Friday, 31 August 2007

Now that`s a Good Question

31st August 2007
The Malta Independent - Friday Wisdom

Quite often when an interviewer puts a question, the interviewee tries to gain time to set his brains working on an appropriate answer by stating: “now that’s a good question”.

I am generally put off by such a prefix. The interviewee would have to score very highly in his subsequent reply in order to regain my respect. The prefix is an insult to the interviewer as if one ought to be surprised at his placing what the interviewee considers a good question; as if the norm is for the interviewer to pose stupid questions. Furthermore, what we are interested in is informative intelligent answers rather eulogies about good questions.

So this week I was elated when the Enemalta chairman favoured us with a very pertinent answer to a question which has been twirling in my mind but which I never managed to express formally. I have been wondering at how it is that while the two main political parties seemed to be falling over each other promising extensive development plans for the inner
Grand Harbour area, nobody was asking the obvious question. When can we brush aside the Marsa power station in order to permit proper development of this strategic harbour location? How can the inner harbour area be truly developed if the power station continues to present a health hazard to all those within its immediate radius of operation?

At the last election I contested the fourth district which included Marsa and Paola – two places very much affected by the polluted environment generated by the power station. From my home visits I quickly formed the opinion that the single most important step which could make a change in the quality of living of my constituents in this area would be the closure and relocation of the Marsa power station.

I made it a focal point of my campaign to work for the solution of this continuous health hazard by transforming the inner harbour area into an international financial centre where international banks, fund managers, fund administrators and such like folks would be offered incentives to set up shop here in a modern office accommodation on the same concept of Canary Wharf in London.

Development with tasteful architecture, open spaces, magnificent views looking outward towards the external areas of the Grand Harbour and working right in the place where the Romans and their fore-runners used to ship in their stuff for the needs of the resident population. Traces of Roman roads leading right from Marsa to Mdina where this stuff used to be transported to safer inland areas are still evident till this very day.

Enemalta chairman informed us that because of EU regulations, the Marsa power station will have to be closed down by 2015. It has to be done not because it makes sense or because we can use the location for a much more lucrative scope but purely because the EU demands it and so we have do it begrudgingly at the latest permissible date.

This was stated in a consultation meeting organised by the Labour Party in its quest to appear as a government in waiting with ready plans to make optimum use of our scarce resources, which are often being misused by applying them to perform misguided functions.

The Marsa power station has been in operation for 45 years and is well beyond it use-by date. When the power station at Delimara was built, we were told that it would be big enough to accommodate our nation’s overall energy needs so that Marsa will be put out of service. This has not happened either because the demand for energy has increased much more than anticipated when Delimara was designed or because Delimara has not worked out as well as anticipated. Well, now Delimara is what it is and it should continue to be developed to accommodate all foreseeable energy needs to be able to close down Marsa without having to spoil some new virgin territory by placing another power station in somebody else’s backyard.

If Labour wishes to score they should applaud the closure of the Marsa power station and promise to work to bring such event forward by a few years. We should close down Marsa because this is sensible and necessary, not because the EU obliges us to. Because the land where the Marsa power station sits is invaluable and can be commercialised to generate economic growth and job creation which will make the financial burden of extending the Delimara Power station bearable.

Now that’s a good question. What? Which party is going to promise us to close the Marsa power station by 2012?

With August being consigned to history today we will soon enter the election fever stage where promises will start flying
six a dozen. We deserve realistic programmes and firm commitments with funding details to ensure the electorate can judge not only the desirability of what is being promised but also the likelihood of implementation without raising taxes in whatever shape or form they are packaged.

Friday, 24 August 2007

Shaping Voters`s Mind

24th August 2007

The Malta Independent - Friday Wisdom

With a general election less than twelve months away, with a great likelihood that it is in fact less than six months away, it would be a very dubious assumption for the PN to make that voters’ minds can be turned around with a strong budget next October and euro adoption celebrations at year end.

The voter’s mind is being formed now and once it forms it sets like concrete. Nothing can then reshape. I well remember a similar position when I used to militate in the Labour Party regarding the EU referendum issue.

The PN considered EU accession as a matter of principle and the conditions negotiated were details in the big picture. Labour on the contrary built their case for a partnership not membership on pragmatism of what was in
Malta's best interest. So while the PN had all the time in the world to build their case and form people's mind on EU membership as a matter of principle, almost as the only way to save us from ourselves and our indiscipline, Labour had to wait for the final terms of the negotiated treaty finalised in December 2002 in order to build their case against EU membership. By then the voters' mind had already set and nothing could turn it around.

My best bet for timing of the next elections is in the latter half of next February. Leaving it for later would bring considerable risks to the PN. The euphoria following Euro accession could well turn in disgruntlement as some upward inflationary pressure, even if one-off in nature, seeps into the economy as a result of Euro adoption. Even the operation of Mater Dei could turn into a liability as the shine of the new edifice is replaced by the defects in its operating performance which will undoubtedly emerge as it reaches full load beyond the first quarter of 2008.

Holding the election earlier would negate the government the momentum it expects from Euro adoption celebrations. A pre -Euro adoption election would have been conceivable if Labour had adopted an anti Euro stance. It would have again forced voters into the PN fold against their better judgment to avoid stalling the Euro project in its tracks. But having learnt from the 2003 misjudgments, Labour did not favour the PN with a high order distinguishing issue regarding Euro adoption.

So the choices for holding the next election have in practice narrowed substantially. February carries a good omen for this first Gonzi administration. The first Fenech Adami administration sought its re-election in a general election held on
22 February 1992 with parliament being dissolved when it was re-convened after the Christmas 1991 recess.

So on the working assumption that the general election is less than six months away, the PN should be seriously concerned that they are still trailing Labour in the polls and that recent events have extended the gap.

What must be seriously confounding the PN strategists is how is it that an improving macro-economic environment, with faster growth, falling unemployment, low inflation, improving tourism and strong manufacturing exports is not filtering down to the voters' base. How is it that a better economic performance is not delivering a feel good factor that will persuade voters to overcome their fatigue with the PN in office and stay with a known quantity rather than revert to Labour with no track record or even a bad record of their last tenure in government of merely 22 months?

I would dare suggest that the absence of feel good factor is with good reason. Very little of the economic growth is actually filtering down to the voters and most of it is showing itself in corporate profits, especially of the financial sector, the property sector and the export manufacturing. The very little that trickles down to the large swathe of middle class voters is being instantly eroded by higher utility bills, higher school fees and higher cost of services demanded by monopolies who can freely package TV bundles to ensure that we are constrained to buy what we don't like with what we like.

Added to this there is growing perception that Prime Minister Gonzi, in spite of good intentions, has lost control over his team who seem to have entered a grab-what-you- can mood in these final months of the legislature. With this growing perception, it is easy for voters to swing to the alternative once they see the incumbent practically clearing the desk.

Corruption, whether real or perceived, (in politics as in business marketing, perception is reality) is a very strong ticket for the Opposition who need not offer much beyond a corruption free administration.

As August slips into September, parents will soon enter into a back-to-school mode. Parents will face stiff expenses in the form of increased school fees or donations, higher cost of books, uniforms and supplies, and yet another utility bill with a killing surcharge. At the same time they harbour a growing conviction that Government has grossly overspent in a hospital project that is throwing up operational defects all over even though it has not yet been put under operational stress. Sprinkle a few corruption charges on these perceptions and the wish for a change come next election will become set concrete which will not be turned around by last minute promises.

This administration has put itself in an embarrassing situation where scoring better macro- economic performance is alienating rather than attracting voters.

Friday, 17 August 2007

Financial Order Under Stress

17th August 2007

The Malta Independent - Friday Wisdom

Most of my readers would probably have no idea what a hedge fund actually is or what the meaning of ABS, CDO and LBO is. As these are acronyms for financial jargon which is of a rather high level, I will not bother my readers with technical explanations as they would otherwise probably stop reading at this point.

What should however be of interest to readers is that the financial structures represented by this financial jargon is putting severe strain on the world financial order and that our economic well-being depends on financial order stability. Further destabilisation of the world financial order could cause loss of confidence, evaporation of liquidity, withdrawal of investment and ultimately will throw the economic cycle into a recession. This would effect the daily bread of most of us, so even if the subject may not appeal to you directly, I think you should read on.

It started in 2001 when the central banks dashed down interest rates to historical low levels in order to avert a recession following the burst of the tech bubble and the financial scandals of Enron and Worldcom. Interest stayed at an extremely low level until mid-2004 in the
US and until the end of 2005 in Europe and has been brought back to “normal” levels since in a very gradual manner. Interest rates stopped rising in the US in the summer of 2006 but are still rising in Europe, Australasia and Asia and before the financial disorder experienced in the last four weeks, expectations were for interest rates to continue rising,

Low interest rates and plentiful international liquidity caused by trade imbalances encouraged easy borrowing fuelling an explosion in real estate prices world-wide and encouraging financial speculators to borrow money at cheap rates to invest in high earning investments. In financial jargon, this is called leveraging.

In the
US, the housing market went out of control. Borrowers with bad credit record found it possible to raise 100% mortgages not only to buy their own residence but to speculate on the assumption that prices of houses in the US will continue to rise forever. Many of these borrowers had no regular income with which lenders could justify being satisfied of borrowers’ ability to service the mortgage and crazy schemes were introduced to allow unduly low rates in the initial years to justify the loan with the rate being reset at a high level after the initial teaser period. Unjustified optimism probably convinced borrowers that they could sell the property at a profit before the higher rates were to set it. With euphemism such mortgages were termed “sub-prime”. Garbage mortgages would have been more appropriate.

Lenders were lax in their lending standard because the risk was passed on and spread among investors world-wide. Securitisation of the mortgages enabled mortgage brokers and banks to package mortgages into different levels of default risk and rating agencies obliged by rating as strong investment grade, garbage bonds on which investors carried only a deferred risk of default as the primary risk was subscribed by more daring investors. Still financial garbage was miraculously changed by rating agencies into strong investment grade paper.

Now reality is catching up. Mortgage defaults in the
US are increasing alarmingly as residential property values fall below the debt mortgage obligation. Investors who borrowed cheap money to invest in such high yield paper are having their credit lines withdrawn and being forced to sell off their investments at a time when nobody wants to touch them. The liquidity cycle has broken as banks amass as much liquidity as possible to finance bond positions they had underwritten which now have to be carried on their books as the market has lost appetite for all risky assets. At several stages during the last week, the major world central banks had to switch to live mode on their function as lender of the last resort and flushed the banks with ample short-term liquidity in order to keep the inter-bank overnight rate close to the official bank rate.

Lack of visibility as to who is actually carrying the risk from mortgage defaults in the
US has caused stress on all values of financial assets which carry any risk. In circumstances of doubts about financial stability, investors take refuge in high-quality short-term sovereign bonds or outrightly in liquid cash or money market funds.

Thankfully, our domestic system does not have exposure to such woes. Local banks invest in very conservative risk-free assets and seem to have no exposure to such garbage bonds, whatever their rating. Banks in
Malta are highly liquid with excess capital and with enviable experience of compliance by mortgage borrowers generally. Our inherited culture of thrift serves us well during such unstable times.

There was certainly no sign of stress on
9 August 1997 when HSBC Malta inaugurated the Business Banking Centre in a new building adjacent to their operations centre in the former Centru Ruzar Briffa in Mill Street, Qormi. HSBC management deserve credit for putting their business centre in a place with easy access and adequate parking facilities where business clients can have access to specialised staff who in turn have the backing of their Operations Centre next door. Having the business centre next to but separate from the Operations Centre offers a better solution than the all-under-one-roof-model of the BOV Centre in Sta Venera where a client, to get into a meeting room with his banker, has to compete through the reception with many other visitors unrelated to business banking.

For me it was a dream coming true 10 years late. When as chairman of Mid-Med Bank I had obtained my board’s agreement to buy the same whole premises in 1997, it was to execute the same business model. Local politics however got in the way. The project was aborted prior to execution as the National Audit Office (NAO), in spite of agreement that the price negotiated was fair and reasonable (on the basis of a report made by three independent architects appointed by the NAO itself) thought it fit to go beyond their brief and suggest a total move out of Qormi to what was termed a more prestigious undefined location. It remains the only example I ever met where the NAO suggests spending more money than what was proposed and expressing views on operational strategy on which the NAO hold no brief.

Time is wiser than all of us. Ten years is a lot of time. HSBC, after spending many millions trying to redevelop the Operations Centre on the existent footprint, arrived exactly at the same conclusion my board had arrived at 10 years before. What happened to the critics who saw abuse where there was only sensible business strategy? Their silence deafens.


Friday, 10 August 2007

Selling Right

10th August 2007

The Malta Independent - Friday Wisdom

Melita Cable was sold by its founding private shareholders to an international private equity fund for a total enterprise value of EUR167 million.

This has been used by the opposition as a benchmark to prove the government’s incompetence in privatising two of
Malta’s largest public sector holdings in recent past. Mid-Med Bank was sold to HSBC in 1999 based on a total enterprise value of EUR247 million. Maltacom was privatised in 2005 based on a total enterprise value of EUR365 million.

As Melita Cable and Mid-Med operate in totally different sectors, direct price comparisons would be technically incorrect. Few doubt however that Mid-Med was sold so cheap and this was clearly reflected in the share market price developments in the immediate months following privatisation. One does not really need benchmarking to a sale of a private company in a different sector eight years later to prove that Mid-Med Bank’s privatisation was a bad deal, from the price point of view, for the Maltese taxpayer.

Benchmarking the sale of Melita in 2007 to Maltacom’s 60 per cent sale to Tecom of Dubai in 2005 is appropriate as both companies operate in the telecoms/media sector. Furthermore, the respective transactions were separated only by a rather short time of two years.

Melita is a private company so one does not get access to the same detailed financial information published by Maltacom as a publicly quoted company. It is therefore difficult for analysts to make a detailed technical comparison. But
Malta is a small place and one forms well-informed impressions about the profitability and size of private companies even without access to detailed financial information.

Melita was sold for EUR167 million enterprise value whereas Maltacom was sold for EUR365 enterprise value. In simple terms Maltacom, with all its subsidiaries was, sold for an enterprise value just a whisker above twice the enterprise value of Melita.

Melita is miniscule in comparison to Maltacom by all plausible measures. By turnover, by profits, by customer base, by asset base, by liquidity, and by any criterion one dares to choose, Maltacom towers over Melita.

What is the reason therefore that Melita shareholders realised a price far better than that realised by the government in passing majority control in Maltacom to Tecom even though the process of Maltacom’s privatisation was far more diligent and transparent compared to that of Mid-Med Bank?

How is it that miniscule Melita realises nearly half the value of towering Maltacom when Maltacom has an extensive fixed line legacy network that under efficient management could make a serious challenge to Melita’s core competency in media network services, and Maltacom has a very successful mobile telephone operation which Melita can only dream of?

As always there is probably a multitude of reasons. Certainly timing matters. The difference between fresh crisp salad and trash is timing. 2005 was not exactly an ideal time to sell a telecom company. History shows that in 2005 all business sectors registered substantial growth in their international share prices. The only exception was the telecom sector, especially fixed line legacy companies, which were being challenged by competition from mobile operators and media companies.

Events turned significantly in 2006 as legacy telecoms continued to return high operational cash flows and developed business plans to use their fixed line legacy networks to offer media services.

However, I think that the main reasons for this very unfavorable turn of events for Maltese taxpayers as vendors of the country’s investment in Maltacom, is that the government did pretty next to nothing to polish and burnish the asset to ensure it gets the best possible price for this prized investment.

How should have Maltacom been polished and burnished you are probably asking? Principally by doings two crucial things.

Firstly by floating on the market a minority shareholding of its most valuable investment in Go Mobile in order to give a market value to this subsidiary which was still shown in Maltacom’s books at ridiculously low historical cost.

And secondly by restructuring the company and getting it into shape prior to selling it. By selling Maltacom in a state of substantial overmanning and inefficient cost platform, the government shot itself in the foot as it depressed the enterprise value in the eyes of bidding contenders. If the government had had the courage to streamline Maltacom operations it could have obtained a price for Maltacom in more appropriate multiples of that obtained by Melita, properly reflecting its true potential enterprise value.

You don’t sell a second hand car with dents and scratches as surely you don’t get the best value for it. The government sold Maltacom full of dents and scratches and without polishing those elements which like Go Mobile were shining stars in their own right.

To avoid the temporary pain of restructuring we are forced to suffer the pain of selling our prized assets at sub- market value. Melita’s shareholders, to their credit, did not do that.

Friday, 3 August 2007

Insult as You Please

3rd August 2007

The Malta Independent - Friday Wisdom

The system whereby one can acquire a mobile phone connection in total anonymity is nothing but a licence to insult others with complete immunity. All one has to do is walk into any bucket shop selling SIM cards and with five liri one can start firing off offensive phone calls or text messages without any risk of having his or her identity discovered.

I never understood why this should be so. I never understood why is it that vendors of SIM cards are not obliged to procure the identity of their client and to register such identity with the mobile phone operator. All fixed lines are registered in someone’s name even if operated on a prepaid system without any billing. Why should mobile phones be any different?

It is one thing not having your number listed in a public directory but quite another having a telephone line which is not registered in anybody’s name not even with the telephone company which in consequence is allowing its network to be used for a totally anonymous and often abusive service.

Whenever I used to ask why is the system so the stock reply I got was that the telephone companies were all for line registration but internationally the practice was different and the Malta Communications Authority (MCA) was following international practice by allowing unregistered prepaid mobile phone connections.

It seems that international practice is changing.
Italy and Switzerland have already moved to compulsory registration and Britain and Germany are moving in that direction too. Frankly I think the MCA should do the same.

There are pretty few things that one can do with complete anonymity in a civilised society and certainly use of mobile telephony should not be among them.

For those like yours truly who have shifted most of their purchases to bank debit or credit cards, they leave an automatic trail of identity behind whatever they purchase. Even for those who still prefer cash as their favourite medium of exchange – modern society compels them to leave behind an identity trail. One is likely to find that most acquisitions of more than negligible value are made either through loyalty schemes operated by many retailers trying to win the continued custom of their clients or is otherwise registered in their name for purpose of warranty.

From mobile handsets to television sets, from internet subscription to cable television service, from airline travel ticket to hotel reservation one cannot obtain any such product or service without registering identity. Gone are the days when one could accumulate wealth in a bank bearer account. All items of value, from property to investments, from works of art to jewellery, the owner somehow leaves an identity trail of ownership either by direct registration or by indirect measures of protection such as insurance.

Even wealth accumulated in cash bearer form is now being attracted to renounce anonymity through special amnesty schemes promoting registration. The effort to regulate and control against abuse through registration of most things we do, buy or sell has become necessary in a civilised society which has then enacted data protection responsibilities to ensure that the collected data is only used for the intended purposes authorised by law or by clients’ consent.

It is therefore quite incomprehensible how a powerful tool such as a mobile telephone connection can easily be acquired in total anonymity permitting abusers total immunity in harassing and insulting others who make perfectly regular use of their mobile telephony service.

Most people I spoke to, admit having received harassing anonymous text messages so the problem is not exactly small. Anonymous messages are the technological equivalent of anonymous letters of old. Controlling anonymous letters was neigh impossible, as one cannot feasibly force registration of all letters without killing the very scope of the postal service. And in any event, anonymous letters left hard evidence which could be used to trace the originator by handwriting expertise and forensic investigations.

Anonymous text messages leave no trail whatsoever except the line connection number registered on the SIM card which is not registered under anybody’s identity. Even if technology could hypothetically permit identification of the location of the anonymous transmitter, being mobile anonymous text harassers they can easily move from location to location to avoid any possible trail back to their identity.

It is not too soon for the MCA to acknowledge that there is a problem with anonymous text message harassment and put order in the market by insisting on registration of all prepaid mobile connections over a reasonable period of time failing which the service has to be disconnected, and to provide for all new connections to be registered against proof of identity of its user.

My attitude has always been to ignore such anonymous text messages but it is annoying to feel like you are being watched over with someone texting you to tell where you were and with whom. The freedom of those who feel they have a right to harass anonymously is limiting the freedom of those who mind their own business and have no qualms in having their mobile number registered formally in their name and put it on their business visiting cards. The MCA should shift from protecting offenders to protecting bona fide users.