George M. Mangion | Wednesday, 09 July 2008

Dry pockets

The government is set to start a process for the privatisation of Malta Shipyards. At a recent press conference Dr Gonzi said that between four and five companies expressed interest in buying into Malta Shipyards. Most were from North Europe but there had also been interest from companies in Russia, China, Japan and America. He said the government would issue an international call for expressions of interest but would keep an open mind over whether it should be all or parts of the shipyard which would be sold. Talks would be held with the EU and the GWU. Communications Minister Austin Gatt said he believed this was the best time to launch the privatisation process, given optimal market conditions, and he believed the country as a whole would back the decision. Ironically, a walk towards Cottonera creek will reveal a large ship repairing yard adorned by rusted steel hangars and a never-ending parking lot indicative of the workers toiling at colossal merchant vessels that are berthed in one of the four active docks. The shipyard looks busy and sources confirm that it is fully booked and the work will be carried out at international market rates. But that is not the whole story, as there are still problems that need to be tackled to achieve viability. The state-owned Malta Shipyards (formerly Malta Drydocks and Malta Shipbuilding) as one of the largest employer have long been in the news. During the British colonial period, the dockyard was the cradle of industrialisation in Malta, employing a large proportion of Maltese workers and at its peak amassed a payroll reaching 13,000. Originally conceived as a military ship repair yard, the shipyards in Malta turned commercial following a decision taken by the British colonial government in 1959. The shipyard was transferred from the admiralty to the management of Baileys (Malta) Ltd. Consistent deficits spiked with industrial unrest saw the handing over of the dockyard in 1963 to a Council of Administration formed of the British and Maltese government. Swan Hunter then managed the shipyard without success for five years and in 1968 the shipyard was nationalised. In 1975 the management of what was now known as Malta Drydocks was transferred under a new experiment of workers participation that is to a management council elected directly by the workers. The experiment failed to achieve viability and over the past decades massive loans and state aid were pumped into the enterprise to jack up its losses. The last reform in 2006 saw the workforce dwindle to 1,726 workers. Under this agreement, it ceded ownership of the real estate and started renting dockyard facilities from the government. Nearly half of 900 surplus workers as evaluated by the management did accept early retirement schemes while the remaining workers have been absorbed by government departments and Councils. The accounts for 2006 carried a sour note showing losses of Lm8.7 million. CEO Chris Bell was also surprised how the company had exceeded its 2006 turnover targets, yet this did not reflect a proportionately lower deficit. The truth is that while every effort was made by management to improve the viability of the enterprise, this was still far short of the projected productivity agreed in the seven year plan. Last year, Dr Gatt lamented that over the past five years, each family in Malta had forked out Lm3,400 in subsidies for the shipyards.
This is a substantial amount and some may comment that it could have been allocated elsewhere. One columnist even recommended that the writing off of ( €700 m) Lm300 million in financial assistance (plus the anticipated €100 million debts to be written off on privatisation) could have been utilised to set up wind farms and photovoltaic cells across the island which over the years would obviated the current need for the 95 per cent electricity surcharge. With hindsight one cannot forget the countless attempts by politicians of various creeds to restructure this loss making behemoth. As far back as in 1966 we saw the birth of proposals contained in the Appledore Report, which had been commissioned by the 1996 Labour government. This was a bolts and nuts approach by a consultancy firm that specialises in industry turnabouts. The yard was then shouldering the payload of over 3,000 workers and losses were draining its resources and that of the country. Some draconian measures were mooted in Appledore report and among these we find that it pays to send surplus workers home on basic pay. At that time in 1997, the labour government has already declared that the workforce at Drydocks needs to be trimmed down by 900. Going down memory lane, one recalls how the yard in the mid seventies had experimented with empowering the representatives of the workers in the decision making and the general running of the business. This did not do the trick although no effort was spared to keep down industrial unrest. Many commentators have expressed the hushed advice that in view of past practices there cannot be any painless surgery. Now years later after the medicine was being administered we are still hearing about substantial losses being incurred and due to EU regulations the subsidies must stop. By sheer contrast in the past decade following the onset of globalisation, we notice the seamless way that a number of publicly or state-owned Drydocks have managed to restructure their operations and entered into re-energised ship repair market with innovative ideas thereby assuring themselves of commercial viability. Nothing whatsoever happened in the yards and this is a pity. Following the announcement by Dr Gatt, every worker must by now realise that the yards operate in a very competitive market. In the past, noble attempts were made to patch up its poor image with overseas clients. This was a slow process yet no expense must be spared by the privatisation team to effectively market the strong points of a restructured and leaner workforce. Naturally whoever buys the yard must embark on re-training and re-tooling scheme on a holistic scale. This must go on relentlessly and no effort spared to diversify from purely repair work to more profitable conversion or oil rig building orders. Privatisation seems to be the only solution to the yard’s saga over its struggle to become commercially viable in today’s world of ever growing competitiveness. As the ‘yard continues to pile up losses year after year, a sense of urgency is once again being felt by the management. Wisely John Cassar White summed it all up in 2007 when he said: “It is a painful reality that, in many cases, the more work we have, the bigger our losses”. Although turnover has in fact improved over the years since the labour force reform, yard losses won’t be reduced to an acceptable level. This means that after bailing out the yard’s losses and accumulated debts which in all reached €925 million (Lm400 million), the end of the tunnel is still not in sight. With this in mind, it comes as no surprise that Dr Gonzi insisted the government saw the improved international ship repair scenario as being the best time for the shipyards to be privatised. The government would have decided to sell the ‘yards whether or not they were making a profit, because it believed that the government’s role should be that of a regulator, not an operator. Yet not everything is up for the sale heap.
We notice that privatisation’s terms of reference would include docks four, five and six; the Marsa shipyard, thus excluding the left side of the dock which was planned for another maritime development; the Manoel Island Yacht Yard and the superyacht facilities. Again it has been reported that Boiler Wharf would not be included in the privatisation because this was earmarked to be turned into a cruise liner berth so that even the Cottonera area would benefit from this ever-growing economic activity. Taxpayers under siege from higher fuel surcharge and food costs conclude that is most unfair to continue to feather bed workers in the public sector whose record of productivity is the cause of their present predicament while piling on subsidies until the cows come home.

George Mangion
Partner at PKF – an audit and business advisory firm
[email protected]