Living Contradictions

 The Malta Independent - Friday Wisdom

Regular readers of my column probably judge that I am nagging too much about the broad chasm between flowery intentions expressed in nicely bound reports and hard reality.

I can’t help it, as the gap between intentions and reality is getting offensively wide. The government seems to know what it wishes. It has no idea of how to make it happen. But it expects our congratulations purely for cleverly expressing its wishes and has no absorption capacity for criticism about its inability to work out a plan on how to realise them. So criticism in this sense is generally ignored and where it hurts so much that it cannot be ignored, the message gets sidelined as the messenger suffers derogatory innuendos.

The Prime Minister, in one of his recent press conferences, had no kind words for columnists like yours truly. The offence of folk like me is having no inhibitions at being critical, citing facts and figures, and showing aversion to being impressed by vain wishes. My judgement is based on hard reality.

So you can imagine my surprise at receiving a personalised letter from the Prime Minister enclosing a copy of the A Better Quality of Life – 2006-2010 Pre Budget Document. I had already publicly expressed my views on the said document which was available from the government’s website. I hardly needed another copy. But in his covering letter, the Prime Minister told me that:

“We want to discuss with you the choices that will guarantee a future of excellence for you and your children. Government’s decision to publish the Pre-Budget Consultation Document was prompted by the firm belief that your contribution will help us prepare a better budget. Your company’s commitment is decisive for Malta to excel.”

What a living contradiction! Being criticised in public and congratulated in private irritates me. Sending me personal letters extracted from most impersonal computer data-bases reinforces my suspicion that the government is more interested in pretending that it means to do something rather than in actually doing it.

If this were a new government that could disclaim responsibility for the problems we need to address, than the approach could make sense. But for goodness sake, this is a government that has been in office since May 1987 when East Germany was still communist and the Berlin Wall was standing tall as hard evidence of the failure of communism which was soon to come.

My commitment has been there without interruption. What is missing is the government’s own commitment to address the problems at their source and to desist from the shameful practice of pretending to solve problems by writing a cheque from public funds leading to further taxation and debt, in the process gaining for itself political patronage at the expense of tomorrow’s well-being.

Let’s take another contemporary example of how the government has no idea of where it is going and is wrapping itself in contradictions. The Malta Tourism Authority (MTA) is conducting a broad-based re-branding of the Malta tourist product. The exercise will take several months to conclude and will cost much, much more than a cup of coffee. This is a much-needed overdue exercise. We cannot continue to make false claims that back-fire when we do not deliver what we promise.

We cannot offer sea and sand as if we were the Maldives when tourists here will have difficulty in finding a free square metre at our scarce sandy beaches. However, we can and should promote our uniqueness, our being so near and yet so different. Our smallness which enables tourists to see in less than one week what in other countries would take several weeks. Our varied and rich history, our bastions, our churches and our village traditions – festas and fireworks included. Our versatility in meeting the different scene locations required by creative film directors. Our ability to speak and teach various languages. Our beautiful and historic harbours and the magic scenery of Gozo and Comino. We need to build an aura around our pre-historic monuments and around sites linked to mythology and famous legends.

Yet while we are trying to re-brand ourselves on who we really are and what makes us different from competitors, in the same breath the government is proceeding with plans to deface us by going for golf courses which can sit comfortably in Dublin or Surrey but can hardly be a distinctive feature of a Mediterranean sun-drenched island. What goes for St Patrick and St George does not necessarily go for St Paul.

If we cannot be led with clear determination and sense of direction, we will continue to spread our resources all across the board with conflicting pressures from different directions forcing us to continue running on the spot.

False Competition and Cooking the Books

The Malta Independent of Sunday

There is no place like Malta. It is the only place on earth where competition works to disadvantage the consumer rather than to provide more value for money.

The first lesson in economics is that competition is healthy. It brings efficiency in allocation of resources and consequently packs value in the final product or service as suppliers compete to win consumers’ custom.

Where competition is absent the consumer will have to take whatever is on offer at the price the monopolist decides. Having total control over the market the monopolist supplier has no commercial pressure either to improve his product or to price it competitively. Profit margins are huge and suppliers laugh all the way to the bank.

Many remember the times in the early 1980s when colour TVs were exclusively distributed by a private monopoly that was literally given a legal right to extort money from consumers’ pockets. The introduction of competition there worked wonders as it was true competition. The consumer was given a choice to buy the same or similar products from a multitude of suppliers who started falling over themselves to improve efficiency in acquisition, distribution, sales, credit terms and after sales service to ensure that they could sell their stock at a profitable price even though margins were much tighter. Often what was lost in the margin was gained in volume as the low prices enticed more consumers to buy the second, third or fourth TV for their home, something which was beyond their reach under the previous monopoly supply rules.

Moving closer to our times, many will remember the high mobile rates we used to pay when Vodafone had all the market to itself. The arrival of the second supplier offering a competitive product lowered mobile rates considerably and a sudden explosion in the use of mobile telephony, which left both the old and the new supplier sufficiently profitable through deeper market penetration. Everybody was happy, but most of all the consumer who benefited from true competition.

So the second economics lesson one learns quite early in his O level studies is that competition will only benefit the consumer if it is true and genuine. If competition is not true, if cartels are created, or if artificial barriers are set up to block the working of true competition, the benefits never cascade down to the consumer. Quite often the consumer is rendered worse-off under the new pseudo competitive regime than under the former plain vanilla monopoly.

Imagine what would have happened if rather than giving Go Mobile a licence to compete with Vodafone across the whole market spectrum, competition was introduced by giving Vodafone the right to install their mobile network in one half of Malta with Go Mobile installing their network in the other half.

Such false competition, rather than working to the advantage of the consumer, would have worked against him/her as mobile users would have been constrained to buy both services in order to have access to the whole country.

This example seems so unreal; it is laughable. No government or regulator in their right senses would allow competition to work so perversely against the consumer.

But this is exactly what seems to be happening with the false competition coming on stream for paid TV services. Until recently we had one monopoly supplier Melita Cable. The service had all the hallmarks of a supplier not subject to commercial competitive pressures. Because of the high cost of their services, many consumers just booked the reception package, which was the cheapest and provides only free-to-air stations without the reception problems of home antenna systems.

Consumers looked forward to the day when the opening up of the market demanded by EU membership rules and the advancement of Digital Terrestrial technology could buy them a better service at a cheaper price. But because our Regulators forgot that they are there to protect the consumers rather than the suppliers, the false competition brought in for paid TV services will add to the consumers’ pain rather than remove it.

Up to the last football season I could watch most English and Italian leagues matches through Melita, the then monopoly supplier. For this new football season, if I want to watch the English league fixtures I have to have Melita Cable and to watch the Italian league fixture I have to have the services of the new DT TV supplier Multiplus.

Rather then compel both suppliers to share the rights and then compete for patronage through price and service quality, the regulator allowed the operators to split the rights forcing football fanatics to buy and pay for both services. This is false competition that extorts money from consumers’ pockets rather than deliver enhanced value. If this is competition give me a monopoly anytime.

But the syndrome of let’s pretend is all pervading in our economy. Let’s pretend we have competition in pay TV services when in reality the measures taken work against not in favour of the consumers.

Now we seem about to play a let’s pretend game with our national debt by creating the illusion that it is being reduced when in reality everything remains the same. The let’s pretend agent there is called securitisation – a modern high tech financial term for the old fashioned “cooking the books”.

Securitisation is normally used in the financial world when banks want to get assets off their books in order to respect capital constraints without hindering growth. So it is quite normal for financial institutions with large consumer credit assets on their books (credit card dues, consumer loans, mortgages) to package these products through securitisation and float them on the market where savers, often institutional like insurance companies and pension funds, buy these products directly thus reversing the intermediation role initially performed by the banks in coming between savers and borrowers.

The government is now proposing to use the securitisation method to sell its property assets (retaining the right of buy back) and income streams to raise lump sums in order to reduce the public debt to within euro rules.

If this let’s pretend scheme is hard to believe, please read pages 49, 58 and 59 of the 2006-2010 Pre-Budget Document that government took so much credit and that I liked so much without mentioning my clearly professed doubt on government’s own willingness to put into practice. I bet you this. Of all the proposals in the said document, the securitisation will be one of the few that will actually come into being, in full honour to the well ingrained let’s pretend syndrome.

Selling Castille

The Malta Independent - Friday Wisdom

There are four ways by which the national debt could be brought down from the current 72 per cent of GDP to under 60 per cent, or at least firmly pointing south in that direction, in order to gain the credentials for acceding into the euro in 2008.

The most challenging and most rewarding method to achieve this is to grow the economy at a faster pace than the rate of debt accumulation. So while the absolute level of the debt will keep growing through the accumulation of the dwindling budget deficits, in relative terms to the GDP, the size of the debt will start reducing as the GDP will be rising at a faster rate.

This is the most logical and practical way to solve the debt problem, but government seems to have given up on it. It projects real growth rates far below our capacity and below those of most of our trading partners or competitors.

For the economy to grow at a faster rate, we need substantial private sector investment in productive capacity and the injection of substantial flexibility in the economy to render it globally competitive and agile to grasp opportunities as they arise. In the current economic scenario, both aspects are conspicuous by their absence rather than by their existence, and our rate of exchange regime remains a barrier to their realisation.

Another way of reducing the ratio of debt to GDP is by creating exceptional non-recurring one-off revenue flows which will help either to reduce the incremental borrowing needs and/or reduce the absolute level of debt itself. Such exceptional non-recurring revenue flows generally come in two distinct forms.

Firstly, through dismantling past reserves. The government has been doing this since 1998 by taking over the sinking funds of maturing government loans, which are rolled over without the obligation to build a fresh sinking fund. The sinking funds accumulated for the old loans are taken as a special financing item, which reduce the need to raise loans to finance the annual deficit.

Secondly, exceptional one-off revenues are generated by selling off public assets through privatisation. The problem with creating these one-off revenues by dismantling past reserves and through privatisation is that the government has already sold most of its assets and after the upcoming privatisation of its 60 per cent holding in Maltacom and 40 per cent in MIA, not much will be left to sell.

The third way of reducing the debt to GDP ratio is by incurring budget surpluses, which is then used to pay off debt. In the local context this is impractical: we have a slow-growth economy which is trying to solve a chronic budget deficit and there are no practical prospects of running budget surpluses anywhere in the near future without causing a deep economic slump which will kill rather than cure the patient.

Having exhausted the above-described three ways of addressing the overgrown debt problem, the government has turned to the fourth way, involving creative financing methods in order to appear to be solving the debt problem without actually doing so.

This fourth method carries the cool name of “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.