Judging Maltacom

26^th May 2006

The Malta Independent on Sunday

How should one judge whether the privatisation of government’s controlling stake in Maltacom has been a success, a failure or somewhere in between?

I propose adopting three criteria for conducting such an analysis, i.e. strategy, process and price. And in so doing one could benchmark Maltacom’s privatisation to that of Mid-Med Bank’s sale to HSBC which by all these measures has been a categorical failure.

From a strategy point of view one should examine whether it made sense to privatise Maltacom at all. I am against the privatisation of monopolies or strong dominant positions unless the privatisation itself involves the opening up of the market to further competition.

Maltacom’s strong dominance in the market relates to its fixed line network which is a declining business as it gets replaced by mobile telephony. Fixed line infrastructure is in fact being adopted to service data transmission where Maltacom has to compete with cable TV operators that can also offer such services. Maltacom’s monopoly over the international gateway for overseas telephony is now consigned to history as the international gateway has been liberalised and international telephony is now available at extremely cheap rates or indeed for free through the internet’s VOIP.

In mobile telephony Maltacom was a late entrant after Vodafone had a practical monopoly for over a decade. The fact that Maltacom has gained a sizeable market share in the space of a few years is a credit to its management. The duopoly that exists in mobile telephony has not led to oppressive pricing for the consumer and new suppliers are free to offer additional competition if they consider the necessary investment worth their while.

From a strategy point of view there was no evident reason why the privatisation should have been avoided especially as Maltacom is in full competition with private sector suppliers who operate without the administrative weight of public sector bureaucracy. Maltacom needed to be freed from this disadvantage if it is to compete on fair basis. Furthermore the sector is well regulated to ensure that unavoidable dominant positions caused by our market size are not abused of to the detriment of the consumer.

The continuous investment needed to keep refreshing the technology justified the linkage of the privatisation to a strategic partner capable of investing substantial funds in the business over and above those needed to pay for the privatisation price. We have been told that Lm30 million would be so invested and we have to assume that this will be new money invested by the new owners and not by using Maltacom’s own existent liquidity.

From a strategy point of view Maltacom’s privatisation made sense, much more than the privatisation of Mid-Med Bank to HSBC which effectively reduced competition in the market through the eventual absorption of the former operation of Midland Bank.

The process for Maltacom’s privatisation has been clear, fair and transparent. The process was widely advertised, interested parties were offered every facility to join the bidding process and the decision making process has not given rise to any claims of unfair selection. The bid selected was reportedly the highest one available even though it came in below the trading price of the free float of the minority shareholding that trades on the Malta Stock Exchange.

It has been a refreshing change from the opaque manner in which Mid-Med Bank was sold to HSBC without any bidding through private negotiations between the Minister and the acquirer. Whereas in Maltacom’s case government engaged the services of internationally renowned investment banks to advise it in the negotiations, in Mid-Med Bank’s case the Minister boasted of acting unilaterally without feeling the need to seek reliable professional advice.

So on the process criterion Maltacom scores very high marks compared to the zero which is the only appropriate mark that could be given to the process adopted for the sale of Mid-Med Bank.

Having given a comfortable pass mark to Maltacom’s privatisation on the criteria of strategy and process how does it rank on the price criterion? When I criticised the poor price obtained by government on the sale of Mid-Med Bank I had argued that this was the direct result of the poor process that lacked all elements of competitive bidding. This was certainly not the case in Maltacom’s process.

So the first implication ought to be that once the process was correct, than the price outcome was consequently equally correct, once the highest bidder was chosen.

Yet this argumentation is tempered by the fact that whilst Mid-Med Bank sale was concluded at a 7% premium on the last market price before the sale was announced, the price for Maltacom was at a substantial discount to the last trading price. Such comparisons are however unfair. Whereas the market price of Mid-Med Bank shares in no way reflected the efficiency gains expected from privatisation as effectively the privatisation was conducted behind everybody’s back, the share price of Maltacom in the free float quotation on the Malta Stock Exchange included substantial premium for such expected efficiency gains as the privatisation process was public knowledge. So much so that even after the announcement of the privatisation price the market price of Maltacom’s shares continued to trade at a substantial premium to such privatisation price.

This does not however completely convince me that from a price point of view we should not have done better, I would say considerably 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 into account the substantial assets that not essential to the company’s profitability.

The most obvious candidate here is the substantial liquidity of Maltacom including substantial cash balances and receivables. Should not these have been distributed to present shareholders before the share transfer was concluded at a price that was not arrived by asset valuation but by discounting future profitability? Should other assets, not essential for the company’s core business, including some valuable real estate, have been sold before the privatisation and profits there from distributed before executing the share transfer?

So in conclusion, whilst a much better affair then the privatisation of Mid-Med Bank, Maltacom’s privatisation has its own blemishes too.

Managing Expectations

26^th May 2006

The Malta Independent - Friday Wisdom

One of the trickiest aspects in the Euro changeover project is ensuring that the process will be inflation neutral. Militating against this objective is the natural inclination to expect an impulse of inflation from the changeover.

As often happens, unless such expectations are addressed in a long process of educational information, they tend to become a self-fulfilling. Expectations turn into reality by the very fact they give pricing power to suppliers.

If inflation expectations are allowed to take root and eventually turn themselves into real measured inflation, this could very well prejudice our credentials to proceed with Euro entry as planned in 2008. Lithuania has just been refused entry into the Euro Monetary Union next January 2007 purely because its inflation rate was minutely above the criteria laid down for this purpose in the Maastricht Treaty.

Whilst other criteria for public fiscal deficit and debt levels seem to carry sufficient flexibility in their application and should not therefore be decisive factors regarding our credentials for Euro entry, the inflation criterion is being applied with exaggerated rigidity without any allowance for the exceptional inputs caused by high energy prices.

It is therefore of paramount importance for macro-economic policies to focus obsessively on the inflation score and this can only be done if the consumer is not allowed to harbour undue inflation expectations by the same process for which contained inflation is crucial.

The only way the consumer can be trained against building undue inflation expectations is by having a long period of dual pricing to avoid suppliers building in price hikes to take advantage of the confusion caused by the changeover process.

Obviously there are problems with adopting a long period of dual pricing. The main one is that until there is final agreement with the EU about entry, which can only come this time next year, the rate for conversion remains a target not a binding commitment. And in the absence of a binding commitment the market will keep throwing up a myriad of rates for converting currencies between MTL and EUR.

There are at least five rates published officially every day, one by the Central Bank and four by the commercial banks two for buying cheques and notes and two for selling them. These range from a minimum of Lm0.4113 per Euro to a maximum of Lm0.4426 giving a spread of 7.6%. This is no small stuff considering that the central rate quoted by the Central Bank is fixed at Lm0.4294 without day-to-day risk of fluctuations.

Which means that for dual pricing to be effective as a means of education, it can only start at the point in time when the target rate turns into an immutable commitment. At that point the Central Bank would be constrained to use monetary policy during the preparation period to pitch interest rates at a point high enough to avoid anticipated conversion into Euro, encourage domestic savings, and control excessive demand but not too high to attract destabilising inflows of hot international money searching for additional interest rate returns without exchange risks.

The timing for making such a move has to be left to the final judgment of monetary authorities who have to weigh the benefits of controlling inflationary expectations through effective dual pricing campaign against the risk of stimulating undue capital flows, outward or inward, by the removal for exchange loading charges for conversion between EUR and MTL in the preparation period.

This is complicated enough on its own and need not be complicated further by introducing additional variables. One such variable that is absolutely avoidable is the risk of an election before the changeover.

The risk of electing a new government before execution of the Euro project will cause market instability that will of itself destabilise the project execution. The clear message from the government has to be that elections will follow not precede the Euro changeover date.

Another variable we ought to do without is introducing additional criteria for economic growth performance before the changeover. I most heartedly agree that this country needs at least 4% (probably more) real annual growth to keep employment stability. We need even more to accelerate the convergence with our European peers. Where I differ is the suggestion to make Euro adoption conditional on such growth.

Growth comes from efficient restructuring and new investments and both these aspects are abetted by adoption of the Euro. We need the monetary stability and recognition that come from monetary union at a competitive level in order to achieve the desired growth. One could choose to argue whether the rate for conversion chosen is consistent with preserving international competitiveness. I think we should have done more, but once a decision has been taken international competitiveness has to be sought elsewhere and not through delaying monetary union.

Portable Everything

19^th may 2006
The Malta Independent - Friday Wisdom

 

Quality of life has improved in leaps and bounds when the human species invented easy and efficient means of mobility. The benefits of international trade would not have been possible if goods produced in one country could not be easily transported to another.

Take energy. As it so happens, natural energy sources are located in world regions far removed from the main energy users. The three industrialised blocks, USA, EU and Japan/China in the east, need regular importation of energy supplies from resource rich regions like the Middle East and Russia. Without oil tankers, LPG carriers, pipelines and other capillary distribution networks the division of labour and specialisation which has permitted so much efficiency and growth in productivity would not have been possible.

Mobility has also facilitated trade development because people could move easily from one place to another. Barriers have been brought down permitting people to move freely within countries and regions to resettle where economic efficiency could guarantee a better quality of life.

One of the best sources of new efficiency inputs which should help the EU to catch up with the higher economic growth of the US is the enlargement to include former communist states in central and eastern Europe which permits two way flow of economic resources. Investment moves eastwards to gain efficiency in lower cost environment while in due time eastern labour will move westward thus bringing a rough equalisation of living standards throughout the EU which will give it the same advantages currently enjoyed by the greater mobility among states in the US.
China’s stratospheric economic growth is only possible because a million or so people every month are migrating from the rural heartland to the sprawling industrial centres in the south and coastal areas.

Even where such labour mobility is illegal, one cannot deny the benefits host countries gain from the gradual integration of such new labour resources into the economic fabric. On 1 May, illegal immigrants in the US staged a one-day “strike” to prove that without their intervention America’s economy would slow down significantly. In fact, it is clear that the most effective way to fight illegal immigration is to promote accessible channels for legal and organised migration.

Once mobility has been achieved, probably to the boundaries of physical possibilities, the concept of portability has kicked in. We do not only need to travel or relocate freely but we need to stay in touch with everyone else all the time. So while travelling, people can still reach us on our mobile phones through telecoms’ roaming services. We can phone anyone while on the move and we can access our office facilities, email networks and all, and keep working as if we were in the office when is fact we could be on a tourist coach in some distant country.

Pretty soon we will be able to watch live digital TV on our mobile phones which are more and more becoming like a hand held PC.

Again, as hard physical portability starts approaching its physical limitations, focus will shift, indeed it has started to shift already, to soft portability. People need to be freed from being locked up with suppliers through invisible mobility barriers. People need to choose the best supplier, which could change from time to time as new and more efficient players come on the market, without being inhibited by such invisible mobility barriers.

Numbers portability in telephony is a prime example. Without numbers portability, users cannot freely switch from one carrier to another as the trauma of having to inform all contacts of their changed number far outweighs the benefits that a new carrier could offer.

It is necessary to transport such soft portability beyond the telecom industry. One area that is ripe for such development is the financial services sector with particular reference to mortgages or house loans. The wide usage of house loans and their long-term nature spanning up to 40 years make it an ideal candidate for a dose of portability in favour of the consumer, i.e. the borrowing customer.

Take a young couple that takes out a 40-year house loan with one of our banks. They are locked in whatever they agreed for the whole duration of the loan and they cannot benefit from more favourable offers that come on the market from different mortgage suppliers unless they actually repay the existent mortgage and take out a new one with a different bank. The cost, the hassle and the logistics of doing this are nearly insurmountable. The client is simply locked in with his original bank come hell or high water for the whole term of the mortgage.

Is it not time to think about portable mortgages? Can’t we device legislation permitting mortgages to be given in favour of a central registry rather than in favour of a particular lender and then the central registry will keep the mortgage interest in favour of any bank that the client desires, so that the client can switch mortgage lenders by a simple letter rather than by expensive contracts and registrations?

Portable mortgages? Portable everything – if it favours the consumer.