Category: economics

Decongesting Bangalore’s Roads: An Analysis of the BDA’s Detailed Project Report on the Proposed Flyover

In response to public demand, the Bangalore Development Authority (BDA) has finally released the Detailed Project Report (DPR) for the proposed steel flyover in Bangalore.

In this article we’ll attempt to address (using points from the DPR), the key question of whether the flyover will be of any use to commuters.

The DPR contains a study of traffic volumes at each of the intersections, and summarizes its findings in the following three diagrams (page 58) which are very easy to understand.

dpr_530dpr_531dpr_532

The Numbers

The numbers in the diagrams are peak hour traffic numbers at all junctions affected by the project in terms of PCUs/hr.  PCU stands for Passenger Car Unit.

So, the first diagram says for example, that at peak hour traffic, there is the equivalent of 6175 cars entering from Hebbal and 6949 cars exiting at Rajbhavan Road in one hour.

The second diagram shows the impact of the flyover on ground-level traffic.  It shows that the number of cars entering at ground level from Hebbal will drop to 3088 while the number of cars exiting at Rajbhavan Road will drop to 4122.

The excess traffic (3087 incoming at Hebbal and 1393 outgoing at Rajbhavan Road) will be carried on the flyover.

The incoming numbers add up (3087 + 3088 = 6175) as expected.

The outgoing numbers don’t add up (1393 + 4122 < 6949)!

The outgoing traffic numbers don't add up because there will no longer be a right turn at Basaveshwara Circle.  So, a part of the traffic volume decrease has nothing to do with the flyover!

Anyways, these calculations, if assumed correct, point to a reduction in traffic by 20% to 50% at the ground level.

Travel Time Calculations

Will the reduction in traffic lead to a corresponding decrease in travel time?

Not necessarily.

The DPR contains no estimate of reductions in travel time.

There are three reasons for doubting there will be huge reductions in overall travel time:

  1.  The impact of the constriction of the road leading to and from the flyover because of the ramps of the flyover needs to be taken into account.  The bottlenecks at the ramps could lead to traffic piling up at the entrances and the exists of the flyover.
  2. If the total capacity of the roads carrying traffic away from the flyover is too low, it could lead to traffic queueing up on the flyover itself.

Those who prepared the DPR should have run a simulation of the traffic on the flyover, below it and on the roads leading into and out of the flyover to determine if any savings in travel time would result or if serious backups on the flyover and around it could cancel any benefits.

A case in point is the flyover from the Electronic City software technology park (STP) to the Silk Board.  It might allow traffic to move fast on it, but it might be slowing down traffic inside the STP and on the road below it at its exit.

Flyover Effectiveness Conclusions

We don’t know if the travel time will decrease significantly unless the required simulations are done.

Public Transportation Conclusions

However, it is possible from the DPR to draw conclusions about the effectiveness of public transportation.

We see from the study that only 2% to 3.5% of the vehicles on the roads are city buses (pages 42-46).

So, if we doubled Bangalore’s bus fleet (which you can for the cost of the flyover) it would not increase the traffic on these roads by much but could replace almost all the private vehicle traffic not just on this stretch but all over the city (assuming people make the switch from private to public transport, and each bus carries 100 passengers).

Explanation & Calculations

Here’s how we can calculate that.

The proposed flyover will cost approximately 1800 crore rupees.

A TATA bus costs about 20 lakhs rupees.

So, you can buy about 7000 buses (and hire drivers/conductors for a year and build facilities for them) for 1800 crore rupees (or get 9000 buses without drivers/conductors or facilities).  I’m assuming that a quarter of the price of a bus will get you facilities and pay for the driver and conductor.

Now the BMTC runs around 7000 buses today.  So, for the price of the flyover, one could double the bus fleet.

We can show that doubling the fleet can drastically decrease the volume of traffic on these roads.

Let’s say that 10,000 vehicles used that stretch of the road.  We know that 2% of those vehicles were buses.  That’s 200 buses.  Let’s assume that all the other vehicles carry on average 2 passengers.  So, except for the 200 buses, the remaining 10,000 – 200 vehicles carry 20,000 – 400 passengers.  If we double the buses, we have 200 more  buses.  Now each bus can easily carry about 100 passengers (50 seated and 50 standing).  So, that means we can carry 20,000 passengers just by adding 200 buses (doubling the bus count).  That is the entire carrying capacity of all the other vehicles on the road!

So with a negligible increase in traffic (from 2% of current traffic to 4%), we can accommodate all the passengers of the remainder of the traffic using that stretch of Bellary Road today.

More Benefits of Public Transport

But it’s not just that!

For the cost of the flyover, we’d have doubled buses all over Bangalore!

So, we’d have added an equivalent carrying capacity to all the private vehicles on all the roads in Bangalore for the cost of this flyover!

That’s what this BDA DPR tells us!

Environment Benefits of Public Transport

But that’s not all!

There are still more benefits!  Think of the reduction in pollution.  Replacing all those private vehicles with equivalent buses would reduce pollution by 95%.

Assumption

In the above calculations, I’ve assumed that everyone will give up private transport for public transport.

That won’t happen in real life unless you get the same convenience from public transport.

It could happen if, like with the metro, bus passengers are:

  1. assured of getting a bus from a known key location to a desired key destination every ten minutes or at a known precise time (with bus tracking) and
  2. assured the buses are not overcrowded (the pleasantness of the travel is comparable to the pleasantness of private transport).

If you can get that sort of predictability, and comfort, then for those travelling on those routes to work, it would make more sense to use public transport than to use private transport.

So, it may need a lot more than doubling buses (mere capacity matching) to assure convenience and ensure that people prefer public to private transport.  It would also need route planning, bus tracking and highly predictable key routes.

Other Proposals

There are many other proposals for reducing congestion along the North South Bellary Road.

Here’s one:  http://www.deccanherald.com/content/561722/rail-link-kia-less-rs.html

This article says that there is an operational railway line between Yalahanka and Channasandra, and this can be extended easily till the airport up North and Baiyappanahalli in the East, taking airport traffic off the Bellary Road.

Estimated cost: Rs. 150 crores.  And it’s a public transport proposal, so it takes a lot of cars off the roads.

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Of Barriers and Free Trade

Many economists insist that free trade benefits everyone.  The argument goes like this:

Model 1

FreeMarketScenario2

Let’s say there are two countries, Country 1 and Country 2, each with a bread factory and two citizens who buy bread from their factory.

There is a trade barrier in place preventing the factories from selling to the other country.

Each factory makes a profit of $2 on each loaf of bread.

The factory in Country 1 earns $4 from its sales.  The people spend $40 on bread.

The factory in Country 2 also earns $4 from its sales of bread.  It’s citizens only spend $20.

So, the net expenditure of money in Country 1 is $36, and in Country 2 $16.

Now, let’s see what happens if the trade barrier is removed.

Everybody now buys from the factory in Country 2.

So the factory in Country 1 earns nothing (it sells nothing) but its citizens spend only $20.

The factory in Country 2 earns $8 from its sales of bread to four citizens now.  The citizens of country 2 spend the usual $20.

So, the net expenditure of money in Country 1 is now only $20 and in Country 2 only $12.

Economists argue that through this mechanism, the free market benefits all trading parties.

But it turns out that not everybody wins if you consider a different model – one that includes businesses shutting down and unemployment.

Model 2

When there are trade barriers, everyone works for the factories in their own countries.

FreeMarketScenario3

With the barriers in place, the factory in Country 1 pays a salary of $20 to its two employees.

The factory in Country 2, being more efficient, pays a salary of $40 to its employees.

Now the net earnings in Country 1 (earnings – expenditure) are $4 (because the earnings cancel out the expenditure of the citizens, and the factory earns $4).  The net earnings in Country 2 are now $64 (because the citizens spend only $10 each while earning $40, and the factory earns $4).

Now let’s say free trade is introduced.

The bread factory in Country 2 starts selling its bread at $10 in Country 1.

The bread factory in Country 1 shuts down (because no one will buy its bread at $20).

The citizens of Country 1 who worked for the bread factory no longer have an income.  They still have to buy bread to survive (using their savings) but their expenditure is lower not at $20.

So now Country 1 ends up with a net earnings of $ -20 (a drop of $24).

The net earnings in Country 2 go up to $68 (and increase of $4).

So in this model, not only does the earnings of Country 1 go down but also the earnings of the world as a whole (because there are fewer people gainfully employed).

However, things don’t stop there.

Model 3

The bread factory realizes that by hiring the citizens of Country 1 to work for it instead of citizens of Country 2, it can cut its cost of production in half (because salaries in Country 1 are half that of Country 2).  By doing so, it can start making profits of $6 per loaf of bread.

So now you have the citizens of Country 2 facing unemployment (no earnings).

So the net earnings of Country 2 drop to $4 (a drop of $64).

The earnings of Country 1 on the other hand go up to $20 (a gain of $40).

But there is again a drop in the earnings of the world, because though the same number of people are employed, it is higher-paid people who are now out of a job.

This is not compatible with a model of free trade that continually improves things for everybody.

Of course, I’ve used a very simple model, but it reflects the truth that when free trade is introduced, there are winners and losers and that the weaker parties are the losers.

There seems to be a way to predict who the winners and losers in any attempt to introduce free trade will be.

Force Model

In models of military engagements, the principle of force is used to predict the outcome.  Given roughly equal equipment and training, the stronger force almost always wins.

The reason for that is shown in the following diagram.  Let’s say there is a red force with 4 soldiers and a green force with 8 soldiers.  Each side fires a shot every minute.  Each soldier aims at an enemy soldier and fires, with a 50% probability of hitting his target.  After the first volley, the red force would have fired 4 shots and hit 2 green soldiers.  But the green force would have fired 8 shots and hit 4 red soldiers.

So the losses would be disproportionately higher for the weaker party, and the green force would win the battle with the loss of two of their own.

ForceModel1

It appears the same model can be used to predict the winners in economics too.

In economic models, the contending forces would be firms or employees.

Larger and better equipped firms (which can produce cheaper products) can be expected to win (push small firms or more expensive employees in direct competition out of business) in any market where free trade is introduced.

For example, before India traded freely with the USA, there were many local soft drink manufacturers (Torino, Thums Up and Limca) in India.  When  Coca Cola and Pepsi entered the market, all the Indian soft drink brands had to sell out.

Similarly cheaper workforces (which cost less to hire) can be expected to win.

An example would be the use of immigrant labour in many countries (especially the USA) for agriculture.

So, how can a weaker economic segment (be they workers or industry) be protected?

Through barriers (barriers allowed by trade agreements).  Barriers (something that a force can shelter behind) may be used to protect weaker forces of any kind.

Here are a few barriers used in economics.  As you can see, barriers to trade are already in heavy use though people talk as if free trade is widely practised.

Barrier 1

The US workforce in the computer industry being more expensive than an Indian workforce, has been protected by visa and fee barriers.

There are visa quotas and a fee  levied on Indian firms – to the tune of $5000 per visa for H-1B and L-1 visas).  The fee costs the Indian software industry $1 billion to $1.5 billion annually.

Not palatable to Indian industry of course, but effective in protecting high-end jobs in the USA.

Now what I don’t understand is why the USA uses barriers to protect jobs for skilled people who are highly qualified and quite capable of acquiring more skills and competing on quality.

I would suppose that if the USA used barriers, they should probably do so to protect jobs at the low end of the economy (helping out poorly skilled or unskilled workers who’d find it harder to acquire more skills or compete on quality) as India does (through a minimum salary requirement for work visas, which is aimed squarely at keeping out cheaper Chinese labour from infrastructure [say road building] projects).

Barrier 2

During the colonial era, barriers to the import of Indian products were used to protect a nascent textile industry and jobs in England.

I quote from an 1840 English parliamentary inquiry about India (taken from the above article):

Before a British Parliamentary Committee in 1840] Montgomery Martin stated that he . . . was convinced that an outrage had been committed ‘by reason of the outcry for free trade on the part of England without permitting India a free trade herself.’ After supplying statistical data of Indian textile exports to Great Britain, he pointed out that between 1815–1832 prohibitive duties ranging from 10 to 20, 30, 50, 100 and 1,000 per cent were levied on articles from India. … ‘Had this not been the case,’ wrote Horace Wilson in his 1826 History of British India, ‘the mills of Paisley and Manchester would have been stopped in their outset, and could scarcely have been again set in motion, even by the power of steam. They were created by the sacrifice of Indian manufacture. Had India been independent, she could have retaliated, would have imposed prohibitive duties on British goods and thus have preserved her own productive industry from annihilation. This act of self-defence was not permitted her’” (Clairmonte 1960: 86-87).

Barrier 3

Another example can be seen in the policy of subsidizing the renewable energy industry in the USA and buying renewable energy locally.

The use of models to determine winners, as described above, can empower governments to decide which sectors of the economy are most vulnerable to competition (so action may be taken to protect them).

Many protective actions can be taken without violating free trade obligations.

Fair Barrier 1

The best example of a fair protection policy is progressive liberalization.

For example, when the Chinese government introduced foreign direct investment (FDI) into the retail sector in China, it did so gradually, increasing the percentage of ownership permitted to foreign owners over 15 years.

In the course of the 15 years, local firms learnt the tricks of the retail trade and were able to compete effectively against the new entrants.

In contrast, the Indian government went from discouraging the participation of Indian private firms in the railways and defense industries, to allowing 100% FDI in one shot, thus failing to give Indian firms the time to develop the capabilities or technical know-how to compete in these markets, with the result that bullet train and metro rail equipment needs to be imported in entirety (or imported with a ‘made in India’ veneer – assembled in Indian factories entirely owned and operated by French firms).

Fair Barrier 2

Another policy that could protect and benefit businesses in certain sectors is grants for nascent industries with vast future potential.  In the USA, there are small business grants, research grants and subsidies for small firms.

In contrast, the government of India seems to have failed to create a level playing field for local startups.  I recall many years ago (at the height of the internet boom) when the government of India had a small business grants program, it had a clause specifically leaving out Indian software startups.  Somehow the government of India had decided that they would not make research grants available to local startups in the highest-growth industry in India at the time.

Here’s more on how the Indian government seems to not be as accessible to local startups as it is to larger global startups/firms competing with them.  This is a problem that needs to be fixed.

It’s easier for a foreign startup or MNC to get forgiveness for inadvertent violation than it is for a domestic startup (today foreign startups enjoy better access to political leaders and therefore easier forgiveness).

Uber got 1.5 years of forgiveness on payments that Ola did not get, and Amazon got forgiveness for having its own supply centres, and not following the marketplace model, which Flipkart did not get. Flipkart had to change its model to comply with the marketplace model. Both Ola and FK were hurt by this favoritism to Uber and Amazon.

Fair Barrier 3

Another method is to strengthen the weakest parts of the workforce in the face of competition from migrant/immigrant labour.

One policy that could help protect and improve the lot of weaker parts of the US workforce might be higher taxation, and using the tax money to:

  1. Sponsor education programs (financial-need-based free college/training) to facilitate reemployment in growing industry segments.
  2. Revive industries that could employ that part of the workforce in larger numbers (the manufacturing industry).  One way to revive manufacturing that might be to create more outlets for US made goods and fund automation of manufacturing.
  3. Visa barriers (Indian work visas require a minimum salary that effectively protects less skilled workers).

Fair Barrier 4

Using regulatory and tax barriers to FDI (as is done in China) to generate scalable revenue for local businesses.

Conclusion

In conclusion, I wanted to point out that if governments could start using models such as the one above to calculate who might win in various scenarios involving free trade (instead of assuming that everyone wins), they might be able to formulate better and more equitable economic policies for their citizens.

The Fine Balance of FDI

Algodones_sand-dune-fence
Courtesy of the Wikipedia

Some governments, such as those of New Zealand and China have opposed FDI (Foreign Direct Investment) in various forms.

We examine in this article what their reasons might be.

  1. Do some countries reject FDI?

It appears that some do.

The Case of the USA

In the USA, there are no serious legal barriers to FDI, but there can be disapproval of and concerted attempts to block FDI.

In this article on factories set up by foreign investors in the USA, there is a discussion of opposition to Japanese manufacturers in the automobile sector decades ago.  I quote:

After Honda Motors opened the first Japanese auto plant in the U.S., in Marysville, Ohio, in the early nineteen-eighties, followed by an engine factory in nearby Anna, Ohio, the company faced an onslaught of vicious anti-Japanese ads on TV and in print, often supported by American manufacturing trade and labor groups.

The comparably subdued response to Chinese manufacturers speaks, on one hand, to changing circumstances, especially the broad acceptance of globalization in the United States and the desire, on the part of some politicians and business leaders, to create manufacturing jobs by whatever means necessary. But it also follows from a conclusion that American companies have reached about their Chinese counterparts: namely, that they are, thus far, relatively inconsequential rivals.


The Case of New Zealand

In October 2015, the government of New Zealand blocked the Chinese firm Pengxin’s attempts to buy (through a local subsidiary) a farm called Lochinver.

The government explained their decision as follows:

Land information minister Louise Upston told the BBC that its decision in September to block Pengxin’s purchase of Lochinver farm does not mean the country is not interested in attracting foreign investment.

“It’s [foreign investment’s] an important part of our economic strategy, but equally when we do have an application for sensitive land and assets – we will put it across the 21 criteria that we need to assess and make a decision based on that,” she says.

“We weren’t convinced that this particular application met that threshold, which is substantial and identifiable benefits for New Zealanders.”

Dr William Rolleston, president of the Federated Farmers of New Zealand, a group that lobbies on behalf of its farmer members, says some farmers are concerned about the scale of the purchases.

“New Zealanders don’t have an issue on ownership at a low level. No one would be concerned if 5% of farmland was owned by overseas buyers,” he says.

“But if 95% of the land in New Zealand was owned by overseas buyers, I think we would have an issue – it would reduce our strategic options in the future.”

Dr Rolleston’s sentiment echoes public concern from 2012 when Pengxin bought 16 dairy farms and sparked a debate about national identity.

During the last elections in 2014, opposition politicians stoked those fears by saying that New Zealanders risked becoming “tenants in their own land”

So, it appears that in New Zealand, the government wishes to keep resources such as land in local hands.


The Case of China

China seems to have laws that make it difficult for foreign firms to compete with local firms, making it a logical choice for them to outsource the manufacture of their goods to Chinese firms.

This is explained on Chinese Law Blog in “Building and Operating a China Factory.  Why Even Bother?

For example, if you are a Wholly Foreign Owned Enterprise (WFOE), you need to pay the government 20% of the profits of your China operations.

I quote:

First off, in your first year, you are going to essentially waste around $50,000 in just forming your WFOE, securing various government approvals, paying someone to figure out your taxes, and making up for all the mistakes you will make because you will be in, what is for you, a very strange land.  On top of that will be your taxes, which you are going to need to pay on just about everything.  Figure 20% on profits and even if you do not make profits, figure on them being imputed to you. And figure on having to pay around 40% to various of the Chinese governments as taxes on the salaries you pay your employees.

And all of this is going to mean that your costs are going to be considerably higher than whatever Chinese factory you are currently using to make your product. In Buying A Chinese Company? Why China Deals DON’T Get Done, I wrote of the way this domestic-foreign price differential works in the context of a client looking to buy its Chinese manufacturer:

I said that there is a good chance the Chinese manufacturer is paying half of its employees completely under the table and reporting to the government only half of what it was paying the other half. I then talked of how there is also a good chance the Chinese manufacturer is underpaying its taxes and of how its rent also may be paid under the table. I then said that this sort of thing may be all well and good for Chinese companies, but that if the US manufacturer were to buy this Chinese manufacturer, it would need to do so as a WFOE and it would then immediately be on a “whole ‘nother level” with respect to China’s various tax authorities.

Joint ventures with Chinese firms on the other hand apparently are difficult to retain control of.

This explains why Apple, instead of running its own factories in China, outsources the manufacturing to a Chinese firm – Foxconn.

So it appears that China, through its taxation mechanisms and through selective enforcement of its laws, deliberately blocks FDI into China.

Numbers show that in the past few decades, China received considerable inflows of FDI.

However, much of that FDI is attributable to Hong Kong (Hong Kong’s share of China’s FDI was 55% – ten times that of the USA).

The imbalance in FDI numbers can be seen in the following table taken from an out-of-print volume from the National Bureau of Economic Research in China.

china_fdi_table

So, it is evident from the above that most of China’s 1990s FDI came from Hong Kong and therefore was not really Foreign DI.

So, what benefits does blocking FDI give to a local area?


  1. Might barriers to FDI help economies?

In the case of China, the advantage seems obvious.

If foreign investors could open their own factories, they would hire Chinese labour and be able to own the scalable income from the proceeds of manufacturing, passing on only the salaries (which are low in China) to their employees in China.

It is only the inability of foreign investors to purchase and operate Chinese factories as cheaply that forces them to  outsource to Chinese firms.

So, the barriers to FDI in China help drive business to Chinese firms.

These policies can also force the transfer of technology to local firms.

Contrast this with the case of India.

India had a similar boom driven by cheap labour in the form of software services.

There were hundreds of small, medium and large firms in Bangalore offering software services to the financial sector in the USA.

However, a trend I have seen in recent years is for US firms to buy up medium-sized software firms in India and get their software related work executed by these now captive software teams than to outsource work to Indian firms.

So, the inability to get work drives many local IT services firms to sell their operations to US-based firms.

This effectively reduces the total revenue earned locally to just the salaries paid instead of salaries+profits.

I am not certain of how the numbers compare with the boom years but I think the absence of a road up the IT services value chain results in the middle being cut out, leaving only the very large firms and a host of relatively tiny shops in the local IT services market.

So, had FDI barriers existed in the software sector, it would have forced foreign consumers of IT services to access Indian programmers through an Indian corporate entity, increasing the share of the pie that accrued to the local economy, and increasing the quantity of business opportunities for local IT firms.


Take the case of New Zealand again.

The argument put forth by the government there is that they need to keep control of land (a scarce resource in New Zealand).

In other words, the restrictions on FDI are meant to allow local firms the retain control of revenue generating resources.

Contrast this with the software industry in India again.

In software the key resources are human resources (the engineers).  And around the world, software engineers are a scarce resource.

There was no barrier to FDI that would allow local firms to compete with foreign firms (which could pay more because of their stronger currencies) for those resources.

The result seems to be a stratification of software engineering resources by capability.

The engineers with the best skills (who could effectively develop products) mostly ended up in American software firms and can be paid salaries in the range of Rs. 60 lakhs per annum.

Engineers with less valuable skill-sets (who can at most configure, install, test or maintain products) seem to gravitate to Indian IT services firms where salaries seem to stagnate at about a quarter that amount.

This flight of resources might have contributed to preventing forays into product development by software services firms in India.

So, in a sense, by providing outside firms direct access to scarce resources, the opportunity to make a lot more money might have been allowed to slip away.

 

Conclusion

In conclusion, it may be said that sometimes, a clever use of barriers to FDI seems to help extract more revenue (by blocking access to valuable resources) and thus create larger surpluses for local businesses.  Those surpluses in turn help build more infrastructure and capacity and improve the economy.  The case of China, contrasted with that of India, seems to illustrate the case where such barriers might have been beneficial to the economy.