Maltacom Shareholders` Distress

The Malta Independent



Maltacom`s share price has been performing badly on the Malta Stock Exchange. During 2002 it has suffered the largest percentage loss, much bigger than the average which coming on top of substantial losses in the previous 2 years has driven down the price close to where it was when the IPO was launched in June 1998.

Loyal investors are searching for reasons why this is happening. They need not go far. Just blame it on the way liberalisation of the telecom sector is being handled.

Maltacom and its predecessor Telemalta have thus far been the executors of a national social contract where monopoly profits earned on the international telecom gateway are used to subsidise socially sensitive fixed line domestic telephony service.

`Just blame it on the way liberalisation of the telecom sector is being handled.` Wherever possible, monopolies have to go not just because the EU dictates so, but also because economically, if over-sustained, they lead to mis-allocation of resources. They lead to disincentives for development of the productive economy as it is burdened with high rates for international connections placing it a disadvantage with competitors from other countries in this small globalised world.

So the argument is not so much as to whether or not the monopoly should go but the method and counter-measures needed to soft-land the removal of subsidies.

Removal of subsidies inevitably lead to (at least one-off) inflationary impulses. To protect those that cannot defend themselves from the consequences of such price rises, social support measures are necessary.` Labour government of the seventies had done so when it had dismantled the rationing of essential food items reminiscent of the post-war days of restricted supply.` Even this administration did something similar on a smaller scale when the price of bread was allowed to respect market realities. It had given a one-off payment to each household.

For the liberalisation of the telecom sector nothing has been so structured.` Is Maltacom expected to continue to carry the social obligations even when it has forfeited the monopoly status` In normal circumstances government would accept that removal of the monopoly would inevitably lead to a tariff re-balancing reducing substantially the tariff on overseas communications and increasing the cost of local telephony through the removal of cross-product subsidies. `Maltacom shareholders, whilst licking their wounds, have the government to thank for causing them financial distress in forcing their company to carry social subsidies whilst removing monopoly`

The fact that government provided for nothing of the sort indicates that the maintenance of the subsidies whilst losing monopoly benefits on the international gateway could impact negatively on Maltacom`s future profits. It is this uncertainty that is driving the Maltacom`s share price down far beyond what could be explained by normal cyclical factors.

Maltacom shareholders, whilst licking their wounds, have the government to thank for causing them financial distress in forcing their company to carry social subsidies whilst removing monopoly profits. This will benefit the productive economy through lower international tariffs but will also transfer profits from a public sector publicly listed company to private organisations who can cherry pick the profitable business segments leaving Maltacom to carry the burden of the social obligations.

In delivering lower international connection rates without relieving Maltacom from the burden of subsidised fixed line services government is trying to have the cake and eat it ` gaining` popularity with the business sector without losing support from the consumer of domestic telephony services . It is forgetting however that private Maltacom shareholders also have a vote!

Alfred Mifsud