Kick-Start the Economy with Cash Flow & Connectivity

Pay government dues and enable high-speed connectivity.

Amidst the welter of problems the government is dealing with, one hopes that the removal of restrictions and lockdown status are being thought through with expert inputs and analysis. We can conjecture on the priorities for economic revival, and here is a short wish list.

Cash flows have to start for any downstream problems to be addressed, without questioning that a major remediation to India’s lockdown trauma is providing food and shelter to stranded workers, and getting them to where they want to go. Many will scatter from their work or holding areas back to their homes. What’s needed for economic revival is the opposite: For workers to return to work and resume productive activities. But this may be unrealistic to expect after the loss of confidence from the shocks of the peremptory lockdown, the deprivation of livelihood, and of food and shelter.

Other stranded people who have the means also need the right to move freely while maintaining prudent constraints. Indians abroad are being flown home; Indians in the country need facilitation too.

Next on the list is restarting the economy by ending the forced closure of productive activity for compensation, spending for products and services, and of economic flows. Recall that before the lockdown, we had a monumental late-payments problem, namely, the non-performing assets (NPAs) of the banks and financial institutions. While there has been considerable scrutiny of the NPAs and fraudsters, much less attention is directed at a major component — that is, late payment of dues and refunds by government and its agencies. These encompass all payments, such as to state and private electricity generators and distributors, airlines, hotels, restaurants, manufacturing companies and service providers, and all refunds of taxes, including goods and services tax (GST) and customs duties.

Source: https://www.eulerhermes.com/en_global/economic-research/insights/In-line-with-the-economic-slowdown-companies-preemptively-reduced-payment-delays-except-for-Mediterranean-countries.html

This aspect escapes corrective action despite its magnitude, although it is remediable through decisive action. It has to be resolved through executive intervention, because it is a precursor and cause of a significant proportion of NPAs.  Among larger commercial enterprises, late payments are a problem for some countries more than others, as seen in the heat map for 2018 by Euler Hermes, a trade credit insurance company (see chart). Surprisingly, India has a reasonable rank of 24 out of 36 countries, and its average at 67 days is close to the overall average of 65 days. Also, 25 per cent of corporations paid before 30 days, although another 25 per cent paid after 96 days. China had the highest average at 92 days, followed by Greece, Italy and Morocco.

However, smaller enterprises suffer considerable delays, as represented to the finance minister before the Budget recommendations in January this year, because their receivables take months to clear.

The biggest problem is not reflected in the chart: It is in delayed government payments and tax refunds.

All the delays have a cascading effect resulting in NPAs. For instance, Nasscom complained in 2017 that overdue payments from central and state governments and public sector undertakings for IT projects amounted to nearly Rs 5,000 crore. A survey is under way on the present status. Another example is delayed subsidies to fertiliser manufacturers that are notorious for creating cash flow crises. A third example is large dues and contested payments owed by the National Highways Authority of India (NHAI). In August last year, the NHAI was the focus of an effort by the Prime Minister’s Office (PMO) to clear its enormous debt overhang, and its contested dues.

Yet, the government resists timely payments even towards public sector dues, while being remorseless with its charges and collections. It is as though there is no understanding of cash flows, except perhaps for election funding. Overdue government payments are an obvious starting point to clear NPAs and create confidence through liquidity, emulating what is already practised here by India’s best corporations.

Another inexplicable impediment is the totally conflicted approach to information and communications technology (ICT). As the past two months have shown, reviving and remodelling our economy depends on effective digitisation and communications for two streams. One is for more efficient production and service delivery in all areas, such as agriculture, dairy farming and horticulture, and so on, as well as finance, manufacturing, trade, logistics, tourism, and in compliance. The other is in functioning in an altered paradigm that depends on effective support for remote working. Yet, telecom companies and high-tech manufacturers are beset with overdue payments on the one hand, while the former are crushed by government charges and retrospective demands. Meanwhile, a failed approach of high-priced spectrum auctions continues, while the most elementary and logical regulatory reforms for wireless broadband are ignored, such as enabling 60GHz and other spectrum bands discussed below.

Is it possible that the authorities do not understand that without wireless reforms, India is just holding itself back, or are they simply not acting on what they know? Consider what other countries are doing to improve productivity. Last month, America opened up the entire 6GHz band consisting of 1,200MHz of spectrum for unlicensed use for faster Wi-Fi.1 Licensed primary users of microwave for backhaul, utilities, and public safety were protected. The EU countries are likely to follow soon. For India, following this lead for Wi-Fi is a foregone conclusion. Dithering because nobody in power cares to even follow feasible measures wisely will only hold India back, as in disallowing the use of unused spectrum bands (60GHz, 70-80GHz, and 500-700MHz).2

If only the PMO would task appropriate authorities to consider permitting the use of four bands, namely, 60GHz, 70-80GHz, 500-700MHz, and 6GHz, the likelihood of better connectivity for high-speed broadband countrywide would greatly improve. The first three bands would be for licensed operators excepting indoor use of 60GHz, and the fourth would be for Wi-Fi. Such action will comply with the Supreme Court’s requirement of having public-interest policies in place for not auctioning spectrum.

Acting on cash flow plus connectivity, both initiated by the government, can effectively kick-start the economy.

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Shyam (no space) Ponappa at gmail dot com

1: https://docs.fcc.gov/public/attachments/DOC-363945A1

https://www.theverge.com/2020/4/23/21231623/6ghz-wifi-6e-explained-speed-availability-fcc-approval

2: https://organizing-india.blogspot.com/2020/03/indias-self-goal-in-telecom.html

Making The Most Of The Cash Flow Crisis

                       

     

                                        Humankind cannot bear very much reality - T.S. Eliot

The government needs to design incentives for greater cooperation, with disincentives to discourage defection.

Shyam Ponappa  |   December 1, 2016  

The economic arguments apart, some observers see the demonetisation/currency replacement initiative as a political strategy, similar to the United Progressive Alliance (UPA)-I’s instituting the National Rural Employment Guarantee Act (NREGA, later renamed Mahatma Gandhi NREGA). MGNREGA was famously successful in reinstating the UPA in 2009, although having beggared the treasury and wrought many unintended consequences through unthinking or even intentional mismanagement. It’s too soon to tell what the election effect of the currency replacement exercise will be despite local election results from Maharashtra and Gujarat. The drastic reduction of cash will induce severe constraints in economic activity for months together with the attendant consequences, unless the need for cash is alleviated.  For now, three weeks later, there seems to be reasonable popular support for the move.

The social and economic aspects of these policies lend themselves to analysis through the frame of Evolutionary Game Theory (EGT). EGT studies how patterns of strategies associated with groups affect competition for resources through repetition. Originating in biology, it is applied to many fields. Its focus is the frequency or spread of strategies in a population in competition and natural selection, and not only the nature of the strategies. EGT explains altruism in life forms as a benefit for a species, whereas survival of the fittest at the individual level leaves little room for altruism.  This explains why people act for the common good despite competition and natural selection, when selfish alternatives offer greater gains.

EGT models help us understand the motivation for group affiliation and altruism affecting behaviour that results in our living conditions and environs.  Of particular interest in our context is a basic assumption that strategies that lead to high pay-offs are transmitted within a population either through a learning process (culture) or through evolution. EGT helps to identify such strategies, as also to understand how additional aspects, such as population structure, affect the emergence of such strategies.

From a public-interest perspective, demonetisation and the MGNREGA are social engineering initiatives aimed at changing the structure and processes in society. In other words, apart from redistributing income, their purpose is to develop a culture that supports cooperative processes for a well-functioning society, e.g., with clean environs and sound infrastructure as well as clean money. A problem with the approach in both has been that they are perceived not so much as strategies crafted for the common good, as gamesmanship for political gain. In the process, the public interest objectives of social stability, productivity and well-being appear to have been sacrificed for partisan gains.

While political aims may be the unstated primary motivation and an unavoidable aspect of reality, both involve major structural changes to influence processes affecting large populations. EGT tells us that while human societies rely on mechanisms that promote cooperation, natural selection in unstructured populations favours defection over cooperation through higher pay-offs to defectors. However, with appropriate corrective mechanisms, natural selection can favour cooperation. But without special incentives for cooperation and compliance, combined with deterrents against defection/non-compliance, natural selection increases the dominance of defectors, driving co-operators to extinction. It follows that the benefits from cooperation and compliance must be attractive (high) so as to result in a virtuous circle leading to dominance by co-operators in a population, while the costs must be kept relatively low.¹ Urgent attention is therefore needed to design such benefits and reduce costs.

Apart from the financial effects of these policies, their aim is, presumably, or should be, to engender behaviour in a virtuous circle to help create a preponderance of co-operators in society. EGT shows that direct reciprocity (A helps B when B helps A) is an effective way of inducing cooperation in repeated interactions. However, researchers working together from Harvard, the University of Amsterdam, and the Max Planck Institute have found that it takes a combination of two factors, namely, direct reciprocity together with a degree of population structure such that it leads to greater interactions between co-operators than between co-operators and defectors, to work synergistically in creating high levels of cooperation.² They report that this combination yields much higher levels of cooperation than achievable through reciprocity alone in unstructured populations. They observe that this combination of reciprocity and some structure is very similar to actual human interactions, which are typically repeated, and occur in not very rigid yet not entirely unstructured populations. They conclude that if reciprocity in behaviour is combined with only a small amount of assortment (e.g., so that altruists interact more often with altruists than with defectors), then natural selection favours the behaviour typically observed among humans (in well-functioning societies): High levels of cooperation implemented using conditional strategies.

To make the most of the demonetisation “stick”, the government needs to design the right combination of incentives to induce greater cooperation, with disincentives to discourage defection. These are needed to help accelerate the adoption of cashless transactions to the extent feasible, given our levels of connectivity. It is also desirable to train change agents to seed co-operator populations, and to design supportive processes, including efforts to induce a degree of structured interaction that clusters co-operators to increase their number in sub-populations. This would be akin to the commercial equivalent of good agricultural extension.

Two aspects need resolution for cooperation to have a reasonable chance of success:

One is improving connectivity for communications for cashless transactions. This needs new approaches to resolve rural, semi-urban and urban communications problems, with government working with industry and experts to bring about genuine breakthroughs.  Otherwise, cashless transactions remain an urban phenomenon, and the hinterland is left out.

The second, and most urgent, is the restoration of economic activity flows. This requires resolution of the induced cash flow problems.  It is not clear how, but without that, there is a risk of a cash flow crisis overwhelming the rest. 

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Shyam (no-space) Ponappa at gmail dot com

1. “A simple rule for the evolution of cooperation on graphs and social networks”, Ohtsuki et al, February 10, 2006, Nature:

http://www.nature.com/nature/journal/v441/n7092/full/nature04605.html

2. “Direct reciprocity in structured populations”, Van Veelen et al, May 3, 2012, Proceedings of the Natural Academy of Sciences:

http://www.pnas.org/content/109/25/9929.full.pdf

The Centrality of Cash Flows

Dealing with the inexorable force of cash flows.

Shyam Ponappa  |  July 2, 2015


Greece's experience tells us that cash flows are crucial to economic outcomes. No matter how far-reaching the vision, ambition, and slogans, the effects of cash flows are profound and inevitable. Many of our politicians and bureaucrats and a large proportion of the public seem oblivious to how cash flows affect our political economy. This apparent absence of understanding (or flouting of fundamentals by opportunists who understand them but act in their own interests) shows up in many ways among all political parties in their approach to the basics: the provision and pricing of essential services such as security and law-and-order, electricity, broadband communications, transport, water, sanitation, and waste disposal. Without an understanding and acceptance of how essential cash flows are for providing these services, we can't realistically aspire to better living conditions. No matter how well or wealthy you may be, you still have to pick your way gingerly through the mess and the stench of your environs when you step out.

Cash flows are at the crux of the problems our governments face at the Centre and states, and that society is up against. They include all the legacy issues mentioned above of the inadequate infrastructure services that we endure, and extend even to problems such as the defence services pensions. While the National Democratic Alliance is not blameless, there are egregious instances among other political parties, such as the Aam Aadmi Party's (AAP's) actions on waste management and electricity supply in Delhi. The essential sticking points have been delayed (obstructed) cash flows, whether in paying sanitation workers or electricity distributors. These instances are mentioned only as indicative examples, as their processes hark back to the habitual practice of governments at the Centre and the states of delaying payments, whether it is fertiliser subsidies to manufacturers (a central government "habit" for decades), or setting realistic tariffs and making prompt payments to electricity distribution companies, as in the case of state governments running Delhi. Various parties - the Congress until 2014 and the AAP thereafter - have themselves been victims of the structural constraints of electricity generation plants with antiquated, inefficient equipment, as in the old coal-based plant at Badarpur, or efficient, modern plants using gas caught in an upward price spiral with domestic gas not being available, such as at Bawana.

In the communications sector,constrained cash flows limit services. One rough estimate is that cumulative charges for spectrum amount to about Rs 1.8 lakh-crore ($30 billion), roughly equal to the total amount invested in networks and equipment. In other words, operators could have invested double the amount in networks and equipment if it had not been paid in government charges. Operators had to take on significant debt for prior payments, thereby hampering their ability to invest in extending and upgrading their networks.The operators' financial constraints constitute one major reason that a market hungry for data services is starved. (Another major reason is the technology constraint of narrow, noncontiguous bands of spectrum, but that is another tale.)

The situation in electricity supply is much worse, because of the high and still growing level of stressed assets of the state electricity boards. Press reports estimate that as much as Rs 53,000 crore may possibly become non-performing assets (NPAs) by the end of September.

There is a view that stressed assets and NPAs need not be a problem, because they can be readily sold to new owners who could reorganise the undertakings, which could succeed or go out of business if they fail. While this is theoretically possible, in practice, this is quite difficult and impractical to carry out, especially in hard times. Banks typically are not equipped to take over a number of non-performing businesses and run them until they can dispose of them. Secondly, considering the problems of being profitable in bad times combined with generating cash for operations in downbeat markets, it is unlikely that there will be acceptable buyers willing to pay reasonable prices for loss-making assets.

One difficulty in addressing such issues is that the basic concepts - of cash flows, of numbers from operations in the profit-and-loss statement in tightly coupled lockstep with the balance sheet, which leads to the cash flow statement, require a level of effort to understand that many are unwilling to put in. Cash flows are measurements of flow, whereas profit-and-loss and balance-sheet items are accumulated over specified periods such as a month or quarter, i.e., statements of stock,with no easily discernable relationship to actual cash movements in those periods. There are additional complexities in delving deeper, e.g., in considering the similarities with the flow of liquids. As cash flows are in some ways comparable to liquid flows, there is research from the perspectives of fluid dynamics that requires an understanding of more complex mathematics, physics, or engineering. For those interested in exploring these aspects, further readings are suggested below.1

Put intuitively, the key is in setting up and/or taking corrective action to facilitate smooth flows, with the recognition that disruptions create turbulence. Smooth flows are laminar, as the layers or lamina of fluid move easily without mixing (see diagram). Once turbulence sets in, it takes time and often additional effort (resources) to revert to smooth flows, because the obstacles have to be removed or worked around, and the vortices and eddies created by disruptions have to be stabilised and smoothed out.

Flow - Laminar (Smooth) & Turbulent

The point is that if key decision makers have an appreciation of cash flows and simulation techniques, they can be better informed in making decisions to improve flows. This understanding needs to be visceral and at the top levels, and not just among financial and engineering experts. This is why it would be useful for the PM and his team to seek financial, organisational, management and technical inputs.

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                                                                                                       Shyam no-space Ponappa at gmail dot com

1. Measuring Financial Cash Flow and Term Structure Dynamics, Cornelis A Los, 30 November, 2001: http://econwpa.repec.org/eps/fin/papers/0409/0409046.pdf

Financial Market Risk: Measurement and Analysis, Cornelis A Los, Routledge, 2003; 2006.

Three Management Concepts for 'Better Days' [Three Ways to 'Better Days']

In 2015, the government should adopt three management concepts that will help realise its objectives.

Shyam Ponappa  |  January 1, 2015

Having heard a lot about vision and goals, how do we proceed? We have the "what", we need the "how". The objectives have been well stated, but the processes are yet to be spelt out. Three concepts that should be drawn upon are systems thinking, cash flows supported by engineering and financial management, and alignment of efforts through cooperation and coordination.

Systems Thinking

Consider the "system-mapping" diagram shown of driving a car along a road.

This chart shows the elements and processes involved: "stocks" like velocity and distance depend on past system performance; "flows" represent changes in stock, with the rate of change being captured in the speedometer, and the distance in the odometer; the accelerator and brake are "converters" that affect acceleration or deceleration (negative acceleration); "connectors" show how parts of the system influence other parts. Stocks are influenced only by flows, while flows can be influenced by stocks, other flows or by converters. Converters may be influenced by stocks, flows or other converters if they are not at the system boundary. The source and the sink are the beginning and the end of the system (go to www.business-prototyping.com/step-by-step-tutorials/introduction-to-system-dynamics/stock-and-flow-diagrams/ for more details).

This is an example of "systems thinking", an approach that emphasises interrelationships instead of only linear effects and end-to-end processes instead of stand-alone events or circumstances. Traditional analyses focus on individual elements, whereas systems thinking emphasises the interactions of all discernable elements that result in outcomes under consideration. For instance, the perspective shifts from product prices, for example, for cereals, power or fuel, to life-cycle costs, including operations and maintenance. (For a brief overview, see the above website.)

Without this approach, the articulation of desirable visions is no more than rhetoric. In economics, "cheap talk" is a promise made with no penalties for non-performance, or "costless communication". "Cheap talk" has its uses, for example, in helping to create a collective vision and unite efforts to that end, but it needs to be followed up with real planning and execution with the commitment of resources to go beyond and establish credible delivery.

Take the very laudable Swachh Bharat campaign for cleaning up one's local environs. While it's excellent that it has been forcefully voiced by the prime minister, there's no visible public evidence of systemic initiatives that address the fundamental elements like sewerage, garbage separation and composting in homes, and incineration, which includes "simply" enforcing existing laws. It's a two-fold challenge: one, of enforcing existing laws, for example, against the open burning of waste and harvest stubble, and two, of dedicating skilled, multi-disciplinary resources to work towards developing integrated solutions, including simple enforcement against acts like littering. Instead, the initiative appears to remain at a superficial level of photo-ops of sweeping waste from one place to another, instead of addressing ultimate disposal.

Process Flows & Cash Flow

A second aspect where change is urgently required is in dealing with problems of growth arising from obstructions in process flows. These may relate to material, or to the conversion of material to cash. The range covers all economic activities, for example:

• The conversion of mineral resources through mining;
   
• Administrative or regulatory impediments regarding communications in areas such as spectrum use, network access and rights-of-way;
   
• Constrained cash flows from lower demand combined with high costs, as in the manufacture of durables, commodities such as sugar, or construction - not to mention manufacturing in general for the "Make in India" campaign.

The crux of this aspect relates to the conversion to cash. The reason flows are critical in this context is because, aside from "resolution" by bankruptcy, even problems of stock (or oversupply) have to be resolved through flows, that is, cash flows, whether by disposal of assets provided market conditions can support reasonable cash yields, or operating profits from higher volumes and/or lower costs, resulting in the turnaround of non-performing assets (NPAs).

Such solutions need an understanding of the underlying engineering or other processes, and of financial management, that is, the tightly coupled lockstep of profit and loss and balance sheet that leads to cash flow. This understanding is critical for effective management of any self-sustaining activity as a going concern. Much of our society, including many in politics, the executive, the judiciary, the media and lay persons, appear either to not understand these principles, or to opt for shortcuts for near-term gains, as in the distribution of sops for elections.

Cooperation on Aligned Goals

The third aspect is cooperation and alignment of efforts to achieve common goals. Credible leadership is perhaps the most important for this form of team building. Effective leadership combined with due attention to processes can help elicit team thinking and performance that aligns group outputs to common goals to achieve results that are "better than rational". Evidence from studies such as of forest management in Maharashtra show how communities cooperate to manage forests as common-pool resources through community control.¹ To paraphrase Elinor Ostrom, this requires building conditions in which reciprocity, reputation and trust overcome the strong temptations of short-run self-interest, by investing in monitoring and sanctioning each other to reduce the probability of free riding.²

However, there's a catch to this upside potential: "Experimental evidence suggests that humans have specialized circuits for understanding threats, as well as recognizing bluffs and double-crosses."3 This loops back to two choices: rhetoric versus actual systemic coordination and reforms, and inclusive versus divisive leadership. The latter calls for a hard choice between divisive electoral strategies for winning the post but resulting in a "zero-contribution" model, versus a potentially higher yield from non-partisan leadership that inspires and persuades the majority to pull together for greater gains.

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                                                                     Shyam (no space) Ponappa at gmail dot com

1. Rucha Ghate, Suresh Ghate and Elinor Ostrom: www.sandeeonline.org/uploads/documents/publication/941_PUB_WP_64_Rucha_Ostrom.pdf

2. wwz.unibas.ch/fileadmin/wwz/redaktion/wipo/Vorlesungen/2012/PolEcon/Ostrom98.pdf

3. Leda Cosmides and John Tooby: www.cep.ucsb.edu/papers/aer94.pdf