Friday, 27 April 2007

How not to do Things

27th April 2007
The Malta Independent - Friday Wisdom

Tax amnesties are tricky mechanisms. They should be used with utmost caution as they could well backfire and cause grave injustices to those who are regularly tax compliant. If overused, they could indeed foster the culture of tax evasion, as offending tax-payers can be tempted to wait for the next amnesty to regularise their position.

As a matter of principle I am against tax amnesties. Yet less than a year ago I had published a contribution entitled A Unique Opportunity (TMIS, 14 May 2006), in which I advocated the launch of a tax amnesty on the lines of the Currency and Bank Deposit Registration Scheme 2007 announced out of the blue last week. Is this a contradiction on my part?

It is not. Matters cannot be judged in isolation. The government had given three amnesties to tax offenders who kept their non-compliant funds in overseas investments, in the process breaking tax laws, exchange control regulations and possibly also making undue claims for undeserved social security benefits. How could the government, therefore, deny the opportunity to those who kept their non-compliant funds in Maltese liri without infringing exchange control regulations, to come clean? How can we offer amnesties to major offenders and deny them to smaller offenders?

I had argued that the fusion of our national currency with the euro on
1 January 2008 presents a unique opportunity to give one genuinely final tax amnesty to permit cash hoarders and the owners of undeclared bank deposits protected by confidentiality, to become tax compliant and, in the process, smooth the process of euro conversion.

I made three important provisos regarding the implementation of such a scheme. Firstly, that it should be launched very early to permit a long time for the necessary due diligence exercise of those declaring cash hoardings to ensure that provenance of such funds did not infringe money-laundering regulations.

I had suggested that such cash declarations should not be covered by confidentiality and should be formally informed to the authorities, who can keep a wider view to combat money laundering infringements. And finally I had suggested that the scheme should include a mechanism for the declared funds to be sterilised by freezing them on deposit for a number of years to ensure that there is no damaging rush of a dormant wave of liquidity into the real economy, which could spur demand for consumption and assets, thus giving a stimulus to inflation just at the time we are committing ourselves irreversibly into a rigid monetary union.

Others came out with similar or variant suggestions but they were met with official declarations that the government had no intention of launching any such amnesty scheme. This was repeatedly stated by the Prime Minister, who doubles as Finance Minister.

Last week there was a damaging change of heart. It is damaging because, after so many denials, it undermines credibility to launch yet another tax amnesty scheme out of the blue. Without such credibility, the scheme starts to look like just another fund-raising exercise, lending credence to the theory that from time to time, as the governments run out of money, it will launch yet another amnesty. So why come on board the tax compliance bus now, if another bus will be passing later?

It is damaging because it allows very little time, just three months, for the appointed registration agents to conduct due diligence regarding the provenance of undeclared funds, especially those in cash form.

There is more than Lm500 million in the form of cash in circulation supposedly for transactional purposes. A per capita quota of Lm1,250 proves that 90 per cent of this is, in reality, hoarded money out of circulation. Can registration agents be realistically expected to handle the registration of some Lm450 million in cash with the due diligence for money-laundering purposes in the space of three months, especially when dealing with new clients who have never had banking relationships as they always kept their savings in cash form?

And if investors of such cash registrations are to continue to be offered anonymity, who is going to have a central overview to ensure there is no structuring of cash funds that becoming collectively suspicious but are not so suspicious at the micro level of individual registrations?

The announced scheme has no serious mechanism to protect the economy against the risks of excessive liquidity migrating suddenly from the black economy to the declared economy. The provision for cash declarations to be blocked in an interest-free account for one year sounds more like a move to protect the Central Bank’s profitability for one more year than a serious attempt to protect from such macro-economic risks.

The Currency and Bank Deposits Registration Scheme 2007 is a typical example of how a sensible idea is poorly executed. It is a case study of how not to do things

Friday, 20 April 2007

Whose Land is it Anyway

20th April 2007

The Malta Independent - Friday Wisdom

The Maltacom volcano erupted again. After months of relative quiet the issue about the land at Qawra, reportedly carrying a commercial price tag of Lm10 million, has come back to persecute the government for bungling it in the privatisation process of Maltacom.

Some background would help readers to understand the issue in its proper perspective.

Until 1998 Maltacom was a wholly owned government company. Among the various real estate assets it owned there were three pieces of land which clearly had a high commercial value and which were not being used for the core business of the telecom company.

The Labour government decided to sell 40 per cent of the equity of Maltacom in 1998 keeping majority control through the remaining 60 per cent shareholding. The sale was done through an IPO (Initial Public Offering) on the local as well as on the international markets. Apart from the involvement of Mid-Med Bank, the government hired HSBC and Banque National de Paris (since then BNP Paribas) to advise it on the best value for the IPO launch.

When the two international banks produced their own valuation of the equity on offer the point was raised regarding the value given to these valuable pieces of real estate property which were not being used for the core telecom business. The answer was that no such specific value was being given as the company was valued for the IPO as a core telecom company and the value was based on the expected future growth and cash flows from such core business.

In view of this the Labour government at the time decided to transfer out of Maltacom the valuable land at St Julian’s prior to the IPO. The land was transferred to a separate government owned company and in fact the PN government sold this land for handsome millions to the promoters of what is currently known as the
Pender Place project. The wisdom of ejecting such valuable land out of Maltacom prior to the 1998 IPO was proved by subsequent events.

The land at Qawra was somehow allowed to stay within Maltacom’s real estate portfolio. Memory is playing tricks on me and I don’t recall exactly why this was not included in the transfer out package with the Pender Place land but I believe that either Maltacom had made the case that they needed it for their own core business or the land was held on very short-term tenure which made its commercial value of no great significance.

By the time the current government privatised the remaining 60 per cent of Maltacom through secret bidding on a trade sale basis to investors from Dubai in 2006, two things had happened since the first IPO. Firstly, Maltacom was no longer 100 per cent government owned but had 40 per cent private ownership. Secondly the land at Qawra had multiplied in value both as a result of the general increase in land prices but also because Maltacom had paid a substantial sum of money to purchase the freehold tenure for the land in question.

When the 60 per cent shareholding was sold to Dubai Investors the government sold it lock stock and barrel at a price some 25 per cent below its then current market price without stripping the company of assets which were not essential for its core business and therefore certainly not included in the valuation model which again was reportedly based on the enterprise growth potential and future cash flows.

In my criticism at the time I had singled the land at Qawra and the excessive cash reserves of Maltacom as assets which should have been extracted out of Maltacom prior to its final privatisation without any negative effect on the negotiated price once such extraction would not prejudice the company’s earnings potential from its core telecom business.

This could have been done by a commercial sale of the land at Qawra and the profits resulting therefrom as well as excessive cash reserves being distributed to the then shareholders, i.e. 60 per cent government and 40 per cent private, as a special dividend prior to final privatisation. I did not just write about it after the event. I had privately spoken to people in authority recommending that this be considered when rumours started circulating that sale of Maltacom was being negotiated without such precautions.

Having bungled the issue the responsible minister tried to parry subsequent criticism by stating in parliament that government had an agreement with the
Dubai investors for transfer of the Qawra land title to government against transfer of full title of various shops and offices used by Maltacom for its core business by title of lease from government. Nothing has happened since and the opposition is now accusing government of giving a Lm10 million present to the new majority owners of Maltacom.

In reality the land in question belongs to Maltacom plc and it is not a matter to be decided solely through negotiations between Tecom as majority shareholders and the government as the former majority shareholder. Minority shareholders’ rights must be respected.

If Maltacom feels that it does not need the land for its core operations it should sell it through a transparent bidding process. The resulting gains should be distributed to shareholders as a special dividend going some way to compensate the minority shareholders for the negative effect on their share price since Tecom bought over their majority stake at a price below the then applicable market value.

If Tecom agree that the privatisation price does not include the true commercial value of this land then they should, as a gesture of goodwill, pass on the special dividend cheque to the former owner, i.e. to the people of
Malta through their government, that once again has succeeded to bungle yet another privatisation process.

Friday, 13 April 2007

Malta Warming

13th April 2007

The Malta Independent - Friday Wisdom

Humanity is sitting on a ticking time bomb. If the vast majority of the world’s scientists are right, we have just 10 years to avert a major catastrophe that could send our entire planet into a tail-spin of epic destruction involving extreme weather, floods, droughts, epidemics and killer heat waves beyond anything we have ever experienced.
 This assertion comes from the hit documentary movie An Inconvenient Truth, which offers a passionate and inspirational look at one man’s fervent crusade to halt global warming’s deadly progress in its tracks by exposing the myths and misconceptions that surround it. That man is former Vice President Al Gore, who, in the wake of the questionable defeat in the 2000 US Presidential election, re-set the course of his life to focus on a last-ditch, all-out effort to help save the planet from irrevocable change. In the movie, which has yet to hit our shores, Al Gore is seen as never before in the media – funny, engaging, open and downright on fire about getting the surprisingly stirring truth about what he calls our “planetary emergency” out to ordinary citizens before it’s too late. In 2005, America experienced the worst storm season ever and Gore suggests we may be reaching a tipping point with catastrophic consequences.

Interspersed with the bracing facts and future predictions is the story of Gore’s personal journey: from an idealistic college student who first saw a massive environmental crisis looming; to a young senator facing a harrowing family tragedy that altered his perspective, to the man who almost became president but instead returned to the most important cause of his life – convinced that there is still time to make a difference. Gore argues we can no longer afford to view global warming as a political issue – rather, it is the biggest moral challenge facing our global civilisation.

In spite of the grave importance of the issues involved and the fact that as a little island we are gravely exposed to its serious consequences, global warming is hardly on the national agenda. There must be something radically wrong with this society if we lose so much energy arguing for and against spring hunting and bird trapping, and yet we do not put global warming, or at least
Malta warming, on the national agenda.

Either I am reading the wrong editions of the newspapers or else something unorthodox is going on. Recently there were two occasions where I had to discover about our concern with global warming and our serious risk exposure to its consequences from international rather than local sources.

Following the last EU Heads of Governments meeting in
Brussels on 9 March 2007, an agreement was signed making it a legal obligation for all members to reduce carbon emissions by making a substantial shift for energy generation from fossil fuels to renewable resources. Specifically, it was agreed: “The European Council emphasises that the EU is committed to transforming Europe into a highly energy-efficient and low greenhouse-gas-emitting economy and decides that, until a global and comprehensive post-2012 agreement is concluded, and without prejudice to its position in international negotiations, the EU makes a firm independent commitment to achieve at least a 20% reduction of greenhouse gas emissions by 2020 compared to 1990.”

As the meeting was drawing to a close, the correspondent from international news and business TV channel CNBC Europe fished out the Maltese Prime Minister from the group of Heads of Governments and asked him how a small country like
Malta could take on such an obligation when its size permitted no economies of scale for generation of renewable energy. The Prime Minister quite correctly argued that the obligation was a collective one and Malta could not withhold its consent to such a matter of life or death. He suggested that Malta would be in a position to buy excess renewable energy sources generated through economies of scale by larger member countries e.g. Italy.

More recently, during BBC Radio News a feature was carried about how small islands like
Malta are exposed to the consequences of global warming. A BBC journalist came here and interviewed a senior official from Water Services Corporation as they went down to the underground water galleries that serve as a reservoir for our water stock. He explained the infrastructural achievements of these galleries built after World War II and warned that rising sea water levels resulting from global warming could impair the usefulness of these reservoirs as the salinity level inevitably increases.

This could force us to depend even more on desalination for our water needs leading to more energy consumption and carbon emissions as desalination is a very energy-hungry process.

Why do our civil authorities show so much awareness to the
Malta warming problem at international level and yet have not made any visible effort to start a national campaign of awareness to its risk and the need for energy conservation at the capillary micro level?

A good starting point would be free cinema tickets for every family to go and see An Inconvenient Truth when it is launched.

At least it would save us the blushes of it being less popular than Mr Bean’s latest.