The 6 Percent Dilemma

The Malta Independent on Sunday

Minister Dalli is free to  go  solo on TV debates to argue what a fantastic deal he made in privatising 40% of MIA and explain how much cleverer he is than I when I had indicated a much lower figure in the embryonic process of such privatisation under Labour in the summer of 1998.   A process which never went beyond the registration of interest without formal bids and without direct negotiations as it was cut short by the early elections.

“Labour meant to retain strategic control through retaining 60% equity control over MIA, our one and only airport so essential for tourism development”

 

I explained in earlier submissions to the media that the two privatisation processes are incomparable as the acquirer has been offered far more rights under Dalli’s privatisation than what was being offered under Labour’s version.

 

Labour meant to retain strategic control through retaining 60% equity control over MIA, our one and only airport so essential for tourism development.    Min.  Dalli contrastingly gave the acquiring consortium effective control over MIA with the very real possibility for the consortium to award itself lucrative management and technical service contract which would cream away for the benefit of the consortium far more than the 40% share of profits they would be entitled to through the equity position.

 

The consortium has also been given the possibility to work itself gradually into a majority shareholding position. This was strictly prohibited under Labour’s version for privatising  MIA which included 20% IPO to the Maltese public and only 20% holding to the strategic partner with the government holding on to 60% of the equity.

 

Min Dalli disregards all this argumentation and prefers TV soliloquies in programmes officially boycotted by Labour.    Anytime Min Dalli wishes to discuss any or all privatisations since 1998 with me in programmes or media not boycotted by Labour I am more than available.   This obviously includes NET TV and Radio 101.

 

“Anytime Min Dalli wishes to discuss any or all privatisations since 1998 with me in programmes or media not boycotted by Labour I am more than available.   This obviously includes NET TV and Radio 101”

The difference between Min Dalli and myself is that while I reply point for point to all his criticisms he escape my criticisms with evasiveness and generic platitudes, often preferring to reply to criticism not made rather that the sharp points of criticism actually made.

 

For example nothing has been said that price of Lm40 million reportedly obtained for 40% plus control over MIA ( though this Lm40 million does not seem quite correct as Min. Dalli himself in his writings gave MIA full capitalisation value of Lm70 million so that 40% equity is valued at Lm28 million – the balance of Lm12 million probably being payments unrelated to the value of the share deal) exposes how incomptent he was  in executing the Mid-Med deal on a direct basis without bidding to HSBC.

 

Because in the sale of Mid-Med to HSBC the whole Bank was capitalised at Lm105 million.   Even taking MIA capitalisation at Lm70 million rather than the more oft mentioned Lm100 million,  begs the question of how a bank which generates five times the profit level of MIA gets sold with full control and all for just 50% mark up over the valuation of MIA.

 

The sale of MIA provides the nation with Min.  Dalli’s emphatic self-signed certificate of incompetence related to the sale of Mid-Med to HSBC.  And this is corroborated by documents which Min Dalli himself laid before the Public Accounts Committee.

 

In the calculation of the share transfer price of Lm2.90 the future estimated earnings of the Bank were discounted to present day values at a discount factor of 12 ¼%.   In layman’s language this takes into account the time value of money. Meaning that one lira today is worth more than one lira next year and much more than one lira in ten years’ time.   So estimated  future earnings are brought down to today’s value by discount them.   The higher the discount factor (percentage) the lower the present day value.

 

The discount factor of 12 ¼% was explained as 6 ¼% being the risk free rate at the time, and 6% as the risk premium.   6% risk premium is a very high risk associated with projects whose future income streams are highly uncertain.   For a bank like Mid-Med with a consistent trading record and with a firm command over 50% of the local banking market 6% risk premium is atrocious.   Its inclusion has practically halved the real value at which the bank should have been sold with a controlling interest to a strategic buyer.

“…And Min Dalli will have every opportunity to give the explanations he has so far denied us.”

 

When I argued that the Minister had pathetically and incompetently swallowed the valuation prepared by HSBC, who as buyers had every reason to inflate the risk premium, the Minister strongly denied and argued that the valuation was prepared by himself.

 

And here is the 6% dilemma.   Why on earth should the Minister of Finance charged with obtaining best value for assets being privatised include a 6% risk premium in the discount factor establishing the share transfer price of the Bank?

 

I have been making this criticism and demanding straight and simple answers for almost 3 years.   The Minister’s reply is often a total escape related to Maltacom shares being sold to bearer that is as untrue as it is irrelevant.

 

Perhaps unknowingly the Min in his self-flattery over the MIA deal is exposing his guilt for the way Mid-Med Bank was sold so haphazardly, unprofessionally and in a way which a Labour government would have to address as a priority upon taking office.   And Min Dalli will have every opportunity to give the explanations he has so far denied us.