Privatisating Properly

7^th February 2006

The Malta Independent - Friday Wisdom

There is no doubt that following the way that Mid-Med Bank was privatised through one-on-one private negotiations without due process of transparent bidding, the privatisations that have been effected since, have been much better organised to secure the best price in what appears to be a fit and fair process.

The main privatisations since the Mid-Med debacle have been MIA and the Pubic Lotto. The Freeport has also privatised its operations with the project title remaining in the hands of the Malta government, although I never understood the logic of favouring a shipping line with such an award rather than a port operator.

P & O port operators of the UK were recently up for grabs and the main contenders were the Singapore and the Dubai port authorities – eager to extend their global coverage to offer a real challenge to Hutchinson of Hong Kong, the largest global port operator. The price in the acquisition contest from P & O got so high that Singapore Port Authority had to withdraw when an international rating agency put its rating on negative watch for fear it might over pay and prejudice its financial strength.

Maltapost was also privatised in a haphazard way by involving New Zealand interest as minority equity partners and technical operators. It is widely acknowledged that the Maltapost deal was badly designed and is evidently being somewhat undone – at least in so far as the technical operations contract is concerned, although it is still not clear what the intentions are regarding the equity position. In any event, Maltapost is in context small fry.

Now we are on the verge of another major privatisation, this time Maltacom. What is different from recent privatisations and is again back to the model of the privatisation of Mid-Med Bank is that this time the government is privatising a controlling stake (60 per cent) of an organisation whose remaining shareholding (40 per cent) is in the hands of the public and is traded freely on the Malta Stock Exchange.

The process of privatisation must therefore take into account the need to protect sensitive information or making it public officially, in order to avoid the risk of creating false markets where information is leaked unofficially – producing an unlevelled playing field in the financial markets.

Certainly, no one has suggested that to avoid this from happening, we should adopt the Mid-Med model of privatisation through secret one on one negotiation. It has been proven that such a model does not produce the best price for the vendor, as it restricts competitive bidding that is the surest way to secure a fair price. In any event it fails basic and elementary governance tests.

However, jittery market movements in the share price of Maltacom – since it was announced that the process has entered the final phase for submission of binding offers by identified short-listed bidders – seem to suggest that the chosen method leaves something to be desired by way of market transparency.

Such jitteriness is not uncommon in equity markets and the fundamental principle should be that all market participants are to be in the same position with the same level of information available to everybody. Furthermore, at such a delicate stage of the privatisation process, licensed analysts who choose to an express an opinion on the appropriateness or otherwise of the share price determined by the official market should do so directly and not anonymously. They should also give technical reasons for their opinion and disclose any conflict of interest in the matter or certify that no such conflict of interest exists in order to remove all doubts regarding the objectivity of their opinion.

Maybe to assist the functionality of a proper market the Privatisation Unit should consider being more transparent in the final phase of its selection process.

Presumably, the fact that a few bidders have been short-listed to submit a binding bid means that the other terms setting minimum standards of acceptability have been met. These, no doubt, would include the bidders’ financial standing, technical ability, investment commitment, and general business plan showing an acceptable deployment of the human resources that will be taken over through the acquisition of Maltacom.

Having come to this stage, I think that in the interest of financial transparency, serious consideration should be given to making the price setting process fully visible by means of bids opened in public or in a beauty contest type of bidding.

In this way, not only will the public be satisfied that the privatisation process is due and proper, but the investing public would not need to stay second guessing where the privatisation price is heading in making its decisions whether to buy, sell or hold Maltacom shares.

Obviously, it is important that such an open bid process or beauty contest be conducted after market hours – in order not to disrupt the operations of the Exchange during its normal trading hours.

These are delicate issues which need to be handled with utmost care and sensitivity. At this time, the Malta Stock Exchange and the Regulator of Financial Services should be extra vigilant to guard from manoeuvres which could condition the market price to the bid price in any way other than through official information placed in public domain as quickly as possible for investors to be guided in their judgment by real things not imaginary hypotheses.