Three months ago the VAT department was hit by one of the biggest local fraud scandals ever. Yet nobody has been charged or sacked. Finance Minister Tonio Fenech insists with Mark Micallef that until the review is over the department commissioner cannot be blamed.
It's been three months since the first arrests were made at the VAT department over fraud allegations. Does it worry you that there has been such a long vacuum with nothing much happening?
I don't think there were three months of vacuum. Obviously, it is not the ministry carrying out the probe, so it is difficult for me to comment on the police investigations. I think the police are doing their job, and it is not an easy one.
Don't you know what stage police investigations have reached?
It's not my place to decide...
...Yes, but you would have information.
I know investigations have not been concluded and that the police are no longer at the department, after having spent months there... I hope they will be able to prosecute soon. Obviously, we have to understand that if the police proceed against someone and then find something else on that person at a later stage, they will not be able to proceed on those new facts. So I appreciate that the Police Commissioner and the corps have a great responsibility to see at what point they should proceed.
Besides the investigation, what has changed on the ground at the VAT department in the past three months?
A number of positions have changed in this period to beef up areas where we felt there was not enough control. Now that the police have left, we are going to start an internal review, which will look at strengthening structures at the department and in other agencies.
When you say other sections...
Obviously, we have sections like the Income Tax Department, the Tax Compliance Unit and Customs. These are all important revenue units, which we have to ensure are not subject to the sort of thing that happened at the VAT department.
So far, whenever you were asked what will happen to the VAT Commissioner and the top brass, both you and the Prime Minister have said you want to wait for the outcome of the police investigation. Don't you think this flies in the face of accountability?
I don't think it would have been wise to say that the VAT Commissioner should be blamed at the outset. So far, investigations are not showing this. It does not appear that the Commissioner was negligent. On the contrary, when he became suspicious he went to the police. But on the other hand, the management's responsibility is not to simply receive a report and go to the police.
If there is something suspicious, they have to identify the problem or ensure it does not happen again. So the internal evaluation needs to establish if there were enough checks and balances. Now, if these were in place and there was a way to abuse them I cannot blame the management... because when there is collusion things become difficult. But I reserve my position till after the review.
We are talking of fraud that involves millions of euros and which was spread over a number of years. It seems there's been an auditing failure.
Yes, prima facie... I cannot say I do not agree with you because, professionally, I come from the auditing field. So I understand the need for internal control and checks and balances. The problem is that from the investigations so far, it seems it was a little difficult to discover this sort of scam.
On the other hand, people have come up to me with allegations and I report them. But you are often in a spot when they do not want to mention names or testify. Then you start to sense they have a problem with the department and it's like they're saying 'reduce my (tax debt) and I won't spill the beans'...
Did you have these kinds of proposals from businessmen?
It is implied but I am not going to accept that sort of pressure. I tell them that if there is really someone who said this they have to give me their name. But when they refuse, I start to suspect how genuine they are.
But was there ever any signal through the system's checks and balances?
It appears nothing was detected, at least based on what the VAT Commissioner told me... But let's make it clear, I cannot remove someone if I do not have a valid reason to remove that person, because I am bound by government procedure. On the other hand, it is up to the individual to look at himself and assess if he is responsible.
The VAT Commissioner has assured me he did everything he could. I have confidence in his abilities, but on the other hand I will take a decision on the sort of changes that need to be made in the department after the review.
What happens when the VAT Commissioner's contract is up? Will you renew it even if the review is not over yet?
Again, I think you are being premature. I wouldn't like to say this is the VAT Commissioner's fault...
It's not a question of fault. The primary question here is how can you task the person who was in charge when this problem developed, to solve that same problem?
Yes, and that is the decision that needs to be taken in the review, even with regard to the sort of management skills needed... because this is not just about the VAT Commissioner, but about a whole management structure.
There are directors and assistant directors and I would have expected that the supervision on something like this would have happened at a lower level because the VAT Commissioner would not be personally checking every detail... there should be a structure that takes care of this so if I had to lay the blame on the system I would place it on the entire management structure and not just on one individual.
That is why I am reluctant to single out one person. What's certain is there will need to be changes... So yes, I could come to the conclusion that certain action should have been taken but I don't think it is fair that this conclusion should not just be based on my decision, viewing things from the outside... I will wait for this exercise to be concluded.
And how long is this review going to take?
I don't imagine it would need to take very long...
One month, two months...
We still have to recruit the audit firm because there is a procedure to follow....
The EU has given us till 2010 to get the deficit back on track, below three per cent of the GDP. Former Finance Minister George Bonello Dupuis accused Brussels of bullying us. Do you agree?
I don't think Brussels is bullying us. The reality is that the Commission is bound by a treaty which obliges it to take action to ensure countries (which have a deficit above the established benchmark) go back below a deficit of three per cent of the GDP.
His argument, however, is that the Commission was much more lenient with other countries.
Effectively, the Commission was more lenient with the countries which were most mischievous, if I can put it that way. If you look at Ireland, which has a deficit of 11.5 per cent, the UK 12 per cent and other countries which have more, evidently the Commission recognised that you can never resolve this sort of problem in a year.
In Malta's case, the Commission considered that its deficit was stemming from issues which were not all related to the financial crisis... so it expected us to be back on track by 2010.
Am I confident we will meet that target? It is a target I would like our country to stick to and we're being careful this year not to stray too far from this benchmark. On the other hand, I have much wider responsibilities... at the end of the day I don't want to take measures which solve the problem of a deficit, that is up a little, and create a long-term problem because I don't give the economy time to develop.
You already said you would not be giving assurances, so what should we expect as measures to reach this target? More taxes?
I think the government is not looking at a budget that would increase the tax burden at this stage. The economy has to have the space to develop and expand, so to increase taxes at this stage is not the right recipe...
...Can we forget about a reduction in income tax?
On the other hand, we have to be realistic. We will be hitting a deficit of four per cent (by the end of the year) so it is difficult to implement the measures we had planned and which we could have introduced when the situation was better... we need the money to be able to invest in the economy.
You are excluding the promised slash in income tax. A lot of countries are trying to finance themselves out of the crisis through tax breaks to boost consumption.
I don't think it is easy to achieve this (reduce income tax) in this budget. At this stage I have not taken any decisions. The government has taken measures to help the economy. Even the Commission, in its report, praised Malta for the work it has done to boost the economy...
Yes, but to boost industry not consumer spending...
The consumer has been helped too. We reduced income tax in the last Budget...
Before the last budget we were not talking of a crisis.
The last Budget also addressed the crisis. It was a Budget focused on the crisis. But we also focused heavily on investment because studies on how our economy works show investment is more effective than disposable income to boost the economy... a euro which goes towards investment has twice the economic impact, in terms of employment and wealth creation, than if I had to give that same euro to someone to consume it.
You will be looking at expenditure cuts then, but the key question is from which area?
There are areas where I feel we give out unnecessary subsidies. One we are looking into is public transport where we do not reap the value of that subsidy. For instance, should the government keep financing the planning authority when we know how wealthy this sector is?
So is this planning authority example something you are considering right now?
I think it is something we need to consider and when we say there is going to be a spending review, it means we are going to look at those sectors that do not help the economy grow but are a weight on people... We need to have better priorities... These are not easy reforms because subsidies are always comfortable... but is it worth it?
You're walking a tightrope: on one hand you need to keep the deficit in check, while financing the crisis and keeping taxes as they are. On top of that now you have capital projects such as the plans for City Gate and the Grand Harbour regeneration project.
Our country cannot afford to lag behind and stop investing to solve the deficit problem. That would be very shortsighted. The truth is our country is a showcase and if we want to attract investment we need to have something to offer because other countries are investing. The project is not something wholly unaffordable for the country. We are talking of a project (the entrance to Valletta) that will cost €70 million to €80 million. It's not like we haven't financed this sort of project before. Mater Dei Hospital alone cost €550 million.
But if you add to that the regeneration project and the financial situation we are in...
The Valletta regeneration project is going to be tied to private investment because they are business opportunities. So, it's mostly a question of private investment there.
Recently you said we should expect to end the year with zero growth or minus one per cent in the red. Why did it take you so long to acknowledge this reality?
I didn't. The truth is that...
Up to a month ago we were asking questions in this sense and your answers were not as clear as they were in your recent statements.
When the Commission gave its forecast I always accepted them; in the sense I have never said I do not agree with the Commission or the Central Bank in their projections. Evidently, however, throughout this economic crisis I was very cautious. In a lot of countries, finance ministers and even governments, wrongly I would say in certain situations, tried to take a leading role.
They figured they are the prima donnas of the situation and they have to come out with their own projections and the package they need to address the situation and this sort of attitude...
And you don't agree with this...
No I don't... The result was that the economic downturn multiplied... They have created fear. When you come out saying, 'I have to develop a package to help the economy' and a month later you say this is not working 'I have to do another one', investors will start asking themselves if we are flogging a dead horse.
We worked in a different way. We had our package in the Budget and then set up a task force when we saw the crisis was affecting key sectors of our economy. Then, instead of having blanket measures which may or may not be effective, we targeted factories one to one. Had we lost the jobs these factories offered, the recovery would have been much slower. Because if they leave our country, how are we going to replace 2,500 jobs overnight? We would have lost them and it would have taken us two to three years to get those jobs back.