Rapped on the Knuckles

19^th June 2009
The Malta Independent - Friday Wisdom

One of my readers rapped me on the knuckles for joining the band wagon in saying (last week’s column) that the PN lost this latest election miserably because “the way they handled the utilities bills saga has all the hallmarks of a perfect recipe for mismanagement.”.

He went on to say:

1) Why was not the rampant corruption mentioned?

2) The general absence of government with only two ministers doing something (right or wrong).

3) Why has not the rampant nepotism in government boards and government institutions mentioned?

4) Why was not the proliferation of boards, authorities, foundations etc with huge amounts of money going down the drain to keep directors, CEOs, drivers, nice cars running?

5) The proven corruption at ADT, Malta Martime and now fraud at VAT department?

6) The immigration problem, which seems to have calmed down now with the efforts of Maroni and not the Maltese Government.

7) MEPA and the environmental disaster it is chairing;

8) The Mater Dei disaster, with a new hospital taking 19 years to build and as soon as it is opened we find out that it is too small for its purpose;

9) The waste on money on direct orders – Mater Dei parking and Security contracts – against all basic government procurement regulations.

11) Energy generation --- where we have fallen backwards on targets set to generate clean energy.

My reader signed off as follows: “I can continue forever – but everybody seems to mention only one thing the W & E bills. These had to be raised and they were raised. People cannot take it for granted that these are practically free. Just visit one of the social housing estates and you will hear air conditioners operating day and night and this in a social housing estate. After all this was the same necessity when Alfred Sant raised the W & E bills in 1999. If certain things need to be done then they should be done no matter if the Prime Minister is Gonzi or Sant.”

My reader is right. This week, after he wrote me the above, the whole country lost nearly one whole productive day due to power outage which stalled all economic activity last Tuesday. Yet again we have tangible proof of a government in crisis with a power station at Marsa which should have been sealed up years ago still critical to meet peak demand on a hot summer day. Someone who has inside knowledge of the extremely tight criticality of the power generation capacity has suggested to me that government’s main reason for the sharp increase in utility rates has more to do with the need to calm down demand until resources get increased through new investments rather than due to commercial need to recover costs and return a fair profit for Enemalta. This week this thesis started to look more credible.

As to my reader’s criticism I believe that in my past writings I was realist enough to admit that consumer energy prices have to reflect their procurement cost on international markets and that structural subsidies will only delay the needed adjustment to consumption patterns. My criticism was mostly related to keeping utility rates low in the period October 2007 to June 2008 purely for electoral convenience purposes considering the general election came in March 2008. Consumers had to pay for the pre-election illusion when it became politically convenient to face reality.

In my article “Nauseatingly familiar” published on 17^th October 2008 I had suggested that government should “consider a price smoothening mechanism similar to the Price Stabilisation Fund operated by Labour government in the 1980s. Price smoothening over the economic cycle is not a subsidy. It simply accepts the reality that over an economic cycle the price of oil will normally move from peak to trough within a spread of say USD50. Let’s take the price range as USD50 at the trough and USD100 at the peak with USD75 being the basic average.

The government should base its tariff on a cost of USD75 at a notional rate of USD1.30 to the EUR which is somewhere close to the purchasing power parity rate. Energy prices, including utility bills and fuel at the pump will be based on the actual cost of procurement within this channel and adjusted frequently to ensure consumer sensitivity to the prevailing international prices.

But there must be a policy that if the price of oil gets higher than USD100 or lower than USD50 these are not reflected in the price mechanism with USD100 being the cap and USD50 being the floor for fixing energy and utility prices for domestic consumption (i.e. excluding bunkering and airline fuel oil which are essentially for international consumption). If the price of energy goes beyond the USD100 mark, the difference is funded by the price smoothening mechanism and this funding is carried forward to be recovered at some future point in time when as normal cycles go, oil will fall below USD50. Any outstanding amounts which remain uncovered or undistributed within five years from origin will have to be reflected for recovery or rebating in future price mechanism by shifting the band higher or lower as may be necessary.”

I didn’t just criticise. I make practical suggestions. And yes we have a tendency to overweight criticism on utility tariffs and energy management but then in these last 12 years utility rates have achieved a special meaning in Malta’s political scene, and became a symbol of what else is wrong with the administration. But my reader is right. We should not forget the rest of the pastiche.