Sea Malta should prove to be an excellent case study for a student of state enterprise policy which deals with policy implications of such matters as privatisation, state-owned companies and private-public partnership agreements.
State ownership is not fashionable. Thirty years ago a major book on public enterprises was published every month. The challenge then, with so many state enterprises, was how to manage them properly.
Today, academics and practitioners in this area migrated to private-public partnerships. Most writings I come across on this topic seem to deal with policy implications.
Ironically, private-public partnerships came in the wake of privatisation and are trying to fill the social vacuum. There is a certain anxiety not to let such partnerships become, or appear to become, state entities.
Sea Malta Company Limited is a hugely interesting case for two reasons. First, it is one of the old state enterprises which seems to be slated for eventual privatisation. Second, it has over the years been very articulate in making its case known.
Interestingly, under the first aspect, Sea Malta provides a service which, in my opinion, just borders on being an essential service. Many, especially in the shipping sector, argue that the services which Sea Malta provides can no longer be considered to be essential.
Mrs Marlene Mizzi, Sea Malta Group chairman, argues it still is and that the government should be careful before deciding to privatise the company.
In an interview in this paper last month she argued: "In order for the state to ensure the sustainability of an economy based on imports and exports, the state must ensure that this service [sea and air transportation] is uninterrupted - come what may... Sea Malta is guaranteeing this reliability... Can this assurance to Maltese businesses be given by any other foreign line or by the private sector whose interest is maximising profits? Should it be expected to?"
Sea Malta regularly plies two important routes with its own ships: Genova-Marseilles-Tunis and Catania-Reggio Calabria.
In the annual report, Mr Joseph Bugeja, general manager, states that from a survey carried out the company established that 65 per cent of those interviewed considered the Genova service of strategic importance. One can argue that the Reggio service is perhaps even more strategic because it carries hazardous cargo, which is key to Malta's main industrial concerns and just in time concept.
The company makes it clear that the government as shareholder has all the prerogatives: to decide whether Sea Malta's services are essential or not, to decide whether, when and how to privatise, etc.
In normal circumstances, the government could take its good time to decide. It may well need it, if only to seek potential buyers or investors. What makes this case special is that time is running out. Sea Malta has made it clear in the past that it urgently needs a capital injection, primarily to repay some of its debts and replace the 32-year-old MV Zebbug.
A look at the financial statements makes the need for a capital injection clear. Sea Malta has total assets of Lm9.2 million financed by liabilities of Lm8 million and Lm1.25 million shareholders' funds. Shareholders are therefore financing only 14 per cent of the assets: a typically under-capitalised company. Past losses have eaten two-thirds of the share capital and of the share premium reserves.
The company was profitable in 1998 and again this year, ended March 31, 2002. Last year there was a loss of Lm342,416. The profit after tax of Lm106,993 reported this year therefore means a swing of half a million liri mainly resulting from severe cost control.
In difficult markets, overall group turnover fell marginally in spite of the company's "aggressive drive to increase market share and exploit opportunities".
Not having the required finance forces the company into certain inefficiencies and operational losses and the company is unable to meet the required capital investment through its own capital resources.
A solution would be to cultivate alternative sources of revenue. In this regard, Sea Malta illustrates another "state ownership" problem. As Mrs Mizzi states: "Unfortunately, whenever we are entrepreneurial enough to tap new business... try to expand horizontally... we find little support. In such instances the private sector always argues there is government investment in Sea Malta and, therefore, it should not compete with private interests. It seems the principles of free competition do not apply to us!"
At present, the government owns 67 per cent of shares in Sea Malta.
The urgent need for financing to ensure that the Group remains a going concern has been referred to by the auditors in their report. The auditors, however, stated that the government is committed to provide financial support and therefore did not qualify the auditors' report in this respect.
All this comes at a time when government finances are cash strapped and the government is executing a privatisation programme. In this context, one understands why the minister for economic services, Prof. Josef Bonnici, commented to Lloyd's List that it would be better for a new owner to decide on the investment to be made. Between the lines: and take care of the financing.
Interestingly, and perhaps this is the most practical and sensible way out of the quandary, Sea Malta has proposed to the government a public service contract which explicitly recognises the company's public service obligations and which envisages that the company is paid for such services.
By recognising Sea Malta's public services - and paying for them - such an agreement would also free Sea Malta to compete and build complementary revenue sources, if only to meet the commercial rights of the 33 per cent non-governmental shareholders.
Indeed, on the basis of such an agreement, the company would be able to borrow on the cash inflows envisaged therein. This, together with an immediate capital injection, will increase the company's chances of becoming permanently profitable and, eventually, once things consolidate, a more attractive privatisation asset.
Sea Malta's case is one illustrating "the delicate balance between the social obligations and the economic operations" of a state enterprise, as Mr Bugeja puts it, and the company's financial state merits urgent attention even though government at present has tough financial constraints to deal with.