From Mr J. Deguara

I am sure many people have heard a lot about hedging and hedging agreements recently. I am also sure that many of them haven't got the slightest idea what the real meaning of a hedging agreement is, obviously due to the fact that most of our politicians sometimes forget that it is not always easy for the man in the street to understand certain things especially when they are said in a technical way. They don't always use simple words and explain in detail what certain words really mean.

I am saying this because I am one of these people, but fortunately I always look up certain technical words and try to define them and understand their meaning.

So for the sake of people like me who need a clear picture to understand, I am going to give a brief explanation of a hedging agreement and what it means.

In a nutshell, oil price hedging is buying a specify quantity of oil today at a fixed price for future delivery and is a technique designed to reduce or eliminate financial risk; for example, taking two positions that will offset each other if prices change.

So why hedge? Because hedging stabilises cash flows, reduces cost of capital, secures company objectives and enables management to measure performance.

As an example, the bulk of Malta's fuel is imported by Enemalta from Libya. During Labour governments Enemalta entered into a number of hedging agreements with various oil companies, and while this could have proved risky it also saved Enemalta up to US$4 million by December of 1999. In 1998, the Labour government had signed two hedging agreements. The first covered the period February 1998 to December 1998; the second, signed in August 1998, covered the year 1999. Therefore with these agreements, the Maltese people were left with $4million profit in their pocket.

If the Nationalist government hadn't cancelled such agreements, today we would be in a position to cushion the surge in the oil prices thereby saving millions of pounds and there wouldn't have been the need to put up the prices of electricity and fuel by such a huge percentage.

So, considering the recent surge in energy prices, if businesses that purchase large amounts of fuel oil such as airline companies for example, didn't routinely hedge, they would face an enormous increase in their operating costs and would have to pass the extra costs on to the consumer, running the risk of losing business and most probably bankruptcy.

That is why I cannot understand why this government, which is supposedly run by professors and intellectuals say that “to hedge is to gamble with people's money” when big companies like British Airways, to name just one, keep using hedging agreements to save millions. After all, hadn't we gambled more than enough with people's money in other big games that left us with big holes in our pockets without any return like the port of Brindisi game, the Lm11 million Brussels house and the $250million hospital?

To conclude, this is what Steve Mann, associate of finance at Texas School of Business University had to say about hedging agreements, “If they are used carefully, and admittedly that can be a big if, hedging products and strategies can help organisations reduce risk. They are like a hammer, you can build a house or kill someone.”

So to say that hedging is gambling with people's money is not what this government should be saying. What this government should be saying is that hedging is a good strategy that Labour decided on when in power in 1998/1999 to save us millions, but since Labour used it we will not use it and get rid of it.

Jake Deguara

Dingli