The prioritisation of investment projects

When economic times get tough productive investment becomes a necessity to sow the seed for future growth. The tough part of investment is deciding what the priorities are and how such investment is to be financed. From an accounting perspective debt is always a liability and never an asset. From an economic perspective debt will become an asset if it is incurred to promote growth through the right investment. So is the building of a new Parliament and theatre the right investment in a time when many people are feeling the pinch of the economic slowdown?

The reduction of our national debt is a top priority- John Cassar White

The setting up of a special purpose vehicle (SPV) to finance the building of our new Parliament is a viable technical option. The dynamics of the financing of this project are complex but essentially what they consist of is the anticipated use of future cash flows due the government from companies managing our airport and cruise liner terminal. It is not unlike taking a mortgage for buying a new house with the hope that you will earn enough money in the next 20 or 30 years to repay the loan plus interest.

The acid test of whether financial engineering makes economic sense, as opposed to just financial sense, is the benefit that such a project is likely to produce for the economy. I will not enter into the merit of whether the aesthetics of this project satisfy the majority of people who ultimately are paying of this major expense with their taxes. But I certainly have an opinion on whether the building of a new Parliament is more important than, for example, the resurfacing of many of our roads that are in such a pitiful state; or whether this SPV should have been set up to raise finance to reduce part of the €700 million debt mountain of Enemalta that according to an EU report is penalising small businesses with monopolistic energy rates.

The management of our debt is possibly the most daunting challenge that faces this and future administrations. When Moody’s decided to downgrade Malta’s credit rating in September 2011, it stated in its report: “When Malta’s guaranteed debt is added to the totals (of public debt), total debt to GDP reaches 80 per cent”. When one considers that a large part of Enemalta’s debt is guaranteed by the government, one can safely conclude that the Maltese taxpayer is indeed responsible to repay this debt mountain.

The Malita SPV will be appropriating future income due to government and as such it limits the ability of future governments to optimise their short-term management of public finances. Put in another way, we are today consuming future income that is still unearned in order to finance a project that many argue will do little to improve our competitiveness or the quality of life of most people.

The servicing of this new debt will hit the pocket of taxpayers for the next three decades. Many would not feel too bad about this, even if they fully understood the implications, as long as they could see this project bring about direct benefits to the economic growth or social prosperity of the country. Unfortunately, this project has not found the consensus amongst our society that would have steered it away from controversy. This lack of consensus was not merely the result of different artistic tastes that any group of people are expected to have, but also by a lack of sensitivity to what the priorities of our society should be in a time of austerity.

A simple but genuine consultation with civic society on what our real priorities should be would have given quite different options from the one actually chosen. The result is that this expensive project will continue to be mired in controversy and resentment on the part of those who ultimately have to foot the bill for the building of this monument.

It is now, of course, too late to remedy this situation. We have to live with this controversial project for at least the next two or three decades. We are not, and unlikely to be, a rich nation. We cannot afford to get our investment priorities wrong, especially when these priorities have to be underwritten with hard earned taxpayers’ money.

We also need to understand that today the reduction of our national debt is a top priority – not simply to comply with the Stability and Growth Pact, but to underpin our strategy for growth.

johncassarwhite@yahoo.com