Saturday, July 29, 2017

Weekend reading links

1. Metro rail projects on the rise in India, with 8 metro projects 370 km already operational, and over two dozen lined up or approved and under construction. Bar a handful, all of the rest are being executed by government owned entities. PPPs have proved a false dawn,
Interestingly, PPP for metro projects has been limited to five in India. Out of these five, one project (Mumbai Metro Phase 2) was terminated before it started, while another (Delhi Airport Line) was terminated after becoming operational. Currently, there are three operational PPP-based metro projects (one in Mumbai, and two in Gurugram) while one project is under implementation (Hyderabad Metro).
Mumbai and Gurugram are very small ones, and the former has already suffered several rounds of acrimony between the government and the operator. Much the same applies to the tortuous process of construction of the Hyderabad metro, despite the very generous land leverage subsidy for the project. This is unlikely to change given the inevitable need for public subsidy for metro rail systems.

2. Property prices in the most liveable cities have been rocketing in recent years on the back of cross-border purchasers, a significant share of whom are Chinese. London has been at the forefront of the froth. The Economist has this nice graphic of iconic London properties which are currently owned by foreigners.
3. Economist has this about India's push to improve transportation,
Local governments are paving and widening rural roads at a rate of 117km a day.
4. Even as expectations are of petrol prices staying low for a long time, oil and gas producers are turning on on their investment spigots on the face of falling development costs.
More new oil and gasfields were given the go-ahead in the first half of this year than in the whole of 2016 as companies such as ExxonMobil, Royal Dutch Shell and BP re-engineer projects to lower costs and accelerate speed of development. Average development costs have fallen 40 per cent since 2014, according to Wood Mackenzie, the energy consultancy, encouraging companies to revive investment despite continued weakness in the oil market. But they are doing so on a highly selective basis, with only the most attractive projects going ahead... the most risky or economically marginal projects are being cancelled, leaving billions of barrels of untapped resources “stranded” as long as weak prices persist. Producers are instead trying to mimic the “short cycle” model of US shale companies by focusing on resources that can be developed at the lowest cost in the shortest time. Almost three-quarters of conventional projects approved this year have been “brownfield” expansions of existing fields, or satellite developments connected to existing platforms and pipelines through so-called tie-backs... Conventional producers are trying to narrow shale’s cost advantage further by adopting a “no frills” approach to development. The “big is better” mentality of the $100-oil era has given way to smaller, simplified projects, often involving fewer wells than originally planned and advanced in phases rather than all at once.
This investment rush in turn only amplifies the prospects of lower prices for the foreseeable future.

5. The Economist points to the work of Michael Sances and Hye Young You who find racism at work in police jurisdictions in the US. They examined 9000 US cities and found, 
Those with more black residents consistently collected unusually high amounts of fines and fees—even after controlling for differences in income, education and crime levels. Cities with the largest shares (98%) of black residents collected an average of $12-$19 more per person than those with the smallest (0%) did. However, there was one subgroup of cities that bucked the trend: the relationship between race and fines was only half as strong in places whose city councils included at least one black member. This may be because black politicians are likelier than white ones are to respond to complaints from black constituents. Black councillors might also intervene to stop certain policies, like increasing court fees, from going into effect to begin with.
The attraction of fines as a valuable source of revenues for cash strapped local governments may amplify the problem,
Part of the problem is that fines are a very effective method for cash-strapped governments to shore up their budgets without having to raise taxes or cut spending. As a result, the temptation to tell police departments to dredge up violations, no matter how petty, can be hard to resist. City judges tend to rubber-stamp these penalties. For example, in Peoria, Arizona, two people were jailed for not trimming weeds more than six inches tall. In Ferguson, a black man resting in his car after playing basketball in the public park was stopped by police and charged with, among other things, not wearing a seat belt in his (parked) car and making a false declaration after giving the officer a shortened name (like “Bob” instead of “Robert”). Such fines may fall disproportionately on the backs of black citizens, because they tend to be poorer and lack the resources to contest the penalties.
6.  A team of analysts from UBS took apart the mass-market electric vehicle (EV), Chevrolet Bolt, which retails for $37000 and can do 238 miles on a single charge. They found compelling evidence that EVs could become mainstream far earlier than being anticipated, with the likelihood of achieving cost parity with internal combustion engine vehicles by early part of next decade. They found EV vehicles to have far less mechanical complexity - Bolt had just 24 moving parts compared to 149 for VW Golf, which means less wear and tear, and less number of workers in production line.

The report has several other interesting findings, including the fact that 56% of Bolt EV content comes from outside the traditional auto-supply chain, thereby indicating the possibility of significant disruption on the supply-chain side.
Further, with far less, almost negligible, maintenance costs, and no engine oil like consumables, the EV could hurt dealerships, who generate almost 40% of their revenues from after-sales maintenance.
As to its impact on the global market for minerals, the demand for cobalt, lithium, and graphite for batteries and rare earths for e-motor magnets would rise,


7. Two contrasting interpretations of Chinese historical perspective. Howard French talks in his new book about a Chinese neighbourhood policy motivated by its historically predominant position and the concept of tianxia, or "everything under heaven",
“Tianxia emerges as a paradigm for China’s geopolitics from a correct sense that it is vastly larger and, for most of its history, vastly richer than any neighbouring state,” French explains during our conversation. “Out of this flows an ideal, from the Chinese perspective, that order can best be established in our neighbourhood by a situation whereby the neighbours defer to us.” In the most technical sense, deference is expressed through a highly ritualised series of ceremonies: embassies dispatched to pay obeisance to the emperor; the adoption of the Chinese calendar and language. In broader policy terms, tianxia combines carefully deployed “sticks” and “carrots”. French points to historical evidence to argue that China uses inducements first and force only as a last resort: the Sino-Vietnamese war of 1979 is an example. Carrots include access to Chinese trade, to its potentially vast market, and to what French describes as “patents of authority. China essentially legitimates local leaders by endorsing them”. On this basis, “a harmonious pattern of coexistence can endure in the region. One could say only on this basis”.
Former Indian Foreign Secretary, Shyam Saran, refutes this interpretation of historic predominance
China uses templates of the past as instruments of legitimisation, to construct a modern narrative of power. One key element of the narrative is that China’s role as Asia’s dominant power restores a ­position the nation occupied through most of history. The period from the mid-18th century until China’s liberation in 1949, when the country was reduced to semi-colonial status, subjected to invasions by imperialist powers and Japan, is characterised as an aberration. The tributary system is presented as artful statecraft evolved by China to manage interstate ­relationships in an asymmetrical world. What is rarely acknowledged is that China was a frequent tributary to keep marauding tribes at bay. The Tang emperor paid tribute to the Tibetans as well as to the fierce Xiongnu tribes to keep the peace. History shows a few periods when its periphery was occupied by relatively weaker states. China itself was occupied and ruled by non-Han invaders, ­including the Mongols, from the 12th to 15th centuries, and the Manchus, from the 15th to 20th centuries. Far from considering these empires as oppressive, modern Chinese political discourse seeks to project itself as a successor state entitled to territorial acquisitions of those empires, including vast non-Han areas such as Xinjiang and Tibet.


Thus, an imagined history is put forward to legitimise China’s claim to Asian hegemony, and remarkably, much of this is increasingly considered as self-evident in Western and even Indian discourse. Little in history supports the proposition that China was the centre of the Asian universe commanding deference among less civilised states... recasting a complex history to reflect a ­Chinese centrality that never existed is part of China’s current narrative of power.
8. Ananthanageswaran and Praveen Chakravarthy provides these very sensible suggestions in response to this SEBI discussion paper to address the disproportionate skew towards derivatives in India's equity market. They find that investors in India's derivatives markets are primarily speculators and not hedgers, and have been encouraged by the lower Securities Transaction Tax (STT) on derivatives over stocks. The scale of distortion is not to be glossed over,
Indian equity investors have an inexplicable fetish for complex derivative products. In FY2017, just 700,000 individuals bought and sold nearly $4 trillion notional worth of derivatives. This is twice as much as all foreign institutional investors in India combined. India’s stock exchanges trade eight times more equity derivatives than the Hong Kong (HK) stock exchange, even though the value of all companies listed in HK is double that of India. Indian retail investors also seem to prefer the riskier of the two categories of derivatives products between stock futures and options. The potential gain or loss in futures is unlimited, while it is limited in options. Retail investors in India bet on a notional value of $800 billion of stock futures in 2016, more than the value of stock futures traded in all of Europe, Hong Kong and Singapore combined. Retail investors account for half of all the stock futures trading in India, while sophisticated institutional investors account for just one-tenth and prefer stock options instead. Not only do Indian retail investors have a puzzling fascination for high-risk derivative products, they seem addicted to the riskiest category.
In contrast, Ajay Shah takes an ideological view on the issues raised in the SEBI discussion paper and claims that India's equity markets "largely work well". I don't have the energy to litigate, but it is amazing that views like "objective of financial markets policy is to achieve liquid and efficient financial markets" persist. 

9. The latest in the search for fancy financing instruments to address development challenges comes with the world's first issuance of Pandemic Bonds by the World Bank. The details,
The World Bank says the probability of another pandemic in the next 10 to 15 years is high. That is why it has issued $425m in pandemic bonds to support its new Pandemic Emergency Financing Facility (PEF), which is intended to channel funding to countries facing a deadly disease. The bonds cover six viruses likely to spark outbreaks: new influenza viruses, coronaviruses (like SARS and MERS), filoviruses (like Ebola), Lassa fever, Rift Valley fever and Crimean Congo fever. Investors forgo their principal when a virus reaches a predetermined contagion level, based on rate of growth, number of deaths and whether it crosses international borders. The facility covers 77 of the world’s poorest countries.
This will raise probably a few millions over the next many years. Is it really worth the effort?

10. Finally, as India refused to enforce the follow-on despite having a lead of 304 over Sri Lanka, one cannot but help think that the follow-on requirement of 200 runs has to be changed. It should be made at least 300 runs, maybe 400 runs. In the age of modern batting (fast scoring and weakness on worn-out wickets), teams realise that a lead of 200 can be made to look very small even with just one session of batting. So, enforcing the follow-on is just inconceivable. 

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