Grave market and political failures

Minister Austin Gatt has made a very bad economic and political mistake. He presented changes in the way we are charged for our water and electricity consumption in the worst possible manner. He put forward an exercise limited to accounting content without considering essential economic and social factors.

There should be no doubt that charges for water and electricity services have to be changed to a broad cost-recovery basis. For decades this requirement has been ignored, even when heavy capital investment was made to ensure better supplies through reverse osmosis plants and a new power station. Charges remained largely unchanged and hell broke loose when the 1996-98 Labour government tried to start remedying the situation, albeit in the clumsiest of manners.

That clumsiness is being matched now. Dr Gatt has put forward five accounting exercises, intended to replace the surcharge model with one to recover the cost of producing and supplying water and electricity, while retaining an eco and social content. Correct though the final objective might be, the process is fundamentally flawed.

The minister said that the social partners could opt for any of the five accounting models, or make a proposal of their own, so long as the model's (cost-recovery) parameters were respected. He also arbitrarily declared that any model would start being implemented with retroactive effect from October 1. The time-limit is wrong, both in consultation terms and on the basis of socio-economic factors.

These factors are set out by economic experts advising the social partners and by economic observers commenting from the outside. In a nutshell, the accounting exercise ignores a basic economic fact - that the Maltese islands are a small and isolated network, which leads to market failures requiring correction through government expenditure. Furthermore, they ignore the need to implement radical change gradually so as not to shock the economy and society unduly.

The government is also closing its eyes to the fact that water and electricity are supplied under monopolistic conditions. Consumers have no choice. Can that ever change? It can and will change when Malta connects to mainland Europe, at least for its energy supplies. If modern technology is selected - as it should, costly though it will be - and provided the right household meters are put in place, consumers should be able to choose between various types of energy supply.

That day is not yet on the economic and political calendar. The government has anticipated it in the most ham-fisted manner imaginable. Decades of pricing neglect and disregard for cost recovery cannot be set right overnight, especially in the wrong economic context. The government should have anticipated the unanimous outcry of the social partners. It now needs to go back to the drawing board to draft a much more rational proposal.

It will have to base it on the existing scenario of a monopolistic situation, with a timescale of implementation based on when and how that situation will be changed. It will also have to pace implementation over a rational period which, among other things, will allow a culture change to take place. The change will lie in educating consumers to appreciate the fact that water and electricity are commodities. Essential commodities, certainly. But in the same manner that food is also essential, yet it is bought at market prices. In the case of water and electricity the charge for them will have to take into account market failures that arise from the tiny size of our economy. Limited outlays of public funds will have to be allocated to correct for them, aside from other public expenditure required in terms of social justice and policy to aid those who are truly at or below the poverty line.

The decent and wise thing to happen is for the Prime Minister to admit that the affair was rushed, to engage in real consultation based on socio-economic considerations, and not just on an accounting exercise, and to come up with a fresh proposal to be implemented in a sensible manner.