Tecom warned over SmartCity

Public Investments and IT Minister Austin Gatt said yesterday he had told Tecom's chief negotiator that Malta would withdraw from the SmartCity project if talks continued to drag on without agreement.

"Although the government really wants this project, it does not want it at any cost. Should it come about, the advantages will be huge but we cannot submit to all of the investor's conditions.

The talks have been dragging on for seven months and they have been extremely complex but the time has come for decisions to be taken.

The differences are few, but crucial, and it will be wrong for anyone to think that we are not ready to withdraw so as to avoid embarrassment," Dr Gatt told Parliament.

"Yesterday I spoke to Tecom's chief negotiator and warned him that we have been talking about the same things for too long and if agreement is not reached in the coming weeks, the government will, regrettably, have to stop them."

Dr Gatt did not say what the differences are. He said the two parties were going into minute detail on each other's obligations. However, the differences were not over the commitment to job creation, and the issue over allocation of land was relatively straightforward.

Dr Gatt said the talks could not be based simply on people's wishes but on realities. Negotiations could not be conducted in public and Labour's attitude during this delicate stage, with occasional disparaging remarks, had not helped.

Later in his speech Dr Gatt said that if SmartCity materialised, Malta would need an additional 3,600 IT workers, which, he hoped, would all be Maltese, although he would not have any problems with foreigners.

In his speech Dr Gatt also spoke at length on oil purchases and revealed that a hedging agreement had worked against Malta following the recent slide in oil prices. Had the arrangement not existed, the surcharge would have been reduced to 57 per cent instead of the current 59.5 per cent.

Dr Gatt said everyone agreed that one could win or lose through a hedging agreement. In 1997 Malta under the Labour government lost $9 million and then recovered them and made a surplus of $1.8 million in 1998.

"The surcharge today would have been 57 per cent instead of 59.5 had we not been caught out like you, losing money from hedging because of a fall in market prices. But up to some time ago, had we not hedged, the surcharge would have been 69 per cent instead of 63.5. We made a gain before and we are losing money now, I am not trying to deceive anyone," Dr Gatt said.

He added that savings as a result of hedging were being channelled to a fund to cushion the surcharge. Some Lm400,000 in savings from earlier hedging had already been used for this purpose.

Dr Gatt said that although the opposition has been saying that in terms of the current oil price, the surcharge should be 51 per cent, that calculation excluded factors such as transport costs, the exchange rate and hedging.

Hedging, he said, provided insurance, but this came at a price.

Dr Gatt also referred to the opposition's promise to cut the surcharge by between 40 and 50 per cent and said that promise was vague and unachievable.

The opposition was saying it would bring down the surcharge by removing or capping duties, removing VAT and removing from the workings of the surcharge the inefficiencies of power generation.

Yet two independent audit reports had already confirmed that the surcharge was calculated solely on the price of oil and inefficiencies were not included. Moreover, no VAT was charged on domestic consumption.

And in any case, government revenue from the taxation on fuels totalled some Lm12 million. Cutting the surcharge by half meant an increased government outlay of Lm23 million. Where did Dr Sant intend getting that money from?

It also needed to be pointed out, Dr Gatt said, that the government was already subsidising oil purchases by Lm14 million.

Speaking on the situation at the dockyard, Dr Gatt said Malta Shipyards had managed to diversify its activities, with ship conversions and work on superyachts now accounting for 70 per cent of its activity. Indeed, Malta Shipyards was a leading facility for such activities in the Mediterranean.

Turnover had risen from Lm13 million in 2002 to Lm24 million this year and losses had been reduced from Lm26 million to Lm7 million in the same period.

Those results had been achieved because the government had absorbed 900 former shipyard workers, work practices had been changed and marketing was more aggressive. Industrial relations had improved markedly and there were fewer disturbances.

The aim was for Malta Shipyards to cut its losses to Lm2 million next year and to achieve profitability by 2009. That, however, had to be achieved without government subsidies, he stressed.

The main problem at Malta Shipyards was that productivity had gone down instead of up. In 2004 sales reached Lm11 million and this year sales reached Lm24 million. Excluding direct expenses on materials and wages in 2004 there was a Lm4.5 million profit, which was 40 per cent of turnover and this year there would be a profit of Lm5.5 million profit, just 22 per cent of turnover.

Dr Gatt said the shipyards imported foreign labour only when this was needed for contracts to be completed on time, so as to avoid penalties.

But it was important that all workers gave a full day's work. No one should run away with the idea that the times of old would return. The government was not a safety net.

The current problems, he said, were affecting cashflow and if they persisted and there were not enough funds to cover salaries early next year there would only be two choices - workers would either have a lower wage or some would have to be dismissed.

Dr Gatt said he was warning the workers not to be misled, as workers at Sea Malta and Interprint had been. He was not taking anyone for a ride and he genuinely believed that Malta Shipyards could become a success if everyone did his duty.

Turning to Air Malta, Dr Gatt said the rescue plan had been a success with the company having reduced overheads by Lm11 million. Over a period of three years the workers had also seen their earnings drop by Lm1.3 million, mainly from overtime, since it was only pilots who saw a cut in their basic salary.

The rescue plan was also a success from an industrial relations point of view, with the worker-director having been replaced by a works council grouping four unions which met the management every month to review the management accounts and discuss and iron out problems.

Dr Gatt said the airline had two main problems, operational losses that stemmed from the price of oil and revenue management

The oil bill rose by Lm6 million last year, despite hedging. Without it the loss would have been of only Lm1.5 million.

Dr Gatt said the purpose of reform was economic viability without subsidies, so that Air Malta would not suffer the sort of problems which had destroyed Swissair and caused hardship at Alitalia.

This had to continue and there were now two options - a new rescue plan or a collective agreement. He said he was prepared to guarantee that there would be no dismissals if the rescue plan option was taken.

Reacting to opposition remarks, Dr Gatt said the former AzzuraAir subsidiary and the RJ aircraft did not have anything to do with operational performance.

As for low-cost operations, it was obvious that the government had safeguarded Air Malta's interests. It was for this reason that market support was only offered on routes which were currently not served.

The low-cost airlines had wanted volume discounts but the government had only accepted to give such assistance for the winter and shoulder months.

Earlier, Dr Gatt said that a review of the main companies falling under his portfolio showed that since 2002 their turnover had risen by Lm96 million, from Lm254.5 million to Lm351 million. Losses were cut from Lm43 million in 2003 to Lm23 million. These losses were made mostly by Air Malta, Malta Shipyards and the Water Services Corporation.

Fuel costs, he said, had made a lot of difference. For while the bill for all the entities ran to Lm78 million in 2002, it was now Lm162 million.

Reacting to some points by the opposition, Dr Gatt warned that remarks by Dr Sant and by Labour MP Joe Debono Grech seemed to imply nationalisation of Malta International Airport. Such statements were dangerous and should be clarified.

He said he also did not agree with a declaration by Dr Sant that there has to be a proactive strategy to sustain national enterprises. The government strategy, he said, was to make way for the private sector to grow and prosper.

Referring to the venture capital fund, Dr Gatt said the government had promised that this would be set up within three years. A fund manager had been identified and a company was in the process of being formed.

Work on an updating of the Business Promotion Act was in hand, but incentives under the current regime would not start to expire before 2008.

Dr Gatt said he disagreed with opposition criticism of Malta Enterprise.

Since 2003 Malta Enterprise had attracted 246 projects which would employ 5,000, with an investment of Lm172 million. Did this constitute failure?

This year alone foreign investment would exceed Lm1 million a day, which was an absolute record, although 2003 was close, when investment reached Lm361 million.

Turning to ICT, Dr Gatt said the three year national IT strategy launched in 2004 had been a success. Its central aim was to make Malta a centre of excellence in the Mediterranean and that aim had been achieved. Tecom's interest in investing here attested to this.

Malta placed second among EU states for the sophistication of government systems and third for its spread of e-services.

Only between 10 and 12 per cent of the specific aims of the strategy had not been reached.

The minister acknowledged that there was not yet enough ICT in business. E-business guidelines would be issued in the coming weeks.

The challenge, Dr Gatt said, was to continue expanding the ICT institute at Mcast.

Furthermore, the number of ICT graduates had to rise from 500 to 1,300-1,500 in five years' time. This was a very ambitious target but it encouraged him to work more. Very few people, he said, had believed that the country could be a centre of excellence in the Mediterranean but this target and more had been achieved in a relatively short time.

Referring to comments on power generation, Dr Gatt said that while there was much in favour of alternative power generation, the country was so small that financial viability was hard to achieve. Nonetheless the government was working on the setting up of a wind farm, apart from linking up with the European power grid.

He had nothing against the use of a combined cycle plant at the power station. Such plants were already in use after all. But gas oil to operate them cost 12 per cent more than fuel oil for ordinary power generation plants, meaning efficiency in generation was defeated by the costs.

John Dalli (PN), who spoke before the minister, said he had noted positive comments from the opposition. Mr Brincat spoke on consensus in the ICT sector. This sector was clearly an important one for future economic growth and it would be a shame if it became a political football, a situation which had befallen other sectors, to the country's detriment.

The opposition had spoken of outsourcing of ICT services, which was also welcome and a change from the opposition's position in the past.

Such changes in the opposition were positive for the country. Malta had no time to lose on internal rivalries when all should pull at the same rope to achieve the same rate of development as larger countries.

With regard to the surcharge, the opposition was no longer saying that it was not needed, given the price of oil. Opec countries were now saying that the oil price was low, at $60, and they wanted to raise it again. Thus high oil prices would remain a reality. One, therefore, needed to make sure that systems were as efficient as possible and users needed to appreciate the costs. Services had to be related to their real costs if waste was to be avoided. Pricing should be according to real market costs.

Mr Dalli said oil prices should spur investment in efficient power generation because the payback period was getting shorter.

But people who cried for change and efficiency should not try to defend old, inefficient practices.

Mr Dalli said he was getting fed up with repeated, and unfair, opposition criticism over rising tax revenue. That the government managed to maximise its tax revenue without actually raising taxes was a sign of efficiency. Tax revenue was going up because the economy was growing and new sectors, such as financial services, had taken root and were yielding dividends.

Mr Dalli said Malta was now widely respected as a financial jurisdiction, which was why he welcomed the Prime Minister's declaration on Friday that Malta was seeking to become a regional financial centre of excellence.

On manufacturing industry, Mr Dalli said the government was always in favour of value-adding activities and it was thus important that Malta remained competitive. It should continue to seek new markets while linking industry and education more closely.