Saturday, 17 December 2011

What's so special about an SPV (Special Purpose Vehicle)?

Read this extract from an article I had written in 2005. You will see that what I had said is now coming to fruition with the difference that instead of selling Castille to use the proceeds to reduce the national debt we are using the funds to build a new parliament at City Gate.

What so special about an SPV is that it is financial engineering meant not to add value, but to create a deception by calling national debt byanother name and keeping it out of statistical measurement. Such manouvres brought the financial ciris of 2008. Enjoy!

Selling Castille


19th August 2005

The Malta Independent - Friday Wisdom
Alfred Mifsud

“Securitisation”, which gives a respectable label to old-fashioned “cooking the books”.

Read the following extracts from the 2006-2102 pre-budget document attractively stamped all over with “A Better Quality of Life” branding.

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

This might look like a complicated financial structure but in reality it is quite simple. Through cool securitisation, the government could sell Castille to a government-owned public company which raises bonds from public subscription to pay the funds to the government.

The government will then lease back Castille from the public company to give it cash flows to pay interest to bond holders and agree either to buy back the property at the end of the loan or to roll over the lease for a further period if the public financing vehicle rolls over the maturing bonds into new bonds.

Suppose Castille is thus valued at Lm50 million and is sold at this price to a government-owned company called Castille Wonder Land plc (CAWLA). CAWLA would raise 15 year bonds at, say, five per cent for Lm50 million to pay the government for the acquisition of Castille. The government will pay CAWLA rent/lease of Lm3 million a year, which enables CAWLA to pay annual interest of Lm2.5 million and keep an annual half-a-million reserve for other running expenses.

The government applies the Lm50 million to pay off outstanding public debt and somehow has to invent revenue enhancements (taxes) to cover the annual lease outgoings of Lm3 million without increasing the deficit. After 15 years the whole deal is reversed or renewed, depending on the rate of interest and the state of public financing prevailing at the time.

“Government will present to parliament a Securitisation Act to make possible the conversion of receivables and other assets to securities that can be traded in the capital markets”

This quote from the same document extends the above concept not only to property but also to receivables. So the government could sell its annual receivables (eg annual profits from the Central Bank) in order to obtain an immediate lump sum to reduce outstanding public debt and come within the Maastricht criteria.

I get the impression that government is focusing on this fourth hi-tech way to solve the public debt problem through securitisation of public assets and revenue flows rather than on delivering a durable real solution to the problem.

The let’s pretend game continues. It could give the impression of solving or reducing our over-blown public debt problem. Whether it delivers a better quality of life is another matter.


  1. So why go through the trouble of a Special Purpose Vehicle? Why not borrow directly as Government does for many other purposes?

  2. Simply because financing such investments in the traditonal way will increase the budget annual deficit and the statistical measurment of the national debt as a percentage of the GDP. So financial engineering through SPV's is used to 'cook the books' i.e. financing and borrowing without being statistically measured.

    This sort of financing could make sense for projects which could generate their own revenues and potentially be self financing e.g. if a motoroway is built and then toll charges are levied to users of the motorway. But Citigate project generates no user revenues, unless we start charging tolls to whoever enters Valletta :)