Friday, 30 July 2004

How Not To

The Malta Independent
 30th July 2004

Malta is giving the world a text book case study on how not to conduct economic re-structuring. Two examples I encountered this week at ground zero level will help to explain this in the clearest possible terms.

Mr G had joined Barclays as a bank messenger in the late sixties. Internally he was known as the most efficient in his job often being entrusted to perform other duties well beyond his rank, always delivering what was expected of him and beyond.

I recently visited my HSBC branch and Mr G was there with all his usual smile and alertness guarding the main door and greeting customers in and out. As we had not seen each other for some time we exchanged courtesies when suddenly I noticed that he was not wearing the usual bank uniform but the uniform and badge of a private security service company.

Upon enquiry Mr G explained that he applied and was given early retirement from the Bank, enjoying an early pension but meanwhile he was performing duties for a private security firm which was contracted by the Bank to perform the duties formerly performed by the police.`

I congratulated Mr G for his decision which put him in command of two salaries for doing one job which he was perfectly capable of doing if the Bank, rather than send him out on early pension, just re-assigned duties to gain efficiency from its existing work-force. Good luck for Mr G but a general waste of money at macro economic level.

Then Mr Z came to see me to discuss something on a professional matter. As it is my duty to get to know clients before accepting to do business with them I discovered that Mr Z was until recently employed with a public sector company which has been privatised. There he was performing a very specialised job which takes years of training and experience. However as the privatised companies could not continue certain business lines he became surplus to requirements and as part of the privatisation agreement he was transferred to perform a job in the civil service without any loss of pay.

On enquiring what sort of posting he was occupying Mr Z, almost red in the face, told me that he was attached to a Ministry making coffees and performing other messenger duties, a job well below his status and capabilities and which normally is done by someone earning half his salary.

Mr Z did not have the same good fortune of Mr G. The fact that he had preserved his salary does not lessen the humiliation of somebody that is forced to perform a job well below his rank. People don`t work just for the money but also need to feel fulfilled and useful to their employer and to society in general.

Yet just like Mr G , Mr Z`s case is a typical example of waste and a sample case of how not to re-structure.

At a time when extension of pension age is well on the agenda the extra salary being paid to Mr Z should have been used to put Mr G on to a re-training programme to teach him new skills permitting him to be fitted into a new productive job not too far away from his rank and his true abilities.

These are not isolated cases. Thousand of such like cases have rendered us globally uncompetitive.` Without global competitiveness we will not attract investment and without investment there will be no growth. Without growth re-structuring will be difficult almost impossible.

So the focal point of any re-structuring exercise has to be on how to boost economic growth by making our economy competitive again.

The lack of competitiveness is currently the main topic of such fatigued economies as that of France and Germany.` Both countries are members of the Euro area, cannot rely on fiscal, monetary and exchange rate policies to re-gain their competitiveness the same way the US has done these last four years. Monetary and Exchange rate policies no longer reside within the national government of France and Germany but have been passed on to the European Central Bank who has to take a wider view than just the immediate needs of the French and German Government. By consequence the use of fiscal policy, whilst theoretically still a national prerogative, has also become restricted by the Growth and Stability Pact of the single currency.

The result is that with the French and German governments largely unable to stimulate the economy by using the traditional tools of fiscal, monetary and exchange rate policy, restructuring is being performed at factory level with workers having to give back benefits like the 35/37 hour week, additional holidays etc which they thought they had earned for good. Workers are having to work more without seeking additional pay merely to protect their jobs under the threat from employers that otherwise they will move their production units to lower cost countries or regions.

Unless our government conducts a proactive re-structuring exercise this will happen in Malta soon with private sector employees being forced to accept reduced conditions to protect flight of investment. Indeed, it is happening already and in some cases investment has moved or is thinking of moving.

Unless we want the crisis to hit us when it is too late government had better re-think and co-ordinate how to use monetary, fiscal and exchange rate policy to re-establish our international competitiveness. Thankfully these are still ours to use but will no longer be so a few years down the line once we join the Euro. The consequences of giving up these policies before conducting true and real re-structuring are just too drastic too contemplate.

Sunday, 25 July 2004

Wrong Perceptions

The Malta Independent on Sunday
25th July 2004
'Perception is reality' dogmatised Tom Peters in his first book publication `In Search of Excellence` which in business education marks a shift change, a new paradigm, where businesses stopped being driven by the production specialist and started being driven by the marketing specialist and by the brand managers.

In politics it is equally applicable ` perception is reality.` We have had a long series of Fenech Adami administrations where this maxim was taken to exaggerated heights, where perception ruled above everything else. People were duped into false sense of feel-good factor through excellent perception management, whilst the reality of economic degradation resulting in chronic public deficit and horrendous build-up of public debt, was kept out of the limelight. Perhaps this is best exemplified by the 2003 election poster of 'Finanzi fis-Sod' giving a perception totally detached from reality but which for the brief moment in pre-election mode proved that perception was reality.

The current administration seems to be giving up as much on perception as on reality. I have already written quite extensively that the Convergence Programme given to the EU for bringing the public deficit under 3% of GDP by 2007, is totally detached from reality and proposes a strategy which will just not deliver. But now not even the perceptions are working. Let me cite a few examples.

My Libyan friend has been coming to Malta for the last quarter century. He owns property here, he has done business here, he spends money here and several of his children were born here. He speaks Maltese better than most of us.

He fully accepts that he now needs a visa to come into Malta and has no problem in complying with our and EU rules. However on his first visit to Malta since EU membership he and his family have been subjected to a level of degradation at point of immigration which seriously shook his intention to keep Malta as his second base. Apart from the actual long wait in the passport control procedures the attitude of the officer there verged on racism.` Whilst beer-belly tourists in the EU line were waived in without formalities, my friend had to incur the rigour of insolent questioning demanding evidence that he had money to sustain himself and that he was in possession of a return ticket. The stamps on his passports should have been enough evidence to the immigration officer that my friend had no intention to stay here more than is necessary for his business.

More than the questioning, it is really the attitude.` Furthermore if such questioning is necessary it should be made at the point of issuing the visa and not at the point of border control where everyone is tired and eager to get on with it.

The perception we are projecting on Libyan visitors is that now we don`t need them and that they have become lesser mortals since we joined the EU. Now certainly this has nothing to do with reality and certainly it is not the official policy of government seeing that the new Minister for Foreign Affairs found an early opportunity to visit Libya as a priority following his appointment.

But we should not allow immigration officers with racist tendencies to project images totally detached from official policy. Especially at a time when all western countries are falling over themselves to get a slice of the Libyan business now that the country is finding its rightful place in the community of nations and its economy is destined to high growth based on further oil exploration at time of record high nominal oil prices.

The perception problem is not however restricted to some officer in a glass cubicle at the airport. It is right at the top round the cabinet table.

Take this week`s favourite flavour, the eco tax or eco contribution or whatever other name you care to assign it. The last thing our economy needs at the moment is another form of taxation which feeds business costs and inflation. Introducing it now gives the perception that it is a simple fiscal measure meant to give another turn to the tax-and-spend fiscal screw.

If government wants to prove that this is an eco measure and not a fiscal measure it must make sure that every contribution levied on an eco-offending product is channelled to give a price subsidy to an alternative eco-friendly product. If an eco-tax is levied on cars then the funds should be channelled into subsidies to commuters that use public transport.

The trophy for sending the wrong perceptions probably goes to the decision to spend Lm9 million to acquire a property for the nation`s need in our second capital city, Brussels. Even if we were in dire need to acquire such a property,` which is as far-fetched as one can imagine,` it is absolutely illogic to proceed with the acquisition when at the same time one is selling to the social partners one`s determination to address the public deficit, to cut on even essential expenditure and to adopt new fiscal measures which continue to erode the purchasing power of the general population.

Let`s compare. When I was chairman of Mid-Med Bank I piloted the bank`s plan to acquire the property next door to its Qormi Operations Centre than known as Centru Ruzar Briffa. It was an exercise that involved the whole executive corpse of the Bank and favoured by the majority of the directors on the Board. I could have well proceeded with the acquisition once the Board approved and the executives were in agreement.` But because of my previous association with the vendor it could have sent the wrong perceptions causing reputation risk for the Bank. So I decided to postpone conclusion of the deal approved by the Board until the whole deal gets examined by the Auditor General, given that the Bank was still then in public sector ownership.

As it happened the whole project was abandoned because the Auditor General, whilst confirming the fair value of the deal confirmed by three independent architects, questioned the wisdom of the continuing to develop the Qormi site which in his opinion lacked the necessary prestige.` Now frankly the Auditor General over-stepped his brief in trying to question the strategic policies of the Bank rather then vouch for the value of the chosen policy. But in deference to the problem of perception the project was aborted, and the Bank, in its new format is still running operations in three different places incurring much higher costs than if it were all under one roof as Bank of Valletta will soon be at Fleur-de-Lys.

What perception management has been implemented for the decision to buy the Lm9 million Brussels property? Anybody gave the public any account of the decision making process for such a huge transaction? Do we know who were the consultants and how were they chosen? Do we know what alternatives existed? Was the Auditor General brought in before closing the deal? All we know is that government decided to vote Lm9 million at a time it is asking us for sacrifices and social pacts, and there is not much we should demand to know more about it.

On top of the consistency of bad reality we are now being treated with a new dose hopeless perception management leading me to believe that government is fast losing control of the situation as we continue to sink in economic stagnation.

Friday, 23 July 2004

Wrong Direction

The Malta Independent
23rd July 2004
It does not take much depth of economic knowledge to realise that government’s strategy to get the public deficit under control by 2007 is pointing in the wrong direction.

There are three methods how the deficit could be addressed: raising revenue, cutting expenditure and growing the economy. In reality it has to be a mixture of all three measures, a tri-pod of solutions.

Raising revenue basically means more tax revenue flows either through new measures or better enforcement of existing ones. This has been pushed hard these last 9 years since the introduction of VAT but on its own could not deliver the bacon. Expenditure growth more than neutralised the increased revenue flows and economic growth was nothing spectacular.

Expenditure controls need to be enforced but this takes time, it is often painful and scares politicians to death. Expenditure controls are unavoidably inversely proportional to electoral popularity.

Consequently any plan to bring public deficit under control has to rely mostly on economic growth so that the deficit gets addressed more in relative terms rather than in absolute terms, meaning that the growth of the economy is faster than the growth of government expenditure.

Government seems to have given up on economic growth for the Convergence Programme period till 2007 and is planning real growth below the EU –15 average. This contrasts with the plans of other new EU members that are planning much more aggressive growth paths to speed up their catching up exercise to EU average GDP. It looks as if government itself is not convinced that it can succeed to stimulate new private investment, both foreign and domestic, and given its own inability to continue pump-priming the economy through capital spending, has accepted anaemic growth as an unavoidable reality.

This need not, should not, indeed, must not be the case. Addressing the deficit without substantial economic growth will be just too painful. Government will unavoidably lose the power to stay on course as the electoral challenge approaches. Whilst we know where we have to go we seem to have no idea how to get there and are consequently setting out in the wrong direction.

Economic growth can be stimulated provided we make our economy globally competitive. We are not doing so because our rate of exchange has been allowed to overvalue itself in real terms whilst running rates of inflation higher than our trading partners. The Conversion Programme submitted to the EU admits “during 2003, the real effective rate index gained 1.1percent…. as year on year inflation in Malta picked up and exceeded inflation abroad”.

It fails to state however that this has been going on quite consistently since 1995 and according to Central Bank’s own estimate our real rate of exchange is more than 10% less competitive than it was in 1995 – the last year when we were not suffering structural disequilibria in government finances.

How is it being proposed to address this inflation differential? Don’t laugh, but what is being proposed is actually meant to increase the inflation differential to the further detriment of our international competitiveness. It is as if a doctor diagnosed smoking induced lung problems and instead of counselling the patient to quit smoking, actually exhorts him to smoke more!

If as the report admits we lost real rate of exchange competitiveness in 2003 even though “the inflation rate for December 2003, based on a twelve month moving average stood at relatively low 1.3%” how is it prescribed as a cure that “during 2004, a one-off increase in Retail Price Index is expected, with annual inflation rising to 3.4%….mainly the result of increase in the VAT rate… and introduction of reduced Vat rate at 5% on printed matter and medical equipment”.

The supposed one-off VAT measure is now being loaded with further one-off eco-tax measures which will further raise the inflation differential between us and our trading partners to the further detriment of our international competitiveness if we continue to operate the current rate of exchange regime. Rising inflation in the context of economic stagnation delivers the worst of both worlds. While other competitors and trading partners enjoy strong growth and low inflation we are setting out on exactly the opposite route.

Unless we come to our senses before it is too late we are set to compromise our international competitiveness in a way that will scare rather than attract investment, with the consequence of little or no real growth, making the addressing of the public finance deficit unbearably painful and politically unfeasible. 

Friday, 16 July 2004

The Devil is in the Detail

The Malta Independent
16th July 20004


The Convergence Programme, that Malta presented to the EU explaining how the budget deficit will be brought below the 3% criterion for accession to the Euro monetary union, makes interesting reading.

It is clearly written by economists for economists with little or no involvement of the real people who make the economy grow. It was readily accepted by the politicians as it meets, superficially, the need to reign in the deficit from 9.7% of the GDP in 2003 (6.5% if the special one-off Malta Shipyards transaction is excluded) down to 5.2 in 2004, to 3.7% in 2005 to 2.3% in 2006 and to 1.7% in 2007.` What a feat! We would have 1.3% of GDP room for manoeuvring and still be within the Maastricht criteria!

The question how is it possible that what we have not done in eight years since the structural deficit was discovered in 1996, and in spite of government success in stimulating its tax revenue flows during this period, is now going to be achieved in three odd years without further tax measures except for an eco tax?

The first check I made is whether this planned improvement is coming from above normal economic growth. But the assumptions in-built in the study re GDP growth in fact under-state our growth potential. The Programme plans average annual real growth of 1.75% whereas EU `15 is forecasting a real average growth of 2.3% p.a. and the US a real average annual growth of 4.8%. If anything we should aim to do better in order to maximise our true potential and speed up our catching up with EU average GDP.

I looked at the revenue side to see if there are plans for further tax measures beyond what has been divulged. But hereagain government revenue is planned to keep normal growth in line with the rate of growth of the whole economy.

The real change catalyst to deliver the objective to bring government budget deficit must, by elimination, lie in reigning in government expenditure. Hurrah! This is exactly what most economists have been preaching. Stop the tax-and-spend habits and attack the problem from the expenditure side as this is what has eroded the increased tax flows which government has enjoyed these last 9 years since VAT was introduced in 1995.

And there it is. Government expenditure is planned to drop from 52.4% of the GDP in 2003 to 44.4% of the GDP in 2007. A drop of 8% of the GDP in 2007 money is equivalent to Lm161 million which on its own accounts for 95% of the drop in the relative size of the deficit from 9.7% to 1.4%.

I searched in the report to find how such miraculous efficiency gain in government expenditure is going to be achieved. Under the relative explanations in para 3.1.2 of the Report I found that recurrent expenditure is expected to drop by 3% of the GDP between 2004 and 2007.` This means that if the special Shipyard item in the 2003 figures accounts for a further 3.2% one expects savings in Capital expenditure of around 2% of GDP to achieve the planned savings in government expenditure.

Now one can accept that government may achieve the savings in capital expenditure by restraining from undertaking new projects once those in hand are completed. The impact of this investment contraction on economic growth can only be cushioned if compensating investment is made by the private sector through Private Public Partnerships or on its own.

But the real challenging bit is the planned reduction in recurrent expenditure. This plan is contradicted by the report narration that states that government employment is to remain constant at 2003 levels (no reductions ` not even through natural wastage) whilst social expenditure is to practically stay constant in absolute terms between now and 2007. How this will be achieved depends on outcome of negotiations with MCESD regarding the costs of Pensions and the cost of Health Services.

The practicality of putting pressure on social expenditure to deliver the efficiency gains in public expenditure is to my mind very doubtful, apart from its very unsocial aspects. But I cannot fail to compare the strategy adopted by the Maltese Government with that of the British Government as expounded by Chancellor Gordon Brown this week as he delivered the UK Budgetary framework for the next 4years.

Now the vibrant state of the British economy is a complete antithesis to ours. It has consistent growth, low inflation, quasi full employment and the monetary authorities are having to raise interest rates to cool it down to protect its sustainability. Its level of deficit and debt is very low and well under control. Chancellor Brown announced substantial social expenditure increase in Health and Education ( apart from similar increases in Defence and Law and Order spending) and to finance it without creating deficit problems is suggesting the rundown of 30% of public sector jobs to deliver the necessary efficiency in public spending.

We seem to be doing the opposite. We are protecting central government employment and its exorbitant cost and inefficiencies (where is the value of e-government if it cannot be translated into operational cost reductions in manpower terms?) and putting the pressure on social expenditure, on those who can least protect themselves!

When the detail of the planned expenditure economies is revealed we may well find that the devil is in the detail that the economist`s report approved by the EU has so conveniently avoided.

Sunday, 11 July 2004

Our Right to Know - Government`s Duty to Inform

The Malta Independent on Sunday
11th July 2004
The resignation of a senior Minister cannot be considered as a simple internal party affair. It is a matter of national concern. The government has a duty to inform and the electorate, in a truly working democracy, has a right to know what led to the resignation when it is clear that is not a case of a simple resignation ‘for personal reasons’.

The secrecy with which the resignation of former minister John Dalli is being shrouded is excessive and obsessive. Former US Secretary of State William Rogers once advised that “the public should view excessive secrecy among government officials as parents view sudden quiet where youngsters are playing. It is a sign of trouble”.

Woodrow Wilson has said that “it is a fair presumption that secrecy means impropriety”. In this contribution I have no wish to scandalmonger. Rather I wish to spray anti-scandal disinfectant called light and transparency.

Anybody who believes that John Dalli resigned because of the allegations of impropriety related to the Iranian shipping contract or the air-tickets saga should probably restart at kinder-garden. Mr Dalli has weathered much more serious allegations in the past. Compared to the allegations made against him in the case of the Daewoo scandal and the fire-sale of Mid-Med Bank, the recent revelations were child’s play.

These far more serious allegations not only did not even give rise to the slightest consideration of resignation, but the whole government just disregarded all claims for independent investigations. And I have no doubt in my mind that both cases of Daewoo and the sale of Mid-Med Bank, merited, still merit, full independent investigations to establish once and for all why things happened the way they happened and who, if anybody, has to be held accountable for the losses that the nation incurred in both cases, running into large millions of liri, which make the IRISL and the ticketing issue look like chicken stuff.

This time things have been made to work differently. And I had predicted this in my article in this paper of 4 weeks ago, before the results of the EP elections were known, when I had written:

“But on the basis of their campaign the PN certainly do not deserve the third seat. They had one of their worst campaigns ever. It was half-hearted, relying solely on the media without the usual capillarity at grass roots level to stimulate enthusiasm and get out the vote.

But even their media management lacked the near perfection typical of when EFA was in charge and RCC used to manage the media. The strange things that happened are too evident to go unnoticed. Was it co-incidental that the Malta Employers Association presented a report to the MCESD proposing ‘rundown’ of 12000 heads from central government employment? Or was it orchestrated by factions more interested in foisting a bad show on the new PM on his first electoral outing rather in seeing their Party do well? ……. Was it co-incidental that in the week prior to the elections a senior minister threatened in parliament to close down the shipyards if they can’t be run in black? Was it co-incidental that in the two weeks before the election the Times showed untypical interest in exposing the alleged scandal involving the Foreign Affairs Ministers using his weighty influence with foreign government organisations to favour family business interests?

My conclusion is the calm that EFA used to impose whilst the Party focuses on the electoral objective was this time completely missing and factions were more interested in embarrassing the new PM to weaken his still fragile hold on the Party. The PM replied with the clear roman dictum ‘mors tua vita mea’.

This cannot be a good omen either for the fortunes of the PN in these elections as well as for what to expect thereafter.”

 I did not have to wait too long to prove my ‘mors tua vita mea’ contention. And if this is the most logical way to interpret recent events I cannot help feeling that we are being treated like headless chickens in being expected to accept the whole issue closed by the simple resignation of Mr Dalli because he felt attacked by a PBS journalist.

If the Prime Minister has found nothing wrong with the Iran Shipping Contract handling and has referred for investigation by the Auditor General the air tickets issue, why has he accepted so pre-maturely Mr Dalli’s resignation? There are so many ‘non-sequiturs’ that I give more credence to street talk that John Dalli had to resign or face being fired, rather than to the official published correspondence which gives a thin sugar coating surface to a bubbly underlying which is shrouded in secrecy.

If Mr Dalli’s resignation was worth accepting why not tell us plainly why. And if so, why not look into the more serious claims of malfeasance which were never properly investigated? If on the other hand Mr Dalli’s resignation was accepted, indeed engineered and forced as Mr Dalli’s official resignation communication clearly implied, why is this so? Is the national interest of preserving some of the best elements in the Cabinet being compromised for the political convenience of the Prime Minister who could not work comfortably with his direct challenger for the post? How ironic for this to happen in the same days that Senator John Kerry, the Democratic candidate for the White House contest next November, has chosen as his running mate his main contender Senator John Edwards. Where has our maturity gone?

In fairness to Mr Dalli one must register his achievements in gaining strides of improvements in tax collection efficiency. The Ministry of Finance, where Min Dalli spent most of his 10 years of ministerial experience, has direct responsibility for the revenue side of the budget and I dare say that his performance in this respect was stellar. The failings to control the expenditure side of the budget obviously has to be shouldered by Mr Dalli but this is a shared responsibility with the whole cabinet. Without strict Cabinet support there is pretty little a Minister of Finance can do to rein in the budget deficit.

When finally we seem to be approaching Cabinet collegial sensitivity to the need to rein in the deficit, is it in the national interest to lose someone with the skills of Mr Dalli in the Cabinet?

Labour’s experience in handling Ministerial resignations in the 1996-98 government was a much more transparent event. Lino Spiteri disagreement on two major government policies were publicised giving his resignation a seal of honour rather than any suspicion of impropriety. Charles Mangion resignation for quite a trivial infringement was also fully explained giving Dr Mangion the opportunity to exit with his head high and to return worth full honours.

Unless there is more than meets the eye, it is in the national interest for the Dalli resignation saga to be properly explained. If he is guilty of malfeasance we have a right to know and government has an obligation to inform. If he is not guilty, and no one has yet proved he is, his resignation should be properly explained giving Mr Dalli the opportunity to exit with honour whilst keeping open the prospect to return.

Failing this I am at liberty to draw my own conclusions. And these are that no matter how much the whole corpse of the PN was moved towards the centre-stage of Maltese politics, without which it cannot achieve political power, its top echelons are still the preserve of the old professions with restricted access to strata of society considered too lay in the eyes of the Christian influence within the party. People from the new professions with origins in the lay strata of society will inevitably find the road to the top of the PN blocked, no matter their skills and competences. And those who obstinate and force their way through, will be ditched out!

Friday, 9 July 2004

Offshoring Over Our Head

The Malta Independent
9th July 2004
Research just published by Auditors Deloitte Touche Tohmatsu shows that the year 2003 registered 46% increase in the number of financial institutions that undertook offshoring operations.

Let`s get the definitions right. This modern offshoring has nothing to do with the conventional offshore concept of establishing offices or booking operations in tax haven centres to transfer profits permitting reduction of tax incidence on profits from international operations.

Modern offshoring is the process of moving some of the work to another country with cheaper operational costs to gain from the efficiency of international division of labour whilst keeping ownership control over the offshore subsidiary to protect quality and consistency.` This modern offshoring is the maturity of the process of outsourcing which generally started in the eighties inside the same country jurisdiction by contracting out some operations to specialised third parties.

According to Deloitte`s research, 80% of the world largest financial institutions, those with market capitalisation in excess of US$ 10 billion, are already involved in modern offshoring and no amount of protests or protectionism will stop the force of this wave seeking to gain cost advantage over competitors or at least not to be outdone by competitors who offshore.

It is expected that by 2010 the value of transactions offshored will increase from US$ 215 billion to US$ 415 billion and that one third of this value will be recouped in saved costs making the investment easily self financing and hugely profitable.

What the manufacturing industry experienced following `the oil shock of the seventies is now being experienced by the financial services industry.` Levi`s had all manufacturing in the US in 1970.` Now it has none.` The last four US factories were closed in 2003. However the scale of shift will be less pronounced for the financial sector as the need for greater customer contact demands the maintenance of a large base in close proximity to the end client.

The processes that are mostly being offshored range from IT, to call centres and include also customer support, business transaction processing, customer transaction processing, accounting, bill payments, fund administration as well as human resources functions.` These functions would necessitate minimal contact with clients and are therefore easier to offshore without diminishing the quality of service to clients.

India is emerging as the clear winner in the offshoring race. 80% of all financial services offshoring takes place in India. The Philippines is also emerging as an attractive offshoring centre. But for smaller countries who cannot justify the volume of offshoring to Asia, there is also a process of offshoring to new accession EU countries in Eastern Europe as well as to Rumania and Bulgaria who are expected to join the EU later this decade.

Why am I saying all this? Because Malta seems to be leaving no impact whatsoever in this process of globalised division of labour.

Whilst we cannot compete with India or Philippines on cost, we should be able to compete on service quality, especially for those medium sized companies whose volume does not justify the risk of establishment in Asia.

We should have long had permanent representation in Ireland and Luxembourg scouting the financial institutions there, encouraging them to offshore their processes to Malta where we speak their language, carry their own culture, operate in their own time-zone and can perform their back office operations at a much cheaper cost.

We should be investing in a modern finance transaction processing centre making it easy for such companies to initially outsource` with the option to purchase the outsource firm to gain control over operations when they are confident of the tangible benefits of shifting to Malta.

Malta Enterprise cannot hope to attract the manufacturing concerns as the MDC used to do in the seventies and early eighties. The fashion these days is outsourcing and offshoring and we have to offer what investors want.

Can one imagine how environmentally gainful it would be if we could replace the Marsa power station site with a financial district where we offer physical facilities for European financial institutions to offshore their operations to Malta?

Opportunities don`t last forever. Once an investment decision is taken normally companies will have to live with that decision even if a better centre comes on stream offering more competitive terms. Each day we sleep over the matter, each day we are losing opportunities for growth and employment.

Friday, 2 July 2004

Cosmetics will get Us Nowhere

The Malta Independent
2nd July 2004


One can understand that government is desperate for any scrap of statistic that might throw any evidence, no matter how patchy, that the economy is getting better, that its measures are working and that the priority issue of getting public finance under control with the deficit on a structural downward trend, is showing progress.

So when last Friday the National Statistics Office released the public finance figures for May 2004 the government was quick to blow its trumpet when the structural deficit showed a reduction of Lm19 million from the same position last year i.e. a deficit of Lm86 million for the 5 months to May 2004 as against a deficit of Lm 105 million for the five months to May 2003.

A reduction of 18% is not to be scoffed at. To be sure one should expect a substantial reduction considering that VAT increased from 15% last year to 18% this year.` In fact revenue from VAT increased from Lm48 million to Lm58 million during the 5 months` in spite of loss of VAT cash flow in May under the new importation arrangements for items sourced from the internal EU market.

But for believers like me in real rather than cosmetic change, deeper analysis of the published figures clearly shows that there is no room for optimism about public finance being really on the mend.

The improvement of Lm 19 million over the corresponding position of a year ago is totally attributable to two items. Firstly the government registered `a net increase of Lm7.8 million under Licences Taxes and Fines mostly by way of signing-on fees received upon privatising the operations of the lotteries earlier this year`. It`s a moot point to argue whether or not it is technically correct to include this one-off item as regular recurrent revenue. Annual recurrent revenue certainly it is not.

If the Lotto and Lotteries were privatised in the form of sale of shares of a government owned commercial company then such revenue would not have been considered as ordinary and recurrent but would have been categorised as an exceptional financing item. The fact that the Lotto/Lotteries was still a government department which could not be privatised through a sale of shares but only through outsourcing the operation under a long-term license agreement, does not change the fact that such revenues are anything but ordinary and recurrent.

So out of the Lm19million improvement, Lm 7.8 million is due to exceptional privatisation revenues that technically, though substantially incorrectly, have been taken as ordinary and recurrent. That leaves a real improvement of Lm11.2 million.

This is all explained by a drop of Lm12.1 million in capital expenditure from Lm54 million last year to Lm41.9 million this year.` In the absence of any evidence that any capital project has been cancelled or postponed this drop in capital expenditure has all the ingredients of a postponement of works and/or payments rather than a real saving that can be relied upon to recur each year.

So official statistics, correctly interpreted, offer no room for optimism that the public deficit is in fact being addressed. Recurrent expenditure increased by Lm11.5 million whilst interest payments on public debt increased by Lm3.5 million.` Jointly such increase in recurrent expenditure fully absorbed the real increase in recurrent revenue of Lm14 million (net of the Lotto license fees) being increased take from VAT and Income Tax.`

The tax and spend worm is still there eroding the energy of the productive sector due to government`s inability to address the weakness in its finances `by tackling the real source of the problem i.e. recurrent expenditure.

I maintain that the real level of structural deficit, judging by the performance of the first 5 months of 2004, is still hovering at the same levels of 2003, excluding the exceptional Shipyards adjustments in the final 2003 figures, and we are still way way above the deficit of Lm68 million registered in the first five months of 2002.

Problems can only be addressed by real solutions based on a clear plan of action. This has not happened. Claiming success where none is evident reinforces my suspicion that government is continuing in its vain pursuit of attempting to solve the problem by hope and prayer rather than by applying carefully thought out and widely supported solutions.

Indulging in hope and prayer is a praiseworthy if considered as a supporting exercise for the real plan of action, but certainly not as a replacement thereof. Cosmetics will get us nowhere.