Evergrande conundrum
Control soaring property
A Chinese behemoth’s missing of an interest payment triggers local and global fears of its impending collapse, but the government is in no hurry to bail it out, indicating that it seeks to
and curtail the wealth and power of corporates.
CHINA’S Evergrande group, identified as the world’s most indebted property developer with accumulated liabilities in excess of $300 billion, missed an interest payment instalment due on September 23, 2021, on bonds borrowed through U.S. dollar bond markets. Although the company enjoys a 30day grace period to pay up and avoid being in default, the absence, as yet, of any clarification on the missed instalment has increased uncertainty. The markets seem to be sceptical that the firm would meet in full the $129 million of interest payments on its bond issues due this month and the $850 million due by the yearend. Evergrande’s share prices have collapsed by more than 85 per cent over the last year.
As an Evergrande default and possible bankruptcy can have repercussions in China and all over the world, the global media has been obsessed with this company for weeks now. The domestic fallout would be influenced by the fact that Evergrande’s sheer size makes it a crucial component of China’s real estate secreputations tor, which is estimated to contribute more than a quarter of the country’s gross domestic product (GDP).
GROWTH AND WEB OF DEBT
Property sector investment accounts for a large share of the more than 40 per cent of the GDP devoted to fixed capital formation, and drives China’s growth. Debt has been a core element of this growth trajectory. Property developers borrow heavily to buy and accumulate land for construction of offices and houses that are acquired by buyers; their purchases are more often than not financed with debt, easy access to which has fuelled a speculative bubble reflected in soaring property prices in multiple urban locations.
Local governments sold land to developers since they needed revenues to service debt totalling more than $8 trillion taken on by specialpurpose local government financing vehicles (LGFVS). The LGFVS were the financing route that provincial governments used to implement huge “prestige projects” that were launched to build and shore up the of provincial party and government leaders. China’s growth rode on this web of debt.
The failure of a property giant like Evergrande can tear this web apart. But that would not be the only damage. A collapse in construction would curtail demand for everything needed in construction, from cement and steel to glass and fittings, adversely affecting those providing these inputs. Banks and other financial intermediaries that lent to property developers would lose heavily in the event of a default.
Individual property buyers who have paid advance instalments, but have still to be given possession of their property, and retail investors who bought into the wealth management products sold by the property developers, will take a hit owing to Evergrande’s failure. Some 80,000 people in China, including employees of Evergrande, reportedly hold around 40 billion yuan ($6.2 billion) worth of the company’s wealth management products. Many of them have been protesting outside Evergrande’s offices asking for their
money back. Many investors’ savings are tied up with the company and if they suffer losses owing to the company’s default, their consumption and investment spending will decline, depressing demand even more.
And Evergrande is not the only property company that can fail. China Fortune Land Development defaulted in February 2021, and other construction firms are in line to follow. All told, the end of the property bubble can cut short the revival of growth in China after a longish slowdown that followed the high growth years of the 2000s and earlier.
The adverse effects of a property market bust would not be restricted to China’s economy. To start with, demand from China has been an important driver of global growth. So, any recession in China will have repercussions for economic performance in the rest of the world. Moreover, foreign financial firms and investors, who have been plied with cheap credit by central banks pursuing easy money policies to revive depressed economies, have been diverting a chunk of that money to the Chinese market.
A consequence has been significant foreign exposure to China’s financial system, with property developers alone, including Evergrande, having raised more than $220 billion in debt from the U.S. dollar bond market. Any shock to the Chinese economy and financial system will reverberate in global markets, with analysts seeing the Evergrande saga as contributing to volatility in stock markets worldwide. Given this fallout, global players have been surprised by the absence as of now of any concerted effort on the part of the Chinese government to intervene and bail out Evergrande, which is seen by many as being “too big to fail”. In fact, Evergrande’s troubles are being seen as China’s ‘Lehman moment’, referring to the mayhem that followed the bankruptcy of Lehman Brothers in 2008. There are similarities and differences.
Riding on debt, China’s property development expanded at a pace that resulted in oversupply relative to the actual needs of the population. But this did not appear to be a problem as investors, looking to benefit from appreciation in property prices and enjoying access to credit, acquired multiple properties with no intention to stay in them. Evergrande’s own difficulties arose not only because it was overleveraged or had accumulated too much debt. It was also because the government decided to rein in the debt- financed speculative bubble in China’s property markets.
To that end, the government implemented its “three red lines” policy in 2020, under which the liabilities-toassets ratio of property companies had to be kept below 70 per cent, the net debt-to-equity ratio below 100 per cent and the cash-to-short-term debt ratio above 100 per cent. The intention was to limit the leverage of property developers.
Simultaneously, lending for property purchases has been curtailed, and property buyers are finding it increasingly difficult to access mortgage finance. A combination of uncertainty among buyers about the viability of developers over the long term, during which they build the assets for which advance payments are made, and the brakes that are being applied on increases in mortgage lending, has slowed sales in property markets. With cash inflows to developers squeezed, and nonbank lenders holding back, servicing debt has become a problem for the likes of Evergrande, precipitating a situation of near default.
As has been the case in the past, many analysts see in the troubles in China’s property and financial sectors the beginning of the end of the country’s growth story driven by credit-financed speculation by local governments and the private sector. However, the Chinese government is not faced with a problem that it finds difficult to address. Rather, by clamping down on excess borrowing, the government has created the crisis in the property sector.
Moreover, the government, as of now, shows no signs of pulling back from its policy of reining in the speculative surge in property markets, nor is it rushing to bail out Evergrande believing that the company is “too big to fail”. This reticence is visible even though there is a real possibility that if the property bubble suddenly bursts, the fall in prices could wipe out the wealth of many ordinary Chinese people who bought properties when prices were high, or who have invested in financial products property companies sold with the promise of high returns.
Although observers expect the government to finally relent and intervene, the delay in its intervention has resulted in palpable uncertainty in markets within and outside China. Will the government relent, that is the Evergrande conundrum.
The thinking behind the Chinese government’s actions, or lack of them, is not all too clear, except for the fact that it has clearly decided to deflate the speculative bubble. One explanation for the government’s stance is that it perceives inequality as having reached levels where it threatens its legitimacy and that of the Chinese Communist Party, with the ordinary citizen’s inability to afford housing being part of that problem. This is in keeping with the recent official emphasis on the pursuit of “common prosperity” rather than just growth and wealth creation.
Another explanation could be the government’s need to rein in wealth accumulation by private sector barons, China’s version of the Russian oligarchs, who might seek to extend their power and influence to the political arena. Even as President Xi Jinping consolidates control over state and party to ensure a long innings in power, it is probably not enough to keep party insiders under control. The increasingly powerful billionaires in the business world need to be reined in and the accumulation of excess wealth that gives them power curbed. Moves against a range of tech giants such as the Ant Group and Didi Chuxing suggest that this is high on Xi’s agenda. It could also be one motivation for new policies in the property sector.
“IF Black Swans leave one feeling helpless, Grey Rhinos teach us that we do have the power to act.” What Noreena Hertz, the English academic and author of Eyes Wide Open, meant when she made this statement could very well be applied to how the Directorate General of Civil Aviation (DGCA) operates. India’s premier civil aviation regulator is responsible for the regulation of air transport services to/from/within
India and for the enforcement of civil air regulations, air safety and airworthiness standards, and has the power to make effective decisions and act. But does it? More importantly, is it allowed to act effectively, regulate without bias and for the larger good of air safety in India? Does the DGCA have adequate, trained, qualified and honest staff who can discharge their duties efficiently? Most aviation pundits would say no.
They cite numerous operational violations and deficiencies by airlines, poorly trained pilots and unlicensed airports to emphasise the DGCA’S ‘callous’ attitude towards effective regulatory oversight and air safety issues. According to data from the Airports Authority of India (AAI), the 110 functional airports in India catered to about 14.26 million passengers this August, a 35 per cent increase over the previous month, in
dicating a sustained recovery in air travel. But, how many of these airports are licensed and meet all safety parameters while operating, as opposed to operating under exemptions?
Speaking to Frontline, Arun Kumar, the Director General, DGCA, refuted the allegations that the DGCA was reluctant to act against several airports despite audits finding deficiencies in them, especially in runways and firefighting services. He said that as many as 86 airports have had their licences renewed after they met the long checklist of regulations and that flight operations inspectors carried out more than 3,000 inspections a year. Said Arun Kumar: “I can’t shut down an airport just because of a bird-hit. Safety must be managed, suitably arranged. Risk and safety assessments must be done. If there are to be absolutely no exemptions, then I will have to basically shut down all airports. While in new airports you can impose regulations across the spectrum, you need to give exemptions in the legacy airfields.”
DGCA’S INDIFFERENCE
From dating a letter nine months ahead of the actual conduct of an audit in a particular month, to poor runway signage and markings that do not conform to international aviation standards even at high-risk airports, narrow perimeter roads around airports, incorrect runway friction testing methods and infrequent testing, flawed rubber removal from runways, faulty HR polices with regard to crew utilisation, and a shortage of air traffic controllers, the DGCA has been seen as largely indifferent to ensuring safe skies.
For instance, Air India pilots stated that the one occasion the DGCA did act was when it arbitrarily, illegally, and together with the airline’s management, enforced detrimental changes in flight duty time limitations (FDTL) from September 2012. Its rationale was that the new FDTL would lead to optimum utilisation of Air India pilots and crew members and reduce the requirements of operating staff. The FDTL guidelines have been imposed on the basis of Civil Aviation Requirements (CARS), which are basically rules issued in compliance with Section 5A, subsection 1 of the Aircraft Act, 1934, in conjunction with rule 29C of the Aircraft Rules, 1937. According to pilots, the guidelines endangered the lives of over 200,000 flyers in 750 long-haul flights to Australia. (The Delhi to Sydney and Melbourne routes were the first ones to be tried with the new FDTL rules.) The pilots claimed that the new FDTL induced a risk factor that was 26 times the normal. The DGCA, which acknowledged that it had received complaints from pilots of SOP violations, chose to do nothing about them.
According to aviation experts, flying into or taking off from an Indian airport is fraught with risk. “You’re flying on horoscope,” said Captain Mohan Ranganathan, an aviation safety consultant. Captain Shakti Lumba, a former pilot who was instrumental in setting up Indigo’s operations in 2005 besides heading Alliance Air, Air India’s regional arm, and Captain Amit Singh, a 30-year veteran in the industry and founder of the NGO ‘Safetymatters’, said that it was a miracle that more accidents did not occur.
MANGALURU AIR CRASH
Accidents, however, do happen. In May 2010 an Air India Express (flight AXB 1344) Boeing 737-800 from Dubai overran the tabletop runway while landing at Mangaluru airport, killing 158 passengers and crew. The aircraft ploughed through a 90-metre (300 feet) sand arrestor bed, which failed to stop it. A large portion of the aircraft’s right-side wing and engine smashed against the concrete socket of the Instrument Landing System’s localiser antenna, causing them to separate from the aircraft, and fuel to spill on to the engine. As a result, the aircraft caught fire even as it plunged down a gorge, 790 feet beyond the end of the runway, and came to a stop around 980 feet past the top of the slope.
It was the third deadliest air crash in Indian aviation history. The court of inquiry (COI) headed by Air Marshal B.N. Gokhale, former Vice Chief of Air Staff of the Indian Air Force, determined that the crash was a result of pilot error. The investigation found that the flight crew had failed to plan their descent profile properly, resulting in the aircraft remaining high on approach. The captain, the investigators found, failed to discontinue this unstabilised approach and persisted in continuing with the landing despite three calls by the first officer (co-pilot) to execute a ‘go around’.
The COI stated: “Probably in view of ambiguity in various instructions empowering the ‘copilot’ to initiate a ‘go around’, the first officer (co-pilot) gave repeated calls to this effect but did not take over the controls to actually discontinue the ill-fated approach.”
‘LITANY OF LIES’
According to Captain Mohan Ranganathan, the COI report was a “well massaged litany of lies”. He said: “The government failed to ensure that all laws of civil aviation were complied with. The aircraft crashed down the gorge by 80-100 metres. The aircraft wing hit the concrete structure that was illegal, broke, and the resultant fire engulfed the aircraft and killed 158 as the rescue did not reach them in time. The law requires that only a frangible structure shall be permitted. The government built a solid, concrete structure. Immediately after the crash, they rebuilt the structure with steel girders, again, against all laws. The COI covered up all the deficiencies of government agencies and blamed the pilot alone. Those on board burnt to death as the firefighting team did not reach in time. The inquiry report cites narrow roads outside the perimeter preventing rescue and firefighting (RFF) vehicles such as the Rosenbaur from being able to reach the crash site quickly. If they had carried out a full-scale emergency test they would have known that the perimeter road was too narrow to accommodate the Rosenbaur RFF vehicle.”
Ranganathan further said that civil aviation in India was not “a well-oiled machine but a wellgreased cancer”. “Several regulatory appointments in crucial positions in safety oversight has the virus of conflict of interest. Airlines and airfields are declared safe, sweeping aside the truth. Accidents are ‘massaged’ as incidents, to keep the slate clean. We are sitting on a time bomb when safety is brushed aside in Mangaluru, Kozhikode, Jammu, Patna and Bagdogra. Lives were lost in Kozhikode, Mangaluru and Patna and there is no accountability. Political interests and commercial interests of airlines take priority over passenger lives.”
Commercial considerations and the desire not to inconvenience passengers seem to override passenger safety. Arun Kumar, however, refuted it, saying: “There is no leniency, and no one is pressuring us not to act. We spare no one. We have conducted two audits on Truejet and Spicejet, and even issued notices. But the airline business is a very complex business, with huge financial implications. Occasionally, handholding [of the airlines] is needed.”
The final investigation report into the Air India Express crash at Kozhikode airport in August 2020 that killed 21 people, including both pilots, attributes the crash to nonadherence to standard operating procedures by the commander. In short, ‘pilot error’.
The accident happened when the aircraft was attempting a landing in tailwind conditions on the tabletop airport. According to the report, which was released recently by the Aircraft Accident Investigation Bureau (AAIB), on an ‘unstabilised’ approach to land (in layman’s terms, an unsafe descent to land), the aircraft touched down deep into the runway, overshot the safety area, damaged a navigational aid antenna before plunging 110 feet down the tabletop runway and coming to an abrupt halt on the airport’s perimeter road just short of the wall. Despite the fuselage breaking into three and the engines shearing off from the wings and fuel leaking from both wing tanks, there was no post-crash fire.
The AAIB report stated: “The role of systemic failures as a contributory factor cannot be overlooked in this accident. A large number of similar accidents/incidents that have continued to take place, more so in Air India Express, reinforce existing systemic failures within the aviation sector. These usually occur due to [the] prevailing safety culture that gives rise to errors, mistakes, and violation of routine tasks performed by people operating within the system.”
Experts such as Captain Amit Singh, however, believe that “blaming the pilots alone for an accident is like addressing the symptom rather than the root cause”. He is convinced that the probable root cause of the Kozhikode accident “is the poor safety culture prevalent in India, the lax attitude of the regulator in maintaining flight standards and the ineffective regulatory oversight by the DGCA”. Said Amit Singh: “The AAIB report highlights a few issues, but it is unable to conclude the report due to the amateurish level of the investigation.”
Blaming the regulator for the Air India Express accident, he cited lacunae in flight crew training requirements; the DGCA’S Flight Standards Directorate (FSD) permitted the captain of the ill-fated flight “to jump back and forth” between airlines (Air India and Air India Express which operate under separate Air Operator Permits (AOP) and hence have separate training manuals) and between aircraft (Boeing 737 and Boeing 777) “without following the DGCA’S CARS”.
Amit Singh also said that the FSD’S inspectors are required to carry out surveillance flights operating to/from critical airfields such as Kozhikode, Port Blair, Sikkim, etc., but “as per the accident report, FSD, DGCA, did not carry out any surveillance flight during the period Jan 2019-June 2020”.
Experts like him are also critical of the DGCA for looking the other way when airlines do not comply with the DGCA’S requirement for 100 per cent flight data monitoring. Said Amit Singh: “The Kozhikode accident report has highlighted the discrepancy in the data on prolonged flare (the transition phase when a fixed wing aircraft is between the final approach and the actual touchdown on the landing surface) between those sourced from the DGCA and Air India Express. Long landing (when an airplane exceeds the touchdown zone) was one of the causes of the Mangaluru accident.” Pilots also criticise the DGCA for turning a blind eye when “red flags over serious deficiencies in Air India Express’ safety culture popped up”.
According to Amit Singh, India does not comply with the International Civil Aviation Organisation (ICAO, the United Nation’s aviation watchdog) timelines for the implementation of a safety management system.
He said: “Operators such as Air India Express have contributed to the same. The Kozhikode accident report has pointed out this deficiency. The pilot’s training record has repeatedly highlighted areas of concern: Landing flare height (low or prolonged float) and decisionmaking. An in-depth analysis was not carried out either by Air India or Air India Express (the two airlines he flew for) or by the DGCA. The accident report mentions that the pilot had Type II Diabetes, a condition that can affect the depth perception of the individual and in turn the ability to decide when to start the approach for a landing. Since training and medical (departments) work in silos, each could not determine the cause or the effect, and the system allowed the pilot to pass through. An effective safety management system would have highlighted these two areas of concern and connected the dots. Sadly, the DGCA did not have an effective oversight of the airline’s safety management system.”
AIR ACCIDENTS IN INDIA
According to data primarily sourced from the DGCA’S accident investigation reports, since Independence 2,173 people have died in 52 commercial passenger airline accidents that have had at least one fatality. Of these, an overwhelming 1,740 people, or 80 per cent, died in mishaps that were attributed to pilot error. Pilot error was also found to be the cause in eight of India’s 10 most fatal air crashes that together claimed 1,352 lives.
Although there have been over a 100 accidents involving commercial
airliners, the fact that they have not resulted in any fatalities brings cheer to DGCA officials. Said a senior official on the condition of anonymity: “Despite the manifold increase in the number of passengers handled by Indian airports over the past few decades, the number of fatalities caused by air accidents has reduced significantly. While in the 1991-2000 decade, 552 people were killed [including 349 in the 1996 mid-air collision between a Saudi Arabian Airline aircraft shortly after takeoff and a Kazakhstan Airlines aircraft approaching Delhi airport) in seven fatal crashes, the 2001-2010 decade saw just one, the Air India Express crash in Mangaluru. And since then, during the 2011-2020 decade there has just been one air crash [the Kozhikode air crash of August 2020].”
Most aviation pundits are, however, not prepared to accept Arun Kumar’s proclamation that the “accident rate is negligible”. Said Ranganathan, echoing the views of many aviation experts: “The DGCA covers up accidents as minor incidents. There have been at least ten hull losses [when the aircraft is damaged beyond economical repair] during the last decade.” They point to hull loss accidents involving Kingfisher Airlines, Jet Airlines, Spicejet, Sahara Airlines and a corporate jet belonging to the Essar Group that crashed in Indore.
Pilots also ask why the ICAO has had to conduct so many safety audits of India’s air safety readiness if the DGCA’S record on effective safety oversight was so good. The ICAO carried out the Universal Safety Oversight Audit Programme for India in November 2017, followed by another in February 2018. Results showed that India’s score had nosedived to 57.44 per cent from 65.82 per cent, placing India even below Pakistan, Nepal and several other countries. However, after the DGCA undertook several steps, the score improved to 74.
Arun Kumar revealed that the United States’ Federal Aviation Administration (FAA) would be auditing the DGCA in October, with the ICAO doing so thereafter. The ICAO audit is expected to check safety aspects of airlines, airports, ground handling firms, aircraft airworthiness, aircraft operations, personnel training and licensing in order to ascertain whether they are up to international standards.
The DGCA, which also coordinates all of India’s regulatory functions with the ICAO, is, as its website proclaims, “an attached office of the Ministry of Civil Aviation (MOCA)”. And therein lies unarguably the biggest of the DGCA’S shortcomings. It is strapped, as an appendage of the MOCA, and the Minister. Despite the Lok Sabha passing the Aircraft (Amendment) Bill, 2020, which provides for statutory backing to the DGCA, the Bureau of Civil Aviation Security and the AAIB, the DGCA is still totally dependent on the Ministry. Explained Captain Shakti Lumba: “Although the DGCA is a statutory body, it is not an autonomous body. Its budget comes from the Ministry. And because of this, it cannot concentrate on the development of its objectives. It would be better if the DGCA is allowed to utilise the money that comes from licensing fees, etc.”
He also emphasised that the DGCA was buried under an avalanche of rules and that there was no ease of doing business. “Yes, we are deregulated on paper, but in actual fact we are over-regulated. Today we have exemptions, CARS, AICS [Aeronautical Information Circulars], directives, etcetera, put out by the DGCA. Compliance not only becomes very difficult, [but] it is also subjective and depends on the person looking at the file. Also, people at the helm should understand that different operations, chartered, cargo or transport, have different limitations, [but] in India one rule applies to all. In addition, every bureaucrat adds one or two lines to the rule book. The government should understand that the regulator is not a rule-making body, rather it is an oversight body. The DGCA needs a total upgrade. Instead of being a safety regulator or facilitator, it is a controlling agency and a pretty stupid one at that.”
Arun Kumar claimed that he had written to the government asking for more autonomy, “especially in matters like finance, hiring”. He said he was “ready to do anything just as long as the Indian regulator is robust, able to face up to the scrutiny of the world and delivers”.
NO DOMAIN EXPERTS
Shakti Lumba opined that the DGCA had been ‘captured’ by the Indian Administrative Service (IAS)