False Competition and Cooking the Books

The Malta Independent of Sunday

There is no place like Malta. It is the only place on earth where competition works to disadvantage the consumer rather than to provide more value for money.

The first lesson in economics is that competition is healthy. It brings efficiency in allocation of resources and consequently packs value in the final product or service as suppliers compete to win consumers’ custom.

Where competition is absent the consumer will have to take whatever is on offer at the price the monopolist decides. Having total control over the market the monopolist supplier has no commercial pressure either to improve his product or to price it competitively. Profit margins are huge and suppliers laugh all the way to the bank.

Many remember the times in the early 1980s when colour TVs were exclusively distributed by a private monopoly that was literally given a legal right to extort money from consumers’ pockets. The introduction of competition there worked wonders as it was true competition. The consumer was given a choice to buy the same or similar products from a multitude of suppliers who started falling over themselves to improve efficiency in acquisition, distribution, sales, credit terms and after sales service to ensure that they could sell their stock at a profitable price even though margins were much tighter. Often what was lost in the margin was gained in volume as the low prices enticed more consumers to buy the second, third or fourth TV for their home, something which was beyond their reach under the previous monopoly supply rules.

Moving closer to our times, many will remember the high mobile rates we used to pay when Vodafone had all the market to itself. The arrival of the second supplier offering a competitive product lowered mobile rates considerably and a sudden explosion in the use of mobile telephony, which left both the old and the new supplier sufficiently profitable through deeper market penetration. Everybody was happy, but most of all the consumer who benefited from true competition.

So the second economics lesson one learns quite early in his O level studies is that competition will only benefit the consumer if it is true and genuine. If competition is not true, if cartels are created, or if artificial barriers are set up to block the working of true competition, the benefits never cascade down to the consumer. Quite often the consumer is rendered worse-off under the new pseudo competitive regime than under the former plain vanilla monopoly.

Imagine what would have happened if rather than giving Go Mobile a licence to compete with Vodafone across the whole market spectrum, competition was introduced by giving Vodafone the right to install their mobile network in one half of Malta with Go Mobile installing their network in the other half.

Such false competition, rather than working to the advantage of the consumer, would have worked against him/her as mobile users would have been constrained to buy both services in order to have access to the whole country.

This example seems so unreal; it is laughable. No government or regulator in their right senses would allow competition to work so perversely against the consumer.

But this is exactly what seems to be happening with the false competition coming on stream for paid TV services. Until recently we had one monopoly supplier Melita Cable. The service had all the hallmarks of a supplier not subject to commercial competitive pressures. Because of the high cost of their services, many consumers just booked the reception package, which was the cheapest and provides only free-to-air stations without the reception problems of home antenna systems.

Consumers looked forward to the day when the opening up of the market demanded by EU membership rules and the advancement of Digital Terrestrial technology could buy them a better service at a cheaper price. But because our Regulators forgot that they are there to protect the consumers rather than the suppliers, the false competition brought in for paid TV services will add to the consumers’ pain rather than remove it.

Up to the last football season I could watch most English and Italian leagues matches through Melita, the then monopoly supplier. For this new football season, if I want to watch the English league fixtures I have to have Melita Cable and to watch the Italian league fixture I have to have the services of the new DT TV supplier Multiplus.

Rather then compel both suppliers to share the rights and then compete for patronage through price and service quality, the regulator allowed the operators to split the rights forcing football fanatics to buy and pay for both services. This is false competition that extorts money from consumers’ pockets rather than deliver enhanced value. If this is competition give me a monopoly anytime.

But the syndrome of let’s pretend is all pervading in our economy. Let’s pretend we have competition in pay TV services when in reality the measures taken work against not in favour of the consumers.

Now we seem about to play a let’s pretend game with our national debt by creating the illusion that it is being reduced when in reality everything remains the same. The let’s pretend agent there is called securitisation – a modern high tech financial term for the old fashioned “cooking the books”.

Securitisation is normally used in the financial world when banks want to get assets off their books in order to respect capital constraints without hindering growth. So it is quite normal for financial institutions with large consumer credit assets on their books (credit card dues, consumer loans, mortgages) to package these products through securitisation and float them on the market where savers, often institutional like insurance companies and pension funds, buy these products directly thus reversing the intermediation role initially performed by the banks in coming between savers and borrowers.

The government is now proposing to use the securitisation method to sell its property assets (retaining the right of buy back) and income streams to raise lump sums in order to reduce the public debt to within euro rules.

If this let’s pretend scheme is hard to believe, please read pages 49, 58 and 59 of the 2006-2010 Pre-Budget Document that government took so much credit and that I liked so much without mentioning my clearly professed doubt on government’s own willingness to put into practice. I bet you this. Of all the proposals in the said document, the securitisation will be one of the few that will actually come into being, in full honour to the well ingrained let’s pretend syndrome.