Now that the Shanghai Electric deal is all but done and dusted – due to be ratified and signed in the coming months, Finance Minister Edward Scicluna has confirmed how close Enemalta was to defaulting on its loan to a German development bank.
Until now, the government has been downplaying the situation, aware of the negative impact it could have had on international organisations ranging from the IMF and European Commission to credit rating agencies.
Shanghai Electric will be ploughing €320 million into Enemalta, nearly halving its €850 million debt.
Some of that will immediately be used to pay the government €120 million in excise tax which was collected by Enemalta over 2012 and 2013 but not passed on.
“There was a risk of default at the end of December 2012, prior to the elections. I was one of the Opposition team briefed by then Finance Minister Tonio Fenech. They gave us a very bleak picture of the situation: A default means you can’t pay either the interest or the 25-year bullet loan for the Delimara power station. We always paid the interest, but when we came to pay the loan, there was no money for it,” he said.
The previous government headed off the default by creating a special purpose vehicle called Vaults, a very complicated legal and accounting transaction put together by PwC – one of the most complicated jobs they ever had, he explained. It was then cleared by the European Commission from the point of view of regulations and state aid.
‘There would have been domino effect’
“The SPV was meant to ensure that the loan would be paid, by BOV, but without it endangering our deficit and at the same time not affecting public finance,” he said. “It was a liferaft!”
However, all it did was defer the debt for a further 25 years – and it would have meant much higher tariffs which would have had to be paid by the consumer.
“That was the only way to increase revenue. But it would not have affected the contingent liabilities, in other words the letters of comfort on the €850 million debt,” he said.
Prof. Scicluna said that the Labour government had managed to appease international organisations, like the IMF and ratings agencies, that a long-term solution would be found, thanks to the strong response to the tender for a gas-powered station.
The problem was the two or three years before this was completed.
“We needed a bridge between now and then and there wasn’t one. We looked at collecting unpaid bills, cutting theft and selling property. But it was not convincing enough.
“We risked the corporation’s rating being downgraded further, then our own sovereign rating would be downgraded, and the bank from which Enemalta borrows would also be downgraded because they have big loans – even though there are letters of comfort, they were exposed to these loans – and there would have been a domino effect...” he admitted.
Deal with Shanghai Electric solves a lot of problems
“This deal with Shanghai Electric solves a lot of problems. It was created in such as way as to ensure a viable and sustainable enterprise. The Chinese would not buy into a bankrupt company: Shanghai Electric is AAA rated. We are not talking about a Chinese backyard restaurant. It is an international company with very good, Harvard-trained management,” he added.
However, another major benefit is that Shanghai Electric will not only get a third of the shares but also a third of the guarantee burden. Enemalta’s debt represents some 80 per cent of the government’s €1 billion in guarantees.
“That changed the landscape. The way it is perceived by the rating agency was critical. We were in Washington talking to Standard and Poor’s and as soon as we told them about the deal, things changed and there was hope that the future was not that bleak after all,” he said.