Energy costs

Infrastructure Minister Austin Gatt's recent discussions with the Malta Council for Economic and Social Development have put the issue of the rising costs of energy firmly on the agenda. Energy costs as proposed are set to go through the roof with increases of up to 300 per cent being envisaged for some companies. The minister is caught between a rock and a hard place - the huge increases in the cost of oil have meant that someone must foot the bill for the cost of energy, he says, as otherwise the deficit will increase and the government's target of balancing the books by 2010 will not be achieved.

The truth is that in a country with no alternative sources of energy we are at the mercy of the price of oil. The situation is still very fluid. Prices were expected to top $200 per barrel, but the price has dropped considerably and, at the time of writing, this stands at about $80 per barrel. Even assuming it remains at this rate, energy consumers will still be hit hard.

Industry is obviously dependent on energy. For some industries it is a high proportion of the cost of production, along with wages and raw materials. Should companies be faced with a 300 per cent increase overnight there is no doubt that these companies will face severe problems and there is a real possibility that this will translate into reduced output due to losses and, consequently, job losses, slowdowns and reduced working hours.

The federation has been inundated with calls from its members expressing their concern and the mood is very grim indeed.

Members have been quick to point out that they are already paying for the increase in the domestic bills through the COLA adjustment. They will also be suffering cost increases by suppliers and issues of lower demand brought about by this shock. It is clear that a sudden increase will have a serious impact on the economy with a knock-on effect to the Exchequer that may mean the government would not balance its books in any event.

Industry now has no protection and those companies exporting, as well as those playing to the local market, need to be able to compete on a level playing field. In 2007, industry had the third highest cost of energy in the EU. Part of this problem is due to Malta's size and the subsequent inefficiency in generating electricity. Industry cannot tap into the European grid and, consequently, is penalised for operating from this island. Clearly, there is a market failure in that there is a single supplier that cannot deliver energy at prices approximating the European average.

The minister is right. Someone must pay but, just as governments have bailed out banks to prevent a meltdown of the financial institutions, the solution in my opinion is not to simply remove capping and load industry with the total increase. In the first instance, some impact of this on the economy must be calculated. Secondly, industry must be given time to adapt and be incentivised to install energy-saving devices and procedures as well as to phase in increases to customers without losing contracts or custom. Thirdly, the increases should not exceed the EU average if we are to remain competitive.

It is clear that there are no easy solutions. To load industry with massive increases, without wishing to sound dramatic or overstating my case, is asking for serious economic consequences.

The importance of industry to this economy should not be under rated. The sector is generating close to 23,000 full-time jobs and many thousands more in the firms servicing the manufacturing industry. Wages and profits generated directly by the sector are almost a sixth of the economy total and this does not include the second round or multiplier effects. Overall, the latest indicators confirm that the manufacturing sector remains a vibrant and dynamic component of the Maltese economy, having significant potential to further contribute to its growth and development.

However, the competitiveness of the sector hangs by a thread, especially within the context of the looming global recession. Unsustainable shocks to costs at the present juncture, so soon after liberalisation, could have very serious consequences indeed.

Mr Galea is president of the Malta Federation of Industry.