Wednesday, May 31, 2023

Some thoughts on affordable housing I

This blog has argued in multiple posts (here, here, here, here, here, here, here, here, here, and here) that affordable housing availability is one of the biggest challenges to sustainable urban growth in developing countries. I'm inclined to place urban housing affordability gap right up there with poor student learning outcomes as the two biggest and most complex development challenges today. 

The conventional wisdom has been that if restrictive zoning regulations are removed, ease of getting building and other permissions simplified, and taxes on construction lowered, it will increase the stock of housing of all kinds including affordable housing. This, in turn, will lead to lowering of house prices - "richer renters trade up into new luxe units, starting a chain of move-ins and move-outs that lower prices for modest homes". This can be called the "trickle-down" theory of housing affordability. 

Instead, I'm inclined to believe that a meaningful dent in the housing affordability issue in the medium-term has to involve an increased supply of large volumes of public (or heavily subsidised) housing. And the aforementioned, market side measures mentioned above if implemented well should take a long time to start showing impacts. In the coming weeks, from articles that have been published in recent days, I'll blog about the hugely impressive Viennese rented social housing, Gemeindebauten, which highlights the former, and the example of Washington DC, which highlights the latter. 

In a blog post, Noah Smith points to several papers that find increased supply of market rate housing results in lower rents - every 10% increase in housing stock, rents decrease 1% and sales prices also decrease within 500 feet"; "rents fall by 2% for parcels within 100 m of new construction, and renters' risk of being displaced to a lower-income neighbourhood falls by 17%"; market rate housing construction reduces rents for low-income housing market specifically; "adding new homes moderates price increases and therefore makes housing more affordable to low and moderate-income families" etc. He also links to papers from Germany and Finland that confirm the downward pressure on prices due to increased supply of market-rate housing. A detailed set of links here. Further, at a macro-level of a city, there's new evidence that cities that have built more housing have seen smaller increases in average housing prices. 

But theory and several data points aside, in reality, there are several reasons to argue that this trickle-down theory for affordable housing may not always play out as expected. This could especially be so in developing countries and their cities. 

There is an important reason. The housing market suffers from an important distortion, arising from certain kinds of people viewing housing less as a place to live but as an investment class. Francesca Mari points to a McKinsey report which found that in the US 68% of growth in asset values over the last four decades came from real estate, and that one in four home sales in 2022 was to someone with no intention of living in it. 

Accordingly, if left to the dynamics of the market, developers will respond by catering to the highest margin (and therefore most profitable) demand. Given that investment residential properties are higher in value and offer much higher margins, it's inevitable that the market will respond to this demand. As the City Lab writes

The market leads developers to build luxury housing on scarce and sought-after property to maximize the return on their investment.

And this will be at the cost of the cheaper and smaller margin affordable housing units. In these circumstances, the solution to affordable housing is to increase the supply of housing stock that people want to use for living, as against those that people want to use for investment. 

We need to step back here a little bit. The starting conditions of the cities under consideration matter. For example, how segmented is the housing market, how do the prices in the different segments compare, what's the likely profit differential between higher-end and marginal housing, what's the marginal demand for higher end housing, how does it compare with the supply, how do the starting prices for each housing segment compare with the annual incomes of different population groups etc. Differences in each can generate entirely different outcomes.  

And on each of these aforementioned factors, I'm inclined to argue that there is a significant difference in the nature of the housing markets in developing countries from those in developed countries. Some general observations:

1. In stratified markets (housing is extremely segmented), the aggregate increase in supply may not only not leave everyone better off, but may also leave the vast majority worse-off. So, an increase in the supply of higher value houses would displace the fixed land and scarce capital that would otherwise have been available for affordable housing. And the per capita land footprint occupied by high-value individual housing is orders of magnitude higher than that occupied by affordable housing (unit-wise or individual-wise).  

Noah Smith has a nice metaphor to explain this

It makes perfect sense to worry about rain when you see people opening their umbrellas, even though the umbrellas don’t actually cause the rain. The reason is that when you see a bunch of people opening their umbrellas, it means they’ve probably checked the weather forecast. Umbrellas aren’t a cause of rain, but they are a signal of rain. A harbinger. An omen. Market-rate housing development is similar. If you’re a working-class person, and you see a big new shiny glass apartment tower going up a block away, it makes perfect sense to be afraid that rents are about to rise. The apartment tower tells you that A) your city is becoming more of an employment hub for yuppie types, and B) for some reason, the yuppie types have decided that your neighborhood is a good one to live in. But that doesn’t mean you think the new apartment tower is the cause of the gentrification.

2. Increased supply of investment housing, especially in blighted and renewal areas, often also leads to gentrification of the area. At the extensive margin, this crowds-out those less well-off, while at the intensive margin, it increases the prices of the existing affordable housing units. This is a macro/regional level reflection of the micro/housing-level crowding out that happens with housing as an investment.  

Further, in large countries like India and their densely populated cities like Mumbai, there is another important dynamic at play. As I have blogged on several occasions, the higher income market segment is itself so large and its unmet demand very high that incremental supply will be heavily skewed towards this segment. This will ensure that the top market segment draws most of the housing investment and limits the growth of affordable housing supply, and that too for a very long time. 

3. As a model, if left to the market dynamics, the trajectory of deregulation of zoning regulations, ease of permissions, and renewal of blighted areas will attract developers looking to maximise their returns. At the unit level, this leads to a much higher supply investment properties than affordable housing. At the level of localities, this leads to gentrification and displacement of poorer people. 

In fact, in the largest Western cities, there has been a net decline in affordable housing in recent years. Sample this from New York City (via this report),
Between 2017 and 2021, New York City lost almost 100,000 units that had rented for less than $1,500 per month, while it added 107,000 units that rent for at least $2,300 per month... In Manhattan, for example, the median effective rent in April 2022 was $3,870, more than 38 percent higher than a year before and the highest level ever recorded.
4. The lesson here is that if governments merely deregulate, ease permissions, and release government lands, on their own these measures will not result in higher supply of affordable housing. Worse still, they could reduce the incremental supply of affordable housing from the marginal unit of land. These measures should be complemented with measures that directly target creation of affordable housing units.  

5. Apart from directly building public housing, the instruments governments could use to target affordable housing could include higher FAR for such developments, lower building permission and other development charges, even lower property taxes for a certain period, fast-tracked clearances, and concessional capital by way of interest subvention. Perhaps confine these benefits to limited profit entities, as the Austrian example shows. 

6. There's a strong case for higher levels of taxation on vacant houses, so as to deter this trend. But it runs into the problem of identification and monitoring. 

In this context, in an effort to discourage property speculation, Singapore has just announced higher taxes by foreigners to purchase residential property in the country. Further, permanent residents and citizens buying their second residential property will also pay more in the form of an additional buyer's stamp duty (ABSD). 

Monday, May 29, 2023

The legal origins of financial value

I came across the work of Katharina Pistor recently through a friend. This post draws from an article published here.

She makes the important point that the value of any asset derives from its legal enforceability - capital is coded in law. For example, apart from the traditional land and labour, they now include anything from a pile of debt (securitisation) to an idea (patent) to a business organisation (share) etc. 

All tangible assets have some physical form that can lay claim to their value. However, in the case of intangible assets like financial assets or patents, there is no physical form and the value derives directly and completely from the underlying law. 
Capital is coded in law and cannot thrive without the ability to invoke the coercive powers of a state if and when needed. For no assets is this more relevant than for the assets that owe their very existence to law itself; namely, for intangibles, such as financial assets.Financial assets are claims to future cash flows, which are not worth much unless they are backed by a credible threat of enforcement.
In recent decades there has been a dramatic expansion in the application of such laws to underpin newer assets.
The spread of shadow banking domestically and globally would not have been possible without their implicit backing by the state’s coercive powers. A promise to future cash flows is an empty promise unless it or the assets that back it, can be enforced. Anonymous markets in which trillions of dollars are traded by the stroke of a key don’t rely on personal trust; they depend on the possibility of coercion. This implies that is not accurate to suggest that state power has not been scaled back in the age of globalization; rather, it has been repurposed to serve the interests of capital. States have offered their laws, the modules of the code of capital to asset holders; and they have empowered private parties to pick and choose from among different legal systems the modules that best suit their needs, while resting assured that their choices will be enforced.
In addition, they have consented to the privatization of dispute settlement and encouraged arbitration in domains that used to be off limits, thereby eliminating courts as the only space for public contestation that the private coding of capital affords to contest capital’s preferred coding strategies. The ability of private parties to pick and choose from among the different legal systems the law that best suits their transactional needs or gives them the most accommodating tax or regulatory regime stands in tension with the use of law as a means of democratic self-governance. The ease with which some can opt out of one legal system and into another weakens the effectiveness of law as a collective self-governance device.

As Pistor writes, financial instruments benefit from private law that has its basis in one country (typically the US) or a few jurisdictions (typically US and Europe) being extended transnationally, its scope being extended from the private realm to even the public realm, and its formulation and even implementation being delegated to private entities. It's actually worse still since the private law itself emerged from rules framed by private interest groups and has its basis in the private law of one reference country. Good examples of such legal encroachment are international standards-setting organisations like International Accounting Standards Board or the International Swaps and Derivatives Association. 

Unlike elsewhere, in the US, private law is mostly in the realm of states and not federal law. Further, being a common law country, these private laws are built on legal precedents which in turn have local origins in US states among clubby private interest groups. In other words, given the institutional dominance of the US in global financial markets, many of the rules that underpin them have their origins in the US and from private laws decreed (and not legislated) into being through lower court orders. 

Supreme Court justices in the USA, especially the originalists among them, have been more inclined to protect the integrity of the common law and to shield it from interference. As an added complication, in the USA private law is largely a matter of state, not federal law. This sets the country apart from other federalist systems like Germany or India, for example, where most private law falls within the jurisdiction of the federation. The extension of constitutional principles into matters of private law in areas that concern racial or sexual equality, for example, is criticized not only on jurisdictional (or federalist) grounds, but because this threatens to upends the norms of a private legal order that preceded the Constitution... In the common law, which was transposed from England to the USA, private attorneys have much leeway to mold the law and graft legal protections onto new assets, subject only to the occasional vindication by a court of law. Moreover, unlike in civil law systems, where judges are career bureaucrats, in common law systems judges are recruited from the practicing bar. Not surprisingly, they have always been inclined to validate the legal innovations that their former colleagues have brought before them.

She points to the egregious flaw in the legal protections offered to entities like Trusts and corporate shells which exist only to obfuscate origins and ownership, and shield assets from credits and tax authorities. She also discusses how property rights have gradually evolved from being a "use value" to an "exchange value" to now even an "expected value" (securitisation). 

She also gives two examples of the differential treatments meted out by this legal system, 

Of course, not all claims to future cash flows are equally protected. Future cash flows that the state promises in the form of social security or explicit subsidies are typically not deemed to be property rights but entitlements that states can give or take at their discretion, except in the rare cases when they have created reliance expectations. This disparity in the treatment of expectations has long been criticized. Decades ago, Charles Reich called for the protection of “government largess,” that is, cash flows that emanated directly from the state, as the “new property”...

Instead, the protection of “old” property, expectations based on private bets not public commitments, has been further expanded. Of course, private bets don’t always work out, and in most instances, the betters will have to absorb the losses. However, if the losses reach a magnitude that might affect the price of private assets across the board, governments often step in ex post and socialize the losses. In these cases the only difference between old and new property is that explicit government pledges to future cash flows will have been approved in a democratic process, whereas ex-post rescue operations are often crisis-driven and conducted by independent agencies, such as a central bank, or backed by ad hoc legislation that leave little room for deliberation. The central bank rescue deals in the midst of the 2008 crisis followed by bailout legislation in the USA, the UK, Germany and elsewhere, are prominent examples. They are often justified by noting that the governments recovered most of their losses when they sold these assets back to the market. But this misses the negative effect of the crisis on firms and households on the periphery of the system that did not receive similar support and were driven into default.

The power of private law over public law, and common law over even constitutional law, is amplified at the global level due to the dominance and co-ordination powers of American financial market actors, network effects from cross-border financial flows, and the fear among other countries of being excluded  from the markets. 

One of the least discussed aspects of international law concerns arbitration law, specifically its almost blanket adoption in the now common bilateral investment treaties between countries. As Pistor brilliantly articulates, such treaties are draconian in so far as they confer protections on investments and even contracts that equate with property rights, allow foreign firms to invoke its provisions even if there’s only a tenuous contractual connection with the host government, provide omnibus protections against actions including by the host country courts, impose liabilities on national governments for actions of even local governments, bind sovereign countries from changing their laws even for right reasons. 

Since the early 1990s most treaties incorporate so-called investor state dispute settlement (ISDS) mechanisms. The sovereign states that are the parties to a BIT thereby empower private parties, specifically investors from their own country, to take the host state of their investments to arbitration for alleged infringements of their “investment.” Several aspects of this arrangement are worth noting. First, the investor needs only a formal attachment to a state to invoke the rights created in the BITs that the state has entered into with other states. Incorporating a subsidiary for the purpose of taking advantage of particularly generous investment treaty is sufficient. Technically, a foreign subsidiary of a parent company that is located in the “host state” is sufficient... 

Second, investment is an even more open-ended term than property rights. Whereas the meaning of property rights has been contested in most legal systems for centuries, the same cannot be said for investments, the term found in most BITs. Most BITs claim that they protect “every kind of investment,” followed by a list of examples that includes movable and immovable property; and direct investments as well as portfolio investments (i.e., shares), including minority shares or indirect shareholders according to some arbitral tribunals; intellectual property rights and “claims to money and claims having a financial value.” This latter wording indicates that not just property rights but even contracts can trigger remedies on par with compensation for expropriating property rights. Any government actions, by the executive, the legislature, or even the courts, might trigger claims, the defense against which alone can run into the millions of dollars. 

They effectively override the sovereignty of the host country. Consider the case of a state or local government corporation in a developing country in which a foreign investor (from a country with which the host country has a BIT) takes a minority right. Now it comes to light that the domestic promoter has indulged in corruption to obtain a license to start the business. The new government in the host country investigates and follows due process and cancels the license, a decision which is also upheld by the local courts. This ends up sharply eroding the valuation of the business and the foreign investor's stake. The domestic investor does not contest the matter any longer. But the foreign investor invokes the ISDS provision in the BIT and goes for arbitration in London. The arbitration court rules in favour of the foreign investor and directs the federal government of the host country to pay compensatory damages and reimburse the equity  valuation differential for repatriation to the foreign country.  

This is not uncommon. Rulings like this in favour of a minority foreign investor, on an issue litigated and closed by the courts in the host country create several perverse incentives. It encourages foreign investors to get around the sovereign power of a state to cancel a license given in violation of extant law and with rents. Apart from legalising rent-purchased assets and condoning corruption, it also encourages foreign investors to strike deals (especially in natural resource mining and public contracts) through corrupt practices. It also provides a superior right to foreign investors in their investment protection over that enjoyed by domestic investors.

Such mechanisms create perverse incentives, open opportunities for abuse, and are certain to invite backlash against foreign investments in general. It's therefore important to revise bilateral investment treaties and provide a fairer and more equitable sharing of risks and responsibilities among governments and private investors.

Saturday, May 27, 2023

Weekend reading links

1. China grapples with the issue of whether to impose property taxes or not. Remarkably for a communist country, China does not have property tax, capital gains tax, and any form of wealth or inheritance taxes. Instead it relies completely on income, corporation, and sales taxes, and revenues from sale of land leases. Concerns about its administration, public discontent, and political economy issues are cited as reasons for not going ahead with such taxes. Further, the government is also concerned that imposing taxes now will further add to the problems being faced by real estate market.

2. Ezra Klein points to the problem of governments trying to achieve too many objectives with one policy. He illustrates with the example of the recently passed CHIPS Act to encourage semiconductors manufacturing,

Page 11, for instance, encourages a pre-application that includes an environmental questionnaire “to assess the likely level of review under the National Environmental Policy Act.” Page 20 mandates that applicants prepare “an equity strategy, in concert with their partners, to create equitable work force pathways for economically disadvantaged individuals in their region,” which should include “building new pipelines for workers, including specific efforts to attract economically disadvantaged individuals and promote diversity, equity, inclusion and accessibility.” Page 21 asks for a plan “to include women and other economically disadvantaged individuals in the construction industry,” “strongly encourages” the use of project labor agreements and sets out requirements for “access to child care for facility and construction workers.”

Pages 23 and 24 ask applicants to detail how they will include minority-, veteran- and female-owned businesses, as well as small businesses, in their supply chain and offer seven bullet points detailing how this might be done, including dividing supply chain requirements “into smaller tasks or quantities to expand access” and “establishing delivery schedules for subcontractors that encourage participation by small, minority-owned, veteran-owned and women-owned businesses.” Then there are requirements for “a climate and environment responsibility plan,” as well as community investments in areas like transit, affordable housing and schools.

He describes this as a the 'everything bagels' problem

You might assume that when faced with a problem of overriding public importance, government would use its awesome might to sweep away the obstacles that stand in its way. But too often, it does the opposite. It adds goals — many of them laudable — and in doing so, adds obstacles, expenses and delays. If it can get it all done, then it has done much more. But sometimes it tries to accomplish so much within a single project or policy that it ends up failing to accomplish anything at all.

I’ve come to think of this as the problem of everything-bagel liberalism. Everything bagels are, of course, the best bagels. But that is because they add just enough to the bagel and no more. Add too much... and it becomes a black hole from which nothing, least of all government’s ability to solve hard problems, can escape. And one problem liberals are facing at every level where they govern is that they often add too much. They do so with good intentions and then lament their poor results... But there is a cost to accumulation. How many goals and standards are too many? And why is subtraction so rare? It is impossible to read these bills and guidelines and not notice that the additions are rarely matched by deletions. Process is enthusiastically added but seldom lifted. The result is that public projects — from affordable housing to semiconductor fabs — aren’t cost competitive, and that makes them vulnerable when a bad economy hits or a new administration takes over and the government cuts its spending.

3. Two graphs about the composition and destination for credit growth in India over the last decade. On composition - banks have declined from 73% to 64%, while that of bonds have risen from 16% to 22%.

On the destinations for the credit growth - share of industry (heavy and MSME) decline sharply from 44% to 31%, whereas that of consumption rose from 19% to 30%.

4. Striking visualisation of China's vice-like grip over the electric vehicle batteries value chain
Its control is greater in the processing of the critical minerals like nickel, cobalt, manganese, lithium, and graphite. Regardless of who and where the minerals are mined, most of it has to be shipped to China to refine battery grade minerals. 
It also makes most of the parts that go into the battery.
Chinese battery makers like CATL and BYD make 64% of all batteries, and the country makes 54% of all EVs itself. 
China has spent more than $130 billion on research incentives, government contracts and consumer subsidies, according to the Center for Strategic and International Studies. Electric car buyers in China get tax rebates, cheaper vehicle registration, preferential parking and access to an extensive charging network. China’s investments have allowed the country to lead the world in production, equipment and product design. Experts say it is next to impossible for any other country to become self-reliant in the battery supply chain, no matter if it has cheaper labor or finds other global partners. Companies anywhere in the world will look to form partnerships with Chinese manufacturers to enter or expand in the industry.
5. The latest update on the performance of the Insolvency and Bankruptcy Code of India,
At the end of March, 6,571 cases had been so far admitted under this framework. Considering that around half of these proceedings were initiated by operational creditors, this does suggest that the Code has been able to serve as a powerful instrument for these firms, which are typically small and medium enterprises, to try to recover their dues from the larger companies. Of these admitted cases, 4,515 cases have been closed, while proceedings are ongoing in the remaining. And of the cases closed, a staggering 45 per cent have ended up in liquidation, while the rest have been either resolved, withdrawn or appealed. In the cases where the process has yielded resolution plans, realisations of creditors have been low. Of the total admitted claims of creditors estimated at Rs 8.98 lakh crore in these cases, the total realisable value was only Rs 2.86 lakh crore. This works out to only 31.8 per cent. Then there are the delays in the process to contend with. Of the cases that are currently going through resolution proceedings, almost two-thirds have crossed the 270-day deadline. And in the cases currently undergoing liquidation, 55 per cent have been going on for more than two years.

6. Naushad Forbes shines light on India private sector R&D spending.

We must increase in-house R&D from 0.3 per cent of gross domestic product (GDP) to match the world’s (and China’s) level of 1.5 per cent. Why does Indian industry lag so far behind the world in in-house investment? Where do the opportunities lie? The top 2,500 firms investing in R&D worldwide account for around 90 per cent of all industrial R&D, and the top 10 sectors account for close to 80 per cent. India has no firms in the top 2,500 in five of these 10 sectors, and just one firm each in two more. Within some sectors, we are much less R&D-intensive: Our software firms, large by world standards of profitability, are small in R&D, investing around 1 per cent of turnover on average, against a world average of 12 per cent (and a Chinese average of 10 per cent). And we are simply missing any giant investors in R&D. The world’s 26th-largest investor in R&D, Bosch, invests more than all Indian firms combined...

Our 10 most profitable non-financial firms are in software (TCS and Infosys), oil refining (ONGC, Reliance and Indian Oil), metals (Tata Steel and JSW), and other industries (NTPC, Reliance Jio and ITC). Among them, they made a profit of $44 billion last year. They invested under $1 billion, or about 2 per cent of profit, in R&D. Contrast China: Its most profitable non-financial firms are in software, oil refining, beverages, mining, and construction. Among them, they made a profit of $106 billion last year and invested $31 billion in R&D — 29 per cent of profit. The top 10 in the US, Japan and Germany invest, respectively, 37, 43 and 55 per cent of profit in R&D... Among the 10 key technology-intensive sectors that dominate global industrial R&D, India has some presence in two — pharmaceuticals and automobiles. The pharmaceutical industry may have no presence in the league table of our most profitable firms, but it dominates the league table of our top R&D investors. With 41 of the top 100 R&D spenders, pharmaceuticals accounts for 34 per cent of all Indian industrial R&D. At 10 per cent of sales, R&D intensity is lower than the world’s 16 per cent, but this ratio is decent relative to every other sector.

7. On the shifting global economic centre of gravity,

Developing countries, broadly defined, have massively increased their global clout. In 2000, they made up 43 per cent of global economic output in purchasing power parity terms, according to IMF calculations. By next year, that will have risen to 63 per cent. That marks a profound shift from west to east and, to some extent, from north to south. The institutions forged after the second world war and the assumptions that underscored them simply do not reflect the world as it is today.

8. Fascinating visualisation story about the Indonesian government's efforts to shift capital to Nusantara in Borneo District. The current capital Djakarta is facing several problems, including sinking due to rising sea levels - 40% of the city now lies below the sea level. President Joko Widodo is proposing to relocate capital from Java to Borneo, the world's third largest island. Nusantara, meaning 'archipelago' is Javanese. He wants the shift to happen by end of next year, before his term as President ends. In keeping with the times, Jokowi wants it developed as a clean, green, and walkable city. 

9. Goldman Sachs has settled a gender discrimination class action suit by paying $215 million, one of the largest such payout in US history. In this context, FT points to snippets,

“I would’ve been better compensated if I wasn’t a mom,” one woman who recently left the bank told the Financial Times. “For guys, most of the people I interacted with, their wives didn’t work.” One current female employee, meanwhile, said “Goldman promises women for a long time they will be senior leaders, then don’t do anything about it”. While the women interviewed said there were few signs of the overt sexism prevalent on Wall Street decades ago, they felt the bank’s culture remained less accessible to women without an interest in sports, and that speaking out on certain issues could still damage their careers. “To me there was never explicit bias,” said another woman who recently left the bank. “It was harder to interact with some of the senior men in the same casual way that other male colleagues at my level could.” One current junior female employee said that although “on a very theoretical level we are encouraged to speak up . . . in practice if you say something controversial it’s not well received”... described a culture in which going to HR to air issues made you “a pariah for life”.

10. Daron Acemoglu interview in FT by Rana Faroohar where he talks about his latest book on technology and development.

The research shows that major technological disruption — such as the Industrial Revolution — can flatten wages for an entire class of working people. It also points to the distributional conflict and power dynamics inherent in it. “Yes, you got progress,” Acemoglu says, “but you also had costs that were huge and very long-lasting. A hundred years of much harsher conditions for working people, lower real wages, much worse health and living conditions, less autonomy, greater hierarchy. And the reason that we came out of it wasn’t some law of economics, but rather a grassroots social struggle in which unions, more progressive politics and, ultimately, better institutions played a key role — and a redirection of technological change away from pure automation also contributed importantly.”

... the fact that technology can create growth while also not enriching the masses (at least not for a long time). “Technological progress is the most important driver of human flourishing but what we tend to forget is that the process is not automatic.”... Acemoglu baulks at conventional policy prescriptions for dealing with tech-based inequality, such as universal basic income, because “it leaves the underlying power distribution the same. It elevates people who are earning, and gives others the crumbs. It makes the system more hierarchical in some sense.”

11. Japan welcomes back inflation (core inflation at 3.4% above the target rate of 2% for 13 consecutive months, but well under control), and with it economic growth (1.6% growth in Q1 2023), stock market boom (Topix at a 33 year high), revival of manufacturing, and much more. 

12. Debashish Basu nails the Adani price manipulation allegation

Adani Green soared more than 5,000 per cent in three years, going up from Rs 55 to Rs 3,000; Adani Transmission was pushed up 1,500 per cent in two years, increasing from Rs 250 to Rs 4,000; Adani Total Gas zoomed 3,800 per cent in 2.5 years, up from Rs 100 to Rs 3,900; and Adani Enterprises went up almost 2,200 per cent in 2.5 years, from Rs 175 to Rs 4,000. On January 20, 2023, when Adani Total Gas had a jaw-dropping price/earnings multiple of 850, its peer group, comprising Indraprastha Gas, Mahanagar Gas, and Gujarat Gas, traded at multiples of 19.7, 15.9, and 23.3, respectively. It is still at 141, while the peer group is around the same at 23, 13, and 22, respectively. As Judge Stewart would have said, we know it when we see it.
I will repeat myself here from a previous column because it bears repetition of how brazen the alleged manipulation was. At its peak, Adani Enterprises, a component of the Nifty 50, was valued at a price-to-earnings (P/E) ratio of 427. If Reliance Industries was valued at a P/E of, say, 400, its market capitalisation today would be 16 times what it is and Mukesh Ambani would be the world’s first trillionaire, with a net worth of $1.38trn (trillion)! And, of course, if TCS and Infosys were similarly valued, the BSE Sensex would be 8-10 times higher at 480,000 to 600,000 instead of 60,000 or so! On the other hand, if Adani shares were valued as modestly (or correctly) as those of Tata Consultancy Services or Reliance Industries, Gautam Adani’s peak net worth would have been only a few billion dollars, not $150bn (billion), which briefly made him the world’s third-richest man.

13. Gillian Tettt points to a new report by McKinsey Global Institute on the trends in paper wealth globally. She writes

Number crunchers at the consultancy McKinsey believe that, since 2000, the world’s stock of paper wealth (the speculative, unrealised price of all its financial assets) has jumped by some $160tn. Yes, really. Partly, that reflects real economic growth. But it primarily stems from a sharp rise in global debt and in the supply of money through quantitative easing, particularly in countries such as the US, which has raised asset prices. For every dollar of global investment made since 2000, some $1.90 of debt has been added. During the 2020 and 2021 period, this “accelerated to $3.40 for each $1.00 in net investment”, McKinsey says. This was the fastest rate in 50 years. That has raised the putative value of all global assets, relative to gross domestic product, from about 470 per cent of global GDP in 2000 to more than 600 per cent today, with real estate and equity markets booming faster than the “real” economy to a truly remarkable ($160tn) degree.  

14. Finally, more on the US experience of asset stripping and quality problems with private participation in railways

The railroads have shown great enthusiasm for cutting costs by any means possible — reducing staff by 30 per cent in the past six years, harming the freight system’s reliability while returning nearly $200bn in the past decade to shareholders. From 2019 to 2022, Norfolk Southern reduced its headcount by 23 per cent, returned more than $14bn to shareholders while investing less than $7bn back in its network, and saw its accident rate climb every year — by 25 per cent in total... American freight trains derail tens times as often as their British counterparts, according to the industry’s own data.

Wednesday, May 24, 2023

More on lessons from the UK infrastructure privatisation

The UK's privatisation drive in the eighties and nineties has formed the empirical basis for infrastructure privatisation across the world since. There is now more than enough evidence to suggest that the privatisation has been a definitive failure. This is my earlier co-authored oped on the balance sheet of UK's infrastructure privatisation. This is a long paper which also discusses the challenges with infrastructure privatisation.

Dieter Helm, a Professor at Oxford and one of the most credible experts on infrastructure regulation, has this assessment of water privatisation

What has gone wrong? Pretty much all that could. There is too much pollution, too little investment, too high returns, and grossly excessive executive salaries. All this and no clear efficiency advances over most of the European public sector comparators... Privatisation was advertised as the way to “unleash” private investment, outside the public sector borrowing requirement, with ungeared (strictly cash-positive) initial balance sheets to carry the investment so that current customers would not have to pay. It would be pay-when-delivered, rather than pay-as-you-go. The water industry was to be the poster example of the greatest efficiency, so that the efficiency gains would comfortably offset the higher returns that customers would pay for...

We could have had a properly regulated private sector, with: clear and accountable ownership structures; fairly paid executives; a lack of regulation-induced financial engineering; more investment utilising the balance sheets for what they were designed for; reasonable returns; and clear, honest and open environmental reporting, performance and delivery. For all the talk of the need to recruit world-class managers and pay FTSE100 or indeed world corporate salaries and bonuses, the performance of many of the new privatised managers has been poor and, in some cases, dire – though of course with some notable exceptions. Diversifying into things that they had no knowledge of in the early days, trying to build global businesses, merging with energy networks, and becoming a merger and acquisition (M&A) pass-the-parcel exercise in maximising leverage, all have little to do with actually delivering the services that we, the public, and we, the customers, actually want. The water companies have not even been good at maintaining the assets and fixing the leaks.

The model is well and truly broken... The water companies have lost public trust (if they ever had it) and no longer have a social licence to operate. So bad is the public regard, that most prefer re-nationalisation.

This is a more detailed and slightly older assessment of water privatisation, with pretty much similar conclusions.   

His assessment of the railways privatisation

There is little doubt that the privatisation of British Rail was badly botched, and it is not surprising that it has been slowly unwound back towards nationalisation. Back in the 1990s, there were two core objectives in privatisation. The first was to deal with an industry assumed to be in decline, and hence the task was to manage that decline. The second was to transfer more of the costs from taxpayers to rail passengers.

The first objective was to be met by breaking up the industry and trying to inject more competition, on the assumption that this would lead to sharp efficiency gains, and reduce the ability of the unions to organise national strikes. Breaking up British Rail involved the creation of leasing companies for the rail stock (the rolling stock companies, ROSCOs), creating franchised rail operating companies, introducing the possibility of entrants bringing on competitive rail services, and Railtrack to provide the core rail network infrastructure. Behind this lurked an entirely inappropriate model – that used in electricity and gas. And as with electricity and gas, it was deliberate that there would be no one responsible for the system as a whole, no “fat controller”, and not even a national ticketing system.

The second objective meant that rail ticket prices would go up, and the result would be amongst the highest ticket prices in developed countries. This further suppressed demand, reinforcing the sense of decline. Like the Royal Mail, the response to weaker demand was to raise prices.
It is no accident that the three last great privatisations of the 1990s were all very badly designed, badly implemented and all fell apart. The Royal Mail, British Energy (the nuclear assets) and British Rail are all sorry shadows of what they once were. It is hard to argue that any of these privatisations improved their industries, and easy to point out obvious failures. 
A couple of observations and takeaways 

1. It's not as though infrastructure regulation is impossible. I feel these are about weak contractual provisions and accountability and even weaker regulatory enforcement. The problems revolve around non-compliance with contractual obligations and asset stripping (pass the parcel). 

The former involves lower service quality than in the SLAs, skimping on investment obligations, and just-in-time operations and maintenance without the requisite slack for resilience. The latter involves loading up excessive leverage, excessive dividend payouts, running down and/or not paying into pension funds etc. 

These are difficult but not impossible to monitor and regulate. I mean how could Ofwat not have noticed that the UK utilities cash flow from customers could have financed all investments undertaken and the borrowings went into rewarding shareholders? Or the egregious leveraging up and dividend payouts by Macquarie-led Thames Water investors? Is it very hard to monitor pension pots not being paid into and/or being raided?  Why were such exorbitant executive compensation packages allowed at all for boring utility companies? This is the same story as happened with Silicon Valley Bank, where regulators did not bother to exercise even cursory oversight. 

All this happens when contracts are deliberately vague on their terms, without explicitly calling out the specific non-negotiables, and regulatory forbearance is very high. Sample this from Helm,
Surprising as it may seem, there really is no clear set of objectives for the industry... The EU directives themselves are very general: they need flesh on the skeletons, and much is better described as aspiration... Worse, the water company licences are vague and general. Try reading one of them, if you can find it. You will not find clear requirements, and hence it is hardly surprising that it has been all but impossible to take legal action against the companies.

With all this in mind, the first and obvious thing to do is to set out clear objectives, which are measurable and enforceable. These are distinct and separate from milestones and targets. For example, reducing storm overflows is an instrumental and intermediate target, not an objective. The objective is clean discharges and biodiverse rivers. Once the objectives are set, these require detail. What exactly is going into our rivers? The water companies do not precisely measure what is in their discharges of treated water, let alone the raw stuff. Nor is there any baseline of what else is going into the rivers and was already there before the water companies’ discharges.
Instead contracts should have these repeatedly observed problems captured explicitly, safeguards clarified unambiguously, reporting requirements and standards made very clear, and the whole thing should be monitored strictly. To reinforce the point, exclusions and common misinterpretations should be explicitly pointed out as such in the contract. 

It's also useful to have the important terms presented unambiguously and separately in the voluminous contract document, instead of being obfuscated by legalese and/or hidden somewhere deep inside, and thereby diluted into irrelevance. It helps to have everyone sharply focused all the time on the easily understood headline terms of the contract. 

In the absence of these, there's an adverse selection. The investors are aware of the contractual ambiguities and regulatory weakness and tolerance (not to mention the ease of regulatory capture) which in turn attracts them to bid for these projects. 

2. This brings to the second point that by any logical reasoning such regulated assets with their low but stable returns should not be attracting returns maximising private equity investors in the first place, except as a pure portfolio diversification asset. The corporate incentives of PE investors and infrastructure funds floated by them are skewed toward returns maximisation. This is evident from their compensation and incentive structures. 

In sectors like education and health, several countries have restrictions on the nature of private investments. Is there a case for such regulation in infrastructure? Should an investor with PE-type financial incentive structure and executive compensation be allowed to invest in such regulated assets which provide essential services? Should certain corporate structures which are primarily aimed at hiding returns, dodging taxes, and evading accountability be disallowed in infrastructure contracting? Should there be some cap on actually realised returns or a telescoped profit sharing structure to clawback windfall profits?

Yes, these restrictions will cost in terms of reducing investments in infrastructure. But they will also ensure the right selection of investors. The costs may be more than off-set by the life-cycle savings in terms of avoiding the wrong kinds of investors. 

Two comparisons here

1. Unlike in the UK and US, where private equity and their infrastructure funds dominate, continental European privatisation is mostly through large public-private companies like Veolia (now Engie), RWE, EDF, GDF, Iberdola, Enel, Orsted etc. The contracts are also simpler long-term concessions. Rarely are the fancy, complicated, and opaque financial engineering and corporate structures. Is it any surprise then that we do not come across similar pervasive examples of asset stripping?

2. Another example, though unrelated but relevant, is how the Reserve Bank of India (RBI) regulates Indian banks. It's a boring and painstaking slog of parsing and auditing the books (though here too, they need to do more of this). It has led to a banking system that is generally unexciting and stable. 

In my opinion, the buccaneering spirit of American capitalism that has also captured the regulators may be the real problem with the failure of infrastructure privatisation in UK and US. 

Monday, May 22, 2023

Lessons from India's EV market regulation

The ongoing story of electric vehicle manufacturers gaming the conditions of the Government of India's Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme to knock off subsidies is a teachable occasion. 

The FAME II guidelines stipulate that all manufacturers must source 50% of components locally, including 18 critical components, and have a price ceiling on the vehicles to be able to avail of the subsidy. The five-year scheme which started in April 2019 and is set to expire by March 2024, with an Rs 10000 Cr outlay has provided a big boost to EV manufacturing in India.  Its biggest beneficiary has been the two-wheeler segment, where the price is capped at Rs 1.5 lakh and the subsidy is about Rs 50000 which has to be passed on to the customer. 

Following an unknown whistleblower's complaint, the government initiated an investigation. It appears to have revealed that certain companies (Hero Electric and Okinawa) have manipulated the local sourcing condition by importing key components from China and passing them off as being locally manufactured, and certain others (Ather and Ola) have been selling components like portable chargers and proprietary software to overcome the Rs 1.5 lakh price cap. The government has withheld the release of subsidies and directed the companies to refund the customers.

It would not be surprising if the content localisation problem is the underlying issue, feeding into the price cap. Right now only two of them may have been caught. Let's wait and see. 

This scandal highlights several issues - corporate governance problems among Indian startups, lack of vision and dynamism among corporates, the weakness in the state's capability to enforce its own regulations, problems with outsourcing core activities etc.

Some observations on the issue:

1. The implementation of the FAME II scheme is a repeated game. The scheme appears well-designed in theory. In the first instance, the government in good faith restrained from micro-managing the assessment of localisation requirements and released the subsidy based on third-party certification and self-disclosure of localisation and pricing. Now that trust has been breached, it's sure to invite greater oversight from the government on the certification process. This, in turn, could add a few layers of bureaucracy to the certification process. The net result could be difficulties, delays, and corruption in accessing the subsidy. And if that happens, the industry has nobody but itself to blame. 

This is a constant feature of regulations in India. In good faith, the government decides to deregulate and liberalise, only for the industry to game the process, and the government to be forced to respond with tightening regulations. The Insolvency and Bankruptcy Code is a very good example. 

As we are seeing with companies in Edtech and elsewhere among the startups, corporate governance remains a serious problem even in the new age businesses. 

2. The certification was done by ARAI and ICAT which are autonomous institutions affiliated by the government as testing and certification agencies. But this is what the whistle-blower wrote about the certification,

The eligibility certification from ARAI and ICAT, subsidy claims and the disbursement process in the FAME-II scheme, is severely compromised. It is a complete mockery of the phased manufacturing plan norms laid out by the department of heavy industries that a simple undertaking submitted by an electric vehicle manufacturer to ARAI/ICAT is considered genuinely Made-in-India.

Apart from poor corporate governance by the EV companies, this is also a serious enough indictment of these two certification agencies. The episode exposes serious weaknesses in their certification processes, poor administrative oversight within these organisations, or regulatory capture of the certifiers by the industry, or a combination of all. In any case, it highlights capability weaknesses within the certification agencies. 

To be fair to them, the certification requirements appear to have been beyond their competencies,

It is not so straightforward. It is going to be very difficult for us to understand which part goes into a scooter that is high-speed (and claims subsidies) and which one goes into a vehicle which doesn’t enlist for subsidies. The nomenclature of parts is also very similar. We are not trained for this sort of analysis, and it is not even expected out of an agency like ours

It's also most likely that the companies showed samples that had localised components to get certification and then went on to cheat in their regular customer deliveries. This is a standard modus operandi. This could be addressed by periodic randomly sampled testing of the EVs, a process that's now followed in third-party quality assessments of public procurements. 

3. The problems go beyond corporate governance and point to the lack of corporate vision and dynamism. The FAME II mandated that critical components like battery pack, traction motor and controller, vehicle control unit, on-board charger, instrument panel should be locally manufactured. Given the need for a supply chain to develop, the government announced generous subsidies and gave five years to the industry to develop the ecosystem. But the industry representatives are now lobbying that the supply chain has not yet developed and therefore want dilution of the localisation norms! 

Given that all manufacturers have access to more or less the same supply chain ecosystem and have to procure components from them, and if the supply chain is still inadequate, it's not clear how others have met their localisation requirements. One more reason to suspect that the localisation problems may be greater than what has come to light.  

This highlights the general lack of long-term thinking and dynamism within corporate India, and the startups seem no less culpable. Businesses want instant gratification and don't want to put the hard yards and hunker down to nurture supply chain for the emerging industry. Companies like Hero Electric should have utilised the FAME II opportunity and taken the lead to bring all manufacturers together and facilitate the development of a supply chain of component makers. Instead all of them opted for the short-term gain of piggy backing on the subsidies to maximise sales without any concern for what would happen when the subsidies expire. Obviously they would have believed that they could lobby to continue the subsidies. 

4. It's being reported that the government have taken steps to rectify the certification process. It has roped in public sector NBFC IFCI Ltd and accounting firm EY to receive applications, manage data, calculate subsidies, and audit the accounts of the companies. I'm not sure this is a good enough solution, given the seriously tarnished reputation of auditors like EY. These mechanisms are no substitute for direct government oversight and accountability when it comes to disbursing such large amounts. Governments need to have the capabilities to at least manage the contract effectively.

In this context, it's worth noting that such failures and weakness among certification agencies is pervasive. It's all fine in theory to argue that the activity of certification can help governments outsource the verification of critical outcomes. But it holds only as long as the certification process is rigorous, which in turn depends on the capabilities of the certification agencies. The example of the Quality Council of India's numerous misadventures in certifications in areas like open defecation free, cleanliness of cities, skilling centres etc should be cause for caution. Deep-rooted problems and persistent weaknesses cannot be overcome by quick-fixes like outsourced certifications.

Given India's poor corporate governance standards, the capabilities have to be not only technically proficient but also administratively strong. The certification agencies will have to be technically proficient enough to detect attempts to technically get around the certification process and also have the administrative integrity to deter efforts to corrupt its bureaucracy. Higher the stakes, the greater the efforts by the industry to indulge in such practices.

5. The FAME II subsidy has boosted EV sales in India by more than seven-fold growth in the 36 months from March 2020. The monthly sales have crossed 100,000 in no time. With the government withholding subsidies, the spectacular growth rate has now started to decline. The government should not be concerned about this. Sales growth is purely a matter of the economy's absorption capacity, and as I have blogged several times India's consumption class is too small to support such rapid growth rates for sustained periods without significant subsidies. If the subsidies are bigger the sales growth will be bigger still. 

6. This episode should alert the government to the possibility of such gaming in the much bigger production-linked incentive (PLI) scheme. There too third-party certification would be playing a major part. And given the much higher stakes involved, it's almost certain that firms will seek to game the process and over-invoice their local content.

The Department for Promotion of Industry and Internal Trade (DPIIT) should strengthen internal capabilities to eliminate such gaming. And that does not mean hiring consultants. 

Saturday, May 20, 2023

Weekend reading links

1. Brett Christophers has a very good article which links to several examples of infrastructure funds and private equity ownership of infrastructure assets gone wrong. It has become conventional wisdom that governments should stay out of infrastructure and should, at best, use public finance to de-risk projects so that private investors can come and invest. The main source of private investment in infrastructure is nowadays from infrastructure funds. Christophers writes that the number of global infrastructure focused funds rose from fewer than 100 in 2016 to more than 250 by 2020, with the total assets under management having quintipled since 2009. 

Led by Macquarie, an Australian financial services group that is the sector pioneer, asset managers began investing substantially in Asian and European infrastructure in the early 1990s. Today, in countries such as South Korea and Britain, infrastructure funds are the leading owners of major infrastructure assets in a range of sectors, among them energy, transportation and water.

The story of asset-manager-led infrastructure investment is overwhelmingly a negative one. Asset managers are focused on optimizing returns on the assets they control by maximizing the income they generate while minimizing operating and capital costs. Many users of infrastructure that has come under asset manager ownership have suffered, as service rates have risen quickly and service quality has deteriorated. Nowhere is this better illustrated than in Britain. There, numerous types of infrastructure have come substantially under asset manager ownership. This has led to consistently negative outcomes in, for example, care facilities, schools and water supply. Many observers have concluded that essential infrastructure and asset manager ownership simply don’t mix.

And in South Korea, Macquarie’s eight-year investment in Metro Line 9, part of the Seoul subway system, involved a bitter spat with the metropolitan government over a proposal to hike fares by nearly 50 percent. That led Macquarie and other shareholders in 2013 to unceremoniously sell their stake, in what commuters came to call the subway line from hell. Local critics charged Macquarie with taking excessive profits without assuming any risk, an accusation that has been a consistent drumbeat accompanying the phenomenon of asset manager infrastructure investment around the world. Macquarie said that it is committed to its operations in Korea and that its Korean infrastructure fund is a “passive financial investor” that has cooperated fully with the city of Seoul. 

The story has been much the same when housing is owned by asset managers. There have been allegations of skimped maintenance and egregious eviction practices in some areas. Such outcomes have been reported in Spain, for example, a notable hot spot of asset manager investment in housing since the global financial crisis, by a series of academic researchers. If the United States has been a relative laggard in asset-manager-owned infrastructure, it has been in the vanguard of asset-manager-owned housing.

2. Productivity booms lag behind inventions.

3. FT feature on South Africa's izinyoka's or copper thieves who steal for survival or to maintain drug addiction.
Copper was the new gold, as far as their gang was concerned, and anywhere it could be found was fair plunder. Theoretically, the sale and export of scrap copper is carefully controlled by South African officials. But the properties that make it the world’s third most-used metal also make copper a smuggler’s dream. Malleable and recyclable, it is easily melted down, after which its origin becomes virtually untraceable. It was February 2021 and prices had hit a 10-year high, reaching $9,000 a tonne on international markets. Any number of unscrupulous dealers would buy the coveted metal, then resell it in South Africa or, more likely, help smuggle it to booming markets in China and India... That made a ragtag group of izinyoka the first link in a lucrative supply chain ultimately controlled by international syndicates... in their time working together, they had all hacked down telephone poles, dug up underground cables and broken into industrial plants. Train stations were a favourite target. By the end of that year, izinyoka had ripped out more than 1,000 kilometres of overhead cable from Transnet, the state-owned freight rail operator, prompting it to contemplate switching from hybrid electric locomotives to diesel-only models that don’t require cabling...

In January, the consequences of industrial-scale theft in South Africa included: three security guards killed during heists; three hospitals scaling back operations because stolen copper plumbing hampers their ability to pipe oxygen to intensive care units; trains cancelled due to stolen signalling cable or track sleepers; parts of the city going without electricity for days after thieves toppled pylons. Mining, South Africa’s largest industry, has been severely disrupted. Pits across the country churn up gold, gemstones, rare earth metals and coal, and the country is home to about 90 per cent of known deposits of platinum, vital for electronics and electric vehicles. One morning in March, a platinum operator discovered 300 metres of copper cabling had been stolen from a production site. Workers at Royal Bafokeng Platinum laid new cables the following day, but the thieves were back by nightfall... City Power, Johannesburg’s main power utility, reported the cost of replacing cables stolen between July 2022 and February this year at R380mn ($21mn).

4. Edward Glaeser and Carlo Ratti write about reviving New York City, which like other cities around the developed world is facing large office vacancies in the aftermath of the pandemic

New York needs to attract the rich and talented, but the poem beneath the Statue of Liberty reminds us that the city’s greatness comes just as much from being the landing site for “your tired, your poor, your huddled masses” that it is now pricing out. One way to balance these two governmental imperatives — to help the poor and generate tax revenue from the affluent — is to view the city as a for-profit real estate development company wholly owned by a nonprofit poverty-alleviation entity. The for-profit company focuses on keeping the city attractive to the rich, and the revenue it generates gets plowed into schools and support for the poor.

This about how the office spaces can be converted into residential spaces and people brought back to the streets

Modern office towers have deep floor plans meant to maximize square footage, but units in residential buildings need windows and their natural ventilation and daylight. To achieve conversion at scale, we must therefore look past the architecture of the traditional apartment. Deep-core office buildings could be converted into new kinds of spaces optimized for co-living and co-working. Bedrooms, with windows, could line the perimeter while common areas for cooking, laundry, work, exercise and socializing could fill the middle. Such arrangements could also help meet one of the social challenges of our time: loneliness... The urban playground should be constantly rearranged: Streets could be cleared for weekends, annual festivals and temporary exhibitions; food bazaars and pop-up shops could multiply. Movie theaters struggle to compete with boundless streaming catalogs available on cheap 4K televisions. More outdoor screenings on summer nights could tip the balance back toward collective experience. These easy interventions are especially useful for garnering public support. To draw people into the Playground City, we need to show, not tell.

5. TSMC is facing a crunch on its most important resource, skilled chip engineers. Taiwan's chip sector employs around 326,000 engineers. There is an acute shortage of chip engineers, with China reporting an estimated shortage of 200,000 engineers. 

6. The debate on the proper role of the corporation has a century old echo

Chief executives have been debating the proper role of corporations — to make profits for shareholders or to serve society at large? — for more than a century. The Michigan Supreme Court considered the question in 1919, when the Dodge brothers, as shareholders in the Ford Motor Company, complained that Henry Ford was diverting profits into expanding the business and lowering the price of cars, rather than paying dividends. More than 50 years before Milton Friedman would famously declare that an executive’s responsibility was to make “as much money as possible,” Ford argued the opposite, saying the purpose of a corporation was to increase employment and pay good wages, and only incidentally to make money. The court ruled in favor of the Dodges. Some business leaders sided with Ford. Owen Young, the chairman of General Electric, said in the 1920s that, in addition to paying a “fair rate of return,” corporations had an obligation to labor, customers and the public.

7. Norway is at the vanguard of the shift to electric vehicles

Last year, 80 percent of new-car sales in Norway were electric, putting the country at the vanguard of the shift to battery-powered mobility. It has also turned Norway into an observatory for figuring out what the electric vehicle revolution might mean for the environment, workers and life in general. The country will end the sales of internal combustion engine cars in 2025. Norway’s experience suggests that electric vehicles bring benefits without the dire consequences predicted by some critics. There are problems, of course, including unreliable chargers and long waits during periods of high demand. Auto dealers and retailers have had to adapt. The switch has reordered the auto industry, making Tesla the best-selling brand and marginalizing established carmakers like Renault and Fiat. But the air in Oslo, Norway’s capital, is measurably cleaner. The city is also quieter as noisier gasoline and diesel vehicles are scrapped. Oslo’s greenhouse gas emissions have fallen 30 percent since 2009, yet there has not been mass unemployment among gas station workers and the electrical grid has not collapsed.

8. The Economist has an article which suggests that in relative economic terms China may already have peaked and it may never surpass the US GDP. 

Capital Economics, a research firm, argues that China’s economy will never be number one. It will reach 90% of America’s size in 2035 and then lose ground. In so far as the Peak China thesis can be captured in a single projection, this is it. What accounts for the lower expectations for China’s economy? And how much of a reduction is warranted? The answers hinge on three variables: population, productivity and prices. Start with population. China’s workforce has already peaked, according to official statistics. It has 4.5 times as many 15- to 64-year-olds as America. By mid-century it will have only 3.4 times as many, according to the un’s “median” forecast. By the end of the century the ratio will drop to 1.7...

The biggest swing in sentiment relates not to population but to productivity. Back in 2011 Goldman Sachs thought labour productivity would grow by about 4.8% a year on average over the next 20 years. Now the bank thinks it will grow by about 3%. Mark Williams of Capital Economics takes a similar view... As China ages, it will have to devote more of its economic energies to serving the elderly, leaving less to invest in new kit and capacity. What is more, after decades of rapid capital accumulation, the returns to new investments are diminishing... 

If China’s prices or exchange rate fail to rise as Goldman Sachs expects, then China’s gdp might never overtake America’s. If China’s labour productivity grows just half a percentage point slower than Goldman Sachs envisages, its gdp, everything else constant, will also never surpass America’s (see chart). The same is true if America grows half a point faster (as Capital Economic projects). If China’s fertility rate declines further (to 0.85 children per woman by mid-century), it might eke out a lead in the 2030s only to lose it in the 2050s. Even if China’s economy does become the biggest in the world, its lead is likely to remain small.

9.  For all the talk about its decline, The Economist points to some staggering numbers about the American economic progress over the decades, and it continues.

America’s $25.5trn in GDP last year represented 25% of the world’s total—almost the same share as it had in 1990. On that measure China’s share is now 18%... In 1990 America accounted for 40% of the nominal GDP of the G7, a group of the world’s seven biggest advanced economies, including Japan and Germany. Today it accounts for 58%. In PPP terms the increase was smaller, but still significant: from 43% of the G7‘s GDP in 1990 to 51% now... A hundred dollars invested in the S&P 500, a stock index of America’s biggest companies, in 1990 would have grown to be worth about $2,300 today. By contrast, if someone had invested the same amount at the same time in an index of the biggest rich-world stocks which excluded American equities they would now have just about $510... 

America’s working-age population—those between 25 and 64—rose from 127m in 1990 to 175m in 2022, an increase of 38%. Contrast that with western Europe, where the working-age population rose just 9% during that period, from 94m to 102m... between 1990 and 2022 American labour productivity (what workers produce in an hour) increased by 67%, compared with 55% in Europe and 51% in Japan... TFP in America increased by about 20% between 1990 and 2019. The G7 as a whole averaged less than half that... roughly 34% of Americans have completed tertiary education... Only Singapore has a higher rate... America is home to 11 of the world’s 15 top-ranked universities in the most recent Times Higher Education table.

And some pointers of economic dynamism,

In 2013 a Gallup survey found that about one in four adult Americans had moved from one city or area within the country to another over the past five years, compared with one in ten in other developed countries. About 5m move between states each year... Stockmarket capitalisation runs to about 170% of GDP; in most other countries it comes in below 100%... about half of the world’s venture capital goes to firms in America... 5.4m new businesses started in 2021, an annual record and a 53% increase from 2019... an OECD measure of the personal cost of failure for entrepreneurs consistently puts America and Canada at the bottom... (in the) World Management Survey America sits at the top of their ranking. Fierce competition... helps to explain America’s corporate culture. Bosses are more comfortable with firing employees... Markets are readier to reward companies for evidence that they are well run. America’s managerial strength, the survey finds, explains as much as half of the productivity lead that it has over other developed countries.
10. Novovax struggles with getting countries to comply with their advance market commitments to purchase Covid 19 vaccines. The lack of demand has led to governments either reneging or seeking to renegotiate their AMCs. The same problem is there with other vaccine makers' AMCs too. 

11. Berggruen Institute Governance Index for 2022 is here. This is the report. 

12. Indian Express article on Kerala's neighbourhood women's groups, Kudumbashree, that is the largest women's collective in the world and has completed 25 years of existence. 

It runs 49,200 micro-enterprises — 31,589 individual units and 17,611 group enterprises. So ubiquitous that in every half a kilometre in the state, you bump into one initiative or the other of Kudumbashree... Kudumbashree’s 46,16,837 members have organised themselves into 3,09,667 neighbourhood groups (or NHGs, called ayalkootam in Malayalam). The neighbourhood group is the primary level unit of Kudumbashree that has a three-tier hierarchy. The next rung is the Area Development Society (ADS) that functions at the level of the ward, followed by the Community Development Society that works at the local government. The NHGs usually begin with thrift and credit programmes, lending money to members using the group’s savings. Subsequently, NHGs are graded and once they qualify, they are eligible for bank loans. These loans address the immediate financial needs of the group members. Subsequently, the state government supplies grants and subsidies, besides administrative support. Banks provide loans to members at low interest rates. The total thrift collected by NHGs in the state, according to Kudumbashree’s website, stands at Rs 5,786.69 crore and the internal loans generated are to the tune of Rs 23,852.45 crore.

This is a striking achievement

Besides social mobility, the movement has armed women with political mobility too. Of the 11,000-odd seats reserved for women, 7,038 were won by active Kudumbashree members in the 2020 local body elections, up from 848 in 2005.

13. Argentina's latest bout of hyper inflation, spike in interest rate, currency collapse, foreign debt default, IMF bailout, economic contraction is on.

Argentina will announce on Monday a new round of emergency government measures, including raising interest rates 600 basis points to 97 per cent, to try to stave off the country’s worst economic crisis in two decades. The Peronist government is desperate to avoid a big devaluation before elections in October. But the South American country is also running out of foreign exchange reserves as Argentines abandon the fast-devaluing peso and embrace the US dollar. Fuelled by money-printing to finance a large government deficit, Argentine inflation hit 109 per cent a year in April, the highest level since 1991. The economy ministry said the new measures, to be announced Monday, would involve the central bank stepping up intervention in the foreign exchange market to try to slow the peso’s fall. Economy minister Sergio Massa is also trying to persuade the IMF to bring forward the disbursement of agreed loans and will travel to China on May 29 to seek greater use of the renminbi in foreign trade.

14. The Business Standard has an article which analysed 10 infrastructure stocks over the last twenty years and found them big wealth destroyers. 

Companies in the construction and infrastructure sector have been among the biggest underperformers and wealth destroyers in the stock market in the past 20 years. The sector has also seen a wave of corporate failures and bankruptcies, making it tough for retail or non-promoter shareholders to make money on their investments. The numbers suggest that companies in the infrastructure sector go through a typical boom-and-bust cycle. First, there is a sharp rally in the share price as companies report rapid growth in revenues and profits, but then earnings growth loses steam, triggering a big sell-off in these stocks and a further decline in share prices that lasts for years. For the poor showing by these companies, analysts blame high debt, poor return on capital and equity, and the inability of these firms to sustain growth and earnings when financial and macroeconomic conditions turn adverse.

15. Ghana signs a $3 bn bailout from IMF following defaulting on its $34 billion debt in December last. The IMF estimates another 19 countries in the continent could face the same fate. 

The government borrowed heavily to insulate the economy from the effects of the pandemic and may have avoided a recession as a result. But the country’s debt as a percentage of GDP went from 62.7 per cent in 2020 to more than 100 per cent last year, according to finance minister Ken Ofori-Atta. Debt servicing now takes up about 70 per cent of government revenue... The administration stopped charging for mains water and brought in cheaper tariffs on electricity... The government saw an opportunity in leveraging the Covid pandemic to engage in reckless expenditure in view of the 2020 election... Much of the Ghanaian government’s spending took place in a world of low-interest rates. Ghana gorged on cheap money, raising almost $17bn in eurobonds that the Ministry of Finance frequently said were oversubscribed for nine straight years. But as central banks began raising rates to control inflation — the Bank of Ghana has raised rates by 1,250 basis points since March 2022 — Ghana found itself shut out of international debt markets as concerns grew over its ability to repay what it owed. The government has since been forced to rely heavily on a domestic capital market, where interest rates are as high as 40 per cent, and central bank financing of 37.9bn cedis ($3.2bn) in 2022. Some of the money being injected into the economy by the central bank may have helped to fuel inflation.

Historically, Ghana, like Sri Lanka, has been a relative good performer in the region.

16. Finally, Gillian Tett has more data on how bad mobile phone use is on children's mental health.

A group called Sapien Labs, which studies mental health, has polled almost 28,000 18-24-year-olds. Part of Gen Z, Sapien describes this cohort as “the first generation who went through adolescence with this technology”. It’s no surprise that this research shows that Gen Z’s mental state is worse than earlier generations. As psychologist Jean Twenge notes in Generations, teenage mental health has worsened sharply in the past decade, the period after smartphones went mainstream. Covid-19 has exacerbated the problem, according to the Centers for Disease Control and Prevention. What’s most interesting, however, is that Sapien tracked the age at which respondents first got cell phones and compared this with their reported mental health. This showed a clear pattern: kids who received phones at a younger age had worse mental health, even after adjusting for reported incidents of childhood trauma. The share of females experiencing mental health challenges ranged from 74 per cent for those who received their first smartphone at age six to 46 per cent who received it at age 18. For males, the numbers were 42 per cent and 36 per cent... The pattern was particularly stark in one of six mental health categories, known as the “social self”, which tracks how we view ourselves and relate to others.