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”.

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