The Resurgence of the Grand Old Party

In a time when most political parties - from TDP in Andhra Pradesh to BJP (we are not even sure who runs it anymore) are in disarray, the Grand Old Party of India (Congress) has been quietly (or not so quietly going by the mayhem in Mumbai) rebuilding itself, bottom-up. And, if the opposition does not take note and start making amends now it will be left far behind in the national polity.

The things that have been going for the Congress over the next 10 years are:

1. Leadership: Yes, I know it is a dynastic rule but then again, who cares? The voter, at large, certainly does not seem to. Over the last decade though the Dynasty has morphed into a well heeled ruling family: it started with Sonia Gandhi’s ‘sacrifice’ that has meant that she runs the show all but in name, Rahul Gandhi seems to have transformed himself into the people’s man, and Priyanka Gandhi still generates more column inches than either when she does decide to do anything political
2. Democracy: It does seem ironical, but the ‘High Command’ does seem to be interested in finally promoting the cause of internal democracy. This could have interesting and unintended consequences, which would make for interesting commentary
3. Recruitment: Rahul Gandhi has been criss-crossing the country to encourage youth to join in the mainstream politics and he surely isn’t encouraging them to join the saffron brigade. This means that come the next general election in five years, the party will have a youngish (someone below 45 rather than below 60) membership to drive the party ahead

However, all this might come undone if the party can not provide effective governance. As the success of Nitish Kumar and Navin Patnaik proves the Indian voters (when not swayed by free booze) have cast their vote in favour of development and proven performance.

Here’s hoping that the trend of positive confirmation to development in the elections continues.

Socially Responsible Investing

I was reminded of one of the conversations I had blogged on at the 2006 Skoll Forum...

Am reproducing the text here:

Al Gore and David Blood - In Conversation with John Elkington

filed under:

• investing
• skoll world forum
• global warming
• al gore

Hello! Here is a brief look into In Conversation: Al Gore and David Blood.

Thinkers from Max Weber and Edmund Burke have reflected not only on the morality of marketplace but on the wider issue of the kind of the society gives rise to and is able to sustain a market economy.

In an increasingly globalizing world where markets are converging and integrating at a faster pace than societies, local societal issues need to be addressed not only by the governments but by the firms as well in order to ensure sustainability of the process.

Blood & Gore
Al Gore (former Vice President of the USA) and David Blood (former CEO of Gldman Sachs Asset Management Company) have been involved in Generation Investment Management LLP, an investment fund with an emphasis on sustainability in the capital market by valuing the intangibles into the price of the firm. Arguably, Generation LLP is the first firm to do so and take a long term view on the firms it invests in.

The context
The conversation started with a discussion on the importance of such an analysis and the need of such a firm in today’s environment. John Elkington (who coined the term triple bottom line, and is the CEO of SustainAbility) talked about fundamental landscape altering change. There are two ways of achieving that objective: by rebelling against the system and the second is to work with and within the system.

Such an investment firm is important in today’s scenario for the following reason:
- Most of the social entrepreneur (SE) work that goes on in the present world is below the radar of the media, public and most importantly the financial markets. The SE firms on the growth trajectory will need financing at intermittent stages to achieve economic scales
- The challenges facing the world are going to be multifaceted from abrupt climate change to endemics and poverty. Even at the recent World Economic Forum these topics found their way right up in the priority list. The number one issue at this stage is sustainable development in countries like China and India.

Al Gore on sustainable investing
There have been efforts over the years to integrate value of sustainaibility (environment, employees, mgmt quality, social, economic environ value) into the pricing of the firms. (*Indeed the equity researchers have been for the past five years now placing great emphasis on the governance of a firm to factor that in the valuation*).

The efforts could be classified into two waves. The first of which was seen 35 years ago, which involved trying to bring down the apartheid and involved companies refusing to do business in countries which promoted apartheid. This then moved in to the environmental movement and an ethical investment viewpoint rose which involved not investing in certain sectors (e.g. Tobacco) of the economy altogether on the basis of ethics. However, this approach to investment was unsatisfactory to fiduciaries/ financial institutions who accounted for 95% of investment flow and were under legal obligation to get the best financial returns. They took the view that if you took whole sectors of economy then you would suffer higher risk and over time a lower rate of return as well (very much in the line of the Capital Asset Pricing Model)

The second wave, which came recently proposed to take a holistic view of the investment. It proposed to tale the whole economy in consideration but invest only in the most responsible companies within the sector by undertaking deep research. However, the research was not so deep and the portfolios ended up looking replicas of the market portfolios.

There have been hurdles in a seamless integration of this facet of equity research in the mainstream, the main cause being the difficulty in measuring the value of the social value. As the market only sees value and understands prices it has ignored important factors in the business.

Here a useful analogy (as given by Al Gore) is to think of an electromagnetic spectrum and although there is a wide spectrum we can only see a tiny portion of it which is visible light. As we relate mostly to the things we can see we assume that it is only what it matters.

Similarly monetization can be thought of as a lens through which we perceive value, it is a narrow lens and it recognizes something very well, others are very fuzzy if they are visible at all! Hence, if the only tool is monetization, then if there is no monetary figure attached to an attribute then it might not be given value.

Therefore the challenge is to find a way to integrate sustainability analysis into equity research that adds value and does not incur a penalty. Towards this end, ‘Generations’ holds a concentrated portfolio of companies with a long term view and a three years (wow!) span of calculating returns. In an era where the average mutual fund turns over its entire portfolio in eleven months that is impressive.

Then the discussion moved to a conversation moderated by John. The talk amongst other things centred on working together where both Blood and Gore acted modest and heaped credit on their team.

Talking on their investment framework, David moved back to the spectrum analogy and the factoring in of all dimensions (market and sustainability) in the pricing of a company. An example for this was measuring the carbon intensity of profits for valuing the automobile companies.

David hopes to encourage the business and the investing community in looking at these factors by responsible lobbying with other investors for internalization of externalities. He however cautioned that the change is not as widespread as it seems to be as most of the corporations are playing lip-service to it either in search of publicity or due to the short term focused financial community (who are the majority owners).

Al Gore spoke on length about externality (for those who want to understand more about externality click here). He argued that since the national accounting was put together mainly by JM Keynes at the time when colonial era was just coming to an end and natural resources were considered to be limitless. It means that a country can hypothetically clear all forest cover without showing any effect on the national accounts. He argued that this could be internalized either through government action or through positive action by the companies.

The discussion was then opened to the floor with some interesting questions. The interesting ones were on the alternative approaches like private placement for the non profit organisations and the IPOs of social enterprises.

Hopefully this approach will be adopted by more investment firms driving change to avoid dealing with Planet Earth as if it is Business in liquidation.

Signing off from the Skoll forum!!

The Third Oil Shock?

Today’s newspapers reported on the capping of production by IOC, something which BPCL has already done. The article claims that IOC is currently losing Rs300 Crore (~$75 million) a day on account of under-recoveries (basically it sells the oils below the cost price for it to get it to the consumer). The tale does not end there, the company will not be left with any cash to pay for crude oil imports by September-end if the fuel prices are not raised or duties not cut. “If the government does not act, we might see queues and shortages,” CMD for IOC was quoted, indicating a ‘major crisis’ was in the offing.

Those are grave words. There indeed seems to be a problem in the offing with crude oil not only scaling $130/ bbl (barrel = ~159 Liters.) but managing to stay above that level for some time now. For a commodity that was trading at sub $30/ bbl till 2004 it is a significant rise. In fact, oil has crossed its historic inflation-adjusted high of $101.70, reached April 1980.

The only other instances in the recent history have been what are termed: “the oil shocks”. The two (three if you take into account the blip in1860s as well, though the global economy was far less dependent on oil at that time and therefore can not really be termed as a “shock”) instances of such “shocks” have been in the years 1973 and 1980, both precipitated by geopolitical changes: the Yom Kippur War and the Iranian revolution respectively, resulting in a supply shortfall. This third shock is being driven by demand for oil by energy users like China, India, and the United States.

What is also driving the prices up are two factors on the supply side:
a) Unreliable supply from the non-OPEC countries: Russia, the largest non-OPEC supplier has not been increasing the supply and does not seem likely to in the near future. One of the key reasons being the lack of opportunity for foreign investment in a sector, which badly needs investments. Other non-OPEC producers like Mexico, have also seen slipping production, whereas the supplies from Nigeria are perennially under doubt due to internal strife
b) Reluctance of OPEC countries to increase output: OPEC countries have been expanding production but that is not sufficient to meet the growing demand. The publicly stated reason is that the prices are high on weak dollar rather than supply issues. What might be the real reason, is that limited reserves mean that the OPEC countries are also trying to get the maximum return for their stocks

That means in the foreseeable future the price/bbl will remain in $100+ band. What make it worse in the Indian case are the government’s policies, which are not only postponing trouble and but also accentuating the level of the measures that would have to be taken to resolve the gap.

The current government policy to partially (at best) link the supply to global prices means that the oil companies are quickly loosing the operating capability as highlighted earlier in the article by the IOC Chief.

This policy has also led to issuance of oil bonds worth $2.3 billion in Jan, 2008 alone. In normal scenario if it was a direct subsidy it would have gone through the budget and would have constituted a part of the budgeted deficit. But by issuing bonds the government has been successful to keep such measures “off balance sheet”. Not so long ago, a large energy company went bankrupt and its top executives are serving time for keeping liabilities off balance sheet. I am not suggesting that the same is the case with the governments, but then there is the thought, as always, who polices the police.

In addition, subsidies on Kerosene and LPG have meant that the industry has been innovating to make diesel the fuel of choice to lower the TCO (Total cost of ownership), do a quick survey of your friends and you would immediately find out, why so many people chose the diesel model of the car they just bought. As Mr. Behuria (CMD, IOC) said “Diesel demand is growing at 20-22 per cent, a rate that will necessitate IOC to import two million tonnes, but the company plans not to shell out international prices and would rather restrict supplies,”

But will the government take action to take corrective actions, especially with pricing/ subsidies when elections are close? The answer seems to be clear from the recent comments coming out of Delhi: FM has refused to lower the import and excise duties and also seems to be reluctant to introduce an oil-cess.

With CPI (M), a key coalition partner hammering away at the government on the inflation issue, government knows that the loan waivers it has offered the farmers will not come handy if it completely antagonizes the middle class

However, by postponing the obvious and essential the government is only going to accentuate the magnitude of the final remedy. What the government can hope is that it can hold the status quo, till the elections, so that either it will have a 5 year term to resolve the quagmire it has created or it can sit in the opposition and rattle arms against the incumbent government on the growing menace of inflation.

Whatever the course of action, the economy is on for some testing times. So, fill up your tanks, and get ready for a rough ride!