Weekend reading links

1. From the early evidence, it appears that the New York City congestion charges are a success. 

Several indicators suggest a sustained decrease of traffic into, within and around the congestion zone. MTA data shows a 13 per cent drop in vehicles entering the central business district in March against a historical average, plus faster movement through the bridges and tunnels that are often snarled with traffic. This is supported by data from analytics firm INRIX that also shows minimal changes on Manhattan bridges outside the zone. On the funding side, the $500mn that the MTA anticipates raising this year from securities ahead of a big bond issue has provided investment for projects including signal upgrades, station elevators and a line extension.

This is corroborated by the findings of researchers in a new working paper who used Google Maps Traffic Trends data. They found speed increases for traffic into and inside the zone, without negative effects on local roads (spillover effects). 

This has also meant shorter response times for emergency service vehicles. 

2. Domestic value addition in exports has been declining in the US and India.

The share of domestic content in the output of US-based manufacturers dropped from 65 per cent in 1997 to 52 per cent in 2023. This decline was most pronounced during the period between 1997 and 2008, coinciding with the peak years of globalisation, when offshoring production to lower-cost economies became the dominant corporate strategy... India’s share of domestic value addition in its gross exports of manufactured goods (as a percentage of gross exports) has declined sharply from 88.2 per cent in 1995 to 63.3 per cent in 2012, before rising to 73 per cent in 2020.

3. Private equity distributions decline sharply

According to Bain & Company’s Global Private Equity Report, distributions as a percentage of net asset value have fallen from an average of 29 per cent in the period from 2014 to 2017 to only 11 per cent today. PitchBook estimates there are more than 12,000 US portfolio companies — around seven-to-eight years of inventory at the observed pace of exits. This is much higher than the five-and-a-half-year median exit time they’ve observed across the industry to date.

4. Nigel Farage's right-wing populist Reform Party has emerged as the biggest party in UK's local government elections even as Labour and Tories suffered their worst performance in decades. 

5. Cory Doctrow offers a negotiating strategy for other countries while negotiating with the Trump reciprocal tariffs. He points to the intellectual property law called "anticircumvention", which prohinit tampering with or bypassing software locks that control access to copyrighted works. 

The first of these laws was Section 1201 of America’s Digital Millennium Copyright Act, which Bill Clinton signed in 1998. Under DMCA 1201, it’s a felony (punishable by a five-year sentence or a $500,000 fine) to provide someone with a tool or information to get around a digital lock, even if no copyrights are violated. Anticircumvention laws are the reason no one can sell you a “jailbreaking” tool so your printer is able to recognise and use cheaper, generic ink cartridges. It’s why farmers couldn’t repair their own John Deere tractors until recently and why people who use powered wheelchairs can’t fix their vehicles, even down to minor adjustments like customising the steering handling. These laws were made in the US... The US trade representative has lobbied — overtly in treaty negotiations; covertly as foreign legislatures debated their IP laws — for America’s trading partners to enact their own versions. 

The quid pro quo: countries that passed such laws got tariff-free access to American markets. Canada enacted its anticircumvention law, Bill C-11, in 2012, after the ministers responsible dismissed 6,138 opposing comments on the grounds that they were the “babyish” views of “radical extremists”. Mexico enacted its version in the summer of 2020 in order to fulfil its obligations under the US-Mexico-Canada Agreement... Why should every peso that a Mexican iPhone owner pays to a Mexican app creator make a round trip through California and come home 30 centavos lighter? Why accept that for every 1,000 rupees someone pays in-app to India’s Dainik Bhaskar newspaper, the paper only gets 700 rupees? After all, if an Indian tech company makes its own app store, it could charge competitive fees that lure away all of Apple’s best Indian app maker customers. And why shouldn’t every mechanic in the world offer a one-price unlock of all the subscription features and software upgrades for every Tesla model... Monopolistic US companies have spent the first quarter of this century extracting trillions of dollars from consumers all over the world, insulated from competition by anticircumvention laws that they lobby to maintain. From printer ink to ventilator repairs, they have been able to pursue monopoly pricing, secure in the knowledge that no one would undercut them with cheaper and/or better add-ons, marketplaces, software, consumables and service offerings.  

6. Fascinating story about Disco Corp, a 87-year-old Japanese company with 7000 employees and $20.8 bn revenues that makes about three-fourths of all machinese used globally to cut, ground and dice semiconductors and has been run on pure free market pricinples. 

Disco is a business unlike any other. Since 2011, it has conducted a radical experiment to operate a blue-chip company on purely free-market principles. Nobody has a boss. Superiors cannot tell juniors what to do. Each day, employees choose whatever tasks they want. They can quit or join a different team at their own volition. Within this state of perfect freedom, most of their decisions will be guided by Will, as Disco’s internal currency is known. Employees earn Will by doing tasks. They barter and compete at auction with their colleagues for the right to do those tasks. They are fined Will for actions that might cost the company, or compromise their productivity. Their Will balance determines the size of their bonus paid every three months. The Will system, as it functions today, is the brainchild of Disco’s chief executive, 59-year-old Kazuma Sekiya, who sees his unorthodox management plan as fundamental to the company’s culture and success...

The Will system works like this. Sales of Disco’s machines generate Will. For each ¥1bn (£5.2mn) of revenue Disco accrues, approximately 400mn Will is typically generated for the sales staff to channel down through the company. They use that Will to reward or incentivise other employees to do tasks that support them. For example, they might pay Will to the manufacturing team to produce new machines for them to sell, pass on a stream of royalties in Will to the research team, or offer a tributary gift to their colleagues in HR for paying their salaries (in yen). Further down the food chain, the exchange of Will can be negotiated informally between employees in return for other tasks, paid for upfront, after completion or however the two parties agree is best. Disco also has an auction system for tasks, which works by dynamic pricing. The fewer people able or willing to do a task, the more Will has to be offered. If someone is desperate to do a certain job, or learn skills from a particular virtuoso, they might offer to pay Will for the privilege. Disco now has a team of eight employees who manage the Will system. They oversee a framework of 772 penalty and 337 reward items. About 187 of these payments and rewards are used regularly. 

The purchasing department fines people who write the wrong address on letters and packages, for example. The communications team has Will subtracted for negative articles that are published about the company. For Disco employees, Will dictates almost everything they do. Each member of staff starts the month with a negative Will balance, which they must strive to get above zero — an “existence cost”, so to speak. The system assumes employees are an inherent drag on the company until they prove otherwise. And the more senior you get at Disco, the greater your cost to the company is assumed to be.

7. Which developed country has had the most impressive economy since 1990?

This performance has helped the country maintain a AAA rating since 2003. The article is a good long read and examines the reasons for this economic perfornance. 

Mining grew to become one of the country’s largest exports, accounting for 12.2 per cent of GDP in 2024, according to Australia’s central bank. For the past three decades, Chinese demand for iron ore and copper, and Japan and South Korea’s hunger for natural gas and coal, have been the key drivers of economic growth... Australia’s lopsided economy, says Chris Bradley, director of the McKinsey Global Institute. The effects of what he calls a “productivity crisis” have been partly masked by the mining boom, high levels of immigration and increased state expenditure, according to a report he co-authored and published in December... “There is no greater beneficiary of the rise in China than Australia,” says Richardson... Whereas average productivity grew more than 1.5 per cent annually between 1993 and 2016, it has not grown since and has been falling since 2022. GDP per capita is down from 2.5 per cent between 1993 and 2007 to negative 1 per cent in the past two years.

8. Huawei has done several extraordinary things. But what it's attempting to do now is even more so and these efforts have accelerated since the US imposed sanctions in 2019. 

Huawei is involved in projects that aim to develop alternatives to technology from chip designer Nvidia, equipment maker ASML, memory-chip maker SK Hynix, and contract manufacturer Taiwan Semiconductor Manufacturing Company.

9. Fascinating description of the importance of the charkha by Mahatma Gandhi

“The spinning wheel represents to me the hope of the masses. The masses lost their freedom, such as it was, with the loss of the charkha. The charkha supplemented the agriculture of the villagers and gave it dignity. It was the friend and the solace of the widow. It kept the villagers from idleness. The charkha included all the anterior and posterior industries — ginning, carding, warping, sizing, dyeing, and weaving. These, in their turn, kept the village carpenter and the blacksmith busy. The charkha enabled the seven hundred thousand villages to become self-contained. With the exit of the charkha went the other village industries, such as the oil press. Nothing took the place of these industries. Therefore, the villagers were drained of their varied occupations, creative talent, and what little wealth they brought them.”

10. Akash Prakash makes an important point about how bringing back manufacturing to the US will be counterproductive for US companies.

Outsourcing has been led by US corporations; they are the masters of moving the capital-intensive manufacturing piece overseas to China and white-collar services to India. The only reason to offshore is to lower costs. Given a choice, it is always easier to have your employees and manufacturing next to you. Offshoring brings complexity to supply chains and is only done if costs can be brought down by 15-20 per cent at a minimum. If the endgame of these tariffs is to bring more manufacturing back to the US, it will affect corporate margins, as it is more expensive to do the job in the US — the reason it was offshored in the first place. Every company cannot pass on the higher costs. US corporate margins are near all-time highs, with return on equity above 16 per cent; both will go lower in the coming years.

This reduction in corporate margins can be seen in two related perspectives. In the first place, these inflated margins were the result of externalisation of the costs of supply chain resilience and national security. The tariffs and trade war with China is now forcing an internalisation of these costs. And that's a good thing. 

11. DOGE may have failed, and Musk may be on his way out, but he may have clinched Starlink's biggest business opportunity.

Trump’s “Golden Dome”, which aims to replicate Israel’s “Iron Dome” for all of the US, could be one of the biggest taxpayer outlays since Ronald Reagan’s strategic defence initiative, better known as “Star Wars”. In dollar terms Trump’s dome may even rival Nasa’s Project Apollo, which cost $280bn in today’s money. Since the missile shield would need to rely on swarms of satellites, Musk’s SpaceX would be the largest beneficiary. The company has formed a Golden Dome consortium with Palantir and Anduril, which are run by his Big Tech friends. Musk’s lasting impact on Washington may thus be to divert a big chunk of US taxpayer money to his empire. As leaving gifts go, this one would be very nice. Whether it would enhance US national security is someone else’s problem. Ditto on whether Golden Dome contracts qualify as waste, fraud or abuse. When only one company can fulfil the project’s biggest functions, there is little prospect of an open bidding process.

12. The definitive graphic on China's continuously rising trade dominance.

This is staggering

“China has surpluses, not just with the US, not just with Europe, but with 172 economies in the world,” Bert Hofman, a former Beijing-based country director for China at the World Bank, told a meeting of the Foreign Correspondents’ Club of China. “And if you have surpluses with 172 economies in the world, that’s not a great soft power position.”

As also this

China was the subject of 198 trade investigations by WTO members over alleged dumping or illegal subsidies last year, double the tally of the previous year and accounting for nearly half of all measures reported to the global trade body, according to research by Peking University economics professor Lu Feng. More than half of the trade cases against China last year were initiated by developing countries, including India, Brazil and Turkey. Even close partner Russia has pushed back on China’s car exports.

13. One area where China is chronically dependent on US suppliers is in the aeroplane manufacturing industry.  

Beijing had been hoping that Comac C919, its domestic aeroplane, would challenge Airbus and Boeing.

With China’s three big state-owned airlines already flying 17 C919s and Comac expecting to build at least 30 more of the single-aisle aircraft this year, the tensions between Washington and Beijing are highlighting how Chinese companies can be heavily dependent on US companies in their supply chains. The C919, which made its maiden commercial flight in China in 2023, has 48 major suppliers from the US, 26 from Europe and 14 from China, according to Bank of America analyst Ron Epstein...

For most western aircraft components for the jet, there are no domestic alternatives readily available, analysts say, meaning the US “can [halt] Comac in its tracks anytime it wants”, said Richard Aboulafia, managing director of AeroDynamic Advisory. One of the most crucial parts of the C919, its LEAP-1C engine, is built by CFM International, a joint venture between the US group GE Aerospace and French manufacturer Safran. While China has been developing a domestic alternative, the CJ-1000A, it is still being tested and is “not ready yet”, said Dan Taylor, head of consulting at aviation consultancy IBA... But if the US, at some point, decides to restrict exports of key components to China and “if China stops buying aircraft components from the US, the C919 programme is halted or dead”, Epstein said.

14. In an important event, Foxconn has struck a deal to manufacture electric vehicles for Mitsubishi Motors of Japan. Foxtron, its EV subsidiary, will develop and produce a Mitsubishi vehicle for Australian and New Zealand markets. In an industry where in-house manufacturing has been the norm, this outsourcing model is a potential turning point for the industry. 

15. Alaska Sovereign Wealth Fund

In 1980, Alaskan leaders created the Alaska Permanent Fund to invest 25 per cent of the state’s revenue from North Slope oil. Each year the fund, which began with less than $1mn and now has around $80bn of assets, pays out a dividend to every Alaskan resident.

16. Agencies have sprung up offering "place-of-origin-washing" services to Chinese exporters by routing their exports to the US through third countries. 

17. Zara's remarakable supply chain integration that changed clothing retail.

In the old days, retailers released just two main collections a year, Spring/Summer and Autumn/Winter. For decades, most chains have outsourced manufacturing to lower-cost factories in the far east with the clothes arriving up to six months later. Zara went against conventional wisdom by sourcing a lot of its clothes closer to home and changing products much more frequently. That meant it could respond much faster to the latest trends and drop new items into stores every week. Just over half of its clothes are made in Spain, Portugal, Morocco and Turkey. There's a factory doing small production runs on site at HQ, with another seven nearby, which it also owns. As a result, it can turn around products in a matter of weeks. More basic fashion staples are produced with longer lead times in countries like Vietnam and Bangladesh... Every piece of clothing is packaged and despatched from its distribution centres in Spain, as well as one in the Netherlands...

CEO Mr Maceiras says, "It's something that allows us to make the right decision in the last possible minute, in order to assess properly the appetite from our customers, in order to adapt our fashion proposition to the profile of our customers in different locations." In other words, getting the right products to the right shops. At HQ, product managers then receive real-time data on how clothes are selling in stores worldwide, and – crucially – feedback from customers, which is then shared with designers and buyers, who can adjust the ranges along the season according to demand. Unlike some other High Street rivals, it only discounts when it stages its twice-yearly sales.

18. Amidst all the talk of the impact of the tariffs on the world economy, here's the impact of GFC and Covid 19 for perspective.

The GFC caused world economic growth to fall from 2.7 per cent in 2008 to minus 0.4 per cent in 2009, a decline of 3.1 percentage points. The Covid crisis saw global growth fall from 2.9 per cent in 2019 to minus 2.7 per cent in 2020, a drop of 5.6 percentage points... The International Monetary Fund (IMF) sees global economic growth slowing from 3.3 per cent last year to 2.8 per cent this year — a deceleration of 0.5 percentage points... The drop in global growth of 0.5 percentage points projected on account of the tariff shock seems piffling in comparison.

19. Muted salary and wage growth of India Inc's 457 listed companies that have declared their results for Q4  FY25

The combined salary & wage expenses of the country’s listed companies grew just 4.8 per cent in the January-March quarter of 2025 (Q4FY25) over a year earlier — in single digits for a fifth straight quarter, and the slowest rate in at least 17 quarters. For comparison, these companies’ combined salary & wage expenses had increased 6.1 per cent year-on-year in the same quarter of FY24 and 5.1 per cent in Q3FY25... The share of salary & wage expenses in Indian companies’ net sales declined to 12 per cent in Q4FY25 — against 12.14 per cent last year, and a five-year average of 12.6 per cent...

The combined net sales (gross interest income in case of lenders) of the 457 companies in our sample was up 6.4 per cent Y-o-Y in Q4FY25 — the slowest growth rate in six quarters. Their revenue is now set to grow at a single-digit rate for an eighth consecutive quarter —since the quarter ended June 2023. These companies’ combined net profit (adjusted for exceptional gains & losses) were up 6.7 per cent Y-o-Y at around ₹2.24 trillion in Q4FY25 — a decline from 7.1 per cent in Q3FY25, but an improvement from 6.4 per cent in Q4FY24... A slowdown in India Inc’s salary & wage expenses was led in the past by IT services companies like Tata Consultancy Services, Infosys and Wipro, the current round of rationalisation is led by BFSI, which has faced a slowdown in growth and margin pressures in recent quarters. Companies in the IT services and BFSI sectors are the biggest employers in the listed space, accounting for 48 per cent and around 30 per cent of the salary & wage expenses of all companies in our sample.

Weekend reading links

1. Ashok Gulati has a good article putting in perspective Punjab's agriculture. The state's typical farming household receives Rs 1.22 lakh per farmer as subsidy in 2019-20, the highest in the country. But in terms of agriculture GDP per hectare of gross cropped area, the state came out only 11th ranked. The concentration on wheat and paddy is clearly the reason and points to the need for crop diversification to sustain farm incomes.

2. Debashis Basu writes about the proposal on allowing corporate houses into banking. The real issue is one of regulation, specifically the capacity to regulate effectively also given the political economy issues. The mainstream criticism appears influenced by the worry that the likes of Ambani or Adani will be one of the licencees, and the likelihood of regulating them meaningfully. 

3. Discom dues mount by 29% to Rs 1.38 trillion by end-October 2020. Granted Covid has been a major contributor, but this is in line with a long-term trend. This problem continues to elude solutions. 

The fundamental problem is that discoms are unable to recover costs and the state governments unable to reimburse the subsidy incurred. So gencos and discoms assume debts, mostly from banks and from REC/PFC. The only meaningful way to address the problem is to take the long-route to change and squeeze credit supply. 

4. On India's solar manufacturing,

Almost 75 per cent of India’s solar power capacity is built on Chinese solar cells, which is a component of a solar panel) and modules (the entire panel). India’s solar cell manufacturing capacity stands at 3 Gw and for modules it is 5 Gw, whereas the country’s solar power generation capacity stands at 32 Gw... It is no exaggeration that Chinese solar cells and modules have been instrumental in the growth of Indian solar power generation. Chinese solar equipment imports jumped nearly six times in 2013-14 when tenders for solar power projects were gathering momentum in India... Analyst reports show that China has reduced the benchmark price of solar photovoltaic panels by more than half to a global low of $0.15-0.20 per kwh in the past eight months.

India may have lost a manufacturing industrial policy opportunity with panels and modules. Industry argues in favour of higher tariff barriers - basic customs duty (BCD), safeguard duty, and anti-dumping duty for a few years, and treatment of manufacturers in SEZs on part with domestic companies (63% of cell and 43% of module makers are in SEZs, who also get levied duties imposed on imports). They also feel the Rs 4500 Cr PLI allocation for solar PV modules is inadequate.

5. From FT here a graphic on the status of foreign fast food retailers in India. 

The numbers of KFC, McDonald's and Subway outlets in India should serve as a note of caution. After nearly two decades, their numbers are surprisingly small. One more signature that raises questions about the size of the middle class.

6. It's a testament to the times that people with extremely dubious track records manage to raise billions for their companies. Latest exhibit is electric truck manufacturer Nikola and Trevor Milton. Milton has a long history of "overstating technology and lying to customers", both central allegations against him in the context of Nikola. 

It's stunning that the army of advisers who conducted due-diligence on the company could have missed the problems raised in the linked FT article. It also raises questions about the Special Purpose Acquisition Companies (SPAC) route that Nikola took to list instead of the more rigorous IPO route. 

The company which once had a valuation of $30 bn, greater than Ford, has never manufactured a truck and is expected to do so only by late 2021, if at all.

7. A silver lining in the dismal economic scenario is the performance of India's corporates. Many of them appear to have used the opportunity presented by the problems of the last decade to deleverage, cut costs, and focus on their core competencies. This is great news going forward for corporate India. 

This trend has accompanied pervasive economic weaknesses induced by various negative shocks, whose adverse impact appear to have been borne by the informal sector and the not so well-off. 

It also raises the intriguing possibility of a new version of the India-Bharat divergence. This time, a formal India which races ahead, and an informal India which suffers and falls behind. It has implications on inequality, broad-based sustainable growth, and socio-economic stability.

8. Jean Dreze proposes an urban employment guarantee program. It's about issuing job stamps at minimum wage which can be distributed to urban poor and used by various government institutions for small works they need to undertake in routine course. 

9. The staggering rise of Adani Green stock, growing 40 fold since June 2018 to reach a capitalisation of $23 bn! Besides it's one of the most illiquid stocks with not even one analyst rating.

10. India has emerged as a top destination for SWFs, surging ahead of China,

According to data by New York-based Global SWF, which tracks over 400 sovereign wealth funds, in the year 2020 to date, these funds deployed capital worth a record $14.8 billion in India, which is nearly three times more than what they have put in China ($4.5 billion). The gap between the capital deployed in the two countries widened this year, but the trend started in 2019, when sovereign wealth funds invested $10.1 billion in India, surpassing the $6.4 billion it did in China. This is a far cry from the period between 2015 to 2018, when China was way ahead in the game and sovereign funds invested a total of $46 billion in that country. In contrast, they invested only $24.6 billion in India over the same period... According to VCCEdge, in 2020 to date, top west Asian sovereign funds, including Abu Dhabi Investment Authority (ADIA), Public Investment Fund (PIF), Mubadala Investment Company, Kuwait Investment Authority and Investment Corporation of Dubai and Qatar Investment Authority, together put in $ 7.38 billion in 14 deals in India. These accounted for more than 20 per cent of all private equity investments in the country. In 2019 the same big boys had put in a mere $0.98 billion in 10 deals, accounting for less than 3 per cent of all PE money. However, the story is different when it comes to Singapore’s sovereign funds such as Temasek and GIC. They reduced their exposure to India, and invested $1.6 billion in 16 deals — a drop of 30 per cent compared to 2019, when they had invested $2.1 billion in the country.

11. A Business Standard editorial expresses concern at the large corporate bond issuance of over Rs 8 trillion this year on the back of low interest rates and high liquidity. It feels that policy is encouraging this releveraging which could become unstuck when rates rise.

12. In its efforts to combat the growing Chinese aggressiveness, the Australian federal government has been taking several steps in recent times. The NAR writes,

On Tuesday, parliament passed a law that empowers the foreign minister to scrap agreements between foreign countries and Australia's local governments or universities that are deemed detrimental to national foreign policy. About 130 agreements could potentially be affected by the law, 48 of which are with China, Australian media report. Under Australia's federal system, each state has the authority make its own rules on such issues as education, property management and the environment. Local governments also tend to handle cultural exchanges with foreign entities, like sister-city agreements... The legislation was drafted partly in response to a contentious memorandum of understanding signed by the state of Victoria in October 2018 in support of China's Belt and Road infrastructure-building initiative... Parliament followed up by passing legislation Wednesday requiring all foreign acquisition of land or businesses that could affect the country's national interest to be screened first by the Federal Investment Review Board. Previously, deals valued at 275 million Australian dollars ($205 million) or less were exempt from review. The change was likely intended to hinder Chinese investments in ports and other important infrastructure.

13. The Economist points to an analysis of 910,000 journal articles from 1990-2019 in EconLit which generated this graphic of which countries were the focus of economics research,

14. Even as economies struggle, businesses have been undertaking a record equity raising spree on the back of booming stock markets. Globally, a record $800 bn of equity has been raised by non-financial firms in 2020. 

Besides, companies are sitting on large cash surpluses, with the world's 3000 most valuable listed non-financial firms holding $7.6 trillion, up from $5.7 trillion last year. 

15. Finally, James Kynge and Jonathan Wheatley point to a new study by Boston University researchers which highlight the rise and fall of China's Belt and Road Initiative (BRI) projects. They examined the 858 BRI projects and found that lending by China Development Bank and the Exim Bank of China, the two banks which function as arms of state and form the overwhelming majority of China's overseas lending, fell from a peak of $75 bn in 2016 to just $4 bn in 2019. Such sharp decline in overseas infrastructure funding constitutes a massive blow in the world of development finance. 

The pullback from BRI appears to be driven by two factors. One, the borrowers have struggled to repay the loans, necessitating restructuring and political backlash within borrowing countries. As an example, even as China lend $40 bn between 2007 and 2017 to Venezuela. Now China is struggling with rival creditors to recover its loans from Venezuela's pile of over $150 bn of defaulted debt. Two, within China too, as part of the dual circulation policy, itself motivated by growing disputes with the external world, the government has sought to focus more on internal development and scale back external engagement. 

Between 2008 and 2019, the two Chinese banks lent $462bn, just short of the $467bn extended by the World Bank, according to the Boston University data. In some years, lending by the Chinese policy banks was almost equivalent to that by all six of the world’s multilateral financial institutions — which along with the World Bank include the Asian Development Bank, the Inter-American Development Bank, the European Investment Bank, the European Bank for Reconstruction and Development and the African Development Bank — put together... A report by Rhodium Group, a consultancy, says at least 18 processes of debt renegotiation with China have taken place in 2020 and 12 countries were still in talks with Beijing as of the end of September, covering $28bn in Chinese loans.

The fate of BRI was known well in advance, and the emerging evidence only validates the same. One more in the list of Bad Emperor failings that Xi Jinping is rapidly accumulating.

NIIF and infrastructure finance - what is the additionality?

There is a growing chorus for the establishment of a Development Finance Institution (DFI) or other new strategies to fund India's massive infrastructure investment requirements. In this context, the role of the National Investment and Infrastructure Fund (NIIF) is interesting. 

There is no lack of clarity about its broad objective to leverage private capital to invest in infrastructure. But the same cannot be said about how it proposes to achieve the objective - the sectors or funds it proposes to invest, and the nature and stage of the projects. These are critical issues that need examination given public finance and the objective proposed. Unhelpfully, for a government financed entity, the website of NIIF is surprisingly opaque, without even an Annual Report. 

It would be simple if the main purpose of NIIF is to be a sovereign wealth fund (SWF), aimed at maximising returns from its portfolio, consistent with a level of risk appetite.

Since it is not an SWF, some questions assume significance. What is the additionality of NIIF's capital? Does NIIF's government shareholding help crowd-in other capital which would not have otherwise come in? Or is the mere presence of NIIF contributing to addressing some market failure? Or is NIIF ending up competing with private capital and displacing them? What other incentive distortions are happening?

In this context, the activities of NIIF are intriguing. Take for example, NIIF bidding for a stake in Ashoka Buildcon,

A roads platform operated by the National Investment and Infrastructure Fund (NIIF) and I Squared Capital-owned Cube Highways have expressed interest in buying Ashoka Concessions Ltd... Ashoka Buildcon and Macquarie Infrastructure and Real Assets (MIRA), one of the biggest foreign infrastructure investors in India, were seeking buyers for Ashoka Concessions, their roads portfolio. In 2012, along with State Bank of India, Macquarie, through its first India-focused fund, had purchased a 34% stake in Ashoka Concessions, a platform to own and operate toll-earning road assets, for ₹800 crore. The remaining stake was held by Ashoka Buildcon. Mint had reported on 29 May that Macquarie was looking to exit its roads portfolio in India... Cube Highways is currently the most active buyer of road assets in the country... The NIIF Roadis platform too has been on the lookout for road assets. Mint reported on 26 July that NIIF was in talks to acquire three roads from Subhash Chandra’s Essel group. The sale of the Ashoka Concessions road portfolio adds to the flurry of activity in India’s roads sector this year. Deal activity has been driven by large investors such as Singapore’s sovereign wealth fund GIC and Canadian pension fund manager CPPIB backed infrastructure investment trust (InvIT) - IndInfravit Trust.

Now CPPIB is close to acquiring Ashoka Concessions Ltd,

Canada Pension Plan Investment Board (CPPIB) has emerged as the frontrunner to acquire too roads developer Ashoka Concessions, and is likely to sign a deal at an enterprise value of Rs 55000 crore or $770 million... Several global and domestic infrastructure investors were in early stages of negotiations to acquire Ashoka Concessions for an enterprise value of Rs 5000-6000 crore as revenue generating highway assets continue to get investor traction. 

Also, another example from NIIF's recent bids for the airports privatisation, 

The GMR Group, the Adani Group, National Investment and Infrastructure Fund (NIIF) and Fairfax India Holdings have participated in the tender issued by the Airports Authority of India (AAI) to privatise six non-metro airports... Australia’s AMP Group and PNC Infratech Ltd are also understood to have submitted their qualification documents to the AAI when the deadline ended on Thursday.

These bids were hotly contested and Adani won them. 

Several questions get raised. What was the additionality of using scarce public finance? Given the level of competitive interest, did these markets (or atleast these particular assets) need any crowding-in? In fact, given the market maturity, is there a need for NIIF to be in the market to buy road assets or road developers or airports? In case of the Ashoka Buildcon, was NIIF merely providing the exit opportunity for MIRA? Most importantly, is NIIF, with its implicit government subsidy, distorting the market by displacing private capital?

Or consider the NIIF partnership with DP World to create an investment platform to invest up to $3 billion as equity in ports and logistics businesses in India.

How much does NIIF's presence increase DPWorld's interest in Indian ports and logistics assets? What is the NIIF value proposition for DP World? Is the government shareholding and important consideration for DP World to commit its capital towards Indian infrastructure? Would DP World not have considered Indian port and logistics assets without this blending? Or is this partnership merely motivated by the $1 bn transferred by Abu Dhabi Investment Authority (ADIA) to NIIF as part of the inter-governmental agreement between Abu Dhabi and India?

And consider the partnership's first purchase,

Dubai’s port operator DP World along with The National Investment and Infrastructure Fund (NIIF) is buying Continental Warehousing Corp (Nhava Seva), one of the largest companies in the logistics sector in India for $400 million from its PE investors... The platform that piped PSA International of Singapore, the world’s largest port operator and Macquarie is buying 90% of the company while the Indian promoters will retain a 10% share, said officials in the know. Private Equity firms Warburg Pincus, Abraaj and IFC Washington together own 60% of the company, with the former being the single-largest shareholder at 40.4%. Abraaj and IFC own 20% while the remaining 40% is held by N Amrutesh Reddy, executive director and promoter. Continental Warehousing, the flagship company of Chennai-based NDR Group, owns and operates cargohandling facilities such as container freight stations (CFS), multimodal cargo handling terminals (MMTs) and private freight stations. It also provides express cargo and third-party logistics services.

Again, given the strong competitive interest, what was the additionality of using NIIF's fiscal resources?

It raises the question of what is the mandate of NIIF? Is it a SWF with the mandate of maximising returns from the deployment of India's foreign exchange reserves? Or is it using fiscal resources to channel private capital into the infrastructure sector? If the former, is the NIIF's pipeline and portfolio reflecting such market catalysis? 

One could argue that NIIF leveraged $1 billion from ADIA. But this raises the question as to what was the value proposition that a partnership with NIIF, an entity without any track-record, offered the commercial returns seeking SWF ADIA? Would ADIA not have put money into India without ? Did the Indian government ownership of NIIF, something a private fund would not have offered, provide a compelling enough reason for ADIA to put its money in India? In any case, is this sufficient to attract anything more than $1 billion?

Or is there a financial co-ordination role for NIIF?

National Investment and Infrastructure Fund (NIIF) of India and Canada Pension Plan Investment Board (CPPIB) today announced an agreement for CPPIB to invest up to US$600 million through the NIIF Master Fund. The agreement includes a commitment of US$150 million in the NIIF Master Fund and co-investment rights of up to US$450 million in future opportunities to invest alongside the NIIF Master Fund. With CPPIB’s investment, NIIF Master Fund now has US$2.1 billion in commitments... CPPIB joins Abu Dhabi Investment Authority, AustralianSuper, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance as investors in the NIIF Master Fund, alongside Government of India.

In other words, was there a need for a government financed general partner (GP) (or anchor) to establish a fund to mobilise limited partners (LPs) (or co-investors) to invest in India's infrastructure market? 

Or is NIIF's investments a means to retain majority domestic ownership of important infrastructure assets?

Apart from all these above, the governance risks for such a deep pure-play investment role for NIIF are significant.

In a system characterised by close links between large infrastructure groups and political leaders, there are several corporate governance risks. If NIIF is indeed going to become a regular investor in infrastructure sector (as the aforementioned examples appear to indicate), does it have sufficient governance safeguards and oversight to avoid problems which have been a feature of such entities earlier?

Consider the example of cash-strapped GVK's efforts to prevent their competitors, the Adani Group, from buying the 23.5% stake in Mumbai International Airport Ltd (MIAL) that was being divested by two South African firms Bidvest and ACSA. GVK got NIIF and ADIA to purchase 49% stake in GVK's airport holding company which owns 50.5% of MIAL, and used the proceeds to buy out Bidvest and ACSA shares and thereby stave off Adani. The issue invited intense competition between two large and politically connected corporate groups and spawned associated litigation, with Adani Group wooing Bidvest and ACSA with an offer to purchase their stake in MIAL. 

In the absence of strong governance safeguards, given the less than transparent nexus of politics and Indian infrastructure corporates, such investments run the risk of being captured by vested interests, including in corporate battles.

Scandinavian economy facts of the day

Times reports about Denmark's reliance on Moeller-Maersk,

Revenue at AP Moeller-Maersk, publicly traded but family controlled, equals more than 14 percent of Denmark’s gross domestic product.

And FT has this about the spectacular size of Norway's Oil Fund,

Every day for the past thirteen-and-half years, Norway's oil fund has grown by an average of $165 million... It has quintupled its assets in the past decade to $860bn and transformed itself into the world’s biggest sovereign wealth fund, with a 100-year plus horizon. Today, it owns the equivalent of 1.3 per cent of every listed company in the world.

Update 1 (12.07.2015)
FT reports that even as the industry has been losing money, Maersk Line has been an exception, thanks to aggressive cost-cutting and new investments,

In the first quarter, its operating profit margin was 11.8 per cent — an estimated 9.8 percentage points ahead of the average of its 12 biggest rivals. And in each of the past three years, Maersk Line has turned in a profit when its average competitor has been losing money. Maersk Line’s consistency could be seen as somewhat related to its size. It transports 15 per cent of the world’s seaborne container freight and is keen to stay the market leader.

Economic counter-factuals - Norway and Britain

From Justin Fox,

As Thatcher took office as Prime Minister in 1979, booming oil revenue from the North Sea offered big opportunities and posed big decisions for the UK and Norwegian governments. Under Thatcher, the UK chose to spend the windfall as it came in and cut other taxes — a policy that her successors didn't really alter. Norway started out on a similar track, albeit using the money more to prop up its increasingly expensive welfare state than to cut taxes, but in 1990 established what was then called the Petroleum Fund, now a $720 billion sovereign wealth fund with significant global influence and hugely positive implications for the country's fiscal present and future. Now, not surprisingly, some in the UK are saying that's an alternative they should have considered.

The Norwegian Sovereign Wealth Fund is indeed one of the most visionary policies by any government in history. There is a limit that no more than 4% of the funds capital be spent in one year. It is estimated to top a trillion dollars in the foreseeable future and currently "owns an estimated 1p in every £1 of world equity, which is a colossal stake in the global economy from such a small base, and is reckoned to be the largest owner of stock in Europe". Its interest and dividend returns are estimated to be around 14.3 bn pounds. 

SWF update

Only a year ago, Sovereign Wealth Funds (SWFs) were the talk of the financial markets, provoking both admiration and raising strategic concerns at their remarkable growth. Then, the sub-prime mortgage market collapsed and the financial markets tanked spectacularly, carrying the global economy down with it.

However, as the graphic indicates, despite shrinking along with the rest during the financial market melt-down, they are now slowly climbing back to their old valuations and stood at $1.5 trillions in June 2009. Norway, Abhu Dhabi, Kuwait, Singapore (GIC and Temasek), and China formed the bulk of these holdings.



However, Brad Setser does not feel that the size of these holdings should not raise much concern given that it is dwarfed by the $7 trillion or so held as traditional foreign exchange reserves.