Too big to fail?

Government’s decision to fork out €4.2 million of taxpayers’ money to acquire a Valletta café – when it could have legally taken possession of the same property without paying a penny – clearly warrants an explanation.

Café Premier gives onto Pjazza Regina in Valletta, where it stands adjacent to the 17th century Biblioteca. The official justification for the government takeover is to remove any potential danger to the collection of manuscripts and other historical treasures housed within the building next door. Government has also defended the ‘amicable’ out-of-court settlement on the grounds that an expropriation order would have entailed compensation anyway.

Neither explanation stands up to scrutiny, however. It transpires that government acquired a cafeteria that had in any case ceased operations; raising questions as to how much ‘damage’ it could have caused to adjacent buildings and their contents. Moreover, by ceasing operations – apart from defaulting on bank loans and other debts, including utility bills – its operators, Cities Entertainment, had violated their lease agreement with the Lands Department.

In comments to this newspaper government further admitted that it stepped in when it “found out” that Cities Entertainment “was negotiating with third parties to sell the business”. Again, this constitutes a breach of contract: the original deed states clearly that the company cannot transfer or sub-lease, or enter into third party ‘partnerships, management, or franchise agreements’ without government permission.

This in turn means that government was fully within its rights to retake possession of the property over breach of contract, without having to expropriate or pay compensation. Yet it chose to spend a lavish sum to purchase what was effectively its own property anyway. Ostensibly the money will be used to acquire the café’s equipment and assets, which include a waxworks museum. In practice, however, it will go towards settling the business’ unpaid debts.

In order to reach this agreement, government terminated ongoing court action against the proprietors. Yet there are other ongoing cases against businesses which are likewise accused of defaulting on their financial commitments. Will all such cases be settled out of court, using taxpayers’ money to bail out the offending businesses? If so, government would have set a precedent that will surely cripple the country in future.  If not, it is incumbent on government to explain the procedures whereby some businesses are allowed to fail, while others are helped to a generous bail-out using public funds.

Even at a glance, this situation makes a mockery of the concept of a level playing field on which competition can be expected to flourish. It is also evidently unjust on other commercial entities that have been treated to very different set of procedures when faced with very similar circumstances.

Given the extent of its claim over the property in question, government owes it to the taxpayer to explain exactly why and how it chose to forgo existing legal proceedings, and to refrain from dissolving a contract that was violated on at least two counts, in order to handsomely pay the defaulters. It may also wish to explain how this approach to the administration of public funds fits in with its broader economic strategy.

For while the issue, in itself, may not have severe repercussions for the country, the principles that have been collectively disregarded could conceivably erode business confidence in future. Placed in the context of its similar handling of the smart meter scandal late last year – when government chose to forego mass legal action over theft and bribery, and instead issued an amnesty – the scenario starts to look worryingly repetitive. Government risks imparting the impression that such behaviour is not only condoned but almost encouraged; or at least, that the consequences can always be ‘negotiated’, depending on who (or how many) you are, or whom you know.

All this may impact the perception of the Labour government as a force for change in the country: a perception that successfully led to an impressive electoral victory one year ago. This development has all the hallmarks of precisely the same ‘way of doing politics’ that Labour had vowed to eradicate before that election. By applying different weights and measures to similar cases, the government is merely reinforcing the old perception of a system which arbitrarily favours some entities but not others. And by resisting calls to publish the workings of this agreement, it is simultaneously betraying its own pre-electoral insistence on more transparency.

This does not reflect very well on its credentials as a reformist government which aims to give Malta a higher vision to aspire to.

From all angles, the Café Premier settlement only makes sense when viewed as the government bail-out of an ailing private enterprise: a practice that is controversial even when applied to cases where there is a genuine need to avert a financial catastrophe, as we all saw in the recent economic crisis.

On that occasion, the excuse to justify using public funds to keep private firms from bankruptcy was that they were ‘too big to fail’. If the same excuse is to be applied to the Café Premier in Valletta, our horizons must have shrunk to minuscule proportions indeed.