Friday, 27 October 2006

Thruth with Bad Intent

27th October 2006
The Malta Independent - Friday Wisdom

In his famous poem Auguries of Innocence, William Blake makes a stark observation.

A truth that’s told with bad intent,beats all the lies you can invent.

This saying came to mind when the disgraced, now resigned Republican Florida Congressman Mark Foley tried to defend his sexual misdemeanours within his Congressional Office by blaming it on a 40-year-old experience where he claims he was abused by a clergyman, who, as it so happened, is a Gozitan priest.

It gains little credit to a person whom life has treated well enough to offer opportunities to reach the highest levels of US politics, to justify his indiscretions by pinning them on a 40-year-old claimed victimisation about which he kept mum for all this time.

I don’t know if Foley was truly victimised by any clergyman 40 years ago. But even if, and I underline if, Foley was victimised as claimed 40 years back by a Gozitan priest, it is poor defence for his own wrong-doing and it is irresponsible towards the rest of society that he has not exposed this clergyman much earlier when he has had ample opportunity to do it. If Foley is now saying the truth it is clearly a truth with bad intent.

The budget figures presented in parliament also carry a few examples of truths, or half-truths, with bad intent. Now that I have had time to comb through the figures it is possible to pinpoint some of these.

I will side-step the issue whether it is substantially correct to consider grants, which are only available for a limited period, as normal ordinary revenue. In the Labour’s old days these were considered as financing items, but technically now it seems acceptable to classify them as revenue, although this does nothing to alter the basic underlying truth that we have to shape up our public finances to do away with such grant revenue by 2013.

However, the assertion that the 2006 deficit is down to Lm58 million and within three per cent of GDP is only half true. How can one consider sale of government land to the tune of Lm20.4 million as recurrent revenue as if the government is going to sell land to the
US government for building their embassy every year? If sale of government shares/assets is considered as a financing item for the purpose of calculating the deficit, why should sale of land be considered as ordinary revenue? If only this item is written back and considered as a financing item rather than revenue, the 2006 deficit will grow to Lm78 million, equivalent to 3.78 per cent of the GDP.

Also, how can one justify taking as ordinary revenue premium achieved by issuing government stock at a rate of interest above market rate? Is this not simply taking revenue this year which has to be paid back in the form of higher interest in future years? If this is not window-dressing, what is?

Examining the projected revenue for 2007, two figures stand out showing step change increases which deserve further explanation. Revenue from gaming taxes is planned to increase from Lm12.5 million this year to Lm18.5 million next year. Domestic economic growth, better tourist traffic and expenditure shifts due to new initiatives, may explain part of this increase but they cannot be expected to explain the full 48 per cent increase. If this relates to additional gaming taxes from international gaming operations that have been attracted to base themselves here, then it is a positive development and we should make the most of it before EU regulation will deprive us of this advantage just as the US has recently done to online non-US based gaming companies.

Harder to explain however is the growth of nearly 30 per cent in excise duty revenue on petroleum from Lm29.7 million in 2006 to a planned Lm38.3 million in 2007. It is hard to explain only in the context of various assertions made that the budget is not increasing any taxes or making new ones. How can one increase excise revenue by over Lm9 million without raising taxes? By magic it is a half-truth which is more insulting than a pack of lies.

Enemalta always made huge margins in its petroleum division with which it used to cross-subsidise its electricity division in order to keep utility rates socially responsible. With petroleum importation and distribution now on the verge of being privatised, the government has taken the right precaution to increase the excise duty in order to remove the excess profits. This explains the projected steep increase in such revenue in the Budget for 2007. So far so good!

But to keep things neutral one would have expected the government to pass back this excess revenue to Enemalta in order to keep subsidising the utility rates. There is nothing in the budget which suggests this is happening, which in a nutshell means that the government is withdrawing the normal subsidy to utility services in order to increase its ordinary revenue. Clearly, the government has every right to take such fiscal measure but this does not equate with the claim of no new taxes. Withdrawal of subsidies is taxation by another name.

Another case is the absence of provision for the government contribution to the
Freeport for Lm6 million to pay interest on its international bond. Suddenly next year there is no such provision. It is hard to believe that the Freeport will finance its own interest when it has privatised all its operations and has no strong revenue flows. Probably another case of window-dressing where this interest payment is being funded outside the budget next year in order to look better than we really are.

Half-truths with bad intent?

Sunday, 22 October 2006

Are We On for the Euro

22nd October 2006
The Malta Independent on Sunday

I tried to look at the Budget for 2007 presented in Parliament last Wednesday as a source of assurance or comfort that we are well on the way to joining the eurozone. After all, the projected date of entry is 1 January 2008 and therefore Budget 2007 is the financial bridge that can get us there in time and in good shape.

Conflicting signals unfortunately emerge from the budget documents. In his speech the Prime Minister, with the Opposition firmly in mind, criticised those who argue that we should not rush into the eurozone before we achieve strong and balanced economic growth. Quite rightly, in my opinion, the Prime Minister points out that joining the eurozone could be a catalyst for achieving such growth and that it is risky for our international reputation and for our ability to attract foreign investment if we start having cold feet at this stage.

Then the Prime Minister made a categorical statement “...with satisfaction I say that today everybody is saying that we are on track (for joining the eurozone in 2008)”. Who is “everybody”? What exactly this everybody is saying we are not told but we are expected to take the Prime Minister’s word for it.

Having been trained in financial analysis and credit assessment, I have a natural inclination not to accept anybody’s word for anything. I have to seek corroboration and evidence to base opinions on an array of evidence from different sources rather than on assertions from partial sources. And as future events cannot be black or white, but with a lot of shades of grey, the opinions I form are quite often flexible and thus can be adjusted to new data as it emerges until the future projected event becomes current and, consequently, definite.

The same had happened to me in the run up to EU membership. Government sources made assertions that
Malta would definitely qualify for top objective one funding upon membership and in the first full budget 2007–2013. I challenged these assertions, pointing out that we were too close to the criterion for objective one funding to permit such positive conviction. As it so happened we did eventually actually qualify for such top funding but we were sailing very close to the wind. Paradoxically, the slow growth and downright contraction we had in our economy between 2000 and 2004 actually helped us to qualify, as we stayed within the 75 per cent limit of the average EU GDP. Had we had normal growth during this period, we would not have qualified, but as it turned out we were lucky to be rewarded for our failures.

So I sought corroboration from other budget documents to see what is giving the Prime Minister all this certitude to make such unqualified assertions about our being accepted to join the eurozone as planned. One has to bear in mind that last spring
Lithuania was denied entry, which was okayed for Slovenia for January 2007, because Lithuania fell marginally foul of its performance on inflation when benchmarked to the Maastricht criteria for entry into the eurozone. This stipulates that our inflation (measured by a Harmonised Index of Consumer Prices – HCIP– worked out on a 12-month moving average) has to be within 1.5 per cent of the average of the best three performers of the EU25.

The latest measures we have for September 2006 shows that our comparable measure of inflation comes out at 3.2 per cent, whereas the average of the best three, Finland, Poland and Sweden is 1.3 per cent, to which adding 1.5 per cent would put the benchmark at 2.8 per cent.

We are therefore 0.4 per cent out of the benchmark and this is categorically confirmed in the documents accompanying the Budget documents and in other official economic and statistical press releases.

Now the jury will stay out till March 2007 and there may be developments that could help us bridge the gap and come within the benchmark. It depends not only on us but also on the performance of the best three in the EU. In a way this comparison is unfair in our regard. Whereas
Finland, Poland and Sweden have alternative and natural sources of energy (coal in the case of Poland and hydro in the case of the Nordic countries), they also have an abundance of free potable water. In Malta we consume expensive imported hydrocarbons not only for our energy needs but also for producing our water through energy-hungry reverse osmosis plants.

But a test is a test and the rules were not bent for
Lithuania just a few months back. I wonder what comfort the Prime Minister has to feel so positive about our making the grade in the short time still available to us or, if we do not, that the rules will be interpreted less rigorously in our case.

I agree that it is important to be there on time for the euro. But being a realist I cannot help but question the assertions being made by our politicians when hard economic data is giving different signals, which create doubt about our being considered euro-ready. Doubts are doubts and reality could go either way, but we have a very marginal case and there is no room for unfounded assertions. Over-confidence kills the cat. Thankfully the Governor of the Central Bank was much more guarded recently when questioned in this regard.

Frankly, rather then gratuitous assertions, we need a plan B. We need a political effort to rally support for our case even if we are marginally out of the benchmark on the inflation front. And we have to make the case that our inflation will head down if oil prices keep steady, as we are now close to running a full 12-month cycle with fuel surcharges, so the year-on-year inflation increase should moderate and this would show up with a time lag in the 12-month moving average inflation measure.

Friday, 20 October 2006


 20th October 2006
The Malta Independent - Friday Wisdom

They say that the only certainties in life are death and taxes. Probably we can add a third. The budget for an election year is loaded with measures that would benefit as wide a section of the electorate as possible. It is loaded with mantras of reaping the fruit of the hard work and sacrifices of the past and basically promising a never-ending spring from that point onwards.

In this respect the budget just announced for 2007 has met all these expectations, and while it is not excluded that the government may slot in a further “goodies” budget before next election if readings from the field still indicate that people need more persuasion to forgive past tax oppression, the government is clearly keeping its options open that this could well be the last budget before taking the plunge.

This is not meant as an accusation. It is just pointing out that all governments in the democratic world try to influence the economic cycle to hit a bottom in the mid-term of their mandate and a peak in an election year. So people are generally oppressed more than is necessary in the first years of a legislature and they are rewarded with what was unnecessarily taken away from them towards the end of the legislature.

The government has two main objectives for 2007. Firstly, it aims to start a momentum of feel good factor that could serve as a sound platform for its re-election bid. Secondly, it needs to meet the
Maastricht criteria to pass the euro test so as to be able to join the monetary union on 1 January 2008.

Past budgets which created so much “feel bad” factors have laid a good platform for meeting the necessary credentials to meet the
Maastricht fiscal criteria for joining the Euro. The deficit is now within the three per cent of the GDP and heading for a neutral position towards the end of the decade. The debt to GDP ratio, while outside the 60 per cent limit, is heading towards it and the rules allow sufficient flexibility in this respect.

So by relaxing the fiscal pressure, the government feels confident it is not compromising its fiscal credentials for euro membership. Having said that, however, there remains the inflation criteria which is becoming the greatest obstacle for euro entry. However, this inflation criterion is not directly controllable through fiscal budgetary manoeuvring and considering the delayed impact on inflation of any budgetary measures, there is pretty little now that can be done fiscally to aid or compromise our bid for joining the euro in 2008.

Through loosening the budgetary screws however the government is leaving disposable income to the tune of some Lm20 million in the hands of the electorate to make them feel better. Revision of tax bands, increase in allowance for private school fees, increased allowances for child care expenses, subsidy for acquisition of energy efficient household appliances (aren’t they all energy efficient these days?), halving of the departure tax and other social security trimmings all add up to give a step change improvement in the disposable income of the average Maltese family.

This is only possible without compromising the euro entry credentials if the economy continues to grow at a healthy rate so that the tax take of the government continues to increase at a healthy rate in spite of the rebates given. Technically this is referred to as SSE (supply side economics) where it is argued that lower tax rates would generate more tax revenues as lower taxation permits higher economic growth so the lower rates would apply to higher tax bases producing an increase in tax revenues in absolute terms.

Whether this would work the way it is planned is a gamble which, if things go wrong, would have to be corrected in post-election mode, a replica of what happened in 1996, not coincidentally another election year.

Yet the government is planning a real GDP growth rate of 2.5 per cent for 2007 which is slightly less than the rate being registered this year if the flash figures till end September 2006 are anything to go by. I am confident that we have the potential to register much higher growth rates for 2007 and my projections would indicate a growth rate more in the region of 3.5 per cent - 4.5 per cent.

We will be registering 2.6 per cent real growth this year even though we have practically contracted in tourism. With the European economies growing much faster than anticipated and planned to overtake the growth rate of the US economy in 2007, our manufacturing sector, mostly geared to the EU markets, should do better next year.

Tourism can hardly do any worse and the introduction of low cost airlines should produce some noticeable improvement both in volume and in earnings terms. Financial services have growth momentum and the tax measures announced for 2007 should give a boost to consumption and thus to retailing and domestic services. Some relief could also be expected from the international price of energy as a structural downward shift seems to be in the making.

So we can get to this time next year being told that growth has exceeded the forecast, that we have passed our euro test and with the government assuming that the electorate would have forgotten or forgiven the pain it went through between 2003 and 2006.

Is there a fly in the ointment? There always is. We are dangerously sailing too close to the wind on the inflation front and we could fail the euro test on this inflexible criterion. Should this happen we may introduce an element of big uncertainty in the economic equation which could blow away all the expected growth.

Friday, 13 October 2006

Tony Zarb is Right and Wrong

13Th October 2006

The Malta Independent - Friday Wisdom

During a meeting of the General Workers’ Union Central Administration held last Wednesday, Tony Zarb and his crew received a unanimous vote of confidence by acclamation. One might argue that a secret vote would have been more credible but a vote of confidence is a vote of confidence, whatever its style.

Tony Zarb told his faithful that: “Their intention was to destroy the GWU, aided by former members who used to leak confidential information to the Nationalist media and their allies. I smell the Nationalist Party behind this plan to destroy the GWU.”

Tony Zarb is right. The PN has been pursuing a long-term plan of dismantling the GWU brick by brick. The plan has now arrived in its final execution stages by pushing the GWU in a one-way route to self-destruct.

The PN’s plan has as its lynchpin the election to GWU leadership of people who have no leadership skills, who don’t know the distinction between strategy and tactics, and whose only credentials for their position is cheap demagoguery.

By giving this type of “militant” leadership to the GWU, the PN has helped the GWU to self-destruct brick by brick so that the GWU has now been turned into a commercially-fragile organisation and in the field of industrial relations, the GWU has maintained its freedom to bark but no possibility to bite.

Following the mishandling of the Sea Malta affair, where the union had misused its power due to lack of strategic vision, there is no way that the GWU can today order a national strike, the sort Anglu Fenech last led successfully in 1995 on the VAT issue.

Tony Zarb said “The government must tell us: What will happen to shipyard workers after subsidies cease in 2008, to workers at Maltacom, Enemalta, and in the ailing tourism sector?”

In due course, the government will obviously tell us, but what will happen then? An issa daqshekk type of street protest and life goes on? The current union leadership describes itself as militant? Where is its militancy when it is allowing private sector employees to have practically no protection against redundancies and has obtained no adequate compensation for the vast majority of workers from the erosion of standard of living caused by the sharp increase in utility bills? Or is militancy only a brand?

The PN know how to break the GWU brilliantly. Tony Zarb told his delegates that last October they “had got rid of those people whom the Nationalist Party had wanted at the union’s helm”. Absolutely wrong! The PN are scared to death that people with strategic vision should reach the helm of the GWU. The PN are much more comfortable with the militants than with the moderates.

In fact they destroy the moderates in the sweetest and most effective way by praising and applauding them publicly. There is nothing more damaging to an aspiring chip on the left of Maltese political spectrum than being praised by the PN. If they hurl insults at you and try to assassinate your character they would be in fact enhancing your popularity among the basic left-wing turf. If they praise or applaud you they know as sure as night follows day that they kill your chances of making it to anywhere.

It’s comical, but that’s how it works. I should know as I have been through it all the way. My political ambitions were not killed by internal obstruction. They were killed gently, gently by the PN and their affiliates, by projecting an image that I could be better than the incumbent here or had more expertise than the other incumbent there.

So when the PN used their media machine to define George Abela, Manuel Micallef, Josephine Attard Sultana, Karmenu Vella, etc as moderates they were not helping them to gain the seats of power within the GWU. They were effectively ensuring that the militants, long on words but short on wisdom, stay comfortably in their posts presiding over the GWU’s operation self-destruct.

The tragedy of this situation for the left side of
Malta’s politics can only be properly understood if current events are placed in a historical context. Mintoff had attempted to re-balance the excess of power held by the PN, being a political cell in a wider network of power spanning the business organisations, the media, the professions, the Church and much more, by building a strategic alliance with the GWU whom he privileged with lucrative commercial positions, mostly cosy money-printing commercial monopolies in the ports, in the insurance sector and in the Maltese language print media sector. Clearly, the scope was for the GWU to channel back these easy money flows to the Labour Party so as to reduce its disadvantage on having to compete with the PN in the political arena in a very non-levelled playing field, as the PN clearly had easy access to much wider financial resources.

Weak leadership in the GWU blew up this clever Mintoff strategy. Instead of running a lean and mean ship to ensure that a large part of their cash flows sink to the bottom line in order to beef up Labour’s resources, they were wasted in internal inefficiencies. Now that the PN has gradually destroyed the easy monopolies left as legacy, the GWU is left to nurse huge commercial inefficiencies which cannot survive the loss of their monopoly profits, leaving the GWU financially fragile.

By helping the GWU to destroy itself, the PN are indirectly weakening their main political adversary, the MLP, as they keep enjoying huge advantage in playing the political game on a financially very non-levelled playing field.

Sunday, 8 October 2006

What`s all this Fuss About

8th October 2006
The Malta Independent on Sunday

I can’t comprehend all this fuss from the Malta Tourism Authority (MTA) board where its members were threatened with legal action if they are found responsible for leaking out information.

MTA is no commercial organisation subject to competitive pressures. It is a national authority tasked with the responsibility of safeguarding the health of the tourism industry by seeking the involvement and co-operation of all participants in this field.

To my mind, MTA’s board should deal only with our strategy and its meetings could just as well be open to the public and the press. Getting everybody on board, and diffusing awareness about the importance of cultivating this sector to build a valuable brand for the Malta tourism product, could probably be better achieved by placing MTA board meetings in the public domain, rather than launching an expensive and quite meaningless media campaign.

Obviously, there are elements of a commercial nature related to procurement of goods and services that need not be exposed to the four winds. These need not be tackled at board level. The board should focus on strategy rather than the boring task of controlling recurrent expenditure, which should be delegated to the permanent executive to operate within the budget approved by the board.

There is something chronically wrong with the whole concept of MTA or its predecessor the NTOM. I remember that for a short time in the eighties, I was a member of the NTOM. I probably attended two or three meetings at most and gave it up as I considered it a complete waste of time. The board used to spend precious time arguing whether to give a few hundred liri sponsorship to this, that or the other but never found time to have a serious discussion about strategy. It seems nothing has really changed except a new obsession for secrecy about matters that really should be widely diffused to get the whole nation on a mission to make our product better and more valuable for our guests.

The whole concept of MTA needs to be re-thought. If the MTA is tasked with the execution of strategy what exactly do we need a Minister of Tourism for? And what can a Minister do for tourism if his colleagues in Cabinet, and their boss the Prime Minister, do not show sufficient sensitivity to the importance of our tourist sector?

What we need is a mixed committee chaired by the Prime Minister and incorporating a select Cabinet representation and representatives from the main private sector tourism business organisations. The CEO of MTA would be the secretary and act as the main link between this mixed committee and the permanent executive at the Ministry.

The mixed committee would hold its meetings in public and focus strictly on strategy especially on product development with all its dimensions. Without product development we will never build an attractive brand.

On product development alone, such a mixed committee would have an agenda to last five years. Let me just give a taste of some urgent improvement needed to render our tourist product more attractive, justifying a higher price to extract more value from this industry.

This week I had dinner at the Valletta Waterfront. My foreign guest was indeed impressed by the excellent work done by the promoters in restoring the Pinto stores and by the bubbliness and the colourful environment created. Business seems to be doing quite well, so I think it is a matter of time when further activities get organised to render the place more buzzing. But looking across the harbour, the bastions and fortifications of the Three Cities were in pitch darkness. How can we hide such treasures other countries can only dream of?

What does it take to raise the standard of our taxi and horse-cab services? Can’t we impose the discipline of a traditional uniform for the karozzin driver? Can’t we educate such important participants that fair and transparent pricing is in their own long-term interest?

When are we going to build the aura that our Neolithic temples deserve? Apart from the work-in-progress to protect these priceless treasures, we need to play on their scarcity value by limiting accessibility and by building replicas in which there will be live performances demonstrating the original use of such monuments. We need to give a sense of realness to these monuments, to show that they were built for a purpose on a land that has a history much longer than civilisation itself.

The events calendar needs to be much more aggressive. Night tours to
Valletta and Mdina should be a regular feature with a fireworks display every day at a fixed time.

In short, we must leverage our distinctive competences rather than continue to sell our products to the same segment which keeps demanding a greater discount every year. Our general marketing message has to be: “Come to
Malta for three days as what you see here in three days is not possible anywhere else”.

Then, after putting our house in order through a determined product development effort, we should take this message to the middle and higher market segment of European society who are getting accustomed to short break holidays in addition to one main holiday in summer.

It should be a fairly easy sell, producing momentum which builds on its own success rather than engage us in useless exercises of finger pointing for blame sharing, inducing paranoiac efforts to preserve secrecy and darkness where we actually need light, ventilation and diffusion.

Friday, 6 October 2006

Offending Democracy in the Name of Democracy

6th October 2006

The Malta Independent - Friday Wisdom

There are all indications that the government is keeping its options open when presenting the budget for 2007 later on this month, that it could well be the last one before the next general election.

Not that this is a constitutional requirement as the election could be held in summer 2008, leaving calendar space for another pre-election budget this time next year. But the rumblings and the posturing indicates that the government is planning a juicy budget on the expectation that if we make the grade for joining the euro in January 2008 it could slot a general election in autumn 2007, making the euro issue a main platform that distinguishes the two main parties, hopefully pushing into the background other bread and butter issues about which the government earns no stripes.

Even the hard-core grass roots of both the main parties seem to be gearing swiftly into election mode. The attendance at the PN festivities to mark the
Independence celebrations has been much larger than any other held since the last election. These manifestations are mostly aimed to keep the troops warmed up for the approaching challenges and the size of the crowd in no way reflects the popularity or otherwise of the party at national level.

The same can be said of Labour’s telethon collection on the same day. It has surpassed handsomely the amount collected in similar events of recent past held in September when many families are hard pressed with extra expenses to prepare their children back to school. Again, this is sort of preaching to the converted and is no reliable thermometer of how the party is faring at national level.

Elections come and go and the question of how political parties, the main instruments for the practical execution of democracy, fund themselves remains obscure. We have learnt nothing from other countries whose societies really prize living in a true democracy in order to bring political party funding under the spotlight. If not in the control of the amounts which are donated or “lent” to the parties at least in the level of disclosure of such donations or loans.

It is odd that whereas our two main political parties rarely agree on anything, on the question of their financing they seem to agree fully to keep them out of the public eye as much as possible. It is particularly strange that the Labour Party seems happy with this situation when it is clear to all who can add two and two that the PN is enjoying a great advantage on availability of financial resources.

As a minimum, those who truly believe in democracy should push for radical changes in the way our political parties finance their activities. There is no question that the normal running expenses of large political parties like the MLP and PN requires substantial funding which is hardly covered by membership fees, fund raising activities and genuine small donations through telethons. Financing elections, especially general elections, involves a bill that runs into the hundreds of thousands of liri and could even reach millions if the individual political expenses of the candidates and their “friends” are added on.

Surely democracy needs formal safeguard to see how this funding is being procured. We need safeguards to ensure that there are no strings attached and that such funding is not conditioning our political parties to restrain their freedom of execution of the political mandate they win, for which they should be responsible only to the people and not to their financiers. Otherwise, the basic granular principle of democracy that we are all the same and have the same democratic rights, which is expressed in the form of one-person-one-vote, irrespective of social status, becomes a mockery.

Otherwise, we will have a situation where our government is not chosen by the people through free execution of their democratic expression, but by commercial interests who invest their money in the political party that best protects their interest in order to create a more effective, and more expensive, media campaign. There is no question that modern society is influenced by appearances and perceptions skilfully delivered through mass marketing methods. Such methods could cover up own weaknesses and augment weaknesses of opponents.

Surely there must be enough influential people of goodwill who are prepared to take up the challenge to raise public awareness to the risk for effective democracy if political financing should remain shrouded in obscurity. Surely as a country, we ought to force our political parties to make full disclosure of donations in excess of a certain relatively small figure, to prohibit all loans other than those covered by a registered hypothec, and to have their finances audited by the National Audit Office to ensure compliance.

I appeal to H.E. the incumbent President and their Excellencies Presidents Emeritus, to take some initiative to pull the country out of its inertia and use the weight of their position to shed light on this dangerous obscurity. Otherwise, we will continue to offend democracy in the name of democracy.