Thursday, 1 March 2012

Enemalta's chickens are coming home

Minister Tonio Fenech seems like the chambermaid trying to lay out a double bed with a single bed sheet.   She pulls the sheet to the right and exposes the left side.  She then pulls the sheet to the left and the right side gets uncovered.  She would ask a colleague to pull the sheet from both sides trying to extend its width and risk tearing it right down the middle.

When S & P downgraded Enemalta from BB to B+, which is deep down in the lower tier of the junk bond territory, the Minister seemed panicky and called a press conference to explain that Enemalta's plan to refinance its current and planned borrowing of EUR 800 million had met technical difficulties and this contributed to the downgrade.  As a palliative he announced that government would be taking over on its own books obligations costing Enemalta EUR 25 million to help improve its profitability.

Now this is simply moving debts from one pocket to the other.  Enemalta is wholly owned by the Maltese taxpayers and whether the expenses are booked by Central Government or by Enemalta as a Corporation, it makes little difference.

If problems could be solved the way the Minister thinks than we can convert Enemalta into a government department and ipso facto Enemalta's  debt would be added to the national debt and it would gain the same rating as the sovereign.  But ( and there is always a but) the resultant increase in public debt would then lead to the downgrade of the sovereign.   So whichever way you pull the sheet one side remains exposed.

Government has played this trick before.  By neutralising the profits that Enemalta used to make from its petroleum division ( by imposing VAT and excise duties to increase its revenues) Enemalta could no longer use such profits to subsidise its loss making Electricity Division.   Electricity generation in Malta can never be profitable, given the lack of economies of scale,  unless unsocial consumer utility rates are charged.

The obvious solution is to raise excise duties on fuel sold at the pump and reduce excise duties on fuel used for electricity generation.   Switching expenditure to central government is like playing hide and seek when central government has just been given the order by the EU to cut recurrent expenditure, including social votes, by Eur 40 million.

Enemalta's chickens are coming home to roost.

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