KM nth restructuring: moral hazard, standard folly or both.

How can anyone justify paying millions to Air Malta employees who opt for early retirement when they were a significant part of the problems that led Air Malta to its present state of financial distress?  It is a typical case of rewarding failure and creation of dangerous moral hazard.   It is a text book example of failed half baked restructurings that Air Malta went through these least 2 decades, in the process absorbing hundred of millions of scarce resources, without actually addressing the underlying problems of inefficiencies and uncompetitive cost structures. 

Here is what I had written on 28.11. 2010 ( almost 12 years ago):

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Can Air Malta Restructuring Fly?

The Malta Independent on Sunday

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 travellers, 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.

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.

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And yet again this is what I had written on 13.03.2011 

The Malta Independent on Sunday:

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As Air Malta continues to sink further into the red, and the rescue money taxpayers invested continue to be eroded by accumulating losses rather than restructuring investments, we are gradually sliding into a blame game where parties with vested interests attempt pain distribution on the basis of blame apportionment as they perceive it. I hope that while negotiations are going on with unions defending the workers and the government defending its legacy, there will be a voice for the taxpayer. 

We cannot have another shipyard, even if the EU were to permit it. The moment the government took a (good) decision to allow low cost airlines to operate to Malta in the wider interest of our tourist industry, it should have immediately pre-empted a thorough restructuring of Air Malta to permit it to compete in the radically changed environment without being burdened by its heavy legacy costs. 

Now that we have wasted valuable time and precious money watching Air Malta sink under the burden of its legacy costs, it would lead to nowhere if we base Air Malta’s restructuring on a deadly blame game. I honestly doubt if Air Malta is still in a state of repair. Maybe it is better to consider the formation of a new Air Malta which would buy from the old Air Malta its valuable assets, including fleet, slots and intellectual rights, and re-build it from scratch on a competitive cost structure without its legacy burdens. The GM model used by the US government is worth bearing in mind. The rest can wait.

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Pity the taxpayers who had to spend hundred of millions to keep it alive and many more millions now that it is quite unavoidable that it gets buried.

Spend your political capital

It’s been practically 12 months since my last post.  You can say that in my 70’s I lost interest in commenting publicly,  or that I am not inspired at all by what has been going on.  It seems that only the August lull creates enough stimulus to force the volcano of emotions held inside me to erupt.

What has forced me back to my keyboard is that whilst around us so many things are changing:

inflation has returned to its 70’s level, 

we have a hot war going on in Europe three decades after what was thought to be the end of the cold one, 

the environmental degradation has become a true menace to sustainability, 

social media has turned into a dangerous tool to absorb people in dangerous echo chambers threatening the very essence of democracy, 

traffic situation seems to be getting worse rather than better in spite of multi hundred million investments in road infrastructure, 

we have a government that seems bent on not deciding anything so as not to upset anyone, and an Opposition that is so in name only.  The real Opposition are now basically NGO’s like Graffiti and Republika.  

Let me get the situation of the Opposition out of the way as it is simpler to decipher and to chart a way out of its paralysis.   The Opposition is divided between two philosophies which are impossible to reconcile and as long as it stays divided it will continue to be ineffective.  It will become a historical relic rather than an government in waiting.   

The Opposition has to call a spade a spade and having lost three consecutive elections with a landslide in spite of all the corruption and lack of  governance issues that have been tormenting Labour,  it must face reality that the party must split up in 1949 Labour style. Only then can an winning philosophy emerge which will strengthen one part and weaken the other until all the remnants re-unite under one philosophy and common leadership as Labour did leading to its election to majority government in 1955. Otherwise we will continue to see Labour landslide wins notwithstanding the normal fatigue of an overstay in government. 

On the other hand Labour in government must show it can govern not only when faced with a crisis like Covid,  but it must be an effective government in business as usual mode.   Unfortunately that is not happening and one gets the impression that Labour seems to be thinking that leadership means taking no decisions so that it steps on nobody’s toes and thus preserve its wide gap in public opinion over the PN.   

That’s not leadership!!  That is management by hope that issues will sort themselves out and government can thus retains its popularity.   But those are pious hopes.  Issues will not sort themselves out.  Only effective leadership can give a sustainable future to our children. Government must spend some of the huge reserves of political capital it enjoys to bring the country back on the straight and narrow road of sustainability in all its dimensions.

Some pretty urgent decisions are needed to address these issues which cannot just evaporate through inertia and passage of time:

Transport

Building new road infrastructure and rendering public transport free of charge will not solve our traffic problems.   As public transport is rendered free of charge private means of transport must be taxed to dissuade its use.  Otherwise many people will not use public transport even if you pay them.   Traffic congestion does not allow punctuality to the operations of public transport.  

The maxim of no taxes is politically catchy but economically, socially and environmentally destructive.  Taxes are not just imposed to raise revenue.  Often they are the only effective tool to change habits.  And we must be nursed out of our addiction to use private transport by having real public transport alternatives and by paying taxes if we insist on sticking to our bad habits. 

Construction

We seem to have placed our economic growth overly dependent on the construction industry.   I tend to get the impression we have embarked on a brakeless train towards a destination which will bring destruction.   We continue to fiscally incentivize the construction industry which by necessity creates substantial challenges to our quality of life beyond any GDP measurement. 

It is time to consider putting some brakes on the construction train.  Removing fiscal incentives introduced during Covid would be the first step.  Closely followed by incentives for property development in Gozo, the rural character of which is being challenged by over-development.  

Then we need to reconsider whether the system of taxing property vendors on the basis of sales price declared rather than profit on the sale is needed to bring order to rampant VAT evasion in the construction industry.

Finally we need to rechannel the capacity of the industry towards environmentally respectful developments such as greening existing buildings.

Labour

There must be a limit to how many guest workers we can accommodate.  And once we set such limit we must be selective in issuing such work permits to persons that bring new skills and value added and not to low skilled food delivery type of operators forced to work under near slavery conditions.    

Whoever sponsors an applicant must be responsible that the applicant is provided with resources that respect our labour laws.  If this means we have less food deliverymen or shelf stackers in our shops so be it.   We did not have any food deliverymen 10 years ago and probably we have too many shops. 

Tourism

It is not possible to freeze applications for new tourism outfits including additional accommodation.   But in so far as accommodation is concerned we can have policies to ensure that any new accommodation projects ties up with a strategy to up-grade our tourist visitors to higher quality value.

Should we not consider that applications for additional accommodation must buy out permits from lower quality outfits who with the premium thus obtained for ceding their license can re-invent their properties to new uses, including old people’s homes, day residences, or sellback their property to the State where the space can be use to create open spaces in our congested areas. 

And we must not continue to waste money on keeping Air Malta alive.  We have spent too much already, probably more than we spent on the shipyards.   Government should bury Air Malta and join the private sector to create a leaner efficient airline which can sustain itself economically and work on strict commercial lines enjoying no preferences and no disadvantages as its competitors.  If this is not possible then bring on more Ryanairs and Whizzairs. 

   

I can keep going.  There are so many decisions that need to be taken.  

Soon after summer is over this government would have spent the first 6 months of the legislature practically deciding nothing of substance.  Now it is time to move forward.  Time to spend a part of its vast reserves of political capital to give back oxygen of sustainability to the environment, the people and the economy.

Clearly there will be complaints and dissatisfaction in some quarters by those who expect the government has to solve everyone’s problems by having the Exchequer carrying an open cheque book.   However by the time of next electoral test if government takes wise and bold decisions now,  it can count more winners than losers.

What is not decided and implemented in the first half of the legislature will never get done.

A strange situation

 The political situation in Malta is at the moment, to say the least, strange.

We are less than 12 months away from the next general elections.  Some would argue we are probably 8 months away if elections are held next spring or just 4 moths away if they are held this autumn.

At this juncture in the electoral cycle,  an opposition which has roundly lost the last 2 elections,  would be gearing up to offer a real challenge to an incumbent government which normally after 2 terms in office would be suffering from electoral fatigue. 

Post independence elections record show that only twice was there a government confirmed for a third consecutive electoral term.   That was Labour government of 1981-1987 and a PN government of 2008 -2013.   In each case there were extraordinary circumstances which forced the electorate to depart from its traditional 2 term cycle of governments.

In 1981 the popular vote was effectively won by the PN so the electorate kept its rhythm.  It was only the strange provisions of the constitution plus an element of district gerrymandering that produced a Labour government with a majority of parliamentary seats through a minority of the popular vote.  A strange situation which on top of the world recession of the time produced a very tumultuous and unstable political situation which was only resolved by late changes to the constitution which gave a clear win to the PN in 1987.

In 2008 PN won a very narrow election victory which gave it a third consecutive mandate.    But in this case again it was only Alfred Sant, who obstinately chose to remain Labour leader in spite of  his policies on non-EU membership being roundly rejected in 2003, that forced the electorate to deny Labour from its rightful claim to govern.   Any PL leader other than Alfred Sant would have scored a handsome victory for Labour in the 2008 election.   Alfred Sant had lost all credibility to lead the country in its status as an EU member when he had fought the 2003 election on the claim of economic disaster falling on the country if it  chose EU membership. Reality was showing that the country could prosper as an EU member.

Yet here we are in 2021, a few months to the next elections and all polls and surveys continue to indicate that Labour still enjoys a commanding gap in ratings over the PN and if general elections are held now Labour would again win by a margin as big as 2013 and 2017. 

I scratch my head trying to understand why this is happening especially at a time when Labour has, since the Yorgen Fenench saga exploded in November 2019, been on the defense shouldering blame for irresponsible governance.  This has projected  a strong perception of corruption at its  highest ranks and it has now been formally declared responsible for nurturing an environment of  impunity which was conducive to the horrible murder of a prominent journalist and government critic. 

I can think of four reasons which, singly or collectively,  contribute to this unusual state of affairs.

1. Labour has cleaned its stables whilst in government in less than 1 year whereas the PN has not cleared its stables after 9 years in opposition

2.  For all Labour's faults as regards poor governance, Labour delivered economic growth which was widely shared and people care more about their pockets rather than  about strong governance.

3. Labour has handled the Covid crisis in an exemplary manner and the importance of a strong economy was brought in evidence by having the necessary fiscal space to protect the economy from a sharp crash in spite of over-exposure to tourism.

4.  The PN show no serious plan to become an alternate government and their eagerness to bismirch the whole country in international fora exposes their narrow mindedness.   People want positive approach to problem solving not just murmurs and complaints. 

Going by the very bad experience of governments when elected to serve a third consecutive term I would have thought that the PN should by now be flying much higher.     It  seems the country may yet have another opportunity to discover whether a third term government can work effectively or if it will again be a bad experience as in 1981 and 2008.    Probably this is Labour's major challenge as it goes to seek a new mandate from an electorate not used to successful third term governments.