Beware Boxing Day

Maltastar Beware Boxing Day

A month today it will be Boxing Day. Beware it!

I don`t think I missed any of the predictions I made in last week`s article `Squaring the circle` about the contents of the budget announced last Wednesday.` It was all too predictable.` Particularly predictable was the Minister`s assertion, contrary to some earlier indications, that privatisation of Public Lotto, Malta International Airport and Kordin Grain Terminal will be concluded by end December next and will net the government Lm47 million without which` government accounts will not balance.

I well remember Easter Monday of 1999.` It was exactly the 5th of April. Many were on holiday. I was still at the breakfast table of a` hotel in Gozo where I was spending a break with my dear family. The mobile rang and someone gave me` the breaking news that John Dalli had just publicly announced the suspension of Mid-Med Bank shares on the Malta Stock Exchange as the government had agreed to sell its 67% stake in Mid-Med Bank to a foreign institution.

Choosing Easter Monday for making such a strategic decision when most critics are on holiday and parliament is closed had a clear aura` of being a manipulative choice. This suspicion increased when the Minister broke new ground in the lack of corporate governance for taking care of the State`s assets. It soon transpired that the Minister had not even informed his cabinet colleagues of the decision he had just made public and that the Minister without any bidding had` conducted the negotiations single-handedly.

It raised suspicion` that making it official to the nation before even informing the Cabinet was part of a scheme to overcome cabinet resistance. And so it was. Cabinet convened the next day and in just a few hours gave its OK to the deal. The cabinet memo which was subsequently revealed at the Public Accounts Committee was very generic and bereft of the necessary details which such a strategic decision should have demanded.` In fact no valuation calculations were made available to the Cabinet other than that the price struck was above the price last traded on the Malta Stock Exchange. Who cares that the price should have demanded a substantial premium even on the basis that the share transfer involved giving total control to one foreign institution of a very solid and profitable bank commanding 50% of the local banking market`

It is elementary that the price for trading a few thousand shares on the Exchange should be very different from the price when majority control was being transferred.` But even these elementary details were denied to Cabinet.` Denied to Cabinet was also the fact that in arriving at the valuation the Minister had discounted the future cash flows of the Bank by a factor of 12.25% by including a risk premium of 6% on top of the 6.25% risk-free rate.

Just think of it.` The Minister as the guardian of national assets in making a calculation of the fair price,` rather than using the normal discount rate of 6.25% for risk free investments,` loaded the discount rate by a further 6% risk premium. He was` thereby` suggesting that the asset he is selling is risky even though in fact its trading record and income streams had just earned it an international award as` one of the best managed banks in emerging or small markets.

I don`t really believe that the Minister did this.` It is much more credible to assume that the calculations were made by the buyer who had every interest to include a high risk premium in order to lower the price. The Minister, without seeking independent professional advice, then swallowed it hook, line and sinker leading his Prime Minister to admit shamefully and` belatedly that the deal was too rush but that in the end Lm10 million ( should read Lm50 - 70 million really!) here or there does not really matter.

Here we are two years eight months later, in spite of many promises and White Paper that future privatisations would be transparent, the Minister is just about to play it again on us.`

This time instead of Easter Monday it is likely to be Boxing Day. On that day or thereabouts whilst we are completely in the dark and probably in high Christmas spirits to dampen the economic monotony of the rest of the year, the Minister will play it again.` He will` sign away a licence to give control to all gaming revenues for next 7 years to a foreign dominated consortium without any social and economic protection against the consequences of having a sizeable portion of the nation`s disposable income shifted to gaming from ordinary expenditure on food drink clothing and entertainment consumption.` He will also give a strategic, indeed effectively controlling,` stake in Malta`s only airport to a foreign dominated consortium.

In doing these deals the Minister will forget another elementary lesson in conducting privatisations.` Technology can be bought without sacrificing equity positions. Indeed even the purchasers will still charge the local company a full commercial price for their technology inputs. The only difference is that the country would be locked up into equity with the technology provider and cannot seek better opportunities as they evolve. We will be giving foreign technology partners the right to control two national cash cows with a minority stake.` In this sense it would be even worse that Mid-Med`s sale.

Beware Boxing Day!