It’s still the economy, stupid | Tonio Fenech

Not long ago, this would have been the busiest time of year for accountant (and former finance minister) Tonio Fenech. T'is the season to prepare the Budget: a time when finance ministers would be putting the final touches, following meetings upon meetings with all the constituted bodies, on a document that would have already been in the pipeline for several months.

But those days are over for the present, and when I meet Fenech at his accountancy firm's offices in Attard, he seems relaxed, comfortable, almost jovial. Still, he clearly remains glued to the ongoing developments in financial and economic sector: and as we exchange the usual preliminaries, he tells me that he is surprised at how nonchalantly the Labour government seems to be approaching its own 'Budget season'.

"I get the impression that the minister of the economy is still on holiday," he breezily begins. "We haven't heard from him in a while..."

What about the pre-budget document? "What about it?" comes the reply. "It came out late, and doesn't seem to contain any clear plan for job creation..."

This, Fenech adds, is entirely consistent with claims made by Labour before the election, to the effect that 'the economy will take care of itself'.

"I sincerely hope they don't still think, as they did before the election, that their own job is limited to simply 'not to get in the way'. But I get the impression that they still think that way. The finance ministry doesn't talk about how to create jobs and wealth. Perhaps they're too busy trying to meet the impossibly high expectations they raised before the election... if they plan to deliver on all their promises, they need to fulfill a promise a day for the next five years."

Fenech jokingly admits that he is not exactly jealous of the workload... but he claims to be concerned that the Labour government is not taking its commitments as seriously as it should.

"The trouble is that Malta's is a micro-economy. It cannot be addressed only by macro-economic policies. Labour's economy minister is a lecture in macro-economics. I'm not saying he doesn't know his subject... but what is needed in a micro-economy is micro, not macro-management."

This brings me quite emphatically to an apparent contradiction in Fenech's (and the PN's) entire argument. Labour appears to be taking a 'macro' approach to Malta's energy problems... coming up with an apparently multi-national strategy which involves the sale of part of Enemalta to Chinese investors... and, consistent with Fenech's point about micro-management, the PN is objecting.

But isn't this a contradiction? The PN's official reaction to the memorandum of understanding with China Power Investments Corporation (which stipulates the sale of an as yet undetermined stake in Malta's only energy provider) was to question the wisdom of 'privatising essential services'. And yet the PN has been associated with privatisation since the early 1990s... and, when in government, it likewise also privatised individual aspects of the same essential energy service: for instance, the distribution of LPG gas.

How does Fenech account for this apparent volte-face? Does the PN no longer approve of privatisation? And how is the so-called 'China deal' substantially different from past PN energy policies?

"The PN has always been a party in favour of privatisation," Fenech promptly replies. Our belief has always been that government should occupy the role of regulator in the economy, not an active player. But there is an exception when it comes to essential services. Energy provision cannot be dependant on the private sector, in an environment where there is no competition. This because the privately owned energy provider would simply become too strong. And private operators do not invest in such areas out of a sense of charity; they will want to see a return on their investment."

Here I interrupt to point out a small discrepancy in this argument. It would appear from his reasoning that Fenech objects to a partial privatisation of Enemalta on the grounds that the private operators would inevitably place their own profits before the social exigencies of the consumer. Yet a sizeable chunk of the problems which had dogged the preceding government concerned the removal of a subsidy on energy, resulting in skyrocketing energy prices and all the social unrest this caused.

Isn't this also a case of putting profits - or at least, an attempt to rein in Enemalta's financial situation - ahead of social concerns? And if so... why is the China deal any different?

Fenech acknowledges that the former government paid an exorbitant price for that single decision; but in reply he invites me to consider the possible consequences of retaining that subsidy. "Don't forget the global economic outlook at the time. Had we kept subsiding Enemalta to the tune of €50 million a year, we wouldn't have had the resources to help factories and businesses which were threatening to pull out of Malta when the recession struck..."

Fenech concedes that Malta was not likely to face the same extent of the financial problems experienced by Greece and elsewhere. "But there would have been problems all the same. Unemployment, for instance. We tend to forget the challenges we also had to face at the time. When you had a company like ST Microelectronics declaring it would downsize its local investments; or Trelleborg saying it would shut down its Malta factory... hundreds of workers would have been out of a job... this was the situation we were facing. "

The former finance minister is emphatic in his argument that you cannot divorce the decision to remove the subsidy from its ultimate effect, which was to help government manage the economy when management was critically needed.

"At the end of the day we were faced with a choice. I have always argued that, given the choice between having subsidised energy bills but no job, or a job but no subsidy on energy bills.... people will always choose the job, not the subsidy."

Coming back to the MOU with a Chinese company, Fenech claims that present government doesn't reason the same way. He sees a contradiction between Labour's argument (when in Opposition) against the removal of the Enemalta subsidy, and its decision to enter into a partnership with a private Chinese firm under such mysterious circumstances.

"This is why we are opposed, not to privatisation in total, but to the privatisation of essential services," he goes on. "Unlike government, private companies do not invest for the greater good of the public. They have their own private interests. We don't know the details of this agreement, so we'll have to wait for the contract to be tabled in parliament. What I want to know, however, is: what's in it for the Chinese company? I somehow don't think a private operator will be interested in investing in a company unless it thinks it can turn that company around into a profitable venture. But how can Enemalta be made profitable? From the point of view of a private company there are some options available: to reduce the workforce, or to raise the tariffs. Government has however excluded both. So what option is left? What else is there in this agreement that we don't know about?"

Fenech also expresses surprise - which is shared editorially even by this newspaper - that government would announce the sale of a stake in Enemalta, without specifying exactly how much is to be sold, and on what terms and conditions.

"First off, it is a direct contradiction of the PL manifesto before the election," Fenech resumes. "Back then they had ruled out privatising Enemalta altogether, and instead they talked about a privately-owned power plant from which Enemalta would buy 40% of its energy. Now they are talking about selling off a chunk of Enemalta, which was never on the cards before the election. Secondly, we are still in the dark as to how much of Enemalta will actually be sold. Initially we were told 20%. Then it became 35%. To this day we don't have an answer to this question..."

Fenech argues that this is an all-important consideration, because the size of the shareholder stake will also determine the amount of decision-making power wielded by the private shareholders.

"If government thinks that by retaining 51% shareholding, it will retain full autonomy over Enemalta, it has another guess coming. The remaining shareholders will also have rights, depending on the terms of the contract. It is unlikely that a private company would bind itself contractually to a situation where it cannot object to decisions that will not be in the best commercial interests of the company it has invested in. So if the board of directors does not act in the interest of the company, clauses can come into effect that would force the same board to act differently. Now: is this a good or a bad thing? It is difficult to answer..."

Surprisingly (given the PN's own financial situation, to which I shall return shortly), Fenech cites the example of Enron: the private US energy firm which went bankrupt in 2001, causing a major economic crisis and laying down the blueprint for 'creative accounting' that would later also spell bankruptcy for the Lehman Brothers, etc.

"Enron was a classic case of why it is dangerous to allow private stakeholders in what is effectively a monopoly."

Moreover, Fenech also criticised government's entire approach to the deal: making the rather familiar argument that government did not defend the national interest when it apparently undervalued Enemalta in the interest of securing a quick sale.

"I think it was counter-productive to constantly run down Enemalta - talking about as if it were bankrupt, and so on - before trying to sell part of it..."

And yet, oddly enough, Fenech's own government once stood accused of exactly the same tactics when it came to privatising two other national assets: Sea Malta, and the Malta shipyards. Fenech however dismisses the comparison. "The financial situation at the dockyard was what it was; as for Sea Malta, as I recall it was a good deal for Malta..."

What about the situation at Enemalta? We all agreed that the dockyard had massive financial problems (though opinions differed as to the causes)... but it's not as though there is broad consensus that Enemalta is a financial bed of roses. What about its debt of €850 million?

"That's not a true picture of Enemalta's financial situation," he quickly replies. "It depends how you evaluate such companies. Enemalta had liabilities, yes, but it also had assets which were never factored into its evaluation. In the last legislature we created a special purpose vehicle which took over €350 million of that debt... as a result that figure no longer appeared on Enemalta's balance sheet. We also invested in things like the intreconnector... the BWSC power plant... the distribution network... these are all assets belonging to the corporation, and their value has to also be taken into account. On top of that Enemalta still owns substantial properties which are also among its assets. Now that the Marsa power station has been decommissioned, that enormous stretch real estate - owned by Enemalta - can be redeveloped. The company owns properties in Birzebbugia, near the Qajjenza plant, and elsewhere..."

Fenech openly questions whether any of these assets were even factored into the price (as yet unknown) for which the stake (another unknown quantity) in Enemalta will be sold to the Chinese firm. He also questions the wisdom of limiting the offer only to one interested party. "It's always good to seek foreign investment, don't get me wrong. But why limit yourself to one buyer? Why did it necessarily have to be China? Why not Norway? Or Germany? If government were serious it could have announced a call for expression of interest, and then chosen the best offer..."

But this, he adds, is only one questionable aspect of the issue. The other concerns jobs, and Fenech here reminds me that Chinese investments secured by past Labour governments had been very successful in creating jobs, yes... only for Chinese, not Maltese workers.

"We have not been told how many jobs are going to be created through this deal for Maltese workers. If you look at past investments such as the China Dock, you will find that China moved in with its own workforce. I can understand this from China's viewpoint: as an economy with a population of around 1.4 billion, it is obviously keen on creating jobs for its own people. What I don't understand is why Malta should be so keen to create jobs for other countries, and not for itself."

At this point I interrupt with an admittedly awkward (some would say rude) question. Without entering the merits of his actual objections: some people out there might find it odd that a Nationalist exponent should be talking about the energy sector at all, when his own government arguably fell apart at the seams over revelations of corruption in precisely the same sector.

Also, it sounds strange that a former Nationalist finance minister should be so critical of the government's economic policy, at a time when the PN's own financial situation is itself entirely comparable to Enron's.

"I was never involved in the financial management of the PN," Fenech butts in before I even have time to frame the question. I know, I reply (and neither, it seems, was anyone else in the party). But my point is quite another: why should anyone take the Nationalist Party's arguments on economic matters seriously, given that its own internal financial management proved so disastrous?

Fenech replies by arguing that the same financial situation proves other things, too. "It proves we weren't corrupt," he begins. "Remember the spin before the election? How we were supposed to be in the pockets of big business? If that were true, we would hardly be in that financial situation..."

Well, that depends. Normally when politicians are corrupt, the money they hive off tends to go into hidden bank accounts in other countries. It is not, as a rule, re-invested into the party. And besides, that doesn't really answer the question...

Fenech counters this by pointing towards the black hole concerning Labour's finances: "We recently published our campaign budget. We spent €2.2 million on our campaign. Labour officially admits to having spent considerably less than us. How is that possible, when they put up three times as many billboards, and you couldn't access practically any website without a Labour ad popping up on your screen?"

Meanwhile he deflects any comparison between management of the PN - which he freely concedes "could have been better handled" - and his own economic management of the country.

"In the 10 years I've been involved with government there were things we could have done better. But that's only part of the story. We also joined the eurozone, built a new hospital... we were faced with an unprecedented economic crisis halfway through. We had to withstand the perfect storm. And we withstood it..."

Fenech here adds that Labour, unlike PN, has the luxury of inheriting the reins of government at a time of relative economic stability. "The Labour government will not face the same challenges we faced a few years ago. They will have a better economic climate to work in. But that doesn't mean there won't be problems. Already there are indications of trouble ahead: Unemployment is up. Imports and exports are down. So are retail and consumption. Clearly, the economy is sending out warning signals which cannot be ignored. I would like to think the government has a plan to counter all this. But so far I have seen no sign of it."