When Energy Minister Konrad Mizzi told Parliament that Enemalta’s debt exceeded €800 million, no one was really surprised by the extent of the problem facing the energy utility and the bigger economy.
Arguably, the management of this debt poses one of the biggest risks to the new Administration.
The Enemalta debt has slowly been building up over the past few decades as different administrations sheltered this energy company from the realities of oil market dynamics. They also occasionally siphoned liquidity from the corporation to oil the wheels of public finances or, conversely, lubricated the machinery of the inefficient utility by pumping in subsidies to keep electricity rates as low as possible.
Another issue that plagued this utility in the past was its inefficient management that operated in a monopolistic environment where consumers could not do much about high energy rates but suffer and pay in silence.
But, judging by what has emerged in court so far, the saddest element in Enemalta’s management was the manner way in which oil was procured by the highest officials.
It is almost certain that the majority of voters in the last general election were influenced in their decisions by the way the energy utility conducted its business in the last several years. They now rightly expect a change in direction in the management of Enemalta as well as a resolution of the debt mountain that could threaten the health of the economy.
Last January, Parliament approved the setting up of a special purpose vehicle to take over part of the debt of Enemalta. Through this SPV, the corporation will have a clear repayment programme that, over a period of years, should see part of the debt reduced. Ultimately, the success of this financial re-engineering will depend on the utility’s ability to generate enough income from its services to the consumers.
The new Administration’s energy policy promises a radical change in the way that electricity is generated and sold to consumers. This entails an added risk that is inherent in any major project that is substantially different from the way we generate electricity now. This energy policy comes with ambitious commitments on the reduction of energy rates for both private and business consumers.
It is encouraging that Dr Mizzi has already announced some deadlines for the milestones of this new energy project because the sooner that Enemalta’s energy inefficiencies are addressed the better it will be for consumers and for the economy. The size of the national debt has to be seen in its totality, which means that one must add the part of that public guaranteed debt that does not feature in the official statistics.
With a debt to GDP ratio reaching the 90 per cent level when the whole national debt elements are taken in consideration, the economy is vulnerable to damaging sanctions by the European Commission, rating agencies and international agencies like the IMF.
The Government needs to show determination in tackling the Enemalta debt with effective financial engineering measures that go beyond the setting up of an SPV.
Hoping that the economy will grow sufficiently robustly over the next few years to reduce the relative importance of the debt mountain is simply not enough. Economic prospects in the euro area remain sluggish, making it that much more difficult to reduce Enemalta’s debt burden through accelerated economic growth.
The Government needs to eventually give more details on how the energy utility will put its house in order.