A wise aside

The Governor of the Central Bank of Malta, Michael C. Bonello gave Herman Grech of The Sunday Times (November 16) a wide-ranging interview. It concentrated mostly on the financial crisis, the sub-prime and subsequent credit crunch and their global effects to the massive parallel problem of global recession, whose tidal wave is already licking at our economic shores.

The Governor's incursions in the media are rare. He usually circulates the odd, thoughtful speech he makes at some public occasion, rather than give interviews. This time he met the request put to him by this paper's sister though not without - his interviewer informed us - laying down stringent conditions.

The conditions were not revealed, but they are easy to guess. The Central Bank is not in the direct or indirect business of politics. Also, it tries to avoid involvement in controversy like the plague. That said, Mr Bonello's replies to Herman Grech's probing questions did not skirt the issues put to him. The replies were careful, with every word in them finely weighed.

That was as it should be. It made the exposition of current local, EU and wider financial and economic affairs all the more interesting and instructive. Within the measured words and tones, one could extend the argument further through one's own analysis. Perhaps nowhere was that more the case than when Governor Bonello replied to his interviewers observation that "eventually everything went haywire after March..." The Governor replied as follows:

"Yes, we have since had an increase in inflation but this is largely attributable to the delayed higher international energy prices and the spike in food and cereal prices. We have been importing inflation, and the way we have administered prices in the energy sector has not helped. We have tried to protect ourselves for too long from market prices, and then when you make changes they tend to be bigger than if you had allowed the gradual movement of prices to take place."

The sting is in the tail of that particular reply. Liberally translated it means that the government has taken too much time to start passing on the real costs of producing and supplying energy to Maltese consumers. As a result the changes proposed in utility tariffs are bigger than they would have been were they introduced gradually.

To me, the delay in reviewing utility prices lies at the heart of the little matter of the winter of discontent we are moving into over the way the government has suddenly decided to hike up utility tariffs. The Administration is tying itself up in all sorts of knots about why it is acting now in such an abrupt manner to shock the economy like it has rarely been shocked before.

Essentially, utility tariffs have not been considered as part of normal consumption, but more so as a public good, like the provision of roads, security, health and education by the government. Charges have been historically low, with little relation to the cost of producing and distributing energy supplies.

That remained so when the post-1987 Nationalist government built the Delimara power station. Notwithstanding the outlay, tariffs were not revised. Meanwhile, Enemalta had to rely on government subsidies to stay in business. When the short-lived Labour government of 1996-98 tried to revise tariffs after they had been static for 17 years, all hell was let loose. The fierce attacks went beyond the bumbling manner whereby the Labour government reviewed tariffs and proposed to implement them.

Eventually the Nationalist government returned to the issue, introducing the surcharge mechanism. It did so without ensuring earlier that Enemalta's inefficiencies were seriously tackled, whether they were of a technical or a human resources nature, or both.

Now, some five years later the government is saying that both mechanisms were wrong, and that the surcharge is an incentive to waste. It wants to raise them in one go and retroactively on the basis of an exercise which has not been explained in simple terms to the people. A number of analysts who have seen it do not agree with its assumptions, and therefore with its conclusions.

The government's rush is not related to some wondrous discovery in our universe. It was induced by the fact that the budget deficit got out of hand once more. The proposed utility tariffs are intended to chop as much as possible off the subsidy which the government extends to Enemalta.

Notwithstanding the absence of a serious exercise which truly accounts for inefficiencies and also takes into account the effects of market failure, the government shocked the economy and civil society with proposals that will aggravate the expected effects from the global recession. Moreover, it is doing so without any sign that it will be shifting to a more direct link to the market prices of Enemalta's inputs.

The situation is bad not only because of the absence of gradualism - the whole approach is wrong. There remains a need to bring about a culture change; to make consumers realise that water and energy are commodities whose prices have to reflect market realities. Those realities will include market failure, certainly, and the fact that Enemalta remains a monopoly. But they will also have to take into account the cost of investing in modern equipment, and of operating with imported fuel inputs, not manna from heaven.

It will be difficult enough to bring about the necessary cultural change if the government of the day tries to do it gradually, sensibly and with proper consultation and social dialogue. It will be impossible to do it in the way the government is going on about it.