Price orders: An exception not the rule - Vassallo

Parliamentary Secretary Edwin Vassallo said in Parliament yesterday that the government was determined to ensure that inflation did not get out of hand. However it was a firm believer in the free market, and the possible introduction of price orders would therefore be the exception, not the rule.

Speaking during the debate on a Bill amending the Excise Duties Act Mr Vassallo said amendments to the Supplies and Services Act made some five years ago had contemplated a situation where, if inflation was too high, price orders could be imposed.

The government was committed to take every responsible measure and implement price orders if necessary, to ensure that inflation did not get out of hand. The government, however, was in favour of the free market and would intervene only when necessary, as an exception and not as the rule.

Reacting to remarks by the opposition, Mr Vassallo said the government was committed to implementing its programme to sustain and promote economic growth and attract investment. The deficit was a problem that was being successfully tackled. The government was also being successful in job creation. Economic success was being achieved despite the problems caused by record oil prices.

The Bill raises excise duties on all petroleum products in an exercise which Parliamentary Secretary Tonio Fenech said on Tuesday, was made necessary by the planned liberalisation of fuel imports. He said the changes would not affect consumer prices. Profits made to date by Enemalta, which would now be charged as excise duty, would be transferred back to the corporation under a public service obligation contract.

Charles Mangion, opposition finance spokesman, said that what the government was doing was to raise excise duty to compensate for the losses that Enemalta would incur through liberalisation.

It appeared that very few lessons had been learnt from past privatisation processes. For example, some two years ago the management of the Freeport was sold off but the government still had to subsidise the operation because the dollar rate of exchange to the Maltese lira had not been fixed.

The privatisation of Malta's only airport now meant that the government had little control over this vital facility and passenger-handling charges were causing problems and necessitating subsidies of one form or another.

The liberalisation of petroleum products was due to have come into effect last January. But the government had committed itself to the EU without properly assessing the consequences. While Enemalta held the monopoly over the importation of petroleum products, profits it made from this activity cushioned losses in other areas, such as power generation.

Furthermore, once Enemalta withdrew from petroleum imports, what would become of its workforce?

Parliament's first obligation was towards the national interest, not the EU. Nothing had been said to justify this particular liberalisation process.

Labour MP Noel Farrugia said the government could not blame external factors for what the people paid in VAT on petroleum products. VAT revenue from petroleum products increased from Lm6.9 million in 2001 to Lm11.7 million in 2005. There was no doubt that disposable income, industrial and tourism competitiveness had suffered from this increase. It was no surprise that private and commercial borrowing was increasing.

It was good that the government had introduced a subsidy on domestic solar heaters, but this subsidy, of some Lm40,000 annually, was a far cry from average VAT revenue of Lm5m from petroleum products per year.

And the government needed to set an example on the use of solar energy. Why not install such equipment at schools and Parliament itself to save spending on power?

The least the people expected were better government services for the taxes they were paying. But the opposite was true. The state of the roads was a prime example. Other examples were the way how some health centres closed for the night and how infrastructural projects fell behind schedule. At Mdina, the roads were paved but the bastions were collapsing.

Jose' Herrera said it would be wrong, especially in the current climate, for the government to use this exercise to boost its own revenue.

The cost of energy was one of the country's biggest problems and what was needed was to dampen such costs.

It was worrying that the government still lacked an energy policy and it had been a serious mistake that no hedging of oil purchases was made. An apology was called for.

With the government bent on bringing down its deficit, it was increasingly transferring the burden of oil purchase costs to the people. This was in sharp contrast to what the PN used to say when a Labour government raised power prices. If the people could not afford the price increases then, could they now?

There was also government inaction on alternative sources of energy.

Since 1998, the cost of a litre of petrol had gone up by 17c and that of unleaded petrol by 14c. And while a year ago one could buy 60 litres of kerosene at Lm10, only 24 litres could now be bought for that price. How different the situation was from the promises made before the 1998 election.

Marie Louise Coleiro (MLP) said she seriously doubted that fuel imports liberalisation would actually bring down prices.

There were several examples of how competition did not work as well in Malta as it did abroad. Former minister John Dalli complained about this some time ago, and FOI director general Wilfred Kenely did so as recently as last Tuesday after the government warned it may have to introduce price orders on medicines.

It was unfortunate that market surveillance mechanisms were not working effectively, leading to poor enforcement of consumer protection laws.

Ms Coleiro underlined the problems which the power surcharge is causing households and appealed to the government to extend its assistance to more low-income families.

Labour MP Leo Brincat said the announcement earlier this week that the government may impose price orders was confirmation of the panic which had taken over the government because it was afraid that Malta would not meet the Maastricht criteria for euro adoption because of high inflation.

One would have expected that any measure affecting prices would be issued by the regulatory authorities and not the government itself. The rate of inflation - and the fact that it was not imported inflation - was worrying as it undermined the people's standard of living.

Just as worrying was the way the government was taking decisions based on electoral considerations and Malta was having management by crisis.

Firms were being privatised solely to improve the government's financial position and the way the power surcharge was imposed was still an enigma.

Decisions on euro adoption were also being taken with political considerations firmly in mind.

The decision on dual adoption had been moved forward despite disagreement by most of the members of the adoption committee.

Once Malta had joined the EU, it had no choice but to adopt the euro. The Opposition, however, was questioning the timing of euro adoption more so because of the possible inflationary impact.

The government needed to better explain its decisions. Was it true that the profits of the Central Bank had deteriorated by Lm4m as a consequence of ERM II membership?

The government was now planning to reduce taxes as the elections approached. But one should see the whole picture, such as the disaster in tourism and deteriorating living standards.

Concluding the debate, Parliamentary Secretary Tonio Fenech again insisted that this Bill would not impact consumer prices. The profits currently made by Enemalta from the importation of fuel would be collected through excise duties and the funds would then be channeled back to the corporation.

He observed that when the government took a step towards liberalisation it always found the opposition to be against. What was the opposition's position on liberalisation?

In his speech Mr Fenech also hit out at Opposition criticism of the Central Bank and its Governor, saying he could not understand how the opposition leader had believed, without verification, an article in L-orizzont by a person who should be asked why he no longer worked at the Central Bank. It was a shame that the Governor was being dragged into the political arena.

Mr Fenech denied that Malta would pay a fine of Lm10 million annually to the European Central Bank upon euro adoption because of the high level of money in circulation in Malta.

He said that upon euro adoption the Central Bank would no longer carry the heavy burden of supporting the Maltese currency. The concept of reserves and money in circulation would be changed. The assets held by the Central Bank would be retained as collateral for the euro in circulation in Malta.

There was a formula which calculated the amount of euros allocated to Malta and if more was required, the Central Bank would be required to make a contribution to the ECB. But this would only follow a transitory phasing in period during which time such requirements by Malta would decrease. At the same time, as the circulation of the euro around the world grew, profits to the Eurozone Central Banks would also grow. Thus any contribution, which Malta might eventually be required to make, would decrease as the proportion of euros in Malta to the rest of the world grew smaller. At the same time, profits would increase.

So effectively while it could have seemed that the country would lose, it would actually gain.

Concluding, Mr Fenech said the opposition was welcome to ask questions to the Governor of the Central Bank when he addressed the House Public Affairs Committee next Wednesday.

The Bill was given a second reading after a division, with the opposition voting against.

Notary Charles Mangion (MLP) also referred to the euro issue during an adjournment speech saying that money in circulation in Malta was almost three times higher than the expected allocation of euros to Malta and Malta would therefore have to pay interest which could reach as much as Lm10 million. This matter was never mentioned at a meeting which the Opposition had with the Central Bank.

Was it true that this issue surfaced after CBM workers demanded a pay rise and were told that no funds were available since, after 2008, the profits of the bank could be wiped out because of the euro adoption costs? he asked.