Friday, 20 November 2009

Wealth or Debt

Wealth or Debt?

20th November 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

“Government decided to establish the National Investment Fund to serve as a means of long-term investment for our country. This Fund aims to create new sources of revenue for Government in order to decrease Government’s dependence on direct and indirect tax revenue from our people.

This Fund will be an institution that is directed on purely commercial lines from a team of professional people. The Fund will have a committee to draft the fund’s investment policy and its financial aims.

The intention is for the Fund to work in three main areas:

1. The management and direction of Government commercial property with the aim of maximising the State’s revenue from this property;

2. To hold investments in stocks and shares, both local and foreign, and with no controlling interest; and

3. To invest in national projects or projects of a strategic nature for the country, like the ones connected to the regeneration of Valletta.”

The setting up of the National Investment Fund (NIF) announced in the above short extract from the Budget Speech for 2010 has not attracted the attention it deserves. Indeed this is possibly so because the announcement was very scant on details and even in its brevity it tends to be contradictory.

Take the first paragraph. If the Fund is to have a long-term time horizon the government can hardly expect it to provide new sources of revenue to reduce its dependence on taxation. Also the announcement that the Fund will have a committee to draft the Fund’s investment policy and financial aims seems to conflict with its being directed on pure commercial lines.

Hopefully its directors will not simply draft the investment policy and objectives but also take active responsibility for the choice and management of the investments undertaken and that its decisions will be autonomous and independent from political influence of government appointing them. Some security of tenure for such directors needs to be built into the structure to ensure that their autonomy is effective in practice not just in theory.

We have seen this before. In the ‘bad old’ Mintoff days we had a Posterity Fund. It was created when Mintoff wanted to create a budget deficit following loss of earnings from the closure of the military base so as to make a case with foreign governments seeking a financial contribution to ease the pain of financial loss through the closure of the base. So charges started being made to the consolidated fund to create a Posterity Fund, which as the name implies was meant to undertake long term investments for the benefit of future generations.

As it so happened when the recession of the first half of the 1980s hit us these funds had to be lent out to ailing para-statal corporations with very scant prospects for recovery, including our shipyards, so that eventually the incoming nationalist administration of 1987 closed the Posterity Fund and transferred all the claims to central government.

Many countries, particularly those resource based like Norway, Russia, Opec members and China have since adopted the idea of creating what are technically referred to as SWF’s – Sovereign Wealth Funds. Acknowledging that resources are not limitless, SWF’s are created to safeguard the welfare of future generations who have an interest in the resources being exploited by the current generation. Consequently part of the revenues from current exploitation of natural resources are set apart in a separate fund which conducts the sort of investments as intended for our own new NIF conception. It is particularly symptomatic of its economic success, that Singapore, in spite of not being a resource based economy, has accumulated two very significant SWF’s which are major participants in the international private equity arena.

Our NIF will not be a SWF. We just don’t have the funds to put into it. Government is still nursing a chronic budget deficit and a high national debt level and basically the State simply does not have liquid funds to put aside for the creation of a SWF. So how exactly will our NIF be structured?

A critical reading of the brief announcement indicates that rather than a Wealth Fund this is expected to be a Debt fund. In the absence of an endowment in liquid form from the government, the NIF can only achieve objectives 2 and 3 above by raising debt possibly by using the security of the real estate which will be endowed to it under objective 1.

However objective 1. only speaks of ‘management and direction’ of government’s commercial property and does not include transfer of ownership. So there is doubtful possibility of using this government’s property to raise capital funding.

To get an idea of where the government is proposing to procure funding for the NIF one has to go back to the following extract from the 2006-2102 pre-budget document attractively stamped all over with ‘A Better Quality of Life’ branding.

“Government is looking at the possibility of moving forward the idea of securitisation of property. This entails the formation of a public company owning government property with an invitation to the public to invest in it leaving its management in private hands. The aim is to commercially exploit to the full a major government asset without the need to sell that asset but rather to create an investment vehicle open to the public.”

I had commented on this in an article in this series dated 19 August 2005 titled Selling Castille:

“This might look like a complicated financial structure but in reality it is quite simple. Through cool securitisation, the government could sell Castille to a government-owned public company which raises bonds from public subscription to pay the funds to the government. The government will then lease back Castille from the public company to give it cash flows to pay interest to bond holders and agree either to buy back the property at the end of the loan or to roll over the lease for a further period if the public financing vehicle rolls over the maturing bonds into new bonds.”

The idea has been brought back to life even though the international financial crisis has given securitisation a bad name. The subject however will not be Castille as I had half-jokingly said but will be the Valletta Regeneration Project including the City Gate project for which no funds have been directly voted in Budget 2010.

To my simple mind we are not creating a National Investment Fund. We are creating a vehicle to finance capital expenditure outside the budget and thus allow room for manoeuvre for government to achieve budget sanity in the medium term without cutting back on real investment. This sounds technically logical but in reality it is just swings and roundabouts.

What is not logical is the Minister’s statement in the Budget that for the NIF “the project will be regarded as an investment which will be leased to the Maltese State over a number of years. This means that this project’s funding will not be a burden on the taxes of the people of Malta and Gozo.” Sorry Minister, the Fund belongs to the people and all burdens and rights of the Fund belong to the people. Shifting loans and assets from one pocket to the other does not create wealth, just the same way Mintoff’s Posterity Fund did not.

No comments:

Post a Comment