Oil and tariffs: Government changes its tune

There appears to be no end to the difficulties facing the debt-ridden state energy corporation, Enemalta. Just over a year since the credit rating agency Standard & Poor’s downgraded the corporation’s credit rating, it has just done so again, giving a clear indication that all is not well with the corporation’s financial health. And, indeed, it is not, judging by the size of its debt, a staggering €600 million, compared to €450 million at the time the agency downgraded its rating a year ago and this is not counting the €200 million bill that would be added for the laying of the interconnector between Malta and Sicily.

The government had shocked the country when it decided to do away with subsidies and sharply raised the utility tariffs to make them reflect the cost of fuel.

However, although this must have surely improved Enemalta’s finances, the credit rating agency is not satisfied yet with the situation.

The agency has given four reasons for the downgrade: volatile oil prices, the corporation’s investment needs, poor profitability and lack of a finalised refinancing plan.

A year ago, it had given as reasons for the downgrade the corporation’s high debts, very weak cash flow generation and weak corporate governance.

Quite strangely, the fact that this is the second downgrade in just over a year has passed unnoticed.

The issue over the sharp rise in the utility tariffs has not gone away and, with a general election now only just over a year away, the government appears anxious to change its tune and its policy over energy prices.

Prime Minister Lawrence Gonzi has said that the government’s position today is that Maltese families had suffered enough and it did not wish to make things worse. Finance Minister Tonio Fenech, too, has made it clear that the government has no intention of further raising the energy rates.

In a bid to ease the corporation’s burden, the government is now planning to absorb some €25 million of its non-core expenditure. It apparently plans to subtract the amount from the additional €40 million it has been told by Brussels to reduce in its spending in this financial year.

But to what extent will this exercise help the corporation, particularly if the cost of fuel keeps going up? Since, as the Finance Minister has said, the corporation’s fuel expenses represent about 70 per cent of Enemalta’s costs, he has very little room within which to manoeuvre.

Does it mean that, eventually, the government would once again have to resort to subsidising energy rates?

Right at this point in time, the government has two reasons for backtracking from its original position over tariffs. The first is that another rise in energy rates would further dent its popularity at a time when it can least afford it and, the second, that another rise would hit competitiveness.

Running the corporation more efficiently is, obviously, a must but if oil prices do continue to rise it will become increasingly harder to ease Enemalta’s financial situation without raising tariffs again or directly subsidising the energy rates. Of course, cutting further government expenditure in order to be able to assist the corporation will help but the exercise is fraught with difficulties as experience has shown.

Taking these and other issues into consideration, how on earth can the Labour Party be believed when it continues to insist it has the secret to the lowering of water and electricity tariffs?