Friday, 25 May 2007

The America`s Cup of The Euro

25th May 2007

The Malta Independent - Friday Wisdom

The America’s Cup is for yachting what the World Cup is for football. Contenders from all parts of the world, supported by robust corporate sponsorships, battle it out in the Louis Vuitton competition to decide who among them will win the privilege of challenging Swiss-based Alinghi, the winner of the last edition of the America’s Cup.

But whoever wins the Louis Vuitton Cup, whether Luna Rossa or Team New
Zealand, who will be contesting the final, will have very little time for celebration. Because the Louis Vuitton is not the real objective but merely a means to get the right to challenge for the real prize; the right to challenge Alinghi to see who will be the 2007 winner of the America’s Cup.

This is an appropriate analogy with our situation vis-à-vis the euro. Our having passed the Maastricht criteria test and given the all clear to join the euro on 1 January, which will be formalised at the ECOFIN and Heads of EU governments summit next month, is like our winning the Louis Vuitton Cup. It is satisfying, but it is not the real prize. It is not the
America’s Cup! But it does give us the right to challenge for the real prize of making efficiency gains through attraction of new investments needed to help the restructuring of our economy to make it more flexible and more competitive.

I can only repeat what I had stated in my contribution of
5 January 2007, in this column, entitled The challenge comes after:

“The true challenge for making success of the euro will not be 2007. It will have to be a few years down the road when we can draw some conclusion about the success or otherwise of our euro project. Unlike what many might think, the euro challenge is not in the preparations for smooth changeover, which will be largely forgotten a few weeks after the event. It is in the process of the unfolding years after the event that will decide whether the euro has enabled us to accelerate the restructuring in order to preserve our competitiveness.

“2007 is pretty much a transitory year. Being the last full year before the latest date for holding fresh elections, governments tend to go soft on the restructuring process. Such issues like restructuring of the health services and a thorough overhaul of our fiscal system will have to wait till after the next election. The government has no tools to manage the economy in 2007. Fiscal policy needs to remain restrictive to pass the ultimate euro test. Monetary policy has effectively already been ceded to the ECB, which cannot be expected to fine-tune its monetary stance with
Malta in mind. Exchange rate policy has never been used to manage the economy since 1992. It has been rather meant to deliver an anchor of stability to our external trade.

“All in all, therefore, 2007 will be a cruising-along year. The real challenge comes after. Making success of our joining the euro depends on our determination to continue restructuring to avoid waste, as is currently inherent in our public services, and accepting that there is no such thing as a free lunch. The euro is certainly no free lunch. It is a veritable challenge.”

The real challenge comes after. Just as Luna Rossa or Team New
Zealand do not consider winning the Louis Vuitton Cup as their real objective, we should not consider being accepted to join the euro as our ultimate destination.

For Luna Rossa and Team New
Zealand their real objective is beating Alinghi and carrying home the America’s Cup. Without this the Louis Vuitton success would be nearly meaningless.

Malta, our euro objective is to use it as a catalyst to stimulate our re-structuring process, to make our economy more flexible and more competitive. It is the attraction of quality investment to make such restructuring smoother and less painful. It is the acceptance that nobody owes us a living and that we have to shed our wasteful practices if we are to win in the globalization game.

Thankfully we are being blessed with the opportunity to conduct such restructuring in the context of a booming European economy, which is surprisingly on the upside beyond anybody’s reasonable expectations.

Luna Rossa, Team New Zealand and Alinghi will know soon enough this summer who of them will go home carrying the America’s Cup and signing fat commercial endorsement sponsorships for the years ahead. For us it will take a few years down the road before we know if we can really celebrate winning the
America’s Cup of the euro.

Friday, 18 May 2007

Blair`s Ten at Ten

18th May 2007

The Malta Independent - Friday Wisdom

Finally UK Prime Minister Tony Blair announced 27 June as the day when he will hand over the premiership to a new leader of the British Labour Party who has to be appointed in the meantime. In all probability, he will hand over to his neighbour at No. 11, Chancellor of the Exchequer Gordon Brown.

This is as good a time as any for Blair to leave. Even though still 53 years old, he has under his belt a record of three successive election victories and leadership of the UK for an interrupted period of 10 years during which the country enjoyed remarkable growth, increased prosperity, strong public finances and very low unemployment.

On the international scene, he has established himself as an influential international leader with substantial achievements including the process of brokering peace in the Balkans and the liberalisation from oppressive regimes in Serbia and Albania, the hopefully permanent truce and abandonment of armed struggle by the IRA with regard to Northern Ireland, and the organisation of efforts to increase aid and debt forgiveness to the poorest countries, particularly those in Africa. He will be remembered for the staunch support he gave for the enlargement of the EU by the inclusion of 10 former communist eastern countries together with
Cyprus and Malta.

Within the UK Labour Party, although despised by those on the extreme left who consider Blair as not being one of them and dislike him for positioning the party almost on the right side of centre, he will always be regarded as the leader who finally managed to engineer the necessary institutional changes that made the party electable after an eternity of 18 years in opposition spent under four different leaders, and who for 10 years made Labour the natural party for governing Britain.

One of the characteristics of quality leaders is their ability to identify the right time to exit. Leaders of lesser quality tend to hold on to power thinking themselves indispensable and increasingly suffering from the law of diminishing returns. In a working democracy, 10 years and three election victories are probably the limit a leader can aspire to spend in position before fatigue sets upon the public’s perception of his image.

By going at this time in spite of his young age, Blair is avoiding the probable humiliation of defeat at the next election by a fresher leader of the Conservative Party who appears to be doing a Blair-like job in bringing his fossilised party back to the mainstream of British politics.

All this creditable performance is however tarnished by the only issue where Blair did not act like himself. The disaster of the war on
Iraq will forever act as a negative counter-weight to Blair’s other achievement and greatly reduces the value of the patrimony he leaves behind.

America and Britain went to war in Iraq is a question still inadequately answered more than four years after the event. Was it really all about the weapons of mass destruction? Or was there a grand plan to remake the Middle East in the misguided belief that the evil regime of Saddam can be replaced by a beacon of working democracy which will serve as a model for other regimes in the region, so that democracy will gradually propagate throughout the Middle East till it becomes a sort of little America in the sand?

Or was the invasion and occupation
Iraq stimulated by the desire to control oil security in the region? Or was it just that after the 11 September 2001 event that hurt US pride, America needed a massive demonstration of its power to repair its hurt ego?

With such flimsy and confusing reasons for going to war, why did a normally-objective Blair allow himself to be poodled into irrational subjectivity by President Bush, and his entourage of neo-conservative warmongers like Cheney, Rumsfeld and Wolfowitz, and agree to go to a war without clear objectives and without an exit strategy?

That is a question which is hard to find a convincing answer for. Clair Short, a former Secretary of State for International Development and a keen Blair supporter in the Cabinet had to resign in May 2003 after Blair went to war in what she calls an honourable deception.

In her book An Honourable Deception? – New
Labour, Iraq and the Misuse of Power, Short argues that Blair had committed himself with his Cabinet not to go to war without a clear and specific mandate from the United Nations. She argued that if Blair had stuck to his guns it would have been almost impossible for Bush to go it alone and Blair could have saved himself, America and the world from a disaster of gigantic proportions.

Blair still unconvincingly argues that
Britain has an obligation to stand by its natural and long-term ally, and almost suggests that it is nearly impossible and certainly inadvisable for Britain to let America go it alone, something that Germany and France found no compunction in doing.

As always it is the fullness of time that will best judge Blair’s rightful place in history.


Friday, 11 May 2007

By Their Fruits you will Know Them

11th May 2007

The Malta Independent - Friday Wisdom

According to the Gospel of St Matthew, Chapter 7 verses 16-20, Our Lord had said:

“You will know them by their fruits. Do men gather grapes from the bushes or figs from the thistles? Even so, every good tree bears good fruit, but a bad tree bears bad fruit. Every tree that does not bear good fruit is cut down and thrown in the fire. Therefore by their fruits you will know them.”

These are profound statements which capture basic truths with emphatic simplicity. You can tell a tree by its fruits, not by its leaves, branches or trunk. And so it is in real life, in so many other, perhaps more complicated, matters.

I was reminded of this week when Dr Frank Portelli, owner and operator of a private hospital, with strong affiliations to the Nationalist Party in government, openly criticised the government for the excessive costs incurred in the Mater Dei hospital. He compared the cost of a similarly sized hospital recently built in the
UK, which roughly came to half the total investment being accumulated in our Mater Dei Hospital and surmised that the only logical conclusion is that a lot of commissions must have been paid, which exploded the costs beyond anything within the bounds of reason.

This argument is not new to my readers. My contributions Auditing the Auditor (Friday Wisdom 16 February 2007) and It’s not a gift at all (Friday Wisdom 27 January 2006) had carried pretty much the same arguments and no satisfactory explanations were forthcoming from any official quarters. Dr Portelli went further than me, because I had not dared call a spade by its name, and attributed the excessive costs in generic terms to bad planning and inefficient execution.

Parliamentary Secretary Tonio Fenech, responsible for the finance portfolio in the Office of the Prime Minister and with particular responsibility for budgetary correctness in the execution of the Mater Dei project, lightly waved away Dr Portelli’s allegations explaining them as being empty claims without any proof whatsoever.

In the absence of valid explanations for the excessive costs compared to any value for money benchmark, the onus of proof reverses. Should we be expected to provide receipts, telephone tapes or other hard evidence as to who paid what to whom? Or is it not the government’s responsibility, once there is smoke (in the form of excessive costs compared to all value of money benchmarks), it has a duty to prove to us that there is no fire and that all has been spent with fair compliance to international standards of good financial housekeeping?

Dr Portelli and I had our differences in the past and he is one of two people I had to file libel against in my extensive public career. Let’s just say we don’t break bread together. And I do register that as owner of a private hospital, Dr Portelli may have a vested interested in criticising public health services.

On the other hand being an insider in the health sector he has better access than most regarding what such a hospital should cost and he quoted chapter and verse the costs of a similar benchmark hospital in
UK. He has not provided hard evidence of commission sleaze but he has surely provided evidence of the lack of value for money in the grossly inflated investments being made in Mater Dei.

Rather than wave away such sleaze claims as unfounded, the government should call in the National Audit Office and open its books to them to perform a thorough value for money audit. And if the Audit Office considers such a task beyond its capabilities or resources, they should bring in impartial experts from overseas to help them out with carrying this job effectively, without fear or favour.

You can tell a tree by its fruit. If the cost of Mater Dei has cost double (at least) what it should have then it is clear that the fruit is bad and the tree is bad. We don’t have to prove it. The government, as the executor responsible for such project has to disprove it. In this case the onus of proof reverts. Otherwise the Gospel is clear about what fate should await bad trees.

Friday, 4 May 2007

The End of Creativity

4th May 2007

The Malta Independent - Friday Wisdom

The appointment of Sonny Portelli as the new chairman of the Malta Council for Economic and Social Development (MCESD) marks the end of the government’s creativity.

The captain of MCESD should be a person independent from the main camps represented by its membership, ie government, the trade unions and the business formations, commanding respect of all sides, widely versed in macro-economic matters and having access to tools with which to nudge opposing positions into a workable consensus.

Sonny Portelli does not come anywhere near to fitting this bill. Gentlemanly Portelli would have been ideal for a tourism-related macro position where he could have put to good use his vast experience in the sector as a micro operator in the industry. But citing Portelli’s performance at guiding Maltacom through the privatisation process as good credentials for the top job at MCESD is illogical and irrelevant.

Firstly, because guiding Maltacom through privatisation demanded skills incomparable to those needed to make MCESD live up to its objective of achieving the wide consensus for a common economic policy that is essential to charge the restructuring that our economy needs to render it flexible, vibrant and capable of winning in the global markets. Secondly, because saying that the Maltacom privatisation process has been a success is a gratuitous, self-serving assertion that is not borne out by the facts on the ground.

How can Maltacom’s privatisation be considered a success if its share price, hovering around Lm2 prior to the announcement of the privatisation decision, is currently still frozen around the privatisation price of Lm1.55, even after the new majority shareholders have had ample time to convince the market about the value added that they are meant to bring into the company?

To judge the success or otherwise of Maltacom’s privatisation perhaps it is best to benchmark it against another contemporary privatisation exercise and see which one delivered the best value to its shareholders. I am referring to the Bank of Valletta privatisation of the last 26 per cent equity still owned by government which in the end never materialised, much to the benefit of its shareholders.

The different styles of management at Maltacom and Bank of Valletta during the privatisation process stand out in stark contrast. The management of Bank of Valletta adopted a business as usual attitude. They stressed that the sale of a block of shares by one shareholder to another was a matter that interested incoming and outgoing shareholders but their obligation was to manage the bank in the interests of all shareholders. Consequently, direction at Bank of Valletta kept its focus on the strategic development of the bank irrespective of the outcome of the privatisation process.

The progress of the bank was reflected in the bottom line, and the figures recently announced for the half-year to March 2007 are a blow out of all reasonable expectations, proving that Bank of Valletta is more than a match for its main competitor of international fame – HSBC.

By contrast, the management of Maltacom decided to basically freeze the company during the privatisation process, with a consequent loss of focus on strategic development. This in turn is being reflected in Maltacom’s financial results, which are showing contraction without mapping out any strategic plan as to how to re-launch the company on a growth platform.

This is best typified by how much Maltacom is lagging behind in the media sector at a time when all traditional fixed line legacy telecoms are making media one of their major growth areas.

Media infrastructure services, basically pay TV services, were liberalised one year before Maltacom was obliged to give up its monopoly over fixed line telephony services. During that year, Maltacom should have focused on rolling out its own media services in order to gain a share in the market that was dominated by Melita Cable before the latter had an opportunity to use their infrastructure to enter the fixed telephony business dominated by Maltacom.

Instead of grasping this opportunity, the directors of Maltacom simply froze the business development potential of the organisation, and consequently gave Melita Cable a chance to extend its first mover advantage. They simply waited for the new owners to come in with some magic solution for the development of the company. No wonder Maltacom is now finding it much more than difficult to penetrate the media sector that is dominated by Melita, than the latter is finding it to penetrate the fixed telephony business dominated by Maltacom. It is as if the direction of Maltacom during the privatisation process was meant to advantage its competitors.

What a change from Bank of Valletta! While the performance of the Bank of Valletta share price continued to progress, in spite of the withdrawal of the privatisation initiative by the government, Maltacom’s shares plummeted even post-privatisation.

Coming back to the MCESD choice, it would have been far more logical to search for a candidate from the Central Bank, which is the only economically oriented non-partisan national organisation in possession of the monetary and moral tools to nudge opposing positions into consensus. If the current governor cannot accept that position, there are at least three former governors (Lino Spiteri, Francis Vassallo and Emanuel Ellul) who could have been chosen for the post, if given the moral support of the present governor agreeing to be briefed about discussions at the MCESD when formulating monetary policy decisions.

Putting square pegs in round holes is the hallmark of inefficiency, and is gravely discordant in an institution tasked with promoting the adoption of economic policies meant to promote competitiveness and efficiency.