Weekend reading links

1. Livemint has a story that questions the conventional wisdom on IIT admissions being a pathway to large starting salaries.

While the crore-plus salaries paid by investment banks, high frequency trading (HFT) firms and quant firms are highlighted in the achievement letters of the institutes—Mint reported last month that proprietary trading company Jane Street Capital offered a salary package of ₹4 crore plus to an IIT Kanpur student—there are many who end up in jobs that pay less than ₹10 lakh annually. Even those from the established IITs... students from the computer science batch are wooed by many suitors, followed by those from electronics, electrical and the like. Civil engineering isn’t too hot. According to a placement officer in one of the newer IITs, chemical engineering isn’t either... Experts and IIT alumni say the wide variance in salaries is simply a reflection of the market and the demand for certain skills.

2. Some facts about unicorns in the US

Of the 639 US startup firms that achieved $1 billion or more in valuations between 2000 and the third quarter of 2021, 427 remain active unicorns and 212 have exited. Among the exits, 137 went public, 110 through IPOs, 18 through special purpose acquisition companies, and 9 via direct listings. An additional 44 unicorns exited through mergers and acquisitions. Only 21 of the firms that reached unicorn status during the study period failed, either filing for bankruptcy or agreeing to a merger at a value below 25 percent of their unicorn round valuation.

3. City of London factoids,

In 1631 the population of the City of London was estimated at 130,163. In 1901 it was 26,923. Today it is about 8,600. It is hardly a thriving 24-hour metropolis.

And concerns from recent trends,

Reimagined from the 19th century as a core of finance, it was rebuilt as a place of pure business. Ten proposed new office towers (peaking with the 63-storey 55 Bishopsgate) will continue to reshape its spiky skyline. Yet the City was never entirely a monoculture. It had markets and hospitals, housing estates, churches, restaurants, a proliferation of pubs and a huge newspaper industry (those latter two largely inseparable). This complex ecosystem emerged from centuries of an intense concentration of trade. New housing (with a few exceptions, notably the Barbican) was excluded. The last thing the postwar City wanted was residents complaining about a new office tower blocking their light or, heaven forbid, more voters. 

But east London’s skyline has since shifted from offices and council blocks to kitschy new residential towers aimed at foreign investors. Housing’s allure has sharpened, particularly after the pandemic shock looked likely to undermine the workplace. With residential developments now the mainstay of construction at London’s other financial centre, Canary Wharf, apartments are sneaking in along the City’s riverside and north and east fringes. Housing (so much easier to finance due to presales) is encroaching on the Square Mile in very visible towers like One Bishopsgate Plaza and serviced apartments at The Moorgate. The problem, according to former City planner Peter Rees, is not the properties themselves but their emptiness. Already 26 per cent of City residencies are classified as second homes (the national average is 1 per cent). Others are investments for children who might study here, or are occupied only a couple of nights a week. This poor use of scarce land adds little to street life. The cautionary tale is the City’s transatlantic twin, Wall Street. Trading floors have gone, business has moved midtown and bank towers are now luxury residences. The once-buzzing street and myriad small businesses are clearly dying, while empty apartments atrophy.

4. Pandemic and indebtedness in developing countries,

The public debt of developing countries, excluding China, reached $11.5tn in 2021. By some accounts, serious debt problems are largely confined to a small share of this figure, owed by highly vulnerable low-income countries such as Chad, Zambia or Ethiopia... During the pandemic, government debt ballooned by almost $2tn in more than 100 developing countries (excluding China), as social spending went up while incomes froze due to lockdowns. Now, central banks are raising interest rates, which exacerbates the problem. Rising rates have meant capital flight and currency depreciation in developing economies, as well as increasing borrowing costs. These factors have pushed countries such as Ghana or Sri Lanka into debt distress. In 2021, developing countries paid $400bn in debt service, more than twice the amount they received in official development aid. Meanwhile, their international reserves declined by over $600bn last year, almost three times what they received in emergency support through the IMF Special Drawing Rights allocation. Foreign debts are therefore eating an ever-larger piece of an ever-shrinking national resources pie.

5. Richard Bernstein writes about the Maytag Repairman effect and the US Federal Reserve,

The Maytag Repairman was a fictional washing machine mechanic who was lonely because no one ever needed to repair a reliable Maytag appliance. Instead of tools, he carried a book of crossword puzzles and cards to play solitaire to combat his boredom. For many years, the US Federal Reserve played the role of the Maytag Repairman with respect to inflation. With the expansion of globalisation and the resulting secular disinflation, there wasn’t much for it to do to fight inflation. Rather, it could generously ease monetary policy during periods of financial market volatility without much concern that its efforts to save investors might spur inflation. The repeated efforts to curtail financial market volatility led to the term the Fed “put”. Investors viewed the Fed’s behaviour as though the central bank were consistently writing a protective put option to limit investors’ downside risk. With perceived guaranteed downside protection, investors rationally took excessive risks because the Fed repeatedly quelled financial market volatility with significantly lower interest rates. Risk-taking often got extreme. There were three significant financial bubbles in the past 25 years — the dotcom boom, the housing market, and the surge in tech companies/growth stocks/cryptocurrencies before recent sharp corrections.

I have blogged on multiple occasions about the Fed's (and in general central banks') undeserved appropriation of credit for monetary stability in the last quarter century.

6. Martin Sandbu points to the downward revising global economic growth rates from the blog of IMF Chief Economist Pierre Olivier Gourinchas. 

7. John Mueller has an excellent analysis of Manchester City's Norwegian forward Erling Haaland. This about Haaland's less than impressive impact on the Club despite he himself scoring 25 goals in just 20 matches,

Even as their superstar striker collects hat-tricks (four so far) for fun, City as a team are scoring at almost exactly the same rate as last season, back when they didn’t have Haaland or often any striker at all. At the other end of the pitch, they’re conceding 40 per cent more goals than before. You do the maths on how this is going. City’s rate of points per game is down from 2.45 last season to 2.25 so far in this campaign. Their expected goal difference has plunged from +1.86 to +1.29 per game. Their team strength rating in FiveThirtyEight’s SPI model has dipped from 93.5 to 90.8, the lowest it’s been since Guardiola’s second season in charge. For the first time at any point since 2019-20, City aren’t favourites to win the Premier League.

This is a stunning graphic that shows the change in where City's centre-forwards received passes last season compared to where Haaland has received the ball this season. 

Last season’s rotating cast of striker-poets functioned as a free-floating spare attacker, popping up in midfield or out wide as often as they did in the box. This season that fluidity is gone. Erling Haaland doesn’t care about your build-up. Erling Haaland cares about goals. Instead of drifting away from the centre-backs, Haaland stays in the width of the six-yard box, receiving most of his passes around a dense, red-hot core just to the left of the penalty spot — which, not coincidentally, is also his favourite place to put his laces through a left-footed shot. Think of it as the Haaland Zone... Since Haaland doesn’t pull out wide to overload the edges of the opponent’s back line, his team-mates have to find other ways to create the three-v-two advantages that help them break through the channels and create high-value shots.

Besides, as Mueller explains nicely, the focus on Haaland leaves City's defence vulnerable to counter-attacks. 

The cost of Haaland’s goals is one fewer passer and a less flexible formation, forcing City to push the attacking tempo and take fewer touches almost everywhere in the opposing half except the centre of the box. Instead of shoving the ball down their opponents’ throats, they’re getting pressured into passing the ball around their own third. They’re less compact and less controlled — in a word, less Guardiola-ish.

A case of the world's leading striker leaving the team less well off?

8. Finally, Noah Smith writes that the biggest push for reconciliation with China will come from the finance industry,

My instinct is that the strongest calls for a conciliatory U.S. approach toward China will come from the finance industry — especially banks and asset managers... Foreign direct investment in manufacturing defined the Chimerica era, but it’s becoming less important now... U.S. banks and asset managers, hungry to find high returns wherever they can, will be eager to pour capital into China, especially now that Zero Covid is over and the real estate crackdown is being partially reversed. Some of this will go into Chinese stocks, but much of it will probably be handed off to Chinese asset managers, from where it will eventually, inevitably, flow into real estate-related investments —developers, local government financing vehicles, contractors, shadow banks, etc.

9. A less discussed big risk posed by the Adani implosion is on the infrastructure sector, where it could have the same or bigger effect as the collapse of Carillion in UK in early 2020

The Adani Group’s dominance in India’s infrastructure sector is undeniable. It may have earned its stripes as a mine developer and port operator, but the group has expanded its reach to control a significant portion of India’s airports, roads, city-gas distribution, and power generation and distribution. In 2019, it won the bid to operate six airports, and two years later, it bought a majority stake in the Mumbai airport. With this, Adani ended up controlling one-fourth of India’s air-passenger traffic and one-third of its air-cargo traffic.The group has also emerged as one of India’s biggest road developers in recent years, with 18 highway stretches in its portfolio... Once you factor in the group’s presence in city-gas distribution and power generation and distribution, it’s not easy to dismiss concerns over the level of dependency on the conglomerate for infrastructure development.

To this add the several giga watts of solar power plants, Navi Mumbai airport development, the Dharavi slum redevelopment, the several electricity transmission projects, Totex model smart meters etc. The dependence is excessive and it's certain to willy-nilly get re-evaluated.

Ten observations on large urban renewal projects

Urban renewal projects are a recurrent topic in this blog. This was the last post about the redevelopment of Midtown Manhattan around the Penn Station. 

The FT reports of the inauguration of the redeveloped 1930s era Battersea Power Station complex in London after a £9 billion regeneration project that would contain homes, offices, and shops. The 42-acre site is redeveloped by Battersea Power Station Development Company, which is owned by a Malaysian Pension Fund. The project has been under development for nearly 40 years since the power generation from the plant stopped in 1983. 

A brief description of the development,

The 42-acre site, which includes a number of residential and office blocks as well as 250 shops, cafés and restaurants, a theatre, hotel and public space, as a “new town centre for London”. The building’s old turbine halls have been converted into an upmarket retail space — with luxury brands such as Cartier and Rolex, alongside Adidas and Superdry — that takes up the majority of space on the ground floor. With Westfield shopping centres in the west and east of London, the former coal-fired power station will become the southern point on a triangle of malls, with the West End nearby...

Apple has taken six floors of offices in the renovated power station in what is one of the biggest leasing deals in London in recent years... Above Apple’s offices, the building houses 254 residential apartments and a roof garden. One of its four white chimneys, a legacy of its days as a working power station, has a glass lift to the top that will be open to — and paid for — by the public. The original power station started producing electricity in 1935. The art deco architecture of the time is well preserved in one half of the building and most clearly seen in a control room that is being turned into an events space. Its panels once controlled the power for a fifth of London, and include a board labelled Carnaby Street 2 that once linked to Buckingham Palace. The other half of the building was added after the second world war, by which time architectural trends had moved to the 1950s-era steel and “space age”. This corresponding control centre will be converted into a 1950s-themed bar.

This is the short history of the redevelopment efforts,  

The plans for the power station site, which is owned by a consortium of Malaysian investors and developers, will finally see the building brought back to use for the first time since the power was cut off in 1983. In the past, the building has attracted owners from Hong Kong, Ireland and the UK, with various aspirations to turn it into a theme park, hotel and even the base of a 300m glass chimney. But the site has largely remained untouched over the decades as its owners have either gone bust or sold out — in the 1990s it was even left without a roof for a period after the project ran out of funding. The Malaysian-pension fund backed consortium bought the site in 2012 from its receivers for £400mn. The new project has already attracted criticism over its lack of affordable housing, fuelling concerns over the number of empty flats built along a stretch of the Thames that is already blighted by soulless blocks... planning consent for the remainder of the site, which had previously featured “some really very large buildings”, had been updated to give greater flexibility in terms of future use, building shape and size, “which is useful at a time when the developers’ crystal ball is a bit foggy”.

London is remarkable for the number and scale of its redevelopments - King's Cross, Victoria Station, London Bridge, Liverpool Street, Greenwich etc.

This is a teachable example and points to several insights that are relevant for all redevelopment projects.  

1. Such projects are always long in cooking and take a very long time to get cooked. It will take-off only when there is a confluence of policies, developers, market prospects, social acceptance, and political support for the project. It's only natural that it takes long years for such confluence to materialise. 

2. Not just the financial life of these projects (time to recover investments), even the project development phase span multiple business cycles. Besides, the project revenue streams and their revenues are uncertain at the beginning and emerge only over time. This demands visionary investors with very high risk-appetite. The high risk nature also means that the patient long-term investors who wait out should be allowed to reap high returns. 

3. Infrastructure or other funds, with multiple investors and long investment time frames, are best placed to assume these project risks. Besides they are also more likely (than large property or infrastructure development companies) to hire professional managers and be comfortable with arms-length ownership. Since their incentives are aligned towards maximising value capture, they are likely to procure the best professionals with the capabilities to market the project aggressively by forging networks and creating eco-systems (critical to maximising value capture). Such arms-length relationships are generally difficult for large property or other infrastructure contractors. 

4. Given the long gestation and the tenuous viability of these projects, especially in their development phase and early years, it's natural that these projects will involve periodic renegotiations and requests for public support. Governments and the society at large should be open to considering these requests. The environment of vigilance enquiries and media trials are a big deterrent to such projects. 

5. The uncertainties and long-gestation mean that such projects invariably involve multiple takeouts, even during the development phase, involving different categories of investors. So flexible and complex financing structures are essential. 

6. Urban planning instruments and property tax concessions are critical in shaping the financial viability and the development trajectory of these projects. Since unlike public finance investments these instruments do not involve budget allocations (though they involve revenues foregone), governments have significant flexibility in deploying them. And since they generally involve concessions on recurring revenues and the value capture on the property investments is generally back-ended, these are financially significant for the project. 

7. Apart from planning instruments, infrastructure connectivity public investments are critical to their success. In fact, all the aforementioned examples from London revolve around the old metro railway stations. The metro station and its connectivity provides the anchor around which the entire redevelopment  happens. 

8. Such projects invariably create a vocal constituency of opponents who mobilise political support against it. While the majority of population would welcome these projects, their diffuse and weak support is more than overwhelmed by the concentrated and loud opposition by the small minority. The strengths of the opposition and support waxes and wanes over time. The developers should have the appetite to ride out these political cycles.

9. The scale and very nature of these projects mean that they are less about infrastructure development but more about branding and marketing, creating eco-systems and jobs, and catalysing activities that contribute to the development not only the project area but of its larger conurbation. This cannot be undertaken by non-local project entities, but have to be led entities grounded in the local government and community. This is an important reminder about one of the important weaknesses of the railways station development projects undertaken by Government of India through a distant central government entity called RLDA as primarily a station rebuilding project.  

10. Finally, these projects require high quality and deeply committed long-term leadership, with the vision to plan for and wait out business cycles. 

Urbanisation trends - transportation and housing facts of the day

I have blogged earlier about unaffordable housing and traffic congestions being the biggest threat to urban growth. 

Take the example of housing. Increasing the stock of affordable housing is arguably one of the biggest public policy challenges. Even when the stock of housing increases, it's often the case that the increase is confined to the supply of higher value units. Worse still, thanks to trends like gentrification and housing increasingly an investment asset in the largest cities, the stock of affordable housing ends up shrinking. 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.

One could say that these effects are much more pronounced in rapidly growing cities of the developing world. Rapid growth of the biggest cities have made them pockets of continuing asset bubbles which in turn attract speculative and other investors, thereby pricing out the middle-class and below. 

On the transportation side, nearly 160 years after the first metro rail system was launched in London in 1863, the £19 bn Crossrail project connecting the west and east of London became partially operational last week. It's designed to halve journey times and bring the city's four airports together with just one interchange, the Elizabeth Line will bring an additional 1.5 m people to within 45 minus of central London. The project is four years late and £4 bn over budget. 

The opening of Crossrail comes at a time when metro rail systems globally are facing a crisis. Passenger growth in metro railways have been stagnant for the last decade and Covid 19 dealt a body-blow. Even after the passing of Covid, commuter traffic is only 60-70% of pre-covid levels. Even more strikingly, overall all transport modes have declined over the last two decades as people have stayed at home.

Between 2002 and 2019, the average distance people in England travelled annually fell by 10 per cent and the number of trips by 11 per cent, according to official UK data. The decline was observed across almost all modes of transport, from short walks to public transport to driving. The trend is similar in Europe and the US, even though it is sometimes masked by population growth. Even before the pandemic, fewer people were commuting the full five days a week, and more employees were on short-term contracts or working in the less routine “gig” economy. This has weakened the economic case for shiny new urban transit projects in those places. Of the 56 new metro systems that opened worldwide between 2010 and 2020, 44 were in the Asia-Pacific region, according to the International Association of Public Transport, and just one was in Europe... The pandemic has accelerated and cemented the shift. Today, more so-called knowledge workers are based at home or in third spaces closer to home, such as cafés or co-working spaces, than ever before... In Greater London, public transport use last week was still down around 33 per cent compared with February 2020 levels, according to Google Mobility data. 

While commutes are stable or declining in mature urban systems in developed countries, they're exploding in the rapidly expanding developing country cities. Worsening the problem is the unaffordability of housing, which pushes people out to the suburbs, thereby increasing commute times. In other words, at their prevailing population levels, congestion and commute times increases faster than the urban population growth itself in most major developing country cities.