Not forthcoming enough
For all his straightforward frankness Infrastructure Minister Austin Gatt was not as forthcoming as he might have been in his interview with Herman Grech of The Sunday Times (December 14). He also missed a good opportunity to make many more people...
For all his straightforward frankness Infrastructure Minister Austin Gatt was not as forthcoming as he might have been in his interview with Herman Grech of The Sunday Times (December 14). He also missed a good opportunity to make many more people aware of the mysteries of how the oil market works, which he has grasped.
He did start off as if he would educate us all a little bit in those arcane mysteries. Usually, he said in reply to the very first question by his interviewer, crude oil works a couple of months later into the refined price, but the refined price then depends on where your refinery is and how many refineries are working at any point in time.
He was referring to price of refined products and to the operations or refineries the world over. In our case, he said, we buy from a refinery in the Mediterranean. The minister also reminded us that the price of refined oil is quoted on the Platt's website. He did not go into any further detail, such as to illustrate by a few examples.
Readers would surely have been interested to learn from the minister how the purchase price of Malta's refined oil has moved over, say, the past six months, since the price of crude began falling. There was more than time enough, by his own description, for the sharply falling price of crude to be reflected in the price of refined products.
Instead he stayed on his chosen ground. Dr Gatt revealed that oil is a very difficult subject. "The reality is that we buy refined oil and most people find it very simple to quote crude oil," he said, adding that was not the reality of Enemalta. Instead of enlightening simple folk he kept his more expert knowledge to himself, merely stating the obvious fact that Enemalta buys refined oil, not crude.
The interviewer suggested to the minister that the goalposts have shifted. Since Minister Gatt started drawing up the new tariffs, the price of crude oil was down from $147 to $ 42 a barrel. Wasn't it about time that was reflected in the cost of electricity?
"You're right," replied the minister with utmost frankness, "but you don't change the price of electricity every day."
No, not every day. But does it have to be every six months, as the government has decreed in regard to the setting of the new tariffs? The minister seemed expansive in this regard. "You take in a bit of the past (price) and the future (sic) - that's the way it should be done, or else you cause economic shocks every time you change it."
This revealed a factor which is quite contradictory and questionable in the government's thinking. The recovery cost of generating electricity is supposed to reflect market forces. The minister stayed away from detailing for the reading public how the formula is structured for such delivery. The general public has heard a lot about the KPMG report for Enemalta and its estimates. But the report has not been translated into popular language and published for the benefit of those who wish to do more than hear and read brittle exchanges between the ministers of infrastructure and finance and the social partners sitting on the Malta Council for Economic and Social Development (MCESD).
Such a translation would show what costs have been assumed to be fixed, that is, they do not change with the level of output, and which are variable, that is changing with the level of output. The variable changes would come mostly through the price of refined oil converted from its US dollar price to a euro base.
Making the formula and its workings available to the public would enable the media to calculate the current cost were Enemalta to use it, as compared to the electricity tariffs fixed every six months. For some unknown reason the government still has to decide to take the public fully into its confidence. Doing that would not prejudice the principle of proper full recovery which, to reiterate my stand, is valid as much as it is valid for us to pay the going price of bread, clothes, entertainment and other items of consumption.
Nor would publishing the formula in terms understandable to the general public bring about any undue pressure. The price resulting from the formula would move upwards and downwards in the same manner that the price of refined oil moves with a lagged (delayed) link to the price of crude oil. In fact people would become more knowledgeable of the fact that prices do move up and down, that's how it goes.
The minister shied away from converting his now deeper knowledge of the oil market into knowledge for the common people, who do not enjoy his exposure to such matters. Instead he took it upon himself to try to deliver a lesson or two in economics.
He argued against setting the tariffs more frequently than every six months on the amazing basis that this could shock the economy, as if he and his colleagues hadn't done just that in the way they introduced the tariff system, retroactively and without properly baring the formula and its assumptions to critical understanding and review.
He then argued that by affecting people's disposable income, thereby restraining their purchasing power at a time when inflation is going down and that affects it further, he jumped to declare, that, no, you're not - thereby you're ensuring there is less inflation. "In what way," asked the minister's bemused interviewer. "Because you are restraining the purchasing power at a time when inflation is going down and that helps it..."
Heaven help us if the Prime Minister and the Minister of Finance also share that fallacy. At a time when people's pockets are squeezed until they hurt, and there is less money to go round than hitherto, Minister Austin Gatt contends that he is right to squeeze the pips harder because that staves off inflation.
If that is told to the people, I doubt that many would feel an irresistible urge to rush to Dr Gatt to thank him for the way he thinks of their welfare.
On another plane the minister did not feel inhibited from making that statement at a time when economic experts and governments are too worried stiff about deflation, a ruinous process of unduly falling prices and consumption which could be about to start.
Dr Gatt was correct to suggest that people will get used to paying for what they consume. They should, provided that the price set by the monopolist supplier is right, adjusted for market failure, is transparent and reflects the market much more frequently than every six months. Uncertainty is worse than the shock of price movements. If the tariffs formula is refined to ensure that it is correct; if, with due regard to the undoubted expertise of KPMG, it is critically examined by other respected accountants; if there is broad agreement ion it; and if the government shoulders its duty to intervene to compensate for market failure, the formula had better come into play every one or at the most two months.
That way consumers - both domestic and commercial - would be able to cost and budget properly. Six months creates far too much uncertainty that they are costing at the appropriate level.
The government has more work to do. It should be able to do it if it does not opt for absolutism, which Minister Gatt, in all seriousness, accused others of.
He did start off as if he would educate us all a little bit in those arcane mysteries. Usually, he said in reply to the very first question by his interviewer, crude oil works a couple of months later into the refined price, but the refined price then depends on where your refinery is and how many refineries are working at any point in time.
He was referring to price of refined products and to the operations or refineries the world over. In our case, he said, we buy from a refinery in the Mediterranean. The minister also reminded us that the price of refined oil is quoted on the Platt's website. He did not go into any further detail, such as to illustrate by a few examples.
Readers would surely have been interested to learn from the minister how the purchase price of Malta's refined oil has moved over, say, the past six months, since the price of crude began falling. There was more than time enough, by his own description, for the sharply falling price of crude to be reflected in the price of refined products.
Instead he stayed on his chosen ground. Dr Gatt revealed that oil is a very difficult subject. "The reality is that we buy refined oil and most people find it very simple to quote crude oil," he said, adding that was not the reality of Enemalta. Instead of enlightening simple folk he kept his more expert knowledge to himself, merely stating the obvious fact that Enemalta buys refined oil, not crude.
The interviewer suggested to the minister that the goalposts have shifted. Since Minister Gatt started drawing up the new tariffs, the price of crude oil was down from $147 to $ 42 a barrel. Wasn't it about time that was reflected in the cost of electricity?
"You're right," replied the minister with utmost frankness, "but you don't change the price of electricity every day."
No, not every day. But does it have to be every six months, as the government has decreed in regard to the setting of the new tariffs? The minister seemed expansive in this regard. "You take in a bit of the past (price) and the future (sic) - that's the way it should be done, or else you cause economic shocks every time you change it."
This revealed a factor which is quite contradictory and questionable in the government's thinking. The recovery cost of generating electricity is supposed to reflect market forces. The minister stayed away from detailing for the reading public how the formula is structured for such delivery. The general public has heard a lot about the KPMG report for Enemalta and its estimates. But the report has not been translated into popular language and published for the benefit of those who wish to do more than hear and read brittle exchanges between the ministers of infrastructure and finance and the social partners sitting on the Malta Council for Economic and Social Development (MCESD).
Such a translation would show what costs have been assumed to be fixed, that is, they do not change with the level of output, and which are variable, that is changing with the level of output. The variable changes would come mostly through the price of refined oil converted from its US dollar price to a euro base.
Making the formula and its workings available to the public would enable the media to calculate the current cost were Enemalta to use it, as compared to the electricity tariffs fixed every six months. For some unknown reason the government still has to decide to take the public fully into its confidence. Doing that would not prejudice the principle of proper full recovery which, to reiterate my stand, is valid as much as it is valid for us to pay the going price of bread, clothes, entertainment and other items of consumption.
Nor would publishing the formula in terms understandable to the general public bring about any undue pressure. The price resulting from the formula would move upwards and downwards in the same manner that the price of refined oil moves with a lagged (delayed) link to the price of crude oil. In fact people would become more knowledgeable of the fact that prices do move up and down, that's how it goes.
The minister shied away from converting his now deeper knowledge of the oil market into knowledge for the common people, who do not enjoy his exposure to such matters. Instead he took it upon himself to try to deliver a lesson or two in economics.
He argued against setting the tariffs more frequently than every six months on the amazing basis that this could shock the economy, as if he and his colleagues hadn't done just that in the way they introduced the tariff system, retroactively and without properly baring the formula and its assumptions to critical understanding and review.
He then argued that by affecting people's disposable income, thereby restraining their purchasing power at a time when inflation is going down and that affects it further, he jumped to declare, that, no, you're not - thereby you're ensuring there is less inflation. "In what way," asked the minister's bemused interviewer. "Because you are restraining the purchasing power at a time when inflation is going down and that helps it..."
Heaven help us if the Prime Minister and the Minister of Finance also share that fallacy. At a time when people's pockets are squeezed until they hurt, and there is less money to go round than hitherto, Minister Austin Gatt contends that he is right to squeeze the pips harder because that staves off inflation.
If that is told to the people, I doubt that many would feel an irresistible urge to rush to Dr Gatt to thank him for the way he thinks of their welfare.
On another plane the minister did not feel inhibited from making that statement at a time when economic experts and governments are too worried stiff about deflation, a ruinous process of unduly falling prices and consumption which could be about to start.
Dr Gatt was correct to suggest that people will get used to paying for what they consume. They should, provided that the price set by the monopolist supplier is right, adjusted for market failure, is transparent and reflects the market much more frequently than every six months. Uncertainty is worse than the shock of price movements. If the tariffs formula is refined to ensure that it is correct; if, with due regard to the undoubted expertise of KPMG, it is critically examined by other respected accountants; if there is broad agreement ion it; and if the government shoulders its duty to intervene to compensate for market failure, the formula had better come into play every one or at the most two months.
That way consumers - both domestic and commercial - would be able to cost and budget properly. Six months creates far too much uncertainty that they are costing at the appropriate level.
The government has more work to do. It should be able to do it if it does not opt for absolutism, which Minister Gatt, in all seriousness, accused others of.