Sunday, 28 November 2004

Budget 2005 - Nibbling at Problems

The Malta Independent on Sunday 

If decisions like removal of leave days in lieu for public holidays falling on weekends are considered as bold, then we have no idea of the magnitude of the economic problem we have and what`s really necessary to address them.

If passing on to the consumer half the additional energy import cost due to the rise in the international price of oil is considered harsh, then we are only kidding ourselves and are still thinking that someone owes us a living.

Government announced in the budget speech that Enemalta will be absorbing Lm8.3 million of the increased cost of Lm16 million whereas Lm7.7 million are being passed on as a surcharge to the consumer.` Who is Enemalta` It is you and I. It is the organisation that in the `bad old` Labour days used to contribute substantial profits to the Exchequer to finance part of the national social costs.` Enemalta`s latest published financial statements show a company burdened with heavy debts and hardly in a position to make ends meet let alone absorb Lm8.3 million of imported cost. Give us explanations please and respect our intelligence.

The Budget pretends to be addressing the fiscal deficit problem. I am a bit cynical of any multi year programme purporting to be addressing the fiscal deficit as inevitably it results that` politicians` will-power to stay the course is very short and practically disappears the moment the next election appears within a two year horizon. If you wish any proof of this just read the budget speech for 1999 and the medium term financial strategy presented therewith explaining in detailed figures how gradually by 2004 we were due to achieve very healthy economic growth and strong public finance position.

Yet here we are five years later being promised another medium term programme explaining that what was not done between 1999 and 2004 will now be done between 2005 and 2007. Between 1999 and 2004` we have had to` finance an accumulation of annual deficits amounting to nothing less than Lm723 million which has practically doubled our national debt in the short space of five years and frittered away privatisation revenues of some Lm120 million.

Should we have any confidence that this time it will be different` Should we believe the chain smoker that he will stop smoking tomorrow. Hardly, and judging by the actual performance of 2004, there is little to suggest that the new hands on the tiller is leaving any positive effect.

The deficit for 2003 excluding the one-off Drydocks financing operations was Lm117 million using the new EU concept of extended government. The projected deficit for the current year 2004 is estimated at Lm99 million. An improvement of Lm18 million is an achievement, you might think.` However I argue that this figure needs to be corrected to take into account Lm 7 million exceptional income in 2004 from the privatisation through licence of public lotto, and by a further Lm 3 million being capital expenditure postponed net of the corresponding inflow of grant revenues.` The real corresponding deficit of 2004 is more like Lm109 million which while Lm 8 million lower than 2003 it is exactly the average deficit we had for the period 2000 - 2002.  

  Considering that fiscal revenue increased by Lm44 million in 2004 over 2003 is it not disappointing that of this only Lm 8 million went to reduce the deficit back to the 2002 level Does it lend credence to the new medium term programme showing that by 2007 the fiscal revenue will increase by Lm96 million and this will be applied to reduce the deficit by Lm78 million. 

  Permit my cynicism but I can only state that I`ll believe when I`ll see it. And with good reason. The government determination to solve the problems by turning on the fiscal screw year in year out will just not deliver. This year the fiscal screw touched cigarettes as usual, mobile phone usage,` and unbelievably foreign travel. Rather than making it easier to travel given that our island characteristics make travelling much more expensive without the need for additional help by fiscal measures, we are being further discouraged to travel. The travel fiscal charge was increased 100% from Lm10 to Lm20.

The budget pretends that the announced measures will help to restore our international competitiveness. The public holidays measures will largely be neutralised by the Lm1.75 legislated wage increase and the increased costs of communications, travel and utilities. By and large we will at best stay were we are which is better than falling further back but not good enough to become competitive again.

I have long been arguing that competitiveness cannot be restored without addressing the exchange rate policy which has hardened our currency by some 10% from its 1995 base.` The Central Bank quarterly for September just published shows on page 43 that as at last July this overvaluation increased to 11% due the continued negative inflation differentials.  

  Quite surprisingly and at grave political risk, the Leader of the Opposition indicated he is willing to lend consensus to government to regain competitiveness by tackling the problems at its rate of exchange source. But unbelievably rather than grab this opportunity to build consensus round the most effective measure to restore competitiveness and economic growth, government played the political game and off-handedly dismissed the suggestion because of its bad effect on inflation.

If we discard effective measures because of their bad effect on inflation then why increase utility bills, why raise public transport fees and why take all the other fiscal measures which inevitably lead to increased consumer prices` Of course the rate of exchange policy has some pain. Long neglected problems do not come with painless solutions. But should the sick patient refuse surgery because he could be in more pain during convalescence` Should the supposed doctor in charge of treating the malady rather than encourage the patient to face surgery with courage and determination with assurance of the long term benefit, scare the patient with the immediate impact convalescence pain of a devaluation. 

And finally we had the Governor of the Central Bank engaging in the technical discussion of the appropriateness of addressing the accumulated increase in the real rate of exchange since 1995. This is a discussion which was started by yours truly and recently extended through the participation of most respected economists like Prof Edward Scicluna and Lino Spiteri.

The Governor`s determined refusal to address the issue is scandalous and illogical. His first argument that there is no guarantee that the 1995 base was a correct benchmark to measure progress with, was feeble and he himself conceded it. There are studies to prove that the positive effect on competitiveness of the devaluation of 1992 was lost by 1994 due to failure to take accompanying measures to prevent the price inflation spiral. There is no argument that the 1995 base was not therefore a low base or` that the present high exchange rate level could be the right one.` I feel that 1995 is a good benchmark as it is the last year of good economic growth without structural fiscal imbalances which developed in and since 1996.

The Governor then defended the current exchange rate level on the basis that this reflects the efficiency gains in our economy since then, implying that these efficiency gains were superior to those of our competitors. He must be joking. If we had such efficiency gains they would show in higher growth and lower inflation. We have had lower growth and higher inflation.

China is registering double digit growth and huge efficiency gains but is still insisting on pegging its exchange rate to the dollar. Tiny economically stagnant Malta is however unperturbed that its rate versus the US dollar in 1995 averaging 2.84 is currently 3.07 being 8% harder.

Nibbling at problems will make the mountain deliver mice.   

Friday, 26 November 2004

Budget with Three Spirits

The Malta Independent 

Like Dicken`s Christmas Carol, this week`s budget, the first under the Gonzi administration, is a brush with three spirits.

Unavoidably we meet spirits from the past. If we have a budget deficit that needs priority above all else it is because in the past the `money no problem` culture has landed us in a situation where further accumulation of debt will prejudice the strength of our financial structure and deny us the presumed benefit of early participation in the Euro monetary system.

It brings memories of the many times that we have been told in the past that problems were being addressed only to find out that they were merely being financed.` It makes me recall the various instances when medium term financial targets were laid out explaining how the deficit problem will be addressed over a medium term period of a few years only to find out that things only got worse. `In particular I recall the budget for 1999, the first after the short Labour government interval, where the then Minister of Finance laid out a medium term plan explaining that by 2004 government finance would be in good shape, a reassurance that was repeated with emphasis in the election campaign of April 2003.

The spirit of budget past makes my heart bleed remembering the money wasted in roads done and redone, in hospital that cost three times more than it should, in useless subsidies given to avoid the inconvenience of serious restructuring which in any case had to be undertaken when things ultimately got of hand, only at much higher cost and deeper pain.

In handing over the encounter to the spirit of budget present, it raises the obvious question as to why should we be in the situation we are in, a situation of high debts and no growth, experiencing the disillusionment of competitor EU countries beating us on growth and in the attraction of investment.` It makes me marvel how a government in office for consecutive 17 years bar 2, could speak about problems without subscribing to their paternity and without accepting the blame for the measures which can no longer be avoided.

The spirit of budget present brings with it a high dosage of rare consensus.` We have consensus on serious structural faults in our economy which need to be addressed. That we have lost our international competitiveness and restoring it means rolling back the standard of living that we have taken for granted. We have no agreement on the measures which need to be taken to make the roll-back burden equitably spread and ultimately the government has to do what it has been elected to do, without expecting the social partners to join in to share the burden of the measures chosen.

The spirit of budget present comes with a spectrum of measures which in their generality rolls back the standard of living of each and every household family. It comes in the form of higher utility bills, higher public transport fees, higher airport fiscal charge and additional working days without additional compensation.

All this is understandable. A sick patient needs sour medicine or painful surgery.` Confetti will just not work. What is less understandable is why in 1998 a legitimately elected government was forced to resign for taking timely measures meant to prevent the need to take the much more painful measures which now have to be taken, following the additional accumulation of several hundred million of debt.

And as these reflections hand us over the spirit of budget future I remain incredulous whether the measures taken are in any way appropriate and/or sufficient in order to achieve the objectives which are undisputedly clear and desirable. We need to address the fiscal deficit in a serious and consistent manner. We need to invest more in education to foster the ability of self-help rather than the continued reliance on government support; and we need to preserve and enhance our environment before we harm it irreparably.

What the spirit of budget future fails to convince me about is that this is not just another half baked attempt which will be irresponsibly abandoned as electoral pressures erode the fiscal sanity which is generally cultivated in the first half of every legislature.

Politicians` record in their staying power on medium term fiscal sanitisation programme is particularly disappointing.` There is no reason to presume that this time it will be different , except may be, and I underline may be, that this time the discipline to join the Euro could overcome the temptation to revert to old habits of` switching priorities again as elections approach

Wednesday, 24 November 2004

A Plea for Liberation

The Malta Independent - Friday Wisdom

If you sit quietly in silence today you can hear the economy’s plea for liberation. It has been strangled for many successive years through multiple burdens of huge public finance deficit, dearth of productive investment, over-valued rate of exchange and rigidity of labour markets.

The result of this strangled economy is showing in low or no growth, loss of international competitiveness, and rising debts (public and private) and falling savings.

This is not to suggest that the economy is about to collapse. For as long as citizens continue to show faith in funding the public deficit by over-subscribing long term public debt issues at cheap interest rates, then the situation can be carried forward for quite some more time.

But doing so will not be solving our underlying economic problems. Financing them does not equate to solving them. It equates to postponing them, making the unavoidable eventual appointment with reality much harder and more painful to resolve.

On this first budget under the administration of Prime Minister Gonzi the economy’s crying plea for liberation sounds louder and more desperate.

Of course the government had to go through the motions of trying to put together a social pact where measures are taken by consensus. But if it had any dose of realism it should have known that a patient is unlikely to prescribe his own medicine. It is unrealistic to expect the unions to subscribe on a nation-wide basis rollback to conditions obtained or given in the past.

As is happening in
Germany, unions have to make such concessions at specific industry level where the choice between such rollback or redundancies is more stark. But expecting them to subscribe to such measures at macro-economic level was like expecting the unions to write their own suicide note.

When the government gained political premium by extending the annual leave from 20 to 25 days and restored public holidays that where removed when the minimum four weeks leave was legislated to all, it did not seek to share its glory with the social partners.

It cannot expect to get away with a policy of ‘glory for keeps, sacrifices to share’ by having the social partners voluntarily subscribe to the rollback of such economically ill-conceived but politically convenient policies.

Prime Minister Gonzi has repeatedly stated that with consensus or without it, he will have to take the decisions to get the economy out of its state of sclerosis and to prepare it for joining the Euro at the earliest possible date, probably in 2008.

He stated, and I quite agree, that we would be disadvantaged if competing member states join the Euro before we do.

Now that we are EU members we cannot negate ourselves the benefit of the external discipline that EU membership, and in particular Euro membership, place on our political leaders to stop shortchanging the long term health of our economy for egoistic political benefits.

Of course Prime Minister Gonzi realises that for some time, hard measures will translate themselves in political unpopularity. But this is not enough reason to avoid doing what the economy is crying out for. And there are also two political reasons for not doing so.

Firstly is that if we administer the medicine now with determination and correct dosage, an economic regeneration could be engineered to show benefits in time for the next general election challenge.

Losing some electoral bouts at local council level would be a relatively small price to pay.

Secondly, Prime Minister Gonzi is blessed by the comfort of wide opinion polls showing that whereas the electorate is prepared to continue giving him a chance to prove that he can deliver, the same cannot be said about the Leader of the Opposition who remains very unpopular even with the electoral segment wishing a change of government at the next time of asking.

Perhaps unconsciously, the Leader of the Opposition through his unpopularity, is serving the national interest by giving government the confidence to apply the sour medicine the economy needs without risking unduly its electoral fortunes.

Tonight is the real test for the Gonzi administration. Unless it hears the pleas of the economy for liberation from its stranglehold there will be no another opportunity.

At next budget the lead-time to the next election will be too short to engineer a timely economic turnaround.

The economy is pleading the government to cut the chains of legislated working conditions and restore these to micro-negotiations at industry level between employers and unions.

It is pleading for government to declare its strong intention, as a major employer of the least productive economic segment, to cap its labour costs and drive efficiency gains to do justice to the employees in private sector whose tax payments are sourced from earnings in jobs competing with the rest of the world.

It is pleading for the rate of exchange over-valuation to be addressed before crisis hits. Tonight we will see whether the economy’s pleas are heard or whether we will have just another medium term plan, promise of more studies and discussions which are nothing if not euphemism for more escapism on the road leading to economic wilderness.

Friday, 19 November 2004

Glory for Keeps, Sacrifices to Share

The Malta Independent - Friday Wisdom

After months of shop talk round the MCESD table, ultimately, when it came down to hammering the specifics of a much wished-for social pact meant to restore the international competitiveness that has long slipped through our fingers, the necessary consensus was found wanting. This is hardly surprising. In fact, I labelled these negotiations in one of my recent writings as the “dialogue of the deaf”.

Global competitiveness can be restored in one of two ways. It can be addressed by means of an instant adjustment to the exchange rate value of the Maltese lira. This is a high-powered tool with immediate positive impact on global competitiveness. Equally it carries the negative impact of reduction in the real value, as against the nominal value which remains intact, of fixed income earnings and financial assets denominated in domestic currency.

For an open economy like ours, where we import most of what we consume and export most of what we produce, such an exchange rate measure is normally avoided on the grounds that the instant benefit to competitiveness is quickly eroded by the price inflation generated by the higher cost of imports.

I would subscribe to such an argument in normal circumstances. But our circumstances are not normal. We are suffering from structural economic fatigue, where growth is at best anaemic. We have structural disequilibrium in public finances. We have a wide consensus that the country is living beyond its means and that this can only be effectively and quickly addressed by a roll-back, hopefully very temporary, in the general standard of living.

We have studies which show that main cause of loss of competitiveness is an artificial real over-valuation of our exchange rate in the region of some 10 per cent, accumulated over the last 10 years by tolerating inflation rates higher than those of our global competitors. And above all we are on the eve of taking a once in a lifetime irreversible decision to fuse our currency into the Euro single currency system, which would remove the potential to use the rate of exchange policy as an economic management tool. Furthermore we have clear case studies showing that countries that joined the Euro at a competitive rate (a rate which is equivalent or below the purchasing parity equilibrium rate) have fared much better than countries that joined the Euro at an over-valued rate. Among the former one can typify
Ireland while the latter are typified by Germany.

I continue to make the case that the possibility of using the rate of exchange as an economic policy tool to immediately restore our global competitiveness should in the current circumstances be seriously considered as a feasible alternative to the much wished-for but quite elusive social pact.

The leader of the opposition gave this policy a nod of approval in parliament this week, even though his suggestion to phase the adjustment over a number of years seems unworkable. A phased approach would extend the period of destabilisation, forcing the Central Bank to substantially increase the premium for domestic interest rates to compensate local savers for the programmed rate of exchange adjustment spread over an extended period. However, implementation method apart, there could be a rare but precious consensus between the government and opposition on the need to use the rate of exchange policy to regain global competitiveness. It should not be discarded too lightly.

Not least, because even in the event of a social pact, but particularly without it, the default alternative could be much more painful. If we fail to regain competitiveness, the market will itself make its own adjustment. Not only we will fail to attract the much needed new productive investment to generate growth at a rate faster than that of our competitors to catch up to their standard of living, but we could lose existing investment as globalisation pressures force employers to seek more competitive locations.

Alternatively, or concurrently, there will be a micro social pact reached at company level, where the unions have to concede the retrenchment of benefits secured in the past in order to deflect employers from the temptation of relocating.

This is happening in
Germany, where the use of exchange rate policy as a tool of economic policy is no longer possible, since the Deustchemark has been fused into the Euro. In Germany, employers like Siemens, Volkswagen and BMW have forced unions to concede extended working hours without additional pay in return for limited no-redundancy guarantees.

Given the local situation, is it any wonder that unions cannot subscribe to a reduction in leave and the forfeiture of overtime entitlements? When the nationalist government of 1987 was elected on the promise of the restoration of seven public holidays formerly abolished by a Labour government and an increase in leave entitlement from 20 to 25 days, the government took unto itself all the ensuing glory and political premium. Now that there are sacrifices to proclaim, is it feasible to expect the unions to subscribe to a government policy of “glory we keep, sacrifices we share”?

In the final analysis, government has the democratic responsibility to govern, to take the measures necessary to address economic ills, with consensus or without it. Trying to restore

competitiveness by rolling back specific measures could be politically unfeasible and should be left to negotiations between employers and unions.

As an employer, government will have ample opportunity to set an example when re-negotiating the collective agreement for public sector employees.

On the other hand, the route to regained global competitiveness through the exchange rate policy route should be not only more politically feasible, but in the current circumstances it spreads the burden of adjustment more equitably.

Its instant impact is an advantage not to be discarded because, frankly speaking, if we go for a gradual medium-term solution, I am not too sure whether we have enough economic oxygen left to see this gradualist approach through.

Sunday, 14 November 2004

Dialogue of the Deaf

The Malta Independent on Sunday 

 About this time every year most financial practitioners assemble for a formal dinner organised by the Institute of Financial Services, Malta Branch, in a opulent setting serving food which expands the waist and narrows blood vessels.

It is timed before the budget for the key guest speaker at such an occasion is the Central Bank`s Governor who normally takes the opportunity to review the performance of the Maltese economy during the year drawing to a close and for the foreseeable future, and to offer some words of wisdom to the Minister of Finance for the proper orientation of the Budget which would be in the final phase of preparation.

Those who, like myself, attend such annual event almost without fail, know that the Governor`s speech is becoming a rather boring repetition and a growing list of complaints that his advices of previous years have been largely ignored; that the problems have if anything compounded themselves through the passage of time and the evident inertia of those responsible for leading us to economic prosperity.

With similar monotony there is unfailingly the replica of the Minister of Finance who broadly acknowledges the problems highlighted by the Governor but positively re-assures that the next budget will be the start of a medium term programme which addresses such problems, with particular reference to the fiscal deficit, within a few years.

Almost unfailingly, events between one annual dinner and another unfold to prove that problems are being avoided rather than addressed and that measures taken are generally cosmetic and do not go to the root of the problem. The end result is that failures and misses are financed by loading another odd hundred million liri to the national debt, reducing the ever diminishing residual debt capacity, complicating the problem for the ensuing year by increasing the debt servicing costs by a few additional million liri, forcing us to borrow more to pay interest on the burgeoning public debt.

Last Thursday`s annual dinner of the Institute of Financial Services was basically more of the same. The noticeable difference was that the replica to the Governor`s critical speech was delivered by the Prime Minister who is directly responsible for the budget portfolio and who in spite of the odds of mathematics insisted that the budget deficit will be addressed in the short time of two years, by 2006, so that that Malta could join the Euro with the first wave of new members in the EMU sometime in 2008.

Old age and experience force people like me to take such assurances with a bucketful of salt and to express matter of factly that we prefer to judge on deeds rather than assertions. As it happened sitting at the same table there was a representative of the `private sector who is privy to the ongoing negotiations within the MCESD regarding the much desired social pact, and I could confirm my suspicions that these negotiations are basically the dialogue of the deaf.` A dialogue where each side states and defends it position expecting the other side to offer concession to bridge the gap by pulling the other side to its own point of view. With the government and Central Bank offering no leadership it appears likely that negotiations within the MCESD will either lead to no agreement or to a botched up deal which in no way makes real and effective contribution to restoring the lost global competitiveness which plagues our economy, forcing us to anaemic growth based on unsustainable consumption whilst the world around is growing fast based on investment and production.

And this dialogue of the deaf is continuing throughout the economy where on the eve of deciding whether to join the Exchange Rate Mechanism of the Euro, no one dares to even suggest at what level such docking into the Euro should take place.

Now every country in the world worries when its rate of exchange is taken by market forces to high levels. Just this week we had Jean Claude Trichet, Governor of the European Central Bank, expressing publicly his concern for the rapid appreciation of the Euro against the US dollar reaching a peak of 1.29 dollars per one euro and calling the rapid adjustment as brutal and undesirable.

How come therefore that our monetary authorities, the government and the parties round the MCESD table do not feel concerned with the fact, confirmed statistically by the Central Bank`s own research (Quarterly Review 2004:2 page 39 Chart 5.4) that the real exchange value of the Maltese Lira is 10% over-valued compared to its 1995 base because of negative differentials between our domestic inflation and that our main trading partners`

The argument is often made that removing this over-valuation through an exchange rate adjustment, whilst restoring competitiveness with instant impact, will not have a lasting effect as the inflation generated by such measures will feed back into the system eroding the gained competitiveness and risking a spiral of exchange rates adjustments and additional inflation feeding on each other.

This argument could have applied in the past but certainly should not be a pervasive show stopper in the current circumstances. By joining the Exchange Rate Mechanism at a chosen central rate we would be making a public declaration that the chosen central rate will be very very close to the eventual fusion rate of the Maltese Lira into the Euro. Further depreciations would be out of question and if necessary other monetary policy instruments would have to be used to defend the chosen rate.

The risk of fusion into the Euro at an over-valued rate cannot be over-estimated and if we have to err we would better err on the side of under rather than over-valuation. Just see the fortunes of Ireland who joined the Euro at a competitive rate and compare them to those of Germany who joined the Euro at an overvalued rate.

The risk of doing nothing is huge. As people`s minds gets focussed on the Euro project, Central Bank own admission of the Maltese Lira real overvaluation will make early conversion into the Euro a one-way bet.` An accumulating avalanche of people who anticipate the Euro fusion will force the Central Bank to defend its reserve position and the chosen peg by raising `interest rates way beyond the level needed to stimulate the tempo of economic growth. The recent experience of Hungary should be an eye-opener.

If this country is to regain global competitiveness any time soon and to catapult itself to fast economic growth rates necessary to catch up with our competitors, the parties around the MCESD table, government and Central Bank included, cannot passively await the Unions and Employers to come up with some elusive magic formula. They need to do their part and offer the necessary leadership and remove taboos and red lines from all economic policies, rate of exchange policy included. By doing so the Governor would gain some credibility for next year`s speech as otherwise we can anticipate as of now that next year he can just as well re-read this year`s speech or that of five year ago.

Friday, 12 November 2004

Ora pro Nobis

The Malta Independent 

  'Mater Dei` ora pro nobis! Mother of God` Pray for us.
We need every bit of prayer to survive the new hospital saga. We had mortally dangerous political spin at its best this week, when the government announced the agreement reached with Skanska for completion of the project.
Not that it does not have some positive factors! At least we now have a fixed completion date and capped construction expenditure, with Skanksa being responsible for delivering the hospital by that date and at that price. Lm145 million for delivery on 1 July 2007. At least that`s what we were told! 
Then somewhat less eloquently we were also informed that this price does not include the medical equipment, furniture, IT and other movables, for which there will have to be provided a separate budget of some Lm40 million. In addition, one has to pile on the cost of finance for a project that has been dragging on for more than 10 years in the development stage, and the cost of re-location from St Luke’s to Mater Dei.

Without including any notional cost for the valuable land that has been dedicated to the project, the Lm200 million mark for the completed project seems well within reach. And that is by no means the end of the story, as any failure in reciprocal obligations could involve further revisions.

Government’s political spinners have been very emphatic in claiming that the new agreement has saved about Lm25 million of costs that would have been incurred if the project were to have been completed without renegotiating the deal with Skanska. This assertion is difficult to prove or disprove and therefore one could easily cheer as much as demure over it. It provides rich fertile ground for political spinners who, rather than help us to analyse the deal objectively on the basis of what in fact we are effectively paying, deflect public attention to hypothetical savings, real or imaginary.

I would rather analyse on the certitudes of what we are actually due to pay rather than on what we are supposedly saving. So in the end we are going to have a modern hospital with 800 beds that at completion stage is coming with a price tag of Lm200 million and counting. Making a rough calculation, that comes at an overall absorption cost of Lm250,000 per hospital bed or Lm200,000 per bed if the specialised hospital equipment is excluded.

Now let’s be generous and take the lower figure of Lm200,000 per bed. And let’s be even more generous and assume that each hospital bed will be in a separate room so it is equivalent to 800 rooms. This is not really the case, as many beds will be in duplex rooms or small wards.

Don’t you think that Lm200,000 per bed/room in a new hospital, excluding the cost of medical equipment and the cost of the land, is quite over the top? I certainly think so and I base myself on a simple calculation.

Excluding the specialised medical equipment, building a hospital should be cheaper than building a five-star de-luxe hotel. Firstly, because hotels don’t come in a configuration of 800 rooms but rather anything between 250 and 450 rooms. There are, consequently, fewer rooms over which to spread the common costs.

Secondly, because a five-star de-luxe hotel has to be finished to a superior standard of luxury than a hospital, especially if it has to carry an international brand name like Hilton, Westin or Intercontinental. Thirdly, because a hotel has to have huge catering and auxiliary facilities to provide banquet and food and beverage business to non-residents, which is not applicable to a hospital.

So you would expect that a five-star de-luxe internationally branded hotel room normally having two beds would cost somewhat more on a total absorption basis, excluding the cost of the land, than the cost of Lm200,000 per bed/room which will be the final bill at our new hospital, excluding the cost of the medical equipment.

Having some experience in the matter, I can categorically confirm that even using the highest specifications and amortising on much smaller number of rooms, all the central public areas, food and beverage, resort and sports facilities which normally go with such a hotel, the total absorption cost per room should never exceed Lm60,000. And this is on the high side and has a good margin for error.

This is by no means something particular to
Malta. If you build a similar hotel in central London, excluding the cost of acquiring the site, you can expect to complete it with a cost equivalent to Lm60,000 per room.

Spinning aside, therefore, can anyone please explain why we should be invited to celebrate for having to pay more than three times the cost of development of a top-class hotel room for a bed in our new hospital when, in fact, we should be paying somewhat less than the cost of such a hotel room?

And can anyone please explain how finishing, and presumably paying for, this project by 2007 squares up with the fiscal objective to balance the budget by that date? And how we are going to finance the much higher operating cost of the new hospital without prejudicing the entitlement to free health services in state hospitals?

Rather than joining government spinners in celebrating hypothetical savings, the independent press should be clamouring for a true value-for-money audit for the entire new hospital project from alpha to omega. It’s a pity the independent press shrugs its duty and like the litany in the holy rosary, submissively professes “ora pro nobis” to the government’s spinners shameful exhortations.

Friday, 5 November 2004

Sledgehammer Politics

The Malta Independent 

The sudden` resignation `for personal reasons` of Bank of Valletta`s Chairman Mr Zahra this week must be connected to the sledgehammer politics of Minister Austin Gatt who brashly criticised the Bank`s breach of customer confidentiality regarding an issue related to Malta Freeport`s involvement in a port operation in Brindisi.

Let me make it clear that any breach of client`s confidentiality on the part of a bank is a very serious matter and should be investigated with diligence. However firing wild accusations before having concrete proof of such breach of confidentiality is equally serious especially if it comes from a senior member of the cabinet who is in the process of selling through privatisation an influential equity stake in the same bank.

Every letter has a sender and a receiver and quite often the action demanded by such letter involves a number of other parties who must necessarily get privy to the document. Breach of confidentiality cannot be lightly pinned upon the receiver without first conducting diligence investigations.

And a time when the nation is expecting to get the best terms from its equity stake in Bank of Valletta, any such investigations should be conducted quietly and covertly to ensure that the gem put up for privatisation sale remains polished in the eyes of potential bidders rather than being purposely tarnished for political self-interest at the nation`s expense.

On the eve of privatisation, when the acquirer would expect to appoint its own chairman and other directors on the board of Bank of Valletta to obtain a strong operational control of the Bank, it is in our interest to ensure that the Bank projects an image of stability, progress and continuity.` `The sudden departure of the Bank`s chairman, even before the December annual general meeting where such orderly transitional changes would normally take place, cannot but place a shadow on Bank`s privatisation process.

Mr Zahra was steady hands at Bank of Valletta and he would have been a re-assurance for potential investors that they can rely on an informative and professional hand-over process without any interruption of continuity.` Probably this can still be done given the strong executive team that Zahra has built and is leaving behind, but the perception cannot be the same with Mr Zahra as without him.

Let it be realised that Bank of Valletta`s privatisation is not going to be a piece of cake. Let`s not make false comparison with the sale of Mid-Med Bank. In case of Bank of Valletta the market price of the shares on the Exchange richly values the Bank`s underlying value. At a price earnings ratio exceeding 20 Bank of Valletta`s share price is well above international sector averages for the financial services institutions especially those whose profits come from retail banking rather than private banking/wealth management and investment banking.

In short, the current market price of Bank of Valletta prices in substantial future profit growth and does not carry the bargain tag that Mid-Med sale had when the Bank was sold at a price earnings ratio of less than 10 and at a price just above its book value.

Furthermore the interest in Bank of Valletta from large international banks could be diluted by the fact that they find it unattractive to control less than 50% of the equity but be practically responsible for the total operation including the need to fund the Bank 100% if it should ever need such funding.` Quite a contrast with the sale of Mid-Med Bank when HSBC acquired 70% and were given positive indicators that the private shareholders would be forced to sell out to obtain full control.

Given these circumstances, Ministers would do well to uphold the national interest of obtaining the best from BOV`s equity sale, rather than involve BOV in the political quagmire to deflect attention from the core issues being discussed in the national arena.

Ministers should be wary of invoking professional secrecy to avoid conducting financial matters related to public institutions with transparency. The public has a right to know whether its purse has been forced to incur a cost of several million liri by an irresponsible involvement in a foreign investment by a publicly owned organisation. Deflection attempts to debate whether this cost was incurred by acquiring worthless shares or by taking over a liability of a bankrupt investee company, changes nothing from the substance that we go hit for Lm4 million which are difficult to recover even in the best of circumstances.

Attempts to lay blame on a Labour government of 1998 for conception of this involvement in the Brindisi project is quite like blaming Hitler`s parents for Hitler`s atrocities. A brilliant conceptual idea can still be hopelessly executed and the faults of the poor executive cannot be lightly shifted on the concept creators.

Sledgehammer politics is the last thing this country needs in the quest for consensual approach to national problems.