Friday, 27 January 2006

It`s Not a Gift at All

27th January 2006

The Malta Independent - Friday Wisdom

I consider it an insult to the intelligence of the Maltese nation that the Prime Minister and the minister responsible for the health sector have this week described the Mater Dei project as a gift to the Maltese nation. Broad grins and photo sessions wearing hard hats do not change the reality that this hospital is an extended financial tragedy, which started in 1992 and lingers on interminably.

A gift is something you receive without payment on special occasions from those who really care about you – and takes the form of a material object of value, which is meant to bring happiness to the receiver.

Mater Dei fits nowhere within this definition. It is certainly not something the Maltese nation is receiving for free from some “sugar daddy”. We are paying for it through our nose, with the original budget exceeded in multiple terms and with the bill still going up and counting – so that when one adds into it the cost of relocation from St Luke’s and the cost of money which has been sunk into the project while it is still in its interminable development stage, we will approach the Lm250 million mark – cost of land excluded.

That someone who really cares for us is giving it to us, is questionable. Certainly, they care about our votes, but if their care was to be measured by decisions like the Mater Dei saga, then one could well conclude that with friends like these, who needs enemies!

Whether the Mater Dei, when and if it is completed and rendered fully operational, would bring us happiness, is still something to be seen. But all indications are that the operational cost of this new hospital would make a severe stress on public finances and could well bring into question – more than it already is – the sustainability of universal free public health services. It could be the straw – or more accurately the monstrous pipe – that breaks the camel’s back.

It is high time that the Auditor General puts together as special team of experts to give independently sourced information about the governance of public spending on this hospital project. Because no matter how you turn around the figures they grossly miss the test of logic and fail every value for money test that one can think of.

If one were to take the publicly admitted total cost figure of Lm145 million – excluding the cost of medical equipment and cost of relocation – and round it up to Lm170 million to include the cost of financing such capital during the development stage, that would mean a cost of Lm212,500 per bed spread over 800 beds.

If one generously assumes that each bed is in a separate room – which is not the case as there are multi-bedded wards – that figure would be three times as much of the cost of completion of a five star standard hotel with 300 plus rooms, excluding the cost of land, but including all equipment necessary for full operation – including the food and beverage departments.

With Lm65,000 cost per hotel room normally housing two beds, one should be able to finish to very high standards a five star hotel project absorbing in the cost of each room the cost of the remaining common parts of the project – kitchens, restaurants, swimming pools, gym, reception etc included.

Now, the comparison makes sense, as ultimately, – medical equipment apart – a hospital is not different from a hotel, as they both offer guest accommodation. If the hospital has some special features which make its development cost more expensive, these are well compensated by the fact that I am taking a per room cost for a hotel and comparing to a per bed cost for the hospital and that the hospital need not be finished off to the luxurious standards of a five-star hotel.

How can one therefore explain this monstrous difference, except through negligence, bad planning and duplication of work that often has to be re-thought and re-done due to continuous changes to the specifications? Which comparable project of its size has taken 15 years to complete, assuming that it will truly be completed and rendered operational within the next 18 months?

From our governments, we do not expect gifts, unless they want to harden the false perception of an all seasons Santa among those who prefer state support, rather than own personal development. From our governments, we expect correct governance coupled with reasonable initiatives to think through their major investment decisions responsibly. The decision to start the Mater Dei hospital at Tal-Qroqq was capricious and ill-thought from the start. Health services provisioning would have been better served by extension of St Luke’s on the Pieta side by relocating the
St Augustine school to a better and more convenient location, rather than under the hospital chimney, and a long-term plan for gradual re-development in situ of the various existing block of St Luke’s.

It’s not a gift at all!

Thursday, 26 January 2006

Inverse yield curve

The Malta Independent on Sunday
For the non-financial sophisticate, inverse yield curve occurs when the interest rate on long-term deposits is lower than interest rate applicable for similar deposit for a shorter term.

This goes against normal logic, which should suggest that the longer the term of the deposit, the higher the applicable rate should be, firstly to reward the depositor for opting to give up the privilege to make use of the deposited funds for a long period of time, and secondly to pay a premium for potential future rise in inflation that cannot be foreseen with any degree of confidence for any long term period.

America we are close to an inverse yield curve situation for US dollar interest rates. A one-year deposit in US dollar currently pays 4.72 per cent, a five-year deposit pays 4.715 per cent and a 10-year deposit pays 4.805 per cent. Not quite an inverse curve but certainly a flat line curve and the risk of moving to an inverse yield curve situation has been the main topic of discussion in economic circles.

The concern about having an inverse yield curve is that economic history shows that it is a harbinger of bad economic tidings. Past history shows that on many occasions where the interest rate scenario produced an inverse yield curve, the general economy was on the verge of a recession. The reasoning goes like this. If long-term contracts are paying lower interest than shorter contracts, then it means that for the long term it is planned that short term interests would drop. After all, the long term is made up of a succession of short terms so if the long term rate is lower than the present short-term rate it means that future short-term rates are expected to fall.

Falling short-term rates are synonymous with a weakening economy, as monetary authorities tend to reduce short-term interest rates when the economy slows down creating spare capacity and falling inflation.

The conundrum this time is that the prospect of an inverse yield curve for interest rates on the US dollar comes with a background of strong economic data, which does not in any way suggest that any recession is round the corner even though one could well expect a slowdown in the aggressive rate of four per cent p.a. growth registered these last two years.

So the talk among economists and financial analysts observing the American economy has been whether an inverse yield curve in the current economic scenario still has the meaning it used to have in the past. One of the influential people who expressed himself on the matter was Alan Greenspan, the outgoing long serving chairman of the Federal Reserve Bank, who opined that it is very doubtful whether this time round an inverse yield curve should be taken to mean what it used to mean.

If this is so then the next question is obvious. Why is it that an inverse yield curve for interest rates no longer is a credible indicator of an impending recession? And the debate rages on, with million reasons to explain the interest rate mystery that saw overnight rates in the US raised from one per cent in June 2004 to the present 4.5 per cent while in the same period the 10-year rates for US treasuries dropped from 4.7 per cent to 4.4 per cent.

Having heard all the arguments I think this new phenomenon is the combined result of three main influences, which happened to coincide at the same time to nullify and reverse normal patterns of economic behaviour.

Firstly, it is that interest rate increases in the short term end of the curve have begun from a very low level of one per cent, and this after a time when we were seriously concerned about the risk of the US economy falling into a Japanese style price deflation. It is quite one thing having short-term interest rates at 20 per cent, like we experienced in 1982, and quite another having short-term interest rates peaking anywhere between 4.5 per cent and five per cent. High short-term interest rates by themselves act as a self-fulfilling prophecy in destroying demand and real asset values. So in such cases it is not the inverse yield that brings about a recession but the high short term rates which condition consumers to save rather than consume and makes borrowing for business, for investment or for home-mortgage prohibitively expensive.

This time, short-term rates have peaked at a rather low level and presented neither a disincentive for consumer demand nor a destroyer of asset values. Real estate prices and equity values continue their upward march all over the world.

The second reason why it is different this time is that we have excessive world liquidity that creates demand for long term financial instruments so that borrowers find easy takers for their bonds without have to pay high interest rates. This is probably the result of globalisation, which is producing sharp imbalances in balance of payments. Eastern countries in general and
China in particular are building huge USD surpluses, which they are re-investing in US, money and capital markets. In a normal economy these surpluses would be spent on consumption of goods and services as citizens of surplus countries use their new-found wealth to raise their standard of living, including travelling to other countries to see the world. In case of China their economic system filters the surpluses to ensure that they continue to serve the collective needs of the State rather than cascade down to individual consumers. This in itself distorts the mechanism to regularise the structural imbalances and is creating excess liquidity ready to finance deficit countries at low rates.

The third reason is that world Central Banks have, since the inflation of the seventies and the recession of the eighties, made a rather good job of stabilising world economies and ironing out structural inflation, so much so that not even oil at USD 70 seems to present a threat to rising inflation. So if consumers have faith that short term interest rate increases serve to pre-empt the formation of long term inflation they do not need to demand high interest rates for their long term deposits knowing that inflation will remain controlled.

So many things these days do no longer mean what they used to mean. Globalisation and technology are changing everything.

Friday, 20 January 2006

Happiness and Innovation

20th January 2006

The Malta Independent - Friday Wisdom

Two recent international surveys show that the Maltese are among the happiest and the least innovative. What should one make of this conundrum?

It reminds me of the anecdote about the IMF delegation that went to a totally undeveloped country where the inhabitants lived on subsistence, mostly fishing. To exhortations to one of the native fisherman who was trying to make the daily catch to feed his family, that he should invest to become rich and have free time that he could enjoy fishing at his leisure, the bloke replied that, fishing for fishing, he would rather stay as he was.

But we are not a subsistence economy. If anything, we harbour insatiable expectations for increased consumption to reach the EU average standard of living in a rather short time. So how can we be happy and yet perform so dismally on innovation? Innovation contains the seed for future economic growth that is the basis for additional consumption. The link between consumption and happiness is not directly proportional, but that one interacts on the other is quite unquestionable, though by no means does this mean that happiness depends solely on consumption.

In fact we have other good reasons to be happy. Most of this we owe to the Creator who placed us on a lovely archipelago that is thankfully free of natural disasters.

Our size also helps to sustain the quality of life without necessarily involving additional consumption. The ability to be sitting at the office desk 15 minutes after leaving home is not something that is enjoyed by many who command much higher incomes in more developed countries. The possibility of being at the beach at two in the afternoon on each summer working day, less than one hour after most public service offices knock-off for business, is a wishful dream for much richer people.

Apart from God’s blessings there are also the benefits of a social structure that is among the most generous in the developed world. Does it not add to our happiness to know that we are all entitled to free medical services, irrespective of means, when in many developed countries – particularly in the
United States – people have to pay through their nose to have some sort of health insurance?

Does it not add to our happiness to know that our parents can enjoy a state pension that gives them, in addition to free medical services, a reasonable level of income that enables them to enjoy retirement without threat of poverty. This is much more than can be said of many pensioners in developed countries, the
USA and the UK included, where pensions depend on contributions to an occupational pension scheme, which many companies are now trying to freeze or change from benefit-defined to contribution-defined?

And our happiness is further augmented by the reality that we are getting richer by doing nothing. Few people are getting richer through their regular income from employment.

But many of us are getting richer through asset price inflation, as property and equity prices make our past investments in our residences and the other financial savings much more valuable. Knowing that asset price inflation is making us financially richer, we can consequently afford to save less or even draw-down from past savings to increase consumption in spite of stagnant earnings.

On further reflection, however, our happiness should be tempered by responsibly asking ourselves whether it is based on an unsustainable platform. How long can we afford free universal health care without breaking the structure of public finances? Will our pension system survive to ensure that those of us who have been contributing to it over several decades of working life can reasonably expect a pension that keeps us out of poverty during retirement?

Will property and equity prices keep going up interminably or will market mechanisms force a price adjustment that could be both shocking and hurtful?

This is where innovation comes in. I would be far happier and peaceful in my mind if our economic growth was based on efficient production sourced on genuine innovation rather than on asset price inflation with the clear characteristics of speculative bubbles. What systems are we promoting to promote innovation? What financial resources are dedicating to innovation? Where is the private equity and venture capital funding without which innovation often remains an unrealised idea rather than a revenue-generating project?

Happiness without innovation can only subsist if we are prepared to accept the living standards of a subsistence economy and base our happiness on the fisherman’s philosophy that the best things in life are free.


Friday, 13 January 2006

Open Bars and Closed Minds

13th January 2006
The Malta Independent - Friday Wisdom

As an ordinary member of society I admit my share of its collective guilt that it is producing adolescents who need to celebrate the ushering in of the New Year through open bar parties.

We must all re-think what sort of world we are constraining our adolescents to live in.

Put yourself in the parents’ position. Peer pressure on our youngsters means that to enjoy themselves at the weekend, they have to leave home on Saturday evening at about 11. Normally parents drive them to their destination, either because public transport is not so convenient or simply to put their minds at rest about the company their children are mixing with.

Halfway through their sleep, somewhere around three in the morning, the parents have to put their coats over their pyjamas and, half asleep, drive to Paceville or wherever, to bring their kids home. The alternative of pooling for a taxi or getting lifts from older friends is generally unappealing to parents, who preach to their adolescents that they have to avoid accepting lifts from strangers, especially if such strangers have spent the evening bar-hopping in Paceville.

As soon as youngsters turn 18, the pressure starts building up to acquire their own means of transport. In young adult circles, being over 18 without a car seems to have become a synonym for not being with it. Financial considerations apart, the parents’ resistance to such pressure starts weakening with the prospect of saving the hassle of driving in nightwear every weekend.

Soon the youngster gets his new or second-hand car and with it the burden of paying its running bills and probably the loan installments. Financial pressure starts building up on top of the existing career pressure. If they are studying, pressure builds from the realisation that getting through their first degree, even with considerable honours, will not give them any special credentials for the world beyond the university.

It will be a struggle to find a job in the first place and a harder struggle to find a job related to one’s own studies, which pays a decent salary justly rewarding the efforts to get through university. Most start feeling the pressure of the need to continue studying beyond their first degree, with all the financial and social pressures that this would involve.

So in the end, the typical 18-year-old that society is producing today is one who expects parents to do his or her room, including picking up dirty clothes and linen from the floor; who expect to have their own car as soon as they can get a driving license after reaching 18; who have pressure to keep up with their studies at sixth form or university and at the same time have to do some part-time job to finance their car, their entertainment and their life-style in general; who are worried that, in spite of their effort in getting successfully through the first degree, it will not be enough to get the job they desire and they will probably have to continue studying till their mid-20s for a post-grad; and who are seeing property prices spiralling out of their reach making the dream of acquiring their own space rather unrealistic. Add to this the love problems of boyfriends and girlfriends, and you have an explosive situation.

Placing open bar parties at their easy access is indeed a recipe for disaster. Having paid a few tenners to get to the party in the first place means that the youngster wants to make the most of his or her money by consuming as many drinks as their body can take, and possibly more. Doing this on an empty stomach, and generally with a concentration of alcohol consumption in the run-up to or just after
midnight, makes it all too easy for our youngsters to lose control over themselves.

Compare this to our own adolescence, when our parents expected us to truly pull our weight and make our own way through life without undue pampering. I was expected to take care of my room and hang up my clothes. Soon after my “A” levels I got my first job, as going through university without money was not a real option. So every evening after work I had to stay in, studying for my Banking Diploma and to pay for all my studies and for the old Mini Minor I got at the age of 19.

A late night out meant that I had to be back by 10.30 at the latest.

Don’t get me wrong. I am not arguing in favour of putting the clock back, even if this were possible, which of course it is not. But I am arguing for fewer open bars and more open minds in training parents how to live with adolescents whose expectations go beyond what many of us can handle. Handling adolescence needs parental skills for which many of us are unprepared. Parents need help.


Sunday, 8 January 2006

Is the Middle East peace process jinxed?

The Malta Independent on Sunday

That is what I asked myself when the news about Ariel Sharon serious medical condition hit the international news wires. It seems that whenever things start taking a promising shape for delivering a lasting if not perfect solution to the Palestinian crisis, one of the prime movers of the process suddenly disappears from the scene.

It happened before when, under the guidance of President Clinton and the good services of Norwegian mediators, Prime Minister Rabin was making considerable progress with Chairman Arafat in reaching a compromise that could assure stability in the region.

Rabin was assassinated and the peace process floundered when the Likud Party was elected to government. Under Prime Minister Netanyahu the process lost its momentum. Netanyahu is a hawk who seems to believe that Israeli security can only be defended with the use of force, without making any political concessions for a lasting peaceful co-existence solution.

I never thought the day would come when I would hear Sharon advocating conceding land for peace in the Rabin mould, and supporting the formation of a sovereign Palestinian State with a clear border with Israel, which for some time would have to be protected by the erection of a dividing wall in order to guarantee Israeli security at its borders.

I never imagined that the hawk of Sabra and Shatila notoriety would eventually be the person to use the
Israel military to force the relocation, from the occupied territories in Gaza, the same Israeli families he had brought there to populate the disputed areas in order to cushion the legal borders between Palestine and Israel.

However, after the death of Arafat and the election of Abu Mazen to lead Fatah, a certain chemistry opened up between the two men, reinforced no doubt by the diplomacy of Simon Peres who had been through it all before together with Rabin. This led to confidence building measures and prospects that they could bring their extreme factions under control in order to forge a political agreement honourable for both sides.

The process seemed to be gaining momentum when
Sharon and Peres teamed up to form a new centrist party and called an early election for next March. Such a new political formation with a heavyweight from each side of the political divide offered the prospect of a stable central government that could lead a coalition with political forces of the left and right who believed in pushing forward the peace process. It offered the prospect of a lasting settlement based on the sovereign rights of a new Palestinian State which accepted Israel as an immutable reality.

Who would have believed it just a year ago that
Sharon would resign from Likud and form his own centrist party in tandem with Simon Peres?

Who would have believed that Peres would resign from the Labour Party he was seeking to lead just a few months back, in spite of being in his eighties, to rub shoulders with his one-time arch rival Sharon in seeking a peaceful co-existence with the Palestinians?

It is said that politics is the art of the possible but the Israeli developments in the last quarter of last year seemed to suggest that politics was even the art of the impossible.

But this week the jinx struck again. Prime Minister Sharon suffered a massive heart attack that caused brain haemorrhage and which, on first indications, would make it improbable if not impossible for
Sharon to continue with active involvement in Israeli politics even if he survives the scare.

There is the grave risk that without the strength of
Sharon’s personality, the new centrist party will be stillborn, leaving a vacuum that could be filled by an extremist like Netanyahu. Such an outcome will not only complicate the resolution of the Palestinian issue but will pour fuel on the fire at a time when the new President of Iran is already doing so.

Iran proceeding with its nuclear plans at the same time that the Iranian president loudly promotes the obliteration of Israel from the Middle East and its relocation to the West, there is a very explosive situation in the making. With Netanyahu in charge at the Israeli end it could be a recipe for making the situation in Iraq look like child’s play.

I have often publicly disagreed with
America’s invasion of Iraq. What has been done cannot be undone and the situation in Iraq is still fragile to be left to its own destiny. Any vacuum could well be filled with Iranian influence that would bring the show of force between Iran and Israel one dangerous step closer.

The situation in the
Middle East has worsened perilously this week because of Sharon’s ill health, and it is not a good omen for world peace in 2006.

Saturday, 7 January 2006

The Year of the Google

7th January 2006
The Malta Independent - Friday Wisdom

With hindsight, every few decades a particular year emerges that becomes a historic landmark for a new way of thinking or for the emergence of a new generation with a radically new approach, changing the long-established habits of the way we go about doing things. A new culture!

For people of my generation, 1968 was one such year. It was the year of the hippies and flower power, when Beatles mania started to fade into modern rock. In 1968 it became evident that
America could not win the Vietnam War. As the post-war baby boomers turned into adults we felt that the old generation had let us down and we wanted to challenge everything, the good, the bad and the ugly. Conservatism gave way to permissiveness. Student revolutions started on both sides of the Atlantic and the revolt against the communist system had to be quashed on the streets of Prague by the military force of the Warsaw Pact.

It was just a postponement however of what was to materialise in the next landmark year of 1989, when the
Berlin wall came down, Germany was re-united and the formal disintegration of the Warsaw Pact was the precursor of the disintegration of the Soviet Union. Existent communist states were liberated and new states were formed, some of which are still finding the transition out of communism painful and hazardous, as proven by the events of this week in Ukraine.

History is still too fresh to judge whether future generations will regard 2004 as the landmark year for the enlargement of the European Union by the incorporation of many of the states that were liberalised from communism through the events of 1989.

My hunch is that the next landmark year will, however, be marked by a new concept rather than by the mere prolongation of events started in 1989, which could take several decades to evolve into their final end through the process of true democratisation of
Russia and the satellite ex-Soviet states that are still under Moscow’s influence. A process that will extend the EU into a loose political union from the Atlantic to the Urals.

If 2005 is to qualify for consideration by future historians as a landmark year, then the marking concept has to be much more universal and pervasive across all societies. 2005 may well be remembered as the year of the google.

It was the year when the power of the internet was placed at the fingertips of the population at large by search engine providers, foremost among which is Google. The brand has become so powerful that the brand word has assumed a popular meaning to explain the act of searching for something on the internet and the coined word may well end up in the official dictionary.

It is not so much that during 2005 the share price of Google that was marketed for the first time in August 2004 at $85 actually reached a high of $430, as Google’s business revenues from electronic advertising reached unprecedented levels. It is that more and more people are resorting to the internet to search for their particular requirements and that this is changing the business model of business organisations large and small.

The internet is no longer amazing technology. Google and its peers have turned it into a powerful information application for students, researchers and businesses alike. Perhaps this is more remarkable because 2005 has witnessed the shrinkage of a strong
US brand which hitherto used to embody the commercial strength of the American model. General Motors (GM) found the going hard to compete against the agile Japanese and Korean car manufacturers that are not burdened with GM’s legacy of costs resulting from its past successes in the form of health care and pensions for existent and former employees.

GM saw its share price more than halve in 2005 to reach a 15-year low and its bond rating was cut in rapid successive steps from investment grade to high yield junk status.

There was a time not so long ago when it was normal to argue that what was good for GM was good for
America. In 2005, it was more appropriate to say that what was good for Google was good for America.

This is probably the vision that should guide the
US and European leaders in taking globalisation one step forward through trade liberalisation under the World Trade Organisation. America’s strength is no longer symbolised by its GMs but by its Googles, just as Europe’s strength is no longer typified by its FIATs but by its Vodafones and Nokias.

Developed countries have every interest in demanding and exacting intellectual rights protection and open markets for its new market leaders and, in compensation, conceding to open their own markets for agriculture trade from developing countries.

2006 may well be the year when the students and young people who revolted in the 1968’s cultural revolution will start turning into “young” pensioners. More people will turn 60 in the developed world during 2006 than in any other year before, as the babies born in the first full year after the end of the second world war approach retirement.

Malta, it is imperative that 2006 be the year of implantation of a new pensions revolution if we truly mean for society to keep its capacity to sustain its growing pension obligations.