There Must be a Better Way

11^th June 2006

The Malta Independent on Sunday

The proposed extension of development boundaries is a high stakes issue. It is a process whereby real estate is turned instantly from bronze into gold. With the stroke of a pen land values could increase a hundred fold or even more.

The higher the stakes, the higher the need for the process to be controlled, transparent and subjected to checks and balances. This is necessary in order to render the final decision beyond suspicion of serving private rather than collective interests.

There must therefore be a better way of going about the process of changing the development boundaries. The one being adopted at present has thrown up all sorts of accusations, whether real or imaginary I don’t know, that this or that is being favoured; that this or that bought land, now included in the extension process, for peanuts just a few months before and suddenly striking gold by seeing it turned into priceless development land.

How can we adopt strict controls on matters of much lesser importance and then allow a process involving large millions to be run without sufficient checks and balances? Take a personal example. Being an economic commentator who frequently expresses opinions about the on-goings in local financial markets and the companies whose shares and bonds are traded thereon, I refuse to hold, as a matter of principle, local quoted investments lest I give the impression that my comments and opinions are motivated by personal gains prospects.

The law imposes severe penalties on any person, journalists included, who try to influence public opinion for personal gain from trading on the Exchange. Directors and senior executives of companies whose shares are quoted on the Exchange are strictly controlled and have to report all their trading activities in such shares. Indeed they are blocked from conducting any trading in certain periods when they can have inside information that is not yet available in the public domain.

If we take such correct and extreme measures on issues that could involve at most, hundreds of thousands of liri, how can we allow a process involving large millions to be dominated entirely by the political class with scant visibility and poor accountability?

Let me fantasise what in my dictionary would amount to something resembling a fair process for such a project. I do not wish to enter into the merits of whether it is or is not necessary to extend the development boundaries. I take it as a given that government feels that it is in the national interest to make some extensions to the development boundaries and I am only concerning myself with proposing a better way for managing such a process to reduce or eliminate claims of favouritism and clientelism.

It should all start with the adoption of a policy that will guide the criteria to be used for extending the development boundaries. At such policy formulation stage, which should be conducted with official public consultation through white papers and so on, no particular areas are to be identified as being considered for boundary revision.

Once the policy formation process is exhausted and a firm policy is decided upon, the public is to be invited to submit requests for boundary revision within the terms of such policy. The process has to be widely advertised with several months given for submissions that have to be accompanied by an architect’s report and certificate explaining why the requested inclusion within the revised boundaries falls in line with the published policy.

For this purpose, architects are to undergo a period of explanation and familiarisation with the word and spirit of the policy and they should be made aware that a dim view would be taken of the professionalism of architects who endorse applications that are evidently outside the terms of the policy.

The applications are to be examined by a wide panel that includes representatives from MEPA, environmental bodies, local councils, and is to be chaired by a retired judge or by a President Emeritus. The work of such panel is to be supervised by the Office of the Auditor General who is to report on the integrity of the process to Parliament.

The recommendations of such panel are then to be submitted for parliamentary approval so the final say would vest in our parliamentary representatives. However, Parliament would not be permitted to change the proposals of the panel but only to either approve it or send it back with comments for reconsideration.

Having built a solid structure for the process to render it more collegial and less subject to domination by any special interest group, there must still be at least two conditions attached to any property which gets through the process to be included in the revised boundaries.

These conditions would include the following, apart of course from the need to go through the normal process for securing a specific development permit:

The land can only be developed by an owner who has had title to the property for at least five years. This is to avoid get rich quick schemes by people who seem to have more inside knowledge than the rest of us about where it is likely to strike success in extending development boundaries. It reduces if not eliminates speculation and tempers the common temptation of politicians to use such development boundary revision to pump up the economy for electoral success purposes. We cannot allow development planning to become a shoddy tool of convenience for political popularity purposes.

A tax is to be imposed on beneficiaries of development boundary revision as a measure of collective sharing of the value added created by the process.

There must be a better way of doing things. I am sure others can improve and refine my above suggestions with the scope of rendering development planning above suspicion, respectful of environmental standards and serving collective needs and priorities.

Lost Governance

9^th June 2006

The Malta Independent - Friday Wisdom

If you are feeling confused about the conditions included in the sale of the government’s majority equity stake in Maltacom, do not despair. You are in good company.

Although the process of this privatisation has been fair and transparent, I am not convinced that, from a price point of view, we should not have done better. The argument that the price of Lm1.55 per share is at a slight premium to international valuation of similar companies, based on profitability criteria, indicates that no premium was included in the price to take account of the substantial assets that are not essential to the company’s profitability.

The most obvious candidate here is Maltacom’s substantial liquidity, including substantial cash balances and receivables. Should not these have been distributed to present shareholders before the share transfer was concluded?

Following criticism that valuable real estate, not essential for the company’s core business, should not have been included in the privatisation package, given that the price tendered was based on profitability criteria and not asset values, revelations were made in parliament this week that sounded like an after-thought to parry such criticism.

The minister responsible for Maltacom’s privatisation explained that the said property was, in fact, not included in the privatisation package, as the government had reached agreement with Maltacom to acquire such real estate and in compensation would be granting Maltacom full title to property used for its core business that is currently rented or used on some concession title from government.

This to me sounds like a “tbazwira” (bungling) bigger than those that government spokesmen like to attribute to the Opposition Leader. These are serious matters and cannot be treated with the off-handedness of an after-thought.

Maltacom’s privatisation was a long drawn out process, as it have should been for the sake of transparency and governance. There was all the time in the world for such matters to be fully planned, approved and executed before the actual privatisation.

Government was not the sole owner of Maltacom. Minority shareholders have every right to be informed of what exactly has been agreed and to satisfy themselves that their interests as co-owners of Maltacom have been effectively safeguarded.

As an outgoing shareholder, the government has a clear conflict of interest in negotiating such a property exchange and it is therefore important for the sake of acceptable standards of governance that such a property exchange deal be conducted under the gaze of the general public and the private shareholders.

I would even dare suggest that, given that such a property exchange is not in the ordinary course of business of the company, there was an obligation to seek approval for the matter from shareholders at a general meeting. At such a meeting, small shareholders would not only have full access to information but would have the opportunity to comment and express an opinion on the transaction.

Has the proposed property exchange deal short-changed the minority shareholders who could have been rewarded better and more fairly if the property was disposed of in the open market? The minority shareholders have a right to ask these questions and the board of directors has a duty to give full and clear answers.

What amazes me is that when the minister concerned gave this skimpy information in parliament, the Opposition only found fault with the deal on the question of parliamentary technicalities.

They took the minister to task for not seeking prior parliamentary approval for this property exchange, given that parliamentary rules demand that concession of property rights – as proposed in the property exchange deal with Maltacom – are subject to parliamentary approval.

It is true that the minister sounded brash and arrogant when arguing that parliamentary approval could be considered as mere rubber-stamping, given that the government commands a five-seat majority in parliament. He could easily have said the same truism in a more technically correct manner by stating that the deal was subject to parliamentary approval and that parliament would be given every chance to debate and decide the matter. All the other assumptions could have been left unsaid, rather than voiced as arrogant assertions. Nothing would have changed the fact that approval of such a resolution by parliament would sail through with or without the Opposition’s endorsement.

But the core of the criticism should have been why was this being presented at this late stage, rather than being addressed in advance during the process leading to the privatisation. As representatives of the people, parliament should be interested in ensuring that such deals are conducted with the highest standards of corporate governance and that the government, as outgoing shareholder, and the board of Maltacom, do not expose themselves to claims of unfair trading which protects the interests of the outgoing majority shareholder at the expense of the minority shareholders, who are staying on as co-owners of the company with the new incoming majority shareholder.

When such things happen it is unavoidable that one questions whether our regulators and corporate executives pay only lip service to the need of high corporate governance standards. Public corporations and the government have to lead by example, as they are responsible for protecting the interests of the public in general and the small minority shareholders in particular.

Having the Cake and

2^nd June 2006

The Malta Independent - Friday Wisdom

…eating it, is what best typifies the attitude of critics to the quarter point increase in interest rates announced by the Central Bank whilst at the same time singing glory to the project for accession into the Euro at the earliest possible date.

One cannot enjoy consistently spending more then one earns and at the same time expects to find money in the bank. One cannot enjoy the spirit of Rome, the eternal city, and expects that all Romans should speak back in English. One just does not go with the other.

So those who support accession into the Euro in January 2008 cannot pretend that the Central Bank in its execution of monetary policy in the pre-accession phase has any choice but to shadow the monetary policy adopted by the European Central Bank (ECB)

When we joined the ERM II in May 2005 the official interest rate of the ECB was 2% whereas Malta’s official interest rate (technically referred to as the central intervention rate) was 3.25% giving a differential in Malta’s favour of 1.25%.

This differential has to narrow down gradually until accession date to permit seamless fusion. Following two quarter point rises in interest rates the ECB rate is now 2.5% and by all accounts it will be raised at least to 2.75% next week at the forthcoming ECB council meeting. Some are even hypothesising the possibility of a half point increase to bring the ECB rate to 3%.

Consequently the increase in Malta interest rate from 3.25% to 3.5% means that the margin has narrowed since ERM accession from 1.25% to at least 0.75%. possibly 0.50%. Given that we are still 19 months away from the projected accession date it is quite logical for the Central Bank to slow down the speed of narrowing the margin differential by raising local interest rates. Indeed we have raised interest rates by one-quarter point for the three or four quarter points raised by the ECB.

One could bring all sorts of arguments against raising domestic interest rates due to internal factors; arguments that on their own are valid and relevant. But if we are to be realistic and believe in the overriding need to join in the single currency in January 2008 we cannot escape that even in this preparatory phase, our monetary policy cannot be attuned to domestic economic issues. Once we join the Euro, monetary policy will be fully transferred to the ECB who will implement their policy on a Euro-land perspective and not on the issues of any single member country especially if it happens to be the smallest one.

In this regard at least the Opposition is consistent in arguing that we should postpone entry to the Euro until we achieve a real growth rate of 4%.

Realistically this is only hypothetically possible within reasonable time frames if our international competitiveness is given a boost from the exchange rate policy, meaning some sort of devaluation which falls in line with proposals for economic regeneration proposed some time back by the Leader of the Opposition.

Such a policy would however prejudice our achieving the all important criterion of keeping our inflation within 1.5% of the average of the best three countries of the EU which explains why it would be unrealistic to think of any such devaluation now and still expect to make to Euro accession come January 2008.

Where such policy falls on its face however is in the instability that such a prospect would create. This would on its own force the Central Bank to raise interest rate far more aggressively in order to stem the outflow of capital and this would work again the smooth fusion into the Euro causing the differential between the respective rates to widen rather than narrow down gradually.

There is plenty to be critical of the Central Bank but not in its implementation of monetary policy during the ERM II phase. One could question whether the Central Bank is sensitive enough to the chronic deficit in our Balance of Payments which increased from 9.6% of the GDP in 2004 to 13.1% in 2005. No country can live with this sort of deficits for an extended time and the pressure on the erosion of reserves seems to be coming more from this source rather than from capital transfers which remain comfortably in black.

One could question whether a Central Bank, which has been relieved of its regulation and exchange control duties, still needs to employ 306 full time and 16 part-time staff. What sense does it make to employ six additional clerks in 2005? Is it possible that the Central Bank, that preaches with moral authority the need for economic restructuring to increase efficiency, which is essential to underpin monetary and economic stability and growth, could not re-structuring itself to lead by example rather than simply keep adding on to its headcount no matter have much responsibility is taken off its plate?

The Central Bank as well cannot have the cake and eat it.