Sunday, 12 December 2010

Malta Fiscal Council

12th December 2010
The Malta Independent on Sunday

Countries that need to project themselves on financial markets as fiscally responsible, or as working towards fiscal responsibility, have taken steps to establish independent fiscal watchdogs to exert influence on governments for fiscal discipline and to provide independent analysis on the consequences of policy decisions and on the sustainability of public finances.

The US have the Congressional Budget Office, the UK has instituted the Office for Budget Responsibility, The Netherlands the Central Planning Bureau, Sweden the Fiscal Policy Council and Hungary the Fiscal Council. The EU has agreed to work out standards for such fiscal councils to be tasked with providing independent analysis, assessments and forecasts.

Such fiscal councils need to be independent and their financing has to be beyond the discretion of incumbent governments they are meant to monitor, to ensure that they are not abolished, or starved of funds, if their independence starts creating discomfort to the executive arm of democracy.

Some might argue that our fiscal position is not in crisis and the need for such a fiscal watchdog is as unnecessary as trying to solve a problem that does not exist. I beg to differ. Firstly because such watchdogs are meant to look beyond the current fiscal position and to express opinions on the fiscal sustainability of current or prospected policies (so that the Governor of the Central Bank would not remain the only Cassandra in town whose voice is quickly ignored by both sides of the political divide who cannot handle uncomfortable truths), and also because the current fiscal situation is not as good as it is made to be.

Politicians’ time frame rarely goes beyond the next election. So the Governor’s warning that our current policies of students’ grants and free universal health services are fiscally unsustainable will come to haunt future governments, not the current administration. Democracy works in a way that the incumbent is faulted for the sins committed by predecessor just like Obama is paying for the fiscal largesse and economic disaster inherited from Bush. So incumbents have no incentive to take unpopular pre-emptive measures to avoid future disasters which have a long gestation period beyond the next election. An independent and effective fiscal council would be tasked to bring out these hidden truths and to educate the public about the long-term bitter consequences of short-term fiscal sweeteners.

No country in the world, no matter how rich pays its students to go for tertiary education but some provide it free of charge, while socially sensitive but not so rich countries offer education financing which graduates would have to repay during their professional years. No country in the world provides its citizens with universal free entitlement to public health and elderly care; social conscience would suggest that such entitlements ought to be offered only to the needy out of the taxation of the rich. Taxing the rich to provide the same rich with free health service is a wasteful and economic nonsense justified only by our inability to enforce reliable means testing. Rather than solve the means testing problem (through lower tax rates and better enforcements), we allow unsustainable two-way transfer payments between taxpayers and government, which delivers an oversized public sector and gross inefficiency in providing supposedly free health services.

An independent fiscal council would translate the Governor’s warnings into projected facts and figures showing alternatives, i.e. either higher taxation to sustain current wasteful and unsocial entitlements or trimming entitlements to a needs only basis allowing more competitive taxation leading to incentives and efficiency.

As to my arguments that our current fiscal position is not as rosy as it is made out to be, I take the existing position as that reported for 2009 under the Maastricht criteria, as explained in NSO News Release of 22n October 2010 showing a net deficit of 3.8 per cent of GDP and 69 per cent Debt to GDP, which although out of the Maastricht criteria are very moderate considering the fiscal problems in other countries caused by the financial crisis.

I would argue that this position is an inappropriate reflection of the true situation. A glimpse of the true situation can be had by leafing through the Auditor General Report Public Accounts 2009.

In addition to the measured deficit, I argue that the following should also be considered as a hidden deficit:

€117 million in the Treasury Clearance Fund being advances to our shipyards made prior to 2002, which will never be repaid and which eventually will have to be provided for from the Consolidated Fund.

A very large chunk of contingent liabilities in the form of letters of comfort or outright guarantees issued by government to cover bank borrowing by various public entities amounting to €893 million, up by €119 million from the 2008 position. Can anyone safely assume the government will not have to pay under a guarantee of €46 million for bank borrowing by Foundation for Tomorrow Schools, €9 million for Property Management Services Ltd, €69 million by Malta Industrial Parks Ltd, and €218 million by Malta Freeport Corporation. All these are public sector borrowers with little or no commercial revenue and can only pay interest on their debt, let alone the capital, by transfers from the Consolidated Fund.

Included are also €534 million borrowed from banks by Enemalta and Water Services covered by government guarantees. How much of this will be repaid from the increased utilities tariff revenue and how much will eventually have to be made good by central government is anybody’s guess.

Financings still going on outside the approved budgetary estimates like the City Gate project and the crisis loan to Air Malta.

If one were to take a realistic view of our state of public financing and start calling a spade a spade, our current fiscal deficit to bring into mainstream all hidden deficits would certainly explode into fearful double figures.

What is comforting is that even at such elevated level (budget deficits exposed or hidden have to be financed either through direct borrowings or through guaranteed bank loans), we have no problems in financing it internally without any recourse to foreign (scarce and expensive) lines of credit. But such a comforting situation is the direct result of fiscal prudence at micro level where households and most businesses (outside the property sector) are compulsive savers ensuring that our economy remains liquid and that all bank lending is covered by stable deposits.

Rather than macro-fiscal prudence, it is the micro thrift culture that saved us. A Malta Fiscal Council is required to ensure that macro-fiscal policies do not abuse such thrift culture to the point of destruction.
Alfred Mifsud

Sunday, 28 November 2010

Can Air Malta restructuring fly

The Malta Independent on Sunday - 13.02.2011

Can Air Malta restructuring fly?

There is one thing worse than allowing Air Malta to go bankrupt. It is Air Malta going bankrupt after it burns through a palliative loan of €52 million which taxpayers will be advancing it as a liquidity breathing space till the re-structuring plan is executed.

Our record for organising effective and timely restructuring of loss making state-owned commercial enterprises is awful. It took us more than 20 years to restructure our shipyards and only after burning through some one and a quarter billion (nine zeros!!) euro. In the case of the shipyards, the government adopted a death by a thousand cuts strategy to avoid the harsh reality of deep cuts needed to restructure quickly and effectively.

Air Malta cannot be allowed to go the shipyards route. Not only because EU competition rules won’t allow it, but mostly because resources are scarce and we have none to waste. Air Malta has to be a one shot thorough restructuring or not at all.

The government has appointed a steering committee to oversee the restructuring. What does ‘oversee’ mean?  Does the committee have an executive role or is it just consultative? If it is purely consultative (as such steering committees normally are, given that governments cannot abdicate their responsibility towards taxpayers who would be funding the restructuring), what are the chances of all represented parties focusing on “where do we go from here” and “how do we get there” rather than getting bogged down in blame sharing of “how and who got us where we are?”

Not that we should not, when the time is right, indulge in a blame apportionment exercise to examine who is responsible for Air Malta’s ailments. Probably the best time for this would be at election time when workers and taxpayers will have both an opportunity to assess overall government performance in managing the economy, rather than just its record at Air Malta, as well as the possibility to take corrective action through their vote. But at present Air Malta is on fire and the priority is to put out the fire and rebuild on sound foundations rather than defensively guard one’s patch purely on the hypothesis that others are responsible for the sad state of affairs.

 Don’t get me wrong. It is hard for workers who have been through one austerity round after another to stomach yet more cuts. But Air Malta cannot be saved with its current cost structures if it is to compete effectively with airlines with a lower cost base. Just last month I was one of the last passengers descending an Air Malta flight which had just landed. A swarm of cleaners made their way up the plane to clean it and turn it around for its next leg. Air Malta cannot compete with such cost structures when competitors have their normal cabin crew clean the plane as part of their regular duties. Air Malta’s front cabin, reserved for the lucrative premium business travelers, is too small to afford such overheads.

Expecting taxpayers to fund a half-baked restructuring is just not on. If, as it was reported, Air Malta made losses even during the peak summer tourist season then the restructuring required is truly deep and raises grave doubt in my mind whether the government, steering committee, management or whoever is involved can deliver true change in the time available.

The steering committee could do worse than take a deep look at one of the most effective corporate restructurings carried out since the financial crisis. General Motors, which had been losing money in the best of times, was forced into bankruptcy by the evaporation of the market for new cars as soon as the financial crisis snapped in the fourth quarter of 2008.

Last week it was back in action under a new corporate profitable structure gaining confidence from private investors as its shares were again floated on the US and Canadian exchanges. The governments of the US and Canada bailed out GM on strict conditionality of true restructuring. Product lines were dropped, factories closed, agency and dealerships terminated, workforce slimmed down to levels permitting efficiency, work practices streamlined, bondholders and pension funds claims converted into equity positions in the new GM. This was a painful exercise. Problems that are neglected for a long number of years never have easy solutions. But the alternative would have been even more painful as the collapse of GM would have transmitted problems down the supplier chain sending into bankruptcy a string of component suppliers on whose health other car manufacturing companies also depended. Small wonder that competitor FORD fully supported the government bailout of GM to safeguard the existence of component suppliers on which it also depended.

 Air Malta today is much in the same position that GM was in November 2008 when it went cap in hand to US lawmakers lobbying for an urgent bailout. If Air Malta folds up it will not only be the employees and stakeholders of Air Malta that lose; it will be entire tourist industry that depends on Air Malta’s seat capacity. Blind believers in the free market, like competitor low cost airlines, will argue that they can fill the slack left by Air Malta. In so doing they would be talking their book. The death of a worthy competitor like Air Malta will give them pricing power to demand better terms from their customers or from government subsidies directly or through the NTOM budget. Much as we value low cost airlines’ contribution to our tourism sector, we cannot allow them to have the concentration of commercial power that would come their way through the demise of Air Malta.

 This is a typical case where policy change is not sufficiently thought through all its consequences. The restructuring Air Malta that now has to be done under a crisis scenario should have been undertaken in calmer waters when the government changed its policies to permit the operation of low cost airlines. That was the time to ease off all burdens which were politically loaded on Air Malta when it was a quasi-monopoly operator; burdens like free tickets to VIPs, excess labour in overhead departments, inflexible work practices, and involvement in activities that are cheaper to outsource rather than provide internally.

 Or is it that our Mediterranean temperament is not suitable for long term planning and we can only deliver under pressure of an impending crisis` Whatever it is, the dice is set. We now have no choice other than effective and painful restructuring under pressure from an acute crisis. The alternative is even more painful well beyond Air Malta’s confines. Burning through millions of euros without change to the final destination, which would sound the death knell for a national champion that made us proud in the 37 years of its existence, is simply unacceptable.

 I will continue contributing my bit by continuing to choose Air Malta even if it is not the cheapest offer.

Sunday, 14 November 2010

Who wants to kill the euro

The Malta Independent on Sunday - 14.11.2010

Who wants to kill the Euro?

“Will the euro be around in 20 years” was the title of this column on 21 March. I followed this up with a contribution entitled “Plan C for the Euro” carried by The Malta Business Weekly on 10 June. On 24 June, in a letter to the Financial Times, I suggested that some euro members ought to “Revert to old currencies temporarily” to save the euro. There can be no doubt: I consider the current euro set-up as unsustainable, and unless some thorough restructuring is carried out pretty soon, the euro’s days, months, or at best years, are numbered.

I am not alone in reaching such conclusions. A prominent British economist Samuel Brittan wrote a piece in the Financial Times on 5 November starkly entitled “The futile attempt to save the eurozone”. Many other leading economists share these views but are less dire in their prognosis. They argue that the Euro is mainly a political not an economic project and that while the economic structure for the single currency is unsustainable, the political commitment to change it, probably in the face of a deep crisis during some marathon weekend meeting where failure would force markets to rip the euro apart, would not fail when it matters.

 It is however difficult to feel positive about such political commitment considering events happening around us. It is as if the Germans are determined to destabilise the euro and bring about its early demise. Last May, at the peak of the Greek sovereign bond crisis, the EU agreed to set up a €750 billion rescue fund to help euro members who were having difficulty managing their debt through normal capital markets at anywhere near sensible interest rates. Primarily, this concerned Greece but other members like Ireland, Portugal and Spain were in the queue right behind it. At the same time, the European Central Bank (ECB) stepped in through market operations purchasing sovereign bonds in a direct measure aimed to create demand and narrow the interest rate spread over the benchmark German Bund. The ECB also continued its programmes of extending nearly unlimited credit to euro area banks, particularly Irish and Spanish banks, which were finding it difficult to fund themselves normally on the wholesale financial markets. This rescue brought some calm to debt markets and provided valuable time to countries in crisis to conduct extensive and painful restructuring in order to win back the confidence of international investors.

Even the Greek colonels, Franco and Salazar would have had problems pushing through the sort of pay and benefit cuts, the abolition of subsidies and tax increases that are being implemented in Greece, Spain and Portugal. Yet nothing compares to the harsh measures with which Ireland is forced to punish its people, not only to address the sudden deterioration in public finances but also to save its main banks from outright bankruptcy.

Amid all this restructuring pain and valiant efforts by the ECB to calm the markets and rebuild confidence on the feasibility of the painful and harsh adjustment programmes adopted by Ireland, Greece, Spain, and Portugal, the Germans seem to be working at cross purposes and seem to be doing their damn best to blow the whole system apart. How can one otherwise explain why the President of the Bundesbank, Axel Weber, who the Germans are promoting to take over from Trichet the presidency of the ECB this time next year, is rocking the boat by openly dissenting and criticising ECB’s policies as decided in a collegiate manner by its central board of governors on which Weber himself sits as a prominent member?

 How can one explain the change of heart on Germany’s part to dismantle the Rescue Fund agreed last May as soon as possible to replace it by a permanent crisis mechanism, which would force losses on investors holding sovereign bonds of euro area governments, even though this would require a laborious change to the EU treaties in order to set it up?  While the ECB works hard to reassure sovereign bond holders that there will be no default and therefore should not demand high risk premiums for lending to periphery euro members, the Germans promote the setting up of a mechanism to enforce default costs on sovereign bond investors. Little wonder that the spreads for Greece, Ireland, Spain and Portugal have gone back or exceeded the levels at the peak of the crisis last May and this in itself puts obstacles on the path of their tough adjustment programmes.

 Wolfgang Schauble , the German Finance Minister is quoted as saying: “Should a eurozone member ultimately find itself unable to consolidate its budgets and restore competitiveness, this country should as a last resort exit the monetary union while being able to remain a member of the EU.” Certainly Schauble should realise that if a weak member is forced out of the euro the market will inevitably ask who’s next. The whole system will disintegrate before there is time to suggest an answer.

If any country should exit the monetary unit without risking its disintegration, it has to be strong countries that are running a strong balance of payments surplus with other euro area countries. It has to be countries whose economic performance can sit well with a much higher foreign exchange value of their currency. So Ireland, Spain, Portugal and Greece should tell Minister Schauble that “Should a eurozone member ultimately find itself unable or unwilling to run down its structural surplus with other member states and with the rest of the world because it has become extremely competitive, then this country should, as a last resort, exit the monetary union to allow its domestic currency to appreciate reflecting its level of competitiveness, while being able to remain a member of the EU”.

 A recent research study I have access to, shows that while Germany will remain competitive with an exchange rate of US$1.50 for each euro, Greece would need a rate of 1:1, while Portugal, Italy and Spain would need a rate of 1.18. The nearest to Germany would be France and Austria with a rate of 1.25. So if Greece is an outlier on the negative side, Germany is an outlier on the positive side and outliers from both ends should embark on adjustment programmes.

 The eurozone, and by implication also the EU, is at a crossroad. It must choose between a Germanic Europe or a European Germany. The former is unacceptable, flies in the face of what the EU stands for and resurrects painful memories of German arrogance in the first half of the last century. A European Germany should understand that it is the main beneficiary of the euro monetary union and that it has much to lose if its irresponsible acts lead to its disintegration. A European Germany would understand that benefits from the euro monetary system come with a responsibility to keep the rest of the pack moving forward in sync through policies that bring about sustainable restructuring rather than force the weakest through a sausage machine.

Lest they forget, the Germans should remember that along with the French they were the first to throw away the euro rule book when it suited them and that Ireland is partly suffering due to a lax monetary policy adopted by the ECB to accommodate Germany when it was suffering the pain of integrating the former East German economy, at a time when Ireland needed much higher interest rates to prevent the real estate boom that nearly killed it when the bubble burst. Rather than destabilise the euro, German leaders should remind their electorate of the huge benefits they are getting by being a European Germany.

They should remember the distaste they would generate if Germany continues with its march to enforce a Germanic Europe.

Sunday, 31 October 2010

Like October rain

The Malta Independent on Sunday

Like October rain - 31.10.2010
The budget for 2011 read out in Parliament last Monday was as predictable as October rain.

The middle budget in any legislature has a particular feel that, in the absence of any crisis, delivers more political convenience than economic logic. It is probably the last real opportunity for the government to raise taxes and squeeze the middle class so as to lay the groundwork to ease up on the middle class in the remaining two budgets before the next election. On the other hand, that squeezing must be more restrained than in the first two budgets, lest public perception suffers irreparable damage that cannot be repaired by any fiscal back-pedalling in the remaining two budgets.

That is exactly what we got, and in clinically precise measures too. The middle class has been squeezed explicitly through higher taxes on fuel, tobacco, beer and alcohol spirits and implicitly by keeping the tax bands rigid, thus increasing the impact of taxation through normal revenue crawl. In compensation, the middle class only got minimal tax credit increases for private school fees due next year, a tax credit that has already been absorbed by the atrocious 12.5 per cent increase in private school fees that middle class parents have already faced in the first quarter of this scholastic year.

I suppose we should be thankful that, in the middle of international economic turmoil, our budget was a non-event, and indeed our economy seems to have recovered its growth path. Maybe it is indicative of elusive normalcy that while the Irish, the Greeks, the Spaniards and the Portuguese, among others, are having to absorb bitter austerity medicine, and while the French protest in the streets and paralyse the country with widespread strikes against the restructuring of the pension system – something we have been through already without a whimper – our national agenda is more concerned about whether we should continue to wear our Catholicism on our sleeves through the no-divorce-we’re-Maltese syndrome.

As an aside, I wonder whether the Minister would consider a religion tax to replace the controversial increase in the tourism tax. It would be ideal if we could persuade tourists to contribute to our national budget through higher taxation. But tourists have a choice of destinations and, coming at an uncertain time when Air Malta is removing seat capacity as part of its restructuring (I would have thought that Air Malta should cut expenses and non-core operations rather than revenue-generating seating capacity if it is to restructure effectively), a tourist tax increase could risk stalling tourism growth (a major contributor to our economic engine) in its tracks. Through a religion tax, we would be able to judge how many of the fundamentalists who insist on imposing their religious values on the rest of society would be willing to dip into their pocket to pay a tax for hearing Sunday Mass.

Lest I be misunderstood, I am not proposing a religion tax, just questioning the religious persuasion of the anti-divorce fundamentalists.

What is questionable is whether the budget is a cause or a consequence of the economic normalcy we are enjoying while all around us is in turmoil. My impression is that it is neither a cause nor a consequence. It is irrelevant! A lot of trumpets are being blown on how the deficit is being controlled and getting it back under three per cent of the GDP and then keep it cruising towards a balanced budget. But frankly there is so much massaging of figures going on in the computation of the budget that it can be made to hit any target one wants.

Let me give a couple of examples. We have no real idea how much the Citigate projects will cost. €80 million has been mentioned but, take my word for it, this is a very indicative estimate and as things go now that the project has been extended, and rightly so, to include the exterior approach to the main gate, the ultimate bottom line will be much bigger than first estimates. There is nothing in the budget that evidently votes money for this expenditure. If this were a revenue-generating project, like for example building a highway on which toll fees would be charged, then I could understand that the investment can be carried out on a commercial basis outside the Consolidated Fund. But Citigate is a non-revenue generating asset and should be financed fairly and squarely from the Consolidated Fund.

Take another example of how the budget deficit can be massaged to whatever one wants it to be, at least in the short term. Since 2005, under the capital expenditure vote of the Ministry of Finance, vote 7189, an increasing amount – estimated at €17 million for next year – is voted under the heading ‘TCF Advances’. TCF stand for Treasury Clearance Fund, which is a sort of a dirty fund where expenditure is funded without it being captured in the Consolidated Fund. So each year we vote capital expenditure, which in reality was incurred long ago in the past, probably without any economic benefit if the supposed capital expenditure was some sort of subvention for the shipyards or similar loss-making organisations, and which only now is being brought gradually in the mainstream books. With two-way transactions going through the TCF, what is the point of judging fiscal performance by the massaged fiscal deficit that the Minister sees fit to declare for any particular year?

If one is to judge the budget exercise on its own, immaterial of the impact it has on the overall economy, that judgement should be based on the actual out-turn on the budgetary position for 2010, which has now been revised from the original estimates. The bottom line is that in 2010 the government will have €64 million less revenue than projected. Recurrent expenditure is expected to exceed original projections by €41 million. The deficit will not show a combined deterioration of €105 million, being the sum total of these two adverse variance. The adverse variance will be ‘only’ €58 million because capital expenditure voted is being under-spent by €47 million.

What the economy needs is for the government to strengthen its revenue structures through efficiency and enforcement, control its recurrent expenditure through control of entitlements and social fraud, and strong capital expenditure to upgrade the infrastructure (maybe one day we can have decent roads and free flowing traffic, clean valleys and natural water reservoirs, protection of water resources in the geology underground table, and green energy). The 2010 fiscal performance merits a fail on all three tests. The government collected less revenue, spent more than planned in recurrent expenditure – which leaves no long-term beneficial impact on the economy, and spent less on capital expenditure, where we need to spend more, much more.

If our economy is rumbling along gracefully and can afford to have people discuss divorce rather than austerity, then credit should go to the people, to their resilience and ability to adjust even in the face of the most adverse circumstances. This was achieved in spite of, not because of, the government.

Sunday, 17 October 2010

What taxpayers want

The Malta Independent on Sunday

What taxpayers want - 17.10.2010

While putting the last touches to the public budget for 2011, which will be read out in Parliament later this month, the Minister of Finance should keep in mind what taxpayers want and what they deserve.

It is not just a simple matter of taxpayers wanting lower taxes. Taxpayers in general understand that, in a civil and social society, taxes are and will always remain an indispensable source of revenue to fund essential but not commercially viable services (law and order, defence, education, health, social services and non-productive infrastructure, among others), as well as to finance the general functions of government. But, more than ever, taxpayers want value for their money.

They want to see their money being spent with transparency and high standards of governance. The government has no money of its own. It manages the country’s debt and assets, which are owned by all society. Governments come and go, but society remains. The government is simply an agent of society and it is the duty of the agent to act in the interests of its principal and to protect the interests of the principal like a good paterfamilias.

Taxpayers are fed up of seeing our country humiliated by the falling standards of governance typical in the operations of a third term government. The strong rebuke given by the EU for lack of governance in the evaluation and award of the Delimara power station extension contract is typical of a government getting too comfortable with managing its affairs and our money. If such low standards of governance prevail in a contract that was under the close scrutiny of the media and the Opposition purely due to its sheer size, then imagine what governance standards prevail in smaller expenditure out of the spotlight in more shadowy corners.

Take the answer given by the Minister of Finance regarding claims of conflict of interest of a member on the Enemalta Board of Directors who also represents the organisation’s insurance broker. The minister sees no conflict of interest because the broker was not the ultimate beneficiary of the contract and, as a broker, his job was simply to identify the best deal for Enemalta. What does it matter to the minister that brokers live by the commission earned on such insurance contracts?

The minister’s argument is like saying that Enemalta’s chairman can also be the local representative of the turbine supplier because the ultimate beneficiary is the manufacturer not the agent. Unbelievable!

It is true that some conflict of interest may be unavoidable and in such case the conflict could be managed through full disclosure and withdrawal from particular matters where such conflict of interest is evident. But it is clear that this government – that expected a high standard of ethics from Labour when in government – lowers these standards when the boot is on the other foot.

Taxpayers do not want the awful experience, which is frighteningly becoming all too frequent, of interminable traffic jams in key arterial bottlenecks. It is high time to accelerate not only the project for better public transport (including an underground metro system in the long term) to encourage the reduced use of private transport, but also to invest in Singapore-type multi-level traffic intersections.

Efficiency gains need these investments if we are to move forward. Taxpayers are also fed up with hearing both sides of the electoral divide proclaiming that our universal entitlements to free health and education will be protected, come hell or high water. Many taxpayers are paying twice, first through general taxation and then again for private health insurance or private health and education services. To many people, the public service for which they pay taxes is just not up to scratch. And it can never be up to scratch if it has to provide for universal entitlement. The result will inevitably be falling standards, long queues and other forms of subtle rationing. Quantity and quality rarely go well together and often it is either one or the other. So taxpayers look forward to the day when, as has happened in the case of pension reform, they are finally told the truth: that the present universal entitlements system is utterly wasteful and clearly unsustainable and that their taxes can be lowered through restructuring by shifting from universal entitlements to limited entitlement by appropriate means testing.

Lower direct taxes will eliminate the discrimination where earned income is taxed at a higher marginal rate than unearned income (a regressive system, if ever there was one!) and will stimulate efficiency and investment as taxpayers are empowered to retain a higher portion of their earnings. It will also stimulate higher participation, especially by married women, in the labour force. It could also lead to better tax compliance, if the cost of compliance falls below the risks and costs of non-compliance.

Lax tax compliance is unfair to honest taxpayers and higher compliance could deliver lower tax rates without reducing the tax take. A simpler tax system would provide for lower marginal taxes and the removal of all the complicated system of exemptions and special provisions accumulated over the years to mitigate the high margin tax rate on certain types of earned income. And, if all this will only be feasible by raising indirect taxation through higher rates or a widening of the taxable base, then this should form part of the package to ensure that we keep our public finances on the straight and narrow and keep cruising gracefully towards a balanced budget in the medium term. Some may argue that such a project would be unsocial and regressive. I strongly disagree.

The social dimension should mean that the State, through taxation, provides to each according to their needs not providing everything to everyone. The latter involves the present wasteful transfer payments, whereby taxpayers pay taxes with the right hand and receive universal entitlements with the left hand. By avoiding such transfer payments, the bottom line should be that more resources are left for government to devote to those who really need them, while more money is left in the hands of taxpayers who can be trusted to take care of their own needs better than the government can on their behalf.

Taxpayers are asking that the taxation system be reformed to stop the practice of paying twice for the same service. The minister has before him all the claims made by unions, business organisations, civil society, the Church and other individuals. It is time, however, that the minister listened to what taxpayers want because, in the end, it is their money.

Sunday, 3 October 2010

The Road to Singapore

The Malta Independent on Sunday - 03.10.2010

The road to Singapore

The Global Completive Index for 2010 – 2011 (GCI) released by the World Economic Forum received superficial coverage in the local media with main emphasis on the fact that Malta has gained two places up the ranks from 52nd place n the last two reports to the 50th spot in the latest report.

The Index is by its own nature merely indicative and sources information which is not necessarily perfectly comparable across all countries.

So whilst superficially moving two places up the ladder is positive, in substance it is neither here nor there.

Deeper analysis provides valuable information of where we stand in comparison to reliable benchmark countries, what our strengths and our weaknesses are, and consequently draw some conclusions of what we have to do to get better.

Take for example the table of where we stand in the GCI index among the 27 EU nation states. We rank in the 21st spot.

 Some countries that joined the EU with us in 2004 stand ahead us. Estonia, Czech Republic, Poland and Cyprus stand in range between the 12th and the 15th spot, Slovenia and Lithuania somewhat behind them but ahead of us.   Hungary, Slovak Republic, Romania, Latvia and Bulgaria rank behind us.
Of the 15 countries that joined the EU before us only Greece ranks behind us and in fact it ranks right at the bottom in the 27th spot, for reasons which have been making negative financial headlines all throughout this year.

What factors are conditioning our ranking?   I propose to analyse by benchmarking with small countries that are in a similar stage of development, particularly Slovenia, Cyprus and Singapore. 111 evaluation criteria used have been clustered into 3 groupings, namely, Basic Requirements (applicable to all economies) Efficiency Enhancers (applicable also to developing economies) and Innovation and Sophistication factors applicable to advanced economies.

Here is how we rank against benchmarks

Country Overall Basic Requirements Efficiency Enhancers Innovation and Sophistication factors Singapore        3   2   1 10
Cyprus           40 29 36 36
Slovenia         45 34 46 35
Malta              50 40 47 46.      
Figures reflect ranking in Competitive Index out of 139 countries

To see where our strengths and weakness are I took the 10 criteria where we perform best and the 10 where we perform worst and compared them to the same benchmark countries.

10 criteria where Malta performs best         :

                                                         Malta Slovenia Cyprus Singapore

Incidence of Organized Crime              8         42         40           4
Auditing Standards                                8        48         18            4
Protections of minority shareholders   10      119         21            7  
Fixed telephone lines                              2       15         17          28
Interest rate spread                                10       52         49          63
Intensity of local competition                 9       43         18          28
Trade tariffs                                            4         4           4            2
Business impactof rules on FDI             7      116         33           1
Financing through local equity market   9        84         65          5
Soundness of banks                               10      110         31          9
Figures reflect ranking in Competitive Index out of 139 countries

One should note that our financial infrastructure provides 5 of the 10 winning criteria.
Our high ranking in fixed line telephony is of doubtful value as many countries skipped legacy communication technology and rank behind in fixed line telephony but ahead in more important mobile and digital communication.

Of particular interest are the criteria where we perform worst.

10 criteria where Malta performs worst

                                                            Malta      Slovenia     Cyprus    Singapore
Burden of government regulation         96             52              23               1
Quality of roads                                   113             42              23               1
Available airline seat kms                     92            121              61             17
Quality of electricity supply                  89              32              31               9
National savings rate                           133              54            127               6
Government debt                                 111              61            100           130
Flexibility of wage determination          86           117               97              3
Female participation in labour force     119             31              58            86
Domestic market size                            128             80            104            49
Tertiary education enrolment rate           72              4                55           30

Figures reflect ranking in Competitive Index out of 139 countries

Some of these we would readily agree to, in particular the quality of our roads and of the electricity supply.

Hopefully we are doing something about it.

Others things are inherent weaknesses we can do pretty little about like the size of the domestic market and availability of airline seat kilometres.

Our poor rating in the national saving rate must be inaccurate as de facto this is one of our strengths, and it seems that some erroneous data was picked up which is condemning us without fault.

Even the low ranking in government debt is surprising given that our financing did not suffer an explosive growth as a result of the financial crisis and ensuing recession.

Same applies for the reported lack of flexibility in wage determination.

I think this is more applicable to the public sector than the overall economy. In these three criteria I think we probably rank better than reported and in fact the World Economic Forum admits using indirect sources of information for these criteria.

However there are other criteria we should be doing something about or we are simply not doing enough.

Government bureaucracy (note were Singapore ranks here – right at the top), female participation in the labour market, and tertiary education enrolment are real weaknesses which are prejudicing our competitiveness.

Add these to our mid table ranking in criteria related to public sector governance (favouritism in decisions of government officials, transparency of government policy making , corruption)and little effort is needed to conclude where we have to improve to seriously improve our ranking and become serious contenders for FDI’s based on credentials of efficiency and innovation.

The good thing is that improvement in these areas requires strong will rather than strong Euros and improvement does not involve negative influence on government funding and fiscal position.

On the contrary, any money invested to improve where it matters will produce multiples in economic growth and resultant government revenues.

If we really want to we can set out on the road to Singapore.

Tuesday, 28 September 2010

Not Quite Convinced or Satisfied by Soft Contrition

Financial Times

Sir, In `Casino jibes do our banks no justice` (September 24), Barclays` outgoing chief executive, John Varley, makes a soft act of contrition and a misrepresentation that core investment banking activities of universal banks consist primarily of positions backing products and services with embedded derivatives providing clients with risk management tools. He says nothing about proprietary trading, which brought many banks to the brink of failure, often at great taxpayers` risk and expense.

Barclays avoided such a rescue mostly due to two strokes of luck rather than internal prudence or risk management skills. The acquisition of ABN Amro sunk RBS and Fortis rather than Barclays, who would have been lumped with it save for the bigger fools in the room. The blind acquisition of Lehman, which was vetoed at the 11th hour by the British authorities, saved Barclays from self-destruction.

Barclays owes the British public more than a soft contrition. It owes a big thank you rather than hints of temptation to relocate if regulators take measures to address its `too big to fail` systemic risk.

Sunday, 19 September 2010

Neglecting What Saved Us

The Malta Independent on Sunday 19.09.2010

Neglecting what saved us

Often we hear boasts from different quarters claiming credit for the fact that our banking sector has remained rock solid even during a financial crisis that shook the best and the rest.   Credit is certainly due.

What is questionable is to whom.

Primarily it is due to our forefathers who have imbued into us a strong culture of thrift.   Thrift ensured that funds necessary for macro and micro investments were found internally without resorting to foreign borrowing in any meaningful manner.   Thrift empowered our domestic banks to fund all their loan books through retail deposit with liquidity to spare.   When the 2008 liquidity crunch hit, our banks were not at the mercy of wholesale lenders withdrawing credit lines simultaneously.

Northern Rock, Bear Stearns, Lehman Brothers, Royal Bank of Scotland, Citibank, Lloyds Bank, Fortis, Hypo Real Estate and many others remain horror stories we read about but thankfully distant
from local realities.

Credit is due to local bankers who stuck to what modern finance whizz kids would consider boring utility banking of taking deposits and converting them into loans to other sectors of the economy, basically the traditional intermediation role of banks between savers and investors.
Prudent banking policies ensured that loan books remained in relatively good performing condition.
Loans were never hived off from our banks’ balance sheet through securitisation.   The need for banks to know their customer who was to remain an asset on their balance for a very long time, ensured that the credit approval process remained robust and capable of withstanding economic downturns.

As success has many fathers, credit has been claimed also by the political class and the regulators.
Probably a measure of credit is due to this class as well but recent events seem to suggest that this credit is mostly due by accident rather than by design.   Otherwise our regulators would not be allowing the stark erosion of competitive advantages that have saved us in times of troubles.

It is strange but true that this is happening whilst financial regulators worldwide are carefully designing stricter regulations and tightening supervision over financial markets to avoid a relapse similar to the 2007 -2009 crisis.

This by no means implies that regulators are allowing or condoning breach of the written rule book.
Effective regulation, however, goes well beyond the rule book.  Effective regulation depends on the wink and the nod much more than it depends on the rule book. It is this wink and the nod which seems to be disappearing from our system of financial regulation.

Let me be as specific as prudence permits me to be.    Local banks that operate across the whole service universe are a great asset to the economy.     HSBC and Bank of Valletta dominate but smaller banks like APS and Lombard offer competition relative to their size.    Recently these were joined by a Banif, a Portuguese owned bank that added spice to the competition much to the benefit of consumers, be they savers or borrowers.

Some competition also comes from foreign owned banks operating mostly to book international business, but once here, they adopt a rather laid back approach to attracting local deposits and do some local lending.

The spectrum was until recently complete with a specialised bank like FimBank, a niche bank with internationally recognised competence for specialised trade finance that competes prudently for fund raising whilst adding value to the local economy through offering trade finance to both local enterprises as well foreign units owned by local entrepreneurs.

All these banks are credit licensed institutions authorised to participate in the privilege to raise deposits in this liquid economy and benefit from the Deposit Protection Insurance set up by the regulator.

 In essence this insurance is a contingent liability that exposes the taxpayer to substantial liability if such liability were to change from contingent to real ( as happened in UK with the failure of
Icelandic banks operating under the home deposit protection scheme which was clearly insufficient and the burden spilled over to the UK taxpayer).

The system has a cloak of fairness around it, a sort of unwritten social contract among the banks, the depositors and the taxpayers represented by the government and the regulator.   The taxpayer offers the depositors an explicitly limited and implicitly unlimited guarantee on their deposits and the banks in return intermediate such deposit by transforming them into maturity mismatched loans to permit the economy to grow through private sector investments in factories, hotels, real estate, homes and to a limited extent consumption borrowing.

This unwritten social contract was breached when a foreign owned bank, using a name, corporate colours and logo which attempt to draw brand power from the former Mid-Med Bank, was licensed
to compete aggressively in the deposit market purely and explicitly to operate as a long only highly leveraged hedge fund investing in high rated foreign fixed income securities.
A thorough analysis of their financials, which show a bare gearing of some 27 times gross assets to equity and consequent unweighted  capital ratio of less than 4% which magically converts to a comfortable 37% through regulatory risk weighting of the assets, shows this is clearly a hedge fund licensed to raise deposits which are used to fund margin for borrowing huge sums on wholesale inter-bank  market to invest in high rated papers currently accepted for repo by the European Central Bank (ECB).

The promoters of the new bank are clever to exploit a rare opportunity created by the artificial scenario caused by the ECB’s rescue effort to stabilise the banking system, where banks can borrow
short term at near zero rate from the ECB, and consequently on interbank markets on a secured basis, and invest same in high rated paper generating a margin of 3% (300 basis points) or more.

 Nothing wrong in banks doing this to restore their balance sheets after the knock they received in 2008/2009, and so be able to start functioning properly again in their crucial intermediation function.

However there is something gravely wrong in allowing private equity investors to dress their hedge fund with a Maltese credit institution licence and ride free on the Maltese taxpayers’ explicit and implicit guarantee to raise deposits which are immediately leaked out of our economy and used to provide margin calls for huge wholesale funding.
Such margins funding is normally done by hedge fund investors with their own money without any taxpayer protection.

Hopefully we will not have another banking crisis in my lifetime and this lowering of our regulatory standards, especially the unwritten wink and nod type, will not send any bill to our taxpayers.  Hopefully I will sound like a Cassandra.    But this does not mean that we should take the risks we are taking.  No way can anyone be satisfied that we are really out of the woods in the financial crisis.

Barclays promoting Bob Diamond to the CEO role says it plainly that the big banks just don’t get it and insist on running casino banking alongside taxpayer protected utility banking. This is like lighting a bonfire next to a fireworks factory.    Barclays received two great strokes of luck that saved it from casino bets that Bob Diamond wanted it to make. It was saved from disaster of overpaying for ABN AMRO just before the crisis hit in 2007, purely because there was a bigger fool who over paid even more. The bigger fool was a tandem formed by RBS and Fortis who both had to be saved at great taxpayers’ expense.

Barclays was saved a second time by the British Government by refusing to authorise its blind purchase of Lehman Brothers which would have wiped out Barclays through the acquisition of overpriced toxic assets.   As it happened following Lehman bankruptcy, Barclays acquired the pieces of Lehman it really needed basically for free and without any risk. It was not Bob Diamond’s skill that kept Barclays on the straight and narrow; it was pure lady luck.

Yet Diamond gets promoted to CEO, secures atrocious remuneration deals and bullies the UK regulator that if they pursue with plans to break up Barclays to separate casino banking from utility banking he will move the bank to a new jurisdiction.

Secondly we should not assume blindly that the ECB will be there forever. The sustainability of the Euro system is being increasingly questioned. Whilst the political will to save the Euro remains strong, ultimately if the price of saving it gets too big, no one should assume a blank cheque from anyone.

And if the ECB is not there to offer repo’s to banks that need instant liquidity would the burden fall on our own Central Bank, and if so would it have the appetite and the capacity to offer such repo’s?

  Are we oblivion to such hidden risks or are we truly willing to neglect what saved us?  

Sunday, 5 September 2010

Caught Between Extremes

The Malta Independent on Sunday  - 05 09 2010

 I just finished reading a Research Note issued by a major global bank on ‘The Future of the Euro’ and it is clear that as the Euro area gets ever more divided into two extremes, Malta is sitting right in the middle. It is not a bad place to be.
If all other Euro members were sitting in close proximity the monetary union would be a much happier and peaceful place.

Reality is much different.

Essentially the EU has become divided into three groups giving a de facto three speed EU.

Motoring along at awesome speed, practically as if the global crisis never happened, are Germany Austria. Netherlands and Scandinavia ( Denmark, Sweden and Finland) who along with Luxembourg and Switzerland are by all measures out of the recession, seeing unemployment falling, growth returning at pre-crisis rates or better, improving fiscal structures and strong balance of payments position.

At the other extreme you have Ireland, Portugal, Spain and UK who are undergoing strong fiscal consolidation to address chronic fiscal imbalances, at a time of high unemployment and economic contraction while dealing with a broken banking system severely damaged by the bursting of the property bubble.

Greece has not been included in the extreme group at the wrong end of the spectrum because even within this group Greece would be an outlier.

Greece’s problems are not so much caused by the global crisis but by a long period of economic mismanagement, undue rigidities suppressing the spirit of innovation and competitiveness, and fiscal evasion on massive scale in an engrained culture of public sector corruption and social benefits fraud.

In the middle close to the point of general equilibrium are a group of countries led by France and Italy comprising Belgium, Slovakia, Slovenia, Cyprus and Malta.

This middle group shows general equilibrium with respectable balance of payments position, slow but positive growth, a healthy banking system underpinned by strong domestic thrift culture, and a fiscal position which although outside the normal Maastricht criteria remains acceptable in the context of a global recession and is expected to continue improving through a combination of increased fiscal revenues from normal growth and mild austerity measures. Where do we go from here? 

Two reflections first.

For all self-criticism about our state of things when examined from the outside looking in, we are quite in shape.   Of course we should be much better given that we are nursing a substantial accumulation of national debt over the last quarter century which is not reflected in the state and quality of our infrastructure.

But as a nation, rather than as a government, we have been prudent and hardworking, we have avoided leverage exposure to foreign lenders and we have kept this a fairly good place to live or visit, with a quality of life superior to what pure financial per capita income would tend to suggest.

With careful and well planned investment, avoiding the sort of tragicomedies we are experiencing in the Delimara power station extension contract, we can make this a much better place and can render our economy more competitive and stable.

Secondly we are living in times of extremes.

Half of the economic cadre, the likes of Paul Krugman in the US and Martin Wolf in UK, argue that governments need to continue stimulating the economy to create demand as otherwise the contraction in consumption could lead the economies of US and UK into a dangerous depression which it would be very painful to recover from.

At the other extreme we have the Chicago economic school of thought who firmly believe in the self healing powers of the free market, arguing that the last stimulus was a perfect waste of money and that further stimulus would be more so as the market needs to be given time to self correct and governments should as much as possible get out of the way by reducing taxes, rather than take a more central role in managing demand.

For those mindful of economic history it is the Keynesian school in a tussle with Ricardian School, but this time in extreme doses.

Experience shows that reality is somewhere in the middle.

I believe that the crisis of 2008 was so sudden and sharp that without massive government intervention we would have experienced a thirties style depression.   Now that the economy has been stabilised, even though growth is anaemic and well below potential, further benefits from any stimulus would be outweighed by the negative vibrations from increasing fiscal deficits.

With governments having limited economic and political capacity to increase deficits to stimulate demand, and with monetary policy having exhausted most of its tool box and at best capable of avoiding a depression but is as likely to stimulate demand as ‘pushing on a string’, growth will be organic, slow but sustainable.

In this context a major portion of the stress of the adjustment process will have to be carried by the foreign exchange markets.  Countries with chronic Balance of Payments surpluses will see pressure on their currency to appreciate.

We are witnessing the Japanese Yen and the Swiss Franc reaching record levels and the China facing increasing political pressure to let its currency float a bit more freely to reflect the country’s economic progress.

Countries with deficits will be forced to see their currencies depreciate as the only practical way to balance their economies by gaining competitiveness on the export front and fill their resource gap through  foreign demand as home consumers stay on the lean and meant while deleveraging and repairing their balance sheets.

Central among these is the US which desperately needs a weaker dollar.

In this context the Euro is an enigma.   The German core are having a free ride through being super competitive without finding appreciating pressure on their currency which is kept down by the woes of Greece and its companions in distress.

The problems of Greece, Ireland, Spain and Portugal are a big bonus for German competitiveness.
Unfortunately labour mobility within the EU is still very viscous.   Were it otherwise the Greeks and the Spanish would merely pack their bags and move to fill opportunities in German core countries.

This will not happen on any significant scale.

These imbalance and the pressure they build in a monetary union among members with very disparate economic realities will continue to stimulate tensions putting the future of the euro
in jeopardy. A small country like us has no choice but to watch out with vigilance while building a strong balanced economy to protect us in the turmoil that awaits.

Sunday, 22 August 2010

After All Has Been Said

The Malta Independent on Sunday   - 22 08 2010
What can be said about the late Guido Demarco that has not been said already`

Honour, tribute and homage have been poured upon his memory in doses which make it difficult to find anything new to say, if not personal experiences or weaknesses from which no human is spared but which are out of place in an obituary.

Guido always impressed me with his warmth whenever we met.   He was invariably happy to meet me and was always ready with unmerited eulogy on some piece I would have written.

He really had a knack for making whoever he met feel important.  One always parted him with a wish to meet again soon.

On assuming Presidency, which was roughly the same time I published a book on Malta’s future relations with the EU, we had exploratory discussions on possible ways how Labour could be less confrontational about EU membership and how his Presidency could become acceptable to Labour to enable him to operate as a unifying force in Maltese politics.

Regretfully no progress was registered on both issues but surely not for lack of trying from Guido Demarco’s side.

What can be said about the divorce issue that has not already been said?

The Curia’s Pro-Vicar Fr Anton Gouder did find something new when he stated categorically that voting for divorce would be a sin without entering into the merits of whether he was referring to a referendum vote, a parliamentary vote or to both.

He also expressed marvel that surveys show that 15% are still undecided about such an important issue and disappointed that 40% have expressed themselves in favour.

Fr Gouder can pontificate as much as he wants about divorce but as someone responsible for where the Church is going he should well ask what relevance the church will have in our daily lives a few years down the road if even today 55% are not outrightly against divorce; if a larger percentage in the under 55 years category are prepared to consider divorce positively if legislation carries safeguards to ensure that it is only accessible to those for whom marriage has broken down irretrievably, with due precautions to safeguard the children’s rights.

There is one thing Fr Gouder and I probably agree upon for different reasons.

We probably both agree that divorce should not be decided through a referendum.

Fr Gouder ought to be against a referendum to avoid having wholesale commission of mortal sins on the scale of the sixties.   Personally I am against a referendum because I consider divorce to be a right of the individual and such rights should not be agreed to or denied based on the will of the majority.

If we do a referendum about divorce we can just as well do a referendum on whether we should continue to pay unemployment benefits or social assistance.

If our political class cannot take responsibility for doing what 40% of us demand without any imposition on the remaining 60% than let the divorce issue mature on its own steam without a referendum which would give us the worst of both worlds; a large segment of the population committing mortal sin without resolving anything, simply postponing the problem to the next generation who will one day laugh disdainfully at our narrow mindedness.

And if the Fr Gouders of this world are screaming that divorce desired by the 40% would be imposed on the remaining 60% as they would be living in a divorce-minded society, even though personally they would not be obliged to make use of divorce facilities, I wonder what difference this would make to the 60% who are already living in a separation-minded society with a jungle law for unwedded family units.

On the contrary there is a lot to say about the proposal to raise retirement age for Judges from the present level of 65 years.

The suggestion made by retiring Mr Justice Carmel Agius is not without merits but also has negative connotations that cannot be ignored.

It is true that in many countries Judges retire at a more advanced stage and in the US, supreme court justices, court of appeals judges, and district court judges are appointed for a life term or until they voluntarily resign.

Such open ended appointments are risky in a local context.   Judiciary is the third branch of government.
Unlike the first two branches (the legislative and the executive) the Judiciary is not subject to constitutionally demanded periodic validation through democratic elections.

Without age limits the Judiciary will have an unchecked mandate which defies the essence of democracy.

One could argue in favour of a higher retirement age, but only if such a measure is accompanied by limits of minimum age to qualify for appointment.  To my mind ten years is the ideal time a person should spend in such important positions, be he a Prime Minister or a Chief Justice.

If a person does a good job for ten years in such position of high responsibility he ought to be exhausted and looking forward to retirement to let new blood creep in.  Beyond ten years in the same position , human nature being what it is, the decision making process of a rational person tends to become irrational, from objective its shifts to subjective, and from analytical it morphs into assertive.

Retirement age for Judges is the only control we have to ensure members of the judiciary do not grow too comfortable in such position of high responsibility.

If longevity means that Judges can continue performing effectively till age 70, them a 10 year maximum term ought to be imposed.

Retirement at 70 would be the maximum for a Judge appointed to the bench at age 60.

And the method for appointment of the judiciary has to be more challenging than the present system of a simple unilateral decision by the Executive.   Some parliamentary screening will surely add value and transparency to the appointment process.

Retirement does not mean all valuable experience will be lost.  Legal research and publications need not stop with retirement.   And there are other positions which retired judges could be considered for, like a former Chief Justice is doing as an Ombudsman.

There is yet much to say about this.

Sunday, 8 August 2010

Europeans are from Mars

The Malta Independent on Sunday   - 08 08 2010
Men are from Mars, Women are from Venus goes the saying originated by the 1992 book of John Gray arguing that men and women are as different as beings from different planets. The stark difference between the US and European approach to the painful and long drawn economic recovery from the greatest recession since the thirties, makes me draw parallels that Europeans are from Mars while Americans are from Venus.

Jean Claude Trichet surprised many when on July 23rd he called for worldwide tightening backing tax rises and spending cuts to address the large fiscal deficits built into most governments budgetary position by the financial crisis of 2007 – 2009 when tax revenues fell and social spending increased alongside additional spending by governments to cushion their economies from spiralling into a depression. He was not just laying out monetary plans for the Euro area for which the ECB is responsible directly or for the total EU area for which it is indirectly responsible given that the ultimate destination should be for all EU members to join the Euro.

He was recommending world-wide tightening, giving advice, if not instructions, to others beyond European shores and stopping just short of a straight admonition about their misguided lax monetary and fiscal policy.

This contrasts sharply with the general approach adopted by Trichet’s counter-part on the other side of the Atlantic who regularly expresses the caution against tightening up too quickly before the economic recovery gets firmly entrenched, warning that any such pre-mature tightening could trip the economy into a double dip recession.

Both the US Treasury and the US Federal Reserve Bank extol the virtue of fiscal prudence for the long term, but like St Augustine they pray for latent rather than instant virtuosity. While Trichet was writing that “we have to avoid an asymmetry between bold, if justified, loosening and unduly hesitant retrenchment..... and with the benefit of hindsight we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrialised economies under the motto ‘stimulate, activate, spend’ “ Bernanke was advising the US Congress that he supported fiscal efforts to boost demand before the US embarked on a well controlled long term deficit reduction plan. He was telling Congress that the prospects for the US economy were ‘unusually uncertain’ and that the Fed believes that the US ‘should maintain a reasonable degree of fiscal support , stimulus for the economy’.

Never before have there been such monetary duels between the two major economic blocks of the industrialised world. Another example of how the great recession caused by the financial crisis of 2007-2009 is changing the rules and game and leading to different views from different vantage points.

Let me speculate about the reasons leading to such duels. The simple reason, too simple really, is that whilst the ECB is only tasked with a unitary objective to keep inflation in the Euro area below but close to 2% p.a., the US Fed not only has no specific inflation targets but has additional responsibility to keep economic growth and employment as close as possible to the potential of the US economy.

So strictly speaking the ECB in setting its policies gives much less attention to the impact they may have on economic growth and employment and instead is guided solely by the single inflation objective irrespective of other macro-economic considerations. Whilst this is undeniably so, it is too simple to assume that in reality the ECB does make any macro-economic consideration other than inflation. This would be unrealistic as economies are dynamic systems and if they do not grow they contract and could fall into a depression, denying the possibility of honouring the close to 2% inflation target. In a depression prices retrench and real interest rates rise, causing an increased debt burden to suffocate new investment which is also discouraged by diminishing demand.

There must be other reasons why the ECB seems more relaxed about the prospects of the EU economy than the Fed is about the US economy. Amongst these is the fact that the property crisis which originated in the US on a nation-wide basis, was only replicated in Europe in some peripheral countries like Ireland and Spain but was no problem in the core EU countries like Germany and France where property prices neither hiked speculatively nor crashed horrendously when the US bubble burst.

So whilst the financial crisis created by the property bubble in the US was quickly exported world-wide due to the mobility of capital that rendered many European banks exposed to US financial products related to US mortgages, the property crash per se remained a largely US affair. Now that the financial system has stabilised it is the US not Europe that has a stranglehold around its monetary policy by the large number of consumers who are still nursing negative equity mortgages as property prices in the US continue to bump along the bottom.

Still I feel there is a more potent, often unspoken, reason for the contrasting approach of the ECB and the Fed. Whilst in the US the Fed oversees a political federation and is responsible for the economy of the whole federation there is a clear tendency in the Frankfurt building of the ECB to measure the fortunes of the EU by those of the core northern European countries with Germany as the core of the core. Policies are not tailored for the needs of the periphery countries who are expected to drudge along and shape their economies on the German model with little respect to the environmental, cultural and skill differences. Whilst the overall EU economy is struggling to grow, the German export machine, aided by the fall in the Euro and the rise of the US dollar in the first half of this year, is humming along with impressive speed and consistency.

Trichet is showing undue optimism if he thinks that Spain, Portugal and Greece amongst others can benefit the same way as Germany from Chinese demand for imports of investment machinery and luxury products. The fortunes of the Euro are already reversing. The Cassandras on the US side which just two months ago were predicting dollar parity with the Euro by end of summer are now eating humble pie as the US gently engineers a fall in the dollar value which is key to reviving export demand to fill the gap in the subdued internal consumer demand as the US consumer has to save more to nurse his/her negative mortgage.

It would be wise for Trichet to keep options open rather than paint the ECB into a corner from which it could exit only with an egg on its face as it did when it raised rates in June 2008, just a quarter before the crisis hit. And again as it had to do very recently when it was forced by the Greek sovereign crisis to start buying sovereign bonds of its members after denying any plans to do so. It would also be wise for the ECB to fine tune its policies with less German-centricity. As Trichet’s term nears its end, the ECB would be served better if it chooses by Banca d’Italia Draghi to lead it rather Bundesbank’s (BUBA) Weber unless the ECB is to be labelled BUBA mark 2.

Rather than Mars perhaps the ECB can come down to Earth. 


Sunday, 25 July 2010

Cynical Me

The Malta Independent on Sunday - 25 07 2010

Do we have a shadow government?   In posing this question, I use ‘shadow’ not in the sense of shadow cabinet or shadow minister to explain the role of the Opposition in keeping tabs on the government’s work. I use it in the sense that company law gives to shadow directors, people not formally appointed as directors on the board of a commercial company who have a strong influence on the directors, who simply act as agents of the shadow directors.

Try as I can to believe in the goodwill of fellow citizens, I cannot help growing ever more suspicious, to the point of turning cynical, that, apart from the official government, we have a more powerful shadow government. Nothing else explains the reluctance, indeed resistance, to launch a new package of rules and regulations concerning funding for the operation and capital investments of our political parties.

This issue has been discussed for years on end, through parliamentary select committees or independent commissions, but nothing ever changes. The status quo seems to be serving powerful interests well. On the maxim that he who pays the piper calls the tune, any judicious observer has a duty to suspect that political parties have a serious conflict of interest between their general duty to discharge their democratic functions in the interests of the general electorate and their obligations to the narrow segment that makes a disproportionate share of contributions towards party funding.

This conflict of interest then starts producing strange occurrences that defy logic and seriously prejudice basic standards of responsible governance. How else can one explain suspicious contract awards either on a direct basis or through grossly faulty competitive bidding` The Delimara power station extension contract is merely the most recent in a trend of similar contentious awards, which include the direct sale of Mid-Med Bank and the privatisation of Freeport operations as prime examples.

Yet these are only instances that make it to the surface because they stand out like a sore thumb. Beneath the surface, by merely adopting the logical use of averages, there must be innumerable cases of smaller governance infringements that cumulatively pay rich dividends to those who finance political parties. Appointments of the same few talking heads to posts with strong executive power on the fringes of extended government operations bear witness of interests that need protection by friendly faces.

A game of musical chairs has been going on for too long, as if the country produces no new blood to carry it to higher levels rather than just perpetuate the scratching of backs silent affair. Why do we suffer such democratic deficit more than other countries?

I can think of two reasons. Firstly, our two-party system – where the winner takes all and the loser merely observes and criticises, but without having effective tools to supervise – gives government absolute power. And if power corrupts, absolute power corrupts absolutely. The political systems of other countries apportion power more fractionally, forcing power sharing through coalitions.

Secondly, alternation of political power has not worked properly since 1987 and that’s a generation ago. The 1996 alternation of power never took root. History will pass judgment on why this happened, but to my mind it is clear that the wide power network, in which the PN is merely a political cell, worked hard to erase the democratic mandate and restore political power to their own.

I remain equally doubtful about the effectiveness of political power alternation for which the electorate may in future vote. Shadows all over, or just cynical me?   

Sunday, 11 July 2010

Defining Social

The Malta Independent on Sunday - 11 07 2010

Why on earth is the Social Affairs Committee (SAC) of our national Parliament wasting its time discussing who should and who should not transmit premium football coverage on pay networks?   Surely there are much more pressing issues of a far more serious nature that should keep the SAC extremely busy, not least among which is the national debate about the introduction of divorce that has, thankfully, again been brought to the fore through the courageous initiative of a back-bencher in the government ranks.

 Surely the SAC should have been working on the divorce issue, which by all accounts has become an issue of strong national importance, given the explosion in the number of marriage breakdowns, children born out of wedlock and the preponderance of unmarried family units. I respect the opinions of all those who have anything serious to say about the divorce issue, from those who, mostly for religious reasons, exclude the very principle of divorce for any reason whatsoever, to the other extreme of those who consider divorce as a civic right that is denied almost exclusively to us Maltese among all peoples on this planet.

What I do not respect is the clear attempt made by the Prime Minister to wash his hands of the matter by stating that this issue should not be decided by a few parliamentarians but by the people. The people can have a say over such matter either through a general election or through a specific referendum. Any attempt to use the medium of a general election for an expression of people’s view on the matter would be cheap political tactics to gain votes and deny freedom of expression outside the rather rigid political divide that our electoral realities confirm at each general election.

On the other hand, abdication of government’s responsibilities to defend the interest of minorities, even substantial ones, and leave them at the mercy of the majority, who thankfully have no need to understand the misery of those who suffer a marriage breakdown, is not dissimilar to holding a referendum among the rich on whether the government should continue to provide social security to the poor. The SAC should be busy, among other things, in extensive consultations on the level of conditionality that the legislation should provide for accessing divorce.

Can someone explain convincingly why divorce should continue to be denied to couples who have been legally separated for endless years and who have no children or have no responsibility for minor children born in wedlock?  What harm can society suffer from the introduction of divorce with such tough conditionality?  Or is it purely a case of religious fundamentalism seeking to impose its values on those who see no merit in fundamentalism.

Yet the SAC thinks it is more urgent to discuss payment for premium sport programmes, which in the end will go to finance such worthy social causes as John Terry’s £200,000 weekly salary, or Cristiano Ronaldo’s expense of a few millions to pay off the surrogate mother of his newborn baby. Football has become an expensive business and if one chooses to see live premium content one has to be prepared to pay for it.

Consumers’ rights are protected by the national broadcasting regulator who classifies certain sport activities as events of importance for society and obliges the broadcasting of such events on a free-to-air basis. Such obligations are normally reserved for events of national importance, such as, for example football matches of the national team, or international events of crucial importance like the final stages of the FIFA World Cup and the UEFA Cup for European nations. In Malta we turn everything upside down.

When the national football team plays competitive matches the transmission, if at all, is on exclusive premium channels and nobody raises a finger in protest. But because a premium TV operator wins, through competitive bidding, exclusive rights for run-of-the-mill weekly club matches of no national importance, specifically the Italian Serie A and the English Premier League, then this becomes a social matter for the SAC. Come off it!

Where was the SAC when such exclusive rights were enjoyed by Melita Cable?  Or is it OK for Melita Cable to enjoy exclusive rights but becomes socially irresponsible for such exclusivity to be enjoyed by GO? Whose interest is the SAC defending` From where I stand, given that the issue has only been raised after exclusivity has switched from one operator to another following competitive bidding, it would seem more likely that they are defending the interests of the operator who lost out rather than the interests of the consumer.

If the winning bidder were to be constrained to share its rights with unsuccessful competitors, the obvious outcome would be that operators would either not bid at all or bid a very low price in the comfort of knowing that if their competitors win they could be forced to share the spoils. If this were to happen, it is more likely that rights would not be awarded at all, with everyone losing out, most of all the consumer.

Consumer protection does not come from imposing unfair competition among operators. It comes from fair competition within the framework of a regulated market to ensure standards are met and that exclusivity does not lead to abusive pricing. Rather than the SAC poking its nose where it does not belong, it should prod the broadcasting regulator to widen the definition of events of importance for society, certainly including football matches of the national team, and the consumer protection agency to ensure fair pricing and minimum standards. Otherwise the SAC should keep itself busy with truly social issues.

Sunday, 27 June 2010

Apres Moi

The Malta Independent on Sunday  - 27 -06-2010

When the government wanted to sell the premium property occupied by the former Holiday Inn Hotel on the Fort Cambridge site, it issued a public tender with a development brief explaining what sort of buildings could be supported on this land. When, in the end, the property was adjudicated to the current developer, the government and Air Malta pocketed between them the princely sum of about €70 million, cash on delivery.

No claims were raised of any irregularities, as the bidding process was conducted with very acceptable transparency levels. On the contrary, it was the winning bidder that complained of unfair treatment when the Mepa approval process took too long to justify being out of pocket with the acquisition prices during the extended permit approval process. The developers complained of drastic changes made by Mepa to the development brief on the basis of which the tender bid had been made and won. For once, the taxpayer ended up on the winning side.

It is strange that a privatisation model that worked well for the taxpayer was instantly cast aside. When the SmartCity project was negotiated, no public bidding was involved. Direct negotiations were held with the Dubai investors and eventually a deal was struck that, notwithstanding that it contains some element of attraction for regional investment in the telecom and high tech sectors, remains essentially a real estate project with residential units, hotels, marina and all. It is a Portomaso in the south, with the difference that the Portomaso owners had had the land in their title since 1964, whereas the new investors in SmartCity were given public land for a pittance.

Still no serious claims of malfeasance were raised. Local developers made some privately expressed side murmurs that, given the opportunity, they could have bettered the terms awarded to the Dubai investors, but there was nothing beyond that. The lure of foreign investment from Dubai (at a time when the Dubai brand had not yet been tarnished by their recent bond default debacle) and the need to locate in the south a major ‘clean’ development to compensate for it being burdened with most of Malta’s ‘dirty’ industrial projects, including the power station and the Freeport, was generally considered sufficient justification for avoiding a full scale bidding process.

It is, however, incredible that the government has chosen the SmartCity model, rather than the Fort Cambridge model, to privatise White Rocks. This is atrocious. White Rocks is premium property along Malta’s northern shoreline. Its open commercial value for real estate development using very conservative plot ratios would come with a handsome nine-digit figure. So any argument that the proposed project will not cost a penny to the taxpayer is laughable, if not malicious. It will cost the taxpayer a high price tag in lost opportunity.

I concede that in defining the privatisation path for such a project, the government cannot look solely to maximising revenue in total neglect of all other considerations. If the government wants to include an element of sports infrastructure to provide missing facilities that will improve the quality of life of the local sport-loving community and act as an attraction for sport-related tourism, that is within its prerogative. What is not within the government’s prerogative, at least from a governance standards perspective, is to negotiate directly with a single bidder of its own choice without opening up the process for competitive bidding in a fair and transparent manner.

 I find the chosen process offensive for two reasons. Direct contract awards open the door to all sorts of speculation of impropriety, favouritism and corruption. I can imagine how much energy will be lost in useless investigations where corruption cannot be proved but suspicions remain. When government departs so widely from governance standards, the onus of proof reverses. Rather than us lesser mortals having to prove corruption, it is the government that will have to prove integrity, despite the lack of a competitive bidding process.

Secondly, I find a pattern where Maltese developers are continually being discriminated against, whereas foreign developers continue to be offered red carpet treatment. The land where the Radisson St Julian’s now stands was given at no cost to a French developer who did nothing but flip it over at great profit to the Maltese owners who developed the site.

The Hilton site was given for nothing to American owners who only very partially honoured their development obligations. When Maltese investors bought it, with right of ownership well into the next century, all hell broke loose because it converted the land into a majestic mixed development project that is now the flagship of Maltese topmost quality of life.

Foreign developers, by contrast, are given land at no charge to execute speculative real estate projects with all the risk involved when such investors, unlike their Maltese underdogs, are not obliged to put a substantial pot of money upfront. See what is happening with SmartCity, which seems to be limping rather than sprinting as pompously promised when the project was launched.

The same will happen with White Rocks if we are not careful. I can well envisage that the chosen investors for White Rocks will phase upfront the real estate element as a priority and then re-invest part of their profits for the less lucrative sports elements. Experience from all major sporting events, Olympic Games and World Cup included, shows that the sport infrastructure built is rarely put to good commercial use after the big event.

The commercial incentive to water down the sports elements of the project, once the lucrative real estate profits are cashed in, are clearly structured into the deal and this augurs that, in the end, the taxpayer will be left with the short straw. A clear, fair, transparent and competitive bidding process is the best protection for taxpayers.

Why give it up, when it worked so well where it was used?  While maximisation of revenue from privatisation cannot be the sole criterion for ultimate selection, revenue, both one-off in nature at the point of privatisation as well as recurring from the project contribution to economic growth, remain a very powerful card.

We now have it with a full EU stamp of dogma that our public finances are unsustainable in the long term. “The reforms to the pension and healthcare systems… should be approached with urgency (in) case of countries (Malta included) where age related expenditure is a significant source of unsustainability.” Any opportunity to strengthen public finances through privatisations conducted with high standards of governance and integrity should not be wasted, unless “long term” for our political class simply means until the next election, and “après moi le déluge”.