Sunday, 11 March 2012

A dockyard in the making

This article was published in The Malta Independent on Sunday 11th March 2012
“Economic growth can only be sustained if energy prices are at the very least reasonable.  Even though oil prices are surging, I cannot in any responsible manner hit the economy with higher tariffs.  It would drain the economy by hurting productivity”
Guess who said this?    The obvious answer is Dr Joseph Muscat the PL leader who has been criticising the high utility tariffs and promised to reduce them if elected.   The PN has been saying that this is a cheap electoral pledge that can never be realised and have been demanding the PL to explain how it would finance such reduction in tariffs, which would mean less income for Enemalta at a time when energy cost inputs are on the rise.

If you think that this quote was uttered by the PL Leader you are wrong.   It has been incredibly said by none other than Minister Tonio Fenech, responsible for our finance, economy and for Enemalta’s health in a Damascene conversion from the government oft repeated policy that energy tariff must be flexible to reflect oil price movements and that they must cover not only the basic operational costs but also a generous dose of investment recovery.

What brought about this sudden change of heart is not difficult to guess.   With general elections looming on the horizon, possibly before summer arrives, social priorities take precedence over hard economic choices.  This is a repeat performance of what was done in the run up to the March 2008 elections.   Utility tariffs even then were kept steady in the face of escalating oil prices, but only until June 2008 when suddenly economic realities took over and the new policy of forcing market prices on utility rates was introduced with the shock and awe that still causes family budgetary concerns especially to lower and middle income households.
It is evident to one and all that the government has no solutions for Enemalta’s financial predicament which was again underlined by Moody’s downgrading of its credit status to deep junk territory explaining that they were constrained to do so in the face of government’s inability to put Enemalta’s viability on sound footings.    The suggestion that Enemalta could be saved by simply transferring some EUR 25 million of operational expenses to central government, and this at a time when central government has been ordered by the EU to shave off some EUR 40 million from its own operational expenses from what was planned in the 2012 Budget approved by parliament, shows that government has run out of ideas, or may be that its ideas are not suitable for implementation in pre-election mode.
Those who follow my column know that I have been warning about the financial time bomb accumulating on Enemalta’s books for several years.   Unfortunately nobody seemed interested in my warnings.  Not the government who simply prefers to keep the problem hidden away in Enemalta’s Financial Statements that get published with a considerable time lag ( the latest available refer to 2009 which were only published in December 2011 and which do not tally with the figures for government guaranteed borrowings as had been reported in the Auditor General Report on Public Accounts for 2009); not the media who keep parroting public deficit and debt figures quoted by official sources and neglect the deficit and debt accumulating in the books of Public Corporations, chief of which Enemalta, that can only be repaid when eventually government is forced to take them over to honour its guarantees.    Enemalta is a dockyard in the making.   Its debt will fall on taxpayers just as government had to pay the dockyard loans with local banks that it had guaranteed.  These are still suspended in The Treasury Clearance Fund accounting and being amortised over several years through an pro-rated annual charge to the Budget (Consolidated Fund).   Even worse than the dockyard I would say, as the figures are scarier, now reportedly exceeding EUR 800 million, including commitments in hand.
So what solutions for Enemalta?   The Minister said that 70% of Enemalta’s costs are fuel related and that “still leaves 30% to be controlled...tariffs cannot be burdened with the cost of operating inefficiencies”.   Forgive me but are we in 2012?   Has this government  not been in power for nearly interrupted 25 years?    So a quarter century is not long enough to address the operational inefficiencies at Enemalta and if not, how much time is enough?
To me it seems more like lack of political will than a question of time.    Enemalta is undergoing the same macabre treatment of death by a thousand cuts which was applied to our shipyards.
The other solution seems to be debt refinancing on a long term basis (twenty five years I heard) by creating an SPV ( special purpose vehicle) which takes over the debt from Enemalta, with the government obviously remaining responsible through its guarantees.   Restructuring and refinancing are clearly necessary, but unless a Greek style haircut is including in the exercise ( which obviously it will not be included as we are not Greece and have to be careful not to assume that such haircuts are manna from heaven) the debt obligations will remain whichever pocket we place them in.   So the SPV solution is more apparent than real and we should be wary of anybody who proposes such financial engineering as a real solution.   It is the sort of financial engineering which rendered Greek statistics  capable of suggesting  the country was ready for Euro membership when the hidden reality was totally different.  A country can run away from reality for some time but it can never hide and as in Greece when reality catches up it would be painful, horribly painful to the country and to its creditors (which in our case is ourselves as most of our debts are internally financed).
So short of real solutions the Minister falls back to his favour line argument “What are Labour proposing we do?”.    This is the wrong question as at least it should be “what are Labour proposing to do when they are in government?”.   Strange that it seems that the Minister, having run out of implementable ideas, is seeking advice from the Opposition about what he should do!!
I have no idea what Labour would do when in government in order to address the very serious situation at Enemalta.   Certainly it would have to honour its pledge to reduce the burden of tariffs.  It would have to proceed with refinancing Enemalta’s debt on a long term basis though the need to create SPV’s for this purpose escapes me.    But for addressing the real problem I have no idea what Labour would do.    But I have a very clear idea of what needs to be done to address Enemalta’s problems.
There is no magic solution and restoring Enemalta to financial health and long term sustainability is a long term process not an instant solution.   Shifting deficits and debts from one pocket to another offers a mirage not a real solution.  Hard choices have to be made.  Avoiding them further would mean bigger disaster down the road.   So the following measures, in a dosed mixture, are unavoidable:
a.       Restructure Enemalta for maximum operational efficiency with Key Performance Indicators based on international standards.
b.      Having relieved itself of operational inefficiencies charge tariffs which make it commercially viable and capable of servicing its debts and investment needs.
c.       Government to adopt a social and industrial policy to subsidise Enemalta’s commercial tariffs to make then socially acceptable and to keep our industries competitive.
d.      Social subsidies are to be tailored to cover normal consumption and excess consumption to be charged at or above normal commercial rates.  Otherwise subsidies will stimulate consumption whereas the objective is to economise on it.
e.      Announce a plan for the gradual removal of such subsidies over a five year term to give families and industries  time to make subsidised investments  in energy efficiency.
f.        Finance such subsidies by raising excise duties on fuel at the pump to bring them up to European averages.
g.       Forget crazy investment like offshore windfarms which can never be cost  justified and consider newer technologies including the feasibility of town gas infrastructure as gas is cheaper, cleaner and more economic in transmission losses.
Failure to act would mean that Enemalta is heading for the dockyard scrap heap.   Or is the ultimate plan to hand over by default  a natural monopoly to the private sector?

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