Pull the Other One

The Malta Independent - Friday Wisdom

So the Freeport operation has finally been privatised. The immoveable remains the property of the State as do all liabilities, including a foreign bond for $250 million taken for a 30-year duration to part finance the investment in Terminal No. 2.

To impress, government sources claimed that through the privatisation deal the government would net $421 million. Not too bad, you might think, even though we have invested much more than that since the project started being developed originally as Marsaxlokk harbour way back in the early 1980s. But since after 30 years the property will revert to the government free and encumbered, then we could afford to get in less what than we originally invested.

But hold your breath. The impressive $421 million is not being received in cash, just as we paid out for the investment in Marsaxlokk/Freeport. We are told that the $421 million will be paid over the 30-year lease period and this includes the lease of the terminal, the sale of equipment and increase in duty from sale of fuel, as well as $5 million for the provision of security for the first five years.

If this is meant to pull our leg, then they may just as well pull the other one, as such deals give problems standing on two feet, let alone on one. So if all goes according to plan, over the next 30 years we will net $421 million from this deal, less the cost of providing the security services.

However, over the next 30 years we have to pay interest on the foreign loan of $18.125 million each year. Multiply that by 30 and you will find out that by way of interest alone on part of the investment in just Terminal 2 of the project we will be paying $544 million. And to make sure you understand it correctly, this is just the interest. The capital of $250 million would have to be repaid in addition.

So over the next 30 years the privatisation could provide us with a cumulative cash flow deficiency of at least $377 million. Rather than just the cash inflow part of the picture, why do our political leaders find it so difficult to give us the full picture and why is the media so incapable of extracting the full story out of secretive politicians?

How many times have we heard that our Freeport is a success story? Someone even once suggested erecting a monument to the former chairman of the Freeport to acknowledge his efforts to get the project up and running. Remember the public open days and free giveaways?

Ultimately time is the best judge of success or otherwise. Here we are, 10 years after the Freeport went operational, and we have the result. Firstly, the Freeport has never earned enough money even to pay its interest expenses and each year the government had to advance, among other things, $18.125 million to ensure that the Freeport does not default on the interest payment on its sovereign guaranteed international bond.

Secondly, the Freeport has not generated enough cash flow from operations to replace the equipment which is now well depreciated and practically past its economic life so much so that we needed to pass on the operation to private investors to make the necessary replacement and additional investment.

Where, may I ask, is the success story of the Freeport? If it were a success story, why is it being privatised on such unfavourable terms?

The Maltese nation has invested too many, far too many, millions in this project to see it privatised in this way without being given a full account of what has brought us to the state that we have to sing victory for such a poor deal.

Questions beg answers, answers that unfortunately are hard to come by. Why has the Freeport been transferred to a shipping line rather than a port operator? What confidence can we have that other shipping lines would do business with a port managed directly or indirectly by a competing shipping line which will no doubt have a first claim on resources? What financial assurance do we have on the financial integrity and stability of the operator to whom we are entrusting in care one of our most expensive “treasures”?

The private shipping line that won the privatisation bid for running the Freeport operation for the next 30 years was also the Freeport’s main client.

The fact that the Freeport did not achieve commercial viability in spite of being used to full capacity could mean that it was charging uneconomic rates for the main benefit of this operator. What assurance can we be offered that the private investor is not, in fact, beating all logic by having the cake even after it has already eaten it?

Because, if this private shipping operator has been eating our cake by being charged uneconomic rates which brought the Freeport to the point of being a huge financial cash flow burden on the State, it is now having the cake by being given full operational control over the Freeport for the next 30 years on very favourable terms.

Let me relate a first hand experience I had about the Freeport in 1998. When the Port Authority of Singapore conducted a deep due diligence exercise about the Freeport to see in what way they could be interested in its operations, they politely sent back a short letter saying they did not have any interest.

When I insisted on being given a reason for such a curt no thank you reply, the message came back from unofficial channels that at the rates the Freeport facilities were contracted out, no operator could make a fair commercial return. It seems that Singapore knew very well what they were talking about.

I can understand that mistakes are made in good faith and things do not always turn out the way they are intended. But singing glory in the face of such a financial disaster make me feel worse than having both my legs pulled.