THE ATHL MONOPOLY: between the devil and the deep blue sea [Fiji Times, 5 March 2002]
Since 1997, three Ministers of Finance have been counting the big bucks from the sales of ATHL shares.
Investors have been praying that their good luck lasts. Stock-brokers are dreaming of lucrative commissions from thousands of new investors.
FINTEL, Telecom and Vodaphone happily continue to make big bucks out of their monopolies. More secure now that Government has created a bigger umbrella monopoly, ATHL. (Their million dollar sports donations are peanuts given their profits).
Tough luck for the consumers
But what about the telecommunications consumers who need cheaper prices to make them internationally competitive? What about the schoolchildren who desperately need cheap Internet, so they can be on par with children inAustraliaand NZ?
Tough luck. They can keep crying.
They can watch beautiful ads from ATHL, FINTEL, Telecom and Vodaphone, promising all kinds of lovely deals. Except that the basic rates will not come down as fast as they should. Why not?
Because they remain monopolies. Because Government refuses to encourage competition. Because Ministers of Finance insist on maximising their income from the sale of the ATH shares.
And they keep creating powerful vested interests opposing competition, to protect their dividends from ATH shares.
Began with SVT’s privatisation program
It began with the SVT Government’s privatisation programme in the telecommunications industry.
Government held 51% of FINTEL shares (Cable and Wireless the remaining 49%); 100% of Telecom shares; and Telecom held 51% of Vodaphone shares (VodaphoneUKthe remaining 49%).
Government had already granted them monopoly rights: FINTEL on the international connection; Telecom on the domestic land-based network; and Vodaphone on mobiles.
Economic theory (and international consultants) strongly advised that Government should sell these shares separately and introduce competition on every front, to ensure efficiency and best service for the consuming public. Competition was possible even among the existing companies.
But, competition would also reduce the share values of these companies, and Government’s sales revenue.
SVT needed hundreds of millions: took easy option, with no safeguards
Unfortunately, the SVT Government needed hundreds of millions of extra money- to pay for budget deficits, out of control because of the NBF disaster, and vote-buying scams such as the CDF programme.
Government took the easy selfish option, to maximise their sale proceeds.
Government created a bigger inter-locking monopoly, the ATHL, comprising all of Government’s shareholding in the three companies, FINTEL, Telecom and Vodaphone.
They did not even put in safeguards. Economic theory strongly advises that if privatisation results in monopoly, then a clear regulatory framework and a strong regulator need to be in place, before the sale. So that the excesses of monopoly can be avoided and private buyers know what they are buying.
Government did nothing of the sort. Indeed, the SVT Minister of Finance even contradicted the SVT Minister for Communications, on the introduction of competition.
Flawed sale process
Government advertised for sale by tender, 49% of the ATHL shares. Even this was not a transparent process.
Just before closing date for tenders, Government found it could not sell its 51% shares in FINTEL (because Cable and Wireless had first call). Government could only sell “management rights” to Government’s shares in FINTEL, and, as a sweetener, threw in 80% of Government’s dividends from FINTEL.
Well, well, well.
Given the lack of clear regulatory framework, international companies were reluctant to bid. In fact, there were only two real bidders.
Cable and Wireless made a “bid” whose value may have been somewhere between $60 million and $90 million.
The Fiji National Provident Fund made a massive bid of $253 millions (later upped to $263 millions for an additional 2% of ATHL).
The fact that there were only two bidders, and the gap between them was at least $150 million made a mockery of the “international tender process” and the millions of dollars that the Ministry of Finance spent on “advice” from consultants (foreign and local).
Why did FNPF pay so much?
Two sets of questions may be asked. Did FNPF pay “too much” for these shares? And, is FNPF financially worse off because of the purchase of these ATH shares?
Given the evidence before us, the answer to the first question is probably “yes”. Paradoxically, the answer to the second question is probably “no” (but at a price).
The present value of the ATH shares may be calculated by discounting expected future dividend flows and capital gains. Important factors are the future introduction of competition, changes in the split of international revenues, and cost savings resulting from expected redundancies.
Using commercial discount rates (above 15% normally), commercial bidders were unlikely to have bid above $160 millions, for the shares that FNPF bought.
Of course, FNPF, could place a higher value on the same expected flows, if it used a lower discount rate of between 6 to 8 percent (given what it normally receives on its investments).
But the fact remains, FNPF could well have bid a sum well below $190 millions and still won the tender against other commercial bidders.
Even Government’s own financial adviser (Credit Suisse First Boston) had placed a value of around $145 millions on the ATH shares being sold, give or take $30 millions.
So why did FNPF bid a massive $253 millions?
Was this a “fraud on workers” whose savings are in FNPF, a conspiracy, as was claimed by a political leader in Parliament?
I doubt it. The key persons from the Ministry of Finance and the FNPF involved in the sale and purchase of ATH shares, are known to be persons of integrity, dedicated to their institutional responsibilities.
But massive conflicts of interest between buyers and sellers
However, the massive conflicts of interest between the institutions, executives and their board memberships, provide ample fodder for those who believe in the conspiracy explanation.
Government (through the Ministry of Finance) is the biggest borrower from FNPF. The PS (Finance) who advises on government budgets, deficits and borrowings (largely from the FNPF), then was the Chairman of the Board of FNPF (although he withdrew for the purchase of the ATH shares).
(Where in the world could the largest borrower from a bank be made the chairman of the board of the same bank?)
And the Ministry of Finance had already planned a huge budget deficit, expected to be covered through asset sales to be managed by the PS Finance.
The then General Manager of FNPF, prior to the purchase (and again after the purchase), was also the chairman or board member of FINTEL, Telecom and Vodaphone, whose shares FNPF was effectively buying, through acquisition of ATHL shares.
The GM of FNPF would undoubtedly have had “insider” information about these companies and their possibilities (certainly far more than any international bidder).
Therefore, was the price paid by FNPF for the ATH shares a “managed” price?
FNPF had too much cash it was prevented from investing overseas
But is FNPF worse off, by buying these ATH shares? Probably not.
FNPF had hundreds of millions of dollars which it was unable to invest because of the depressed state of the economy (and because Government limits how much it can invest overseas). These funds earned virtually zero interest.
FNPF had already lent far too much to Government and needed increase its private investments, on which higher returns are possible.
Even if ATH shares earned only 5% return, that was better than nothing.
However, the pressure on FNPF would have been less and the returns to the workers higher, had they paid a more reasonable price for the ATH shares.
Future returns threated by competition which will be good for Fiji
More unfortunately, even these moderate returns from ATH will be threatened, if Government rapidly encourages competition in the industry.
With competition, international and local communication charges are likely to significantly drop in the short run. Profits would drop in the short run (although they may recover in the long term if the volume of sales increases more than proportionately).
On the other hand, the public, including hundreds of thousands of businesses, domestic users, and school-children, would be major beneficiaries. And the economy must benefit all round.
Between the Devil and the Deep Blue Sea
But if Government brings in competition ahead of time, without the agreement of the three companies, FINTEL, Telecom and Vodaphone can all sue Government (i.e. the tax-payers). So also can FNPF, representing hundreds of thousands of workers (and also tax-payers), who were also given monopoly guarantees when they bought the ATHL shares.
Government has still not reached agreement with FINTEL, Telecom, Vodaphone and ATHL on an acceptable regulatory framework for the future.
Other vested interests are now coming into the picture. A few weeks ago, Government privately sold another 10 percent of ATH shares to powerful groups such as Fijian Holdings Limited, Unit Trust of Fiji, and Fijian provincial councils and their companies.
And, to help cover yet another out of control government deficit, Government plans to sell another 8% of ATH shares to the general public, including FNPF members.
More vested interests who will support the monopolies in telecommunications, to bolster their dividends.
For short-term revenue purposes, Government continues to lock the public “between the devil and the deep blue sea”.