the plane, and 50 per cent when the first officer is in charge of the controls. Right?

In 1994, the NTSB published a study of accidents due to flight crew mistakes between 1978 and 1990. The study reported a staggering finding. Nearly three-quarters of major accidents occurred during the captain’s turn to fly. Passengers were safer when the less experienced pilot was flying the plane. Of course, it’s not that captains were poor pilots. But when the captain was the flying pilot, he (and most often it was a “he”) was harder to challenge. His mistakes went unchecked. In fact, the report found that the most common error during major accidents was the failure of first officers to question the captain’s poor decisions. In the reverse situation, when the first officer was flying the plane, the system worked well. The captain raised concerns and pointed out mistakes and helped the flying pilot understand complex situations. But this dynamic worked only in one direction.

All this changed with a training program known as Crew Resource Management, or CRM. The program revolutionized the culture not just of the cockpit but also of the whole industry. It reframed safety as a team issue and put all crew members — from the captain to the first officer to the cabin crew — on more equal footing... An important part of the training, for example, focuses on a five-step process that first officers can use to raise a concern:

1. Start by getting the captain’s attention. (“Hey, Mike.”)

2. Express your concern. (“I’m worried that the thunderstorm has moved over the airport.”)

3. State the problem as you see it. (“We might get some dangerous wind shear.”)

4. Propose a solution. (“Let’s hold until the storm is clear of the airport.”)

5. Get an explicit agreement. (“Does that sound good to you, Mike?”)

These steps sound barely more sophisticated than what we might teach a child about how to ask for help. Yet they were rarely followed before CRM came along... CRM was a huge success. Since it took hold in U.S. commercial aviation, the overall rate of accidents involving flight crew mistakes has declined sharply. And whether the flying pilot is the captain or the first officer no longer matters. In the 1990s, just half of the accidents — rather than three-quarters — happened when it was the captain’s turn to fly.

2. Fascinating profile by Simon Kuper of Manchester City coach Pep Guardiola, who's now won nine league titles in three countries - Spain (Barcelona), Germany (Bayern), and England - over the last twelve years. 

3. Tamal Bandopadhyay examines the flawed structure of Asset Reconstruction Companies (ARCs) which buy bad loans from banks and make money from that. He makes several reform suggestions in this regard.

4. Apart from problems with the vaccine policy, an area of big concern is their pricing. This and this are good articles on the problems with the pricing offered by Serum Institute of India and Bharat Biotech. The former is a contract manufacturer for Astra Zeneca. 

Unlike other countries, India has allowed both vaccine manufacturers to sell their vaccines in the open market at prices determined by them. Despite this freedom, which allows them to price much higher, there are compelling reasons to believe that the prices at which the vaccines are being sold to state governments amounts to rent-seeking. 

The unfortunate part is the complete opacity on these things. For example, the Department of Biotechnology, Government of India has not made available the various forms of support received by Bharat Biotech in developing Covaxin and the different grant agreements. Nor are the details of the advance purchase order put for Covishield. 

5. Mahesh Vyas makes the point about demand weakness being a big drag on economic recovery. 

The index of consumer sentiment declined by 1.5 per cent in the week ended May 16, 2021. This was the fifth consecutive week of a fall in consumer sentiments. Cumulatively, the index has dropped 8.3 per cent since the week ended April 11, when it began its persistent fall. It has fallen 9.1 per cent since the last week of March... In the week ended May 16, only 3.1 per cent of the households reported that their incomes were higher than they were a year ago... Well over half the households – 55.5 per cent reported a loss of income compared to a year ago. The remaining 41.5 per cent stated that there was no change in their income compared to a year ago... The unemployment rate shot up to 14.5 per cent in the week ended May 16, 2021. This is the highest unemployment rate in last one year. The average unemployment rate in 2020-21 was 8.8 per cent. It was 8 per cent in April 2021. It could be in double digits in May 2021... By December 2020, household incomes were 6.7 per cent lower, in nominal terms, than the average incomes during 2019-20.

6. India's solar manufacturing snapshot,

India imports close to 90 per cent of its solar cells and modules, with 80 per cent being from China. According to industry data, India has 3,100 Mw of cell manufacturing capacity and 9,000 Mw of module making. India’s installed capacity of solar power stands at 39.08 Gw (including ground mounted and rooftop). India aims to have 100 Gw of solar power capacity by next year.

7. India health care brain drain fact of the day,

As per OECD data, around 69,000 Indian trained doctors worked in the UK, US, Canada and Australia in 2017. In these four countries, 56,000 Indian-trained nurses were working in the same year.

8. Indian Express report on how the local government and civil society organisations are leading the Covid management efforts. This example of Mayyil Panchayat in Kannur with a population of 31,000 says it all,

This panchayat, with 18 wards, has set up a 24×7 call centre of its own and deployed a Rapid Response Team (RRT) of 140 active volunteers, including college students, youth leaders, daily wagers and taxi drivers. Apart from the RRTs, every ward has “jagratha committees”, comprising a local panchayat member, ASHA workers, government employees and RRT members. The focus is on monitoring cases, especially those under home quarantine.

“Our call centre is for people to inform us about all their requirements… food, medicine and vehicles to go for Covid tests and vaccination. Three persons have been deployed at the centre to alert RRT teams in each ward on the requests received. The idea is to ensure that people do not come out of their homes for even a minor requirement,’’ Rishna K K, the panchayat president, said... “The panchayat had only one ambulance at its primary health centre. But when we asked for more vehicles, a local organisation handed over its ambulance and several others their vehicles and taxis,” she said. Special care is taken in cases of Covid deaths. “Teams for burial or cremation are deputed considering the religion of the victim to ensure that all the rituals are followed,” Rishna said... The panchayat has a domiciliary care centre, which is a quarantine for those who do not have a bathroom-attached isolation option at their homes. It also has a “people’s hotel”, where a plate of rice and curry costs Rs 20. For Covid patients and those under home quarantine, this “hotel”, run by women members of the poverty alleviation mission Kudumbashree, supplies food free of cost three times a day. “Volunteers in each ward organise home delivery, wearing PPE kits if they are supplying to positive cases,” Rishna said.

Local government and civil society organisations have been the central force behind Kerala's Covid response. 

Srinath Reddy outlines a decentralised response action plan.

9. India trade facts of the day,

The level of exports in 2019-20, for instance, was roughly the same as in 2014-15... As highlighted in the latest Economic Survey, India’s exports went up by a compound annual growth rate of 0.9 per cent between 2011 and 2019. The comparable number for Bangladesh was 8.6 per cent.

10. I have never understood the case for lower corporate tax rates in India. A K Bhattacharya has this data based assessment of the corporate tax reduction policy of the government of India.

This is a summary of all corporate tax changes made by the government in recent years,

In 2016-17, new manufacturing companies incorporated on or after March 2016 were given the option to be taxed at 25 per cent plus surcharge and cess (compared to 30 per cent plus surcharge, etc.) if they did not claim profit-linked or investment-linked deductions, investment allowances, or accelerated depreciation. Additionally, the tax rate for all companies with an annual turnover of less than Rs 5 crore was brought down to 29 per cent plus surcharge and cess. In 2017-18, the tax rate for small and medium companies with an annual turnover of up to Rs 50 crore was brought down to 25 per cent. This meant about 96 per cent of companies that filed a tax return were brought under a concessional tax rate of 25 per cent plus surcharge and cess... In the following year, 2018-19, the government extended the coverage of the 25 per cent tax rate to cover all companies with an annual turnover of up to Rs 250 crore — a move that would benefit 99 per cent of companies filing tax returns... In 2019-20, the government extended the concessional tax rate of 25 per cent to all companies with an annual turnover up to Rs 400 crore, thereby covering 99.3 per cent of all companies filing tax returns. Subsequently, in September 2019, all companies not availing themselves of the various exemptions and incentives like tax holidays were allowed to be taxed at 25 per cent, inclusive of the 10 per cent surcharge and a 4 per cent cess. Moreover, manufacturing companies starting operations after October 1, 2019, were to be taxed at an overall rate of 17 per cent.

The outcomes,

Corporation tax collections used to be about 34 per cent of the Centre’s gross tax revenues in 2014-15. This share plummeted to 28 per cent in 2019-20 and further down to 23 per cent in 2020-21... the share of corporation tax in GDP has kept falling almost every year in this period — from 3.4 per cent of GDP in 2014-15 to 2.74 per cent in 2019-20 and 2.28 per cent in 2020-21... In 2014-15, about 188,000 companies in a sample size of close to 580,000 paid taxes at an effective rate of over 30 per cent and this cohort accounted for 60 per cent of the total corporation tax collected by the Centre that year. In 2018-19, thanks to the various tax concessions, only about 85,000 companies of a larger sample size of 885,000 paid taxes at the rate of over 30 per cent. And this cohort accounted for only 50 per cent of the corporation tax revenue of the Centre... In contrast, there were just about 24,000 companies in 2014-15 paying taxes at an effective rate of 25-30 per cent, accounting for only 16 per cent of the corporation tax collected by the government. Another 15,000 companies paid taxes at the rate of 20-25 per cent, but their contribution to the corporation tax revenue was only 10 per cent. By 2018-19, the number of such companies saw a huge increase, without, however, a corresponding increase in their share in total taxes collected. Companies paying taxes at 25-30 per cent numbered around 184,000 in 2018-19, but their share in corporation tax was 19 per cent. The number of companies paying tax at 20-25 per cent increased to over 46,000 and their share in total corporation tax rose to 23 per cent.

In short, the story of India’s corporation tax revenues is about how more and more companies have been taxed at a lower rate. As a result, the contribution of a large number of companies to the corporation tax kitty is getting smaller. No wonder, corporation tax buoyancy has suffered in the last seven years.

There appears no Laffer curve here. 

11. India allopathy health care facts of the week,

The Allopathic doctor-population ratio in India is 1:1,404, per the current population estimate of 1.35 billion. This is well below the WHO norm of 1:1,000. Interestingly 52 per cent of these doctors are practising in just five States — Maharashtra, Tamil Nadu , Karnataka, Andhra Pradesh and Uttar Pradesh... Ministry of Health and Family Welfare (MoHFW) data presented to the Rajya Sabha last month show that there were 12,01,354 Allopathic doctors registered with the State Medical Councils/Medical Council of India as on September 30, 2019.

12. President Trump initiated the $10 bn Operation Warp Speed to expedite vaccine development. It involved massive amounts of research grants, capital investment subsidies to establish manufacturing facilities, and advance market commitment for vaccine purchases. 

Operation Warp Speed is now credited with having played a central role in expediting vaccine supplies. 

13. India corporate earnings facts of the day,

Despite the havoc created by the covid-19 pandemic, listed companies’ net profit as a percentage of the gross domestic product (GDP) has hit a four-year high at 2.6 per cent for the financial year 2020-21 (FY21)... At its peak in FY08, the contribution stood at 7.8 per cent. Since then, it has been on a downward slope. Corporate earnings growth has largely remained stagnated in the last five years. The global average is about 4.7 per cent. India’s long-term average is about 4.4 per cent.

Examining the economic returns from infrastructure investments

It's considered an article of faith that infrastructure investments, especially in developing countries, pay for themselves and have large multipliers. This belief has generated both demand (the argument that developing countries have large infrastructure financing requirements) and the supply (the very vocal movement on private participation and cross-border capital flows into infrastructure). Reports like this and this fuel and sustain these beliefs.  

In this backdrop Peter Blair Henry and Camille Gardner of NYU urge a very important cautionary note. 

The paper's objective in the words of the authors is important,

Specifically, the paper presents a simple framework for evaluating the productive potential of investing in infrastructure that explicitly and simultaneously compares the social rate of return on infrastructure in emerging economies with the rate of return on alternative investment opportunities in: (a) the local environment, and (b) advanced economies. This dual- hurdle rate framework yields a unique classification that sorts countries into quadrants according to their potential for efficient investment in infrastructure. The quadrant-based classification flows naturally from a simple but powerful result: adding to a given country’s stock of infrastructure capital is both economically efficient and potentially financeable through a market- based allocation of foreign savings only when the return on doing so exceeds the return on all capital (infrastructure and non-infrastructure) in both the local economy and the developed world.

Their finding,

There are a total of 53 developing countries, 26 of which have data for the return on paved roads and 49 for the return on electricity generating capacity (EGC), yielding a total of 75 country-infrastructure-return observations. Of these 75 observations, 71 exceed the mean return on the corresponding type of infrastructure in advanced economies, and the returns differ, on average, by a factor of 21 in paved roads and a factor of 6 in EGC. In spite of this reality, however, opportunities for efficient investment in the infrastructure of EMDEs are not nearly as widespread as the large prospective return differentials would otherwise seem to suggest.

Just 39 of the 75 observations (distributed across 32 developing nations) clear both the cross-country and within-country hurdle rates for efficient investment. This means that 21 of the 53 countries, or roughly 40 percent, do not clear the dual hurdle for either type of infrastructure and are therefore not obvious candidates for additional investments in paved roads or electricity generating capacity. Furthermore, of the 32 countries with projects that clear the dual hurdle, only 7 are places where it is efficient to engage in additional investments in both kinds of infrastructure. The reality that the data from less than one-seventh of the countries present a clear case for investment in both roads and electricity raises questions about the wisdom of big-push approaches to infrastructure in the developing world.

Their explanation for these findings,

First, developed countries are over-invested in infrastructure relative to their other forms of capital. This has driven down their return on infrastructure to the point where the yield on another dollar invested in the infrastructure of advanced economies is less than their overall return on capital. Accordingly, the binding constraint for market-driven cross-border investment from developed countries into emerging-economy infrastructure is actually not the return on infrastructure in developed markets but rather the return on all capital in developed markets, and there are fewer developing countries whose returns on infrastructure clear this more stringent hurdle rate. Second, in order for additional investment in infrastructure in a given developing country to be efficient, its rate of return on infrastructure must exceed its own return on all capital. The imposition of this second hurdle rate renders still fewer countries as candidates for efficient investment in infrastructure.

They propose a twin-test for foreign investment in infrastructure 

A country whose return on all capital is less than that of advanced economies can nonetheless be an efficient destination for advanced-economy savings to finance infrastructure if: (a) the return on investing in that country’s infrastructure exceeds the return on all capital in advanced nations, and (b) the country’s return on infrastructure exceeds its own return on all capital.

They point to countries where this holds, 

Ten of the 32 countries whose social rates of return on infrastructure justify greater investment in paved roads or electricity generating capacity have rates of return on all capital that fall below the rate of return on all capital in the developed countries... For example, of the 39 country-infrastructure-return observations that suggest opportunities for efficient investment, 21 are in paved roads where the average (median) social rate of return is 10.2 (5.99) times larger than the return on capital in advanced economies. The average (median) prospective return for the 18 efficient investment opportunities in electricity generating capacity are more modest: 2.2 (1.87) times as large as the return on capital in advanced economies. In addition to the opportunities for efficient investment in EGC being substantially smaller than in the case of paved roads, another notable difference is that the potential for efficient investment in EGC manifests primarily in low-income countries— particularly those in Africa—whereas the opportunity in paved roads falls mainly to middle- income developing nations.

It is to be noted that, based on 1985 data, investment only in electricity generation fails to clear both hurdle rates and in paved roads clears only the cross-country hurdle rate. 

In other words, the purely economic case for domestic investments in infrastructure does not exist for a country like India. 

A problem with the study is that it uses the 1985 data to calculate hurdle rates. While it makes no difference to the framework, its outputs may vary based on factors like changes in cost of infrastructure, elasticity of returns on infrastructure, and so on. It would be great if someone could update this study with the latest data on returns to investment and analyse the economic case for investments in infrastructure. 

The importance of urban zoning regulations

I have blogged on multiple occasions earlier that zoning is perhaps the most powerful but low-cost policy lever available to policy makers in developing countries to shape the destinies of their cities. Its value also comes from the fairly high degree of flexibility (for policy makers) and low levels of friction (in terms of implementation and realisation of outcomes) in its implementation.  

The main levers of zoning are relaxation of the restrictions on building regulations, floor area ratio and height, and land usage.  

Allison Shertzer, Tate Twinam, and Randall P. Walsh have a paper which looks at the long-term impact of zoning regulations. They used the natural experiment from the first comprehensive zoning ordinance adopted by Chicago in 1923 to analyse lot-level land use data by controlling for pre-zoning characteristics. They find that zoning has very broad and significant impact on spatial distribution of economic activity,

In particular, zoning may be more important than either geography or transportation networks – the workhorses of urban economic geography models – in explaining where commercial and industrial activity are located. Furthermore, rather than simply “following the market,” zoning appears to be a powerful tool for achieving separation of uses. Our results strongly suggest that over the long-run urban planning has been effective in creating residential neighborhoods that are distant from undesirable manufacturing uses, and that houses in these neighborhoods are more valuable as a result... Previous research has focused on the causes of macro-level persistence such as agglomeration economics, locational fundamentals, durable capital, and natural advantages... At the same time, block-level persistence has received far less attention, and institutional factors such as zoning have been left largely unexplored. Our results suggest that policymakers have great power to shape the overall form of cities, and the spatial arrangement of economic activity in urban areas a century from now may be largely the consequence of land use regulation choices made today.

This means that instead of being bogged down with the problems of scarce government land, limited stock of affordable housing, and deficient transportation and utility infrastructure, policy makers should focus their attention on deploying zoning regulations effectively to shape the long-term form and fortunes of their cities. 

The simple levers of zoning can be used to expand the stock of buildable space available (thereby influencing property prices), concentrate populations and economic activities, guide the locations of economic activities, catalyse economic systems and markets, and optimise work and other commutes. They can be very important contributors to addressing pervasive urban problems like traffic congestion, affordability in property markets, commute times etc. 

In the form of master plans and coupled with complementary infrastructure investments (especially in transportation), they are a form of forward guidance to shape the city's long-term development trajectory. 

Weekend reading links

1. The pandemic has been associated with massive liquidity infusion by the central bank. However, the majority of the liquidity has found its way back to government securities,

According to RBI data, banks invested Rs 7.2 trillion in government bonds as compared to Rs 5.8 trillion extended as loans in 2020-21... The RBI went for government borrowing of a record Rs 12 trillion in the previous financial year. At the same time, credit demand remained anemic and grew by 5.6 per cent in FY21... FY21 ended with a total credit expansion of Rs 5.8 trillion by scheduled commercial banks, a shade lower than the Rs 6 trillion in the previous year. Banks’ investment of Rs 7.2 trillion in government securities, was nearly twice their investment in the previous year. “Banks’ investment in 2020-21 outpaced overall credit extended – a phenomenon not seen in nearly twenty years, barring the year of demonetisation,” the RBI observed in the state of the economy report in April... The RBI report said the ‘feeble’ credit growth of 5.6 per cent pointed to continuing risk aversion amidst pandemic-linked impairment to their balance sheets.

2. Business Standard reports that Blackstone has paid Rs 5250 Cr to buyout Embassy Industrial Parks from Embassy Group and Warburg Pincus. 

Embassy Industrial Parks comprises 22 million square feet of modern logistics and warehousing facilities, as well as yet-to-be-built assets, located across Bengaluru, Delhi-NCR, Hyderabad, and Pune. These are leased to leading e-commerce and retail players... For Blackstone, warehousing seems to be a new focus area, after it entered office properties in 2011 and then malls. Blackstone floated two REITs (real estate investment trusts) with its partners Embassy and K Raheja Corporation and listed them. It is the largest owner of offices in the country. With the latest deal, Blackstone will have a portfolio of over 40 million sqft of developed and yet-to-be-developed assets with its partners Hiranandani and Allcargo. This is similar to what another logistics developer Indospace has... Since 2010, Blackstone has acquired more than 1.2 billion sqft of logistics globally.

And this about foreign investments into real estate,

According to Colliers International, the sector has attracted interest from multiple large institutional investors, with investment inflows of Rs 27,800 crore ($3.7 billion) since 2017. Between 2017 and the first half of 2020, the sector garnered a 17 per cent share of the total PE investment in the country.

3. The Serum Institute of India (SII) is a large contract manufacturer of vaccines and should not be compared with drugs manufacturers. As an illustration, in the 2010-11 to 2019-20 period, it made just Rs 17,176 Cr in profits, with margin of 44%, mainly by exports at higher margins, and invested just Rs 900 Cr in R&D. It's licensed to manufacture over 20 vaccines in India. It's therefore no wonder that unlike the likes of Moderna, or even Bharat Biotech, SII remains a contract manufacturer and has done little to move up the value chain despite its long history. 

4. This is a list of 56 mails, SMSes, and WhatsApp messages sent by David Cameron to various Ministers and officials to lobby for government support to Greensill Capital, where he held a large share, once worth tens of millions. In a delicious irony FT had this to write,

In 2010, when David Cameron was UK prime minister, he made a speech criticising lobbyists. “We all know how it works. The lunches, the hospitality, the quiet word in your ear, the ex-ministers and ex-advisers for hire, helping big business find the right way to get its way.” Eleven years later Cameron’s own relentless lobbying has been exposed in a treasure trove of private messages sent to senior members of the Tory government.

5. Fascinating profile in the NYT of Bayern Munich's Polish striker Robert Lewandowski, widely acknowledged as the best goal scorer in club soccer today. He's two goals away from breaking Gerd Mueller's longstanding Bundesliga record of 40 goals in a season. 

6. Even as the Israel-Palestine conflict erupts, The Economist points to changing trends in the actions of Saudi Arabia's Mohammed Bin Salman, 

So far this year he has held two rounds of talks with Iran in Baghdad, the Iraqi capital, and spoken of his hope for “a good and special relationship”. His officials have met his Yemeni foes, the Iranian-backed Houthi rebels, in the Omani capital, Muscat. The Saudis offered to lift the kingdom’s siege of Yemen and to help rebuild the country his jets have bombed. He has also stopped funding the rebellion against Syria’s ruler, Bashar al-Assad; earlier this month he sent his intelligence chief to Damascus to discuss restoring ties. Prince Muhammad is mending fences with Turkey and Qatar as well. Both had irritated him by backing Islamist groups that he dislikes, such as Egypt’s Muslim Brotherhood. But the prince has lifted a three-year blockade of Qatar and bought arms from Turkey. On May 10th he hosted Turkey’s foreign minister, Mevlut Cavusoglu, and Qatar’s emir, Tamim bin Hamad al-Thani.

The change of guard in US, with Biden even calling Saudi Arabia a "pariah" during the election campaign, and setbacks in Yemen and attacks on Saudi oil installations, may be the triggering factors for these reversals.

7. The Economist examines the issues in the rising momentum on harmonising corporate tax rates globally. 

The foundations of the global corporate-tax system were laid a century ago. It recognises that overlapping taxes on the same slice of profits can curb trade and growth. As a result, taxing rights are allocated first to wherever profits are produced (the “source”) and then to wherever the parent company is headquartered (or “resident”). A multinational based in America but with an affiliate in Ireland, for example, typically pays taxes in both places. Where the company makes its sales is irrelevant. Payments between an individual firm’s various legal affiliates are recorded using the “arm’s-length” principle, supposedly on terms equivalent to those found on the open market. 

These principles, now baked into thousands of bilateral tax treaties, have had two unintended consequences. First, they have encouraged governments to compete for investment and revenue by offering tantalisingly low tax rates. In 1985 the global average statutory corporation-tax rate was 49%; in 2018 it was 24%... There is a huge mismatch between where tax is paid and where real activity takes place. Analysis by the OECD suggests that multinationals report 25% of their profits in investment hubs, although only 11% of their tangible assets and less than 5% of their workers are based there. Parents can allocate paper profits to affiliates in tax havens by having them hold intellectual property that is then licensed to other affiliates in high-tax places.

The two solutions that the Biden administration has put forth to address the problem,

The first would reallocate taxing rights so that a slice of profits could be levied according to, say, the location of a company’s sales. That right could be incurred even if the company had no physical presence in the country. Mr Biden’s negotiators have proposed a reallocation that would apply to the 100 biggest and most profitable companies worldwide; in return, the Biden administration wants all the digital-services taxes to be dropped. The second element would apply a minimum rate of corporation tax, putting a floor on the race to the bottom. The Biden administration is gunning for a global minimum tax rate on foreign earnings of 21%, applied to profits within each jurisdiction separately.

8. As the Covid 19 rages on in India, an issue that has assumed prominence is of temporary waiver by the WTO of TRIPS that would allow others to manufacture patented vaccines. While India and South Africa have been leading efforts in this regard, it got a big boost with the recent decision by the US to back temporary patent waiver. 

However, several people are sceptical of rapidly increased production even with patent waivers. They point to challenges in setting up manufacturing facilities, technology transfer, limited supplies of critical inputs like lipid nanoparticles and equipment like bioreactor bags, and easing of various types of export restrictions on inputs. 

Tread the middle path points me to this article by Monica de Bolle and Maurice Obstfeld who point to the legal challenges,

Since August 2003, the WTO has explicitly allowed emergency departures from the TRIPS agreement, enabling countries with manufacturing capacity to suspend IP protections to produce life-saving drugs and vaccines, not just for domestic use but also for export to countries that lack manufacturing capacity of their own. However, the process of negotiating the August 2003 decision—which created a temporary procedure for export waivers—took 14 months, and it was not until January 2017 that two-thirds of WTO members had ratified it as a formal amendment to the TRIPS agreement. Because of this painful negotiation process, the bureaucratic procedures for exercising IP flexibility are so cumbersome that there are very few instances of its use.

Then there is the technical challenge,

True, patent protection is the main obstacle to creation of generic small-molecule drugs, which chemists can synthesize. But other major obstacles exist for vaccines, which are biologics. For the latter category of drugs, an identical product requires an identical production technology, with most steps categorized as hard-to-replicate trade secrets rather than patentable innovations. Thus, Moderna announced in October 2020 that it would not enforce its COVID-19-related patents during the pandemic. But this step, however laudable, is of limited immediate help to would-be producers of a "generic" version of the Moderna vaccine. Without precisely replicating all steps of Moderna's production process, including the many quality controls, a generic version would have untested immunogenicity (the ability to induce the body to generate an immune response) and thus would require extensive clinical trials before release... The replication hurdle is especially high for the new and more sophisticated messenger ribonucleic acid (mRNA) vaccines, which have proven most effective against SARS-CoV-2 (the virus that causes COVID-19) and which are likely to provide the most adaptable platforms for the vaccines of the future. The genetic vaccines produced by Pfizer-BioNTech and Moderna require considerable technical knowledge and sophisticated techniques to generate a version of the viral spike protein that elicits a strong immune response.

Interestingly, even as India is fighting for patent waiver at the WTO, it submitted an affidavit in the Supreme Court opposing patent waiver as being counterproductive. It remains to be seen how it would affect its WTO case. 

9. The latest in one of the most important watched indicators in the global economy and financial markets, US headline inflation. Last week the US CPI flashed 4.2% annual increase. But Fed played down the increase, describing it as transitory.

After countless false alarms over the last four decades, will this time be different?