From ST Microelectronics to Air Malta, the ball is now in workers' court Finance Minister Tonio Fenech tells Kurt Sansone.

The government has agreed to give ST Microelectronics financial aid in return for investment in a new production line. But should ST be kept here at all costs?

The government still feels ST Microelectronics has a role to play in the economy. Despite having a cost base that is higher than China, where ST also operates, the company recognises that the quality of engineering in Malta lends itself to higher value-added products.

The government can support an investment programme but this is also linked to making the Maltese plant more competitive. On the issue of competitiveness, the government can do its bit by mediating but ultimately it is workers who have to acknowledge labour costs spiralled upwards making the operation here less attractive.

Two years ago ST had decided to leave Malta and when that decision was communicated to the government, we expressed a desire to keep the company here, but obviously not at all costs. If we were willing to support jobs at all costs we would not have gone through the restructuring of the shipyards and all the other entities that we privatised or closed. We want to support productive jobs.

We believe ST can be productive and continue to contribute positively, but we have to create the adequate base for it to operate in Malta.

The company has made the agreement conditional on a cost-cutting exercise that is asking workers to forego part of their monthly income. Does this mean that the government condones cheap labour?

Things have to be put into perspective. If you had to look at what remuneration ST workers receive compared with other manufacturing companies, they are the highest and by far. We are clearly not talking of cheap labour.

We are also not talking of workers being asked to accept the minimum wage. If that was the case the government would say ST has no place in the economy like it did with the textile industry. This is not the case and negotiations did not centre on a product line, but a new technology that the company has developed.

We are looking at something much more long-term. Admittedly, there is some sacrifice to make in the coming two years but this will benefit the long-term strategy of ST in Malta and the workers. The government will do everything to keep the company here but it is not up to us alone. We cannot force ST to stay here.

But will ST be here for longer than two years?

With this investment definitely much more, because after committing itself the company will not move out quickly. A lot of technical investment and retraining is required. The government will be supporting retraining to bring the labour force up to scratch with this new technology and this is not a cheap cost so the company will not do it twice over.

What will this cost the taxpayer?

We have specific schemes and I cannot divulge the details of the investment package, but it is within EU norms. We can support training because it benefits workers directly and we can also give investment tax credits.

ST has agreed to stay on condition that the wage cost component is reduced and I must say their initial demands were much higher than what the union managed to negotiate. The General Workers' Union has done a good job in negotiating a less drastic package.

I hope that if workers do not trust the government, because in Malta we tend to get lost in politics, they should at least accept the union's recommendation. A union is never happy to go to its members and talk to them about sacrifices because it will make it unpopular.

However, if the union has had the guts to do that then it was for good reason and workers need to trust it. I hope workers realise that nobody is joking on this issue. Nobody is pulling a fast one. The situation was not serious but devastating: ST had decided to leave.

The government is also speaking of restructuring at Air Malta. The airline's CEO, Joe Cappello, recently told this newspaper it was more expensive for Air Malta to handle itself in Malta than it was to be handled by third parties in other airports. Is the government planning to hive off the airline's ground operation and privatise it?

In today's market maintaining a 12 aircraft fleet is challenging. It is not only Air Malta that has experienced difficulties because of market realities. Other legacy airlines have also faced problems.

However, we cannot console ourselves with this.

Air Malta is a public company and under EU rules the government cannot subsidise it and therefore it has to operate competitively. Air Malta cannot sustain a €30 million loss per year because at the end of the day somebody will pull the rope, mainly the banks that have loaned their money to the company. At current losses we will not manage to sustain the company for long.

Significant restructuring has to take place. Ground handling is a component but it is not the be-all-and-end-all of the solution. Ground handling operations are costing Air Malta far more that what it costs them at other airports.

This is caused by the draconian work practices linked to the agreements reached in the past. If a flight has excess baggage for the number of ground handling staff on a particular shift - normally made up of seven workers - and the company needs one extra worker it cannot simply call up one person but it would have to call up a group of seven.

The company has long been discussing these practices with unions and at some point we have to bring them to a head. We cannot continue operating with these work practices.

There are two options: workers can accept a significant restructuring in the way they operate to bring the cost down and make it a leaner more flexible operation or the government could consider hiving off the ground handling operation and possibly privatising it. Ground handling is not a core operation for Air Malta. An airline is there to fly - not to handle luggage.

But more examples of inefficiency abound. Do we appreciate that for a 12-aircraft operation we have 383 people in administration and commercial operations? The proportion of overheads on the airline is far higher than what should logically be expected for an operation of that size.

But aren't governments also to blame for finding jobs for their boys with the national airline?

You can make that argument for any public corporation and that is why this government believes the state should not be involved in operations that should be run in a profitable way and on strictly commercial lines.

In the case of Air Malta the situation is a bit different. It has strategic importance for the country which is not easily replaceable by the private sector. Air Malta ensures the country maintains important routes, which may not be immediately profitable for the airline but are necessary to keep Malta connected to mainland Europe, benefitting business and tourism.

Other carriers have no obligation to Malta. So if in winter they are not flying with reasonable capacity they will just drop the routes. Air Malta cannot do that and these realities must be kept in mind. However, these obligations must not be carried at a cost that is significantly higher than what is reasonable. This is why the restructuring is needed. We are carrying out significant reviews and are in detailed discussions with the European Commission.

The government is supporting ST Microelectronics, so why is Air Malta not given its strategic importance?

We do not support ST through direct subsidies. The European Commission does not allow direct subsidies. We are not giving ST money to finance operating costs. Our support is linked to the investment and training programmes.

The Commission would allow the government to inject capital in Air Malta to increase the number of aircraft but this is not what the airline needs at the moment. Apart from this, in some sectors such as shipyards and aviation the EU has particular rules on what the government can do and how it can intervene.

What is being discussed with the Commission?

It is difficult for me at this stage to divulge any information. We are discussing the business plan and ways to make the company more sustainable. It is important that the airline passes the market test, which means that any action government takes will be in line with what any proper investor would have done, otherwise it would be deemed state aid.

If we go for the option of state aid instead of injecting capital within the investor principle it would imply the government is not seeing the possibility of the company turning a profit any time in the future. The Commission would allow state aid only if we downsize operations considerably. I would be wary of going down that route because it is not the ideal route for the airline.

What does investor principle mean?

We need to convince the EU that any support or capital injection is being done because as an investor the government believes the airline will turn a profit. If this cannot be proven it would be considered state aid. With the business plan and restructuring we are proposing we have to convince the Commission that Air Malta will become a viable operation. This is a tough nut to crack.

When will the government present the pre-budget document?

The document will be released this week. The pre-budget document is an important process in the way we formulate the budget itself. It will be a wide-ranging document dealing with a number of important themes such as green jobs and the social sector.

Will it simply be an analytical and academic document like last year's?

It is always an analytical document but it will also have a number of concrete proposals. Last year the pre-budget focused on competitiveness and I know these aspects sometimes tend to get lost on people, who may consider them theoretical. In reality, competitiveness is what brings jobs. However, this year there will be other issues. Within the context of a European debate on sustainability, especially in the wake of financial difficulties faced by Greece, Portugal, Spain and Ireland, the emphasis will be on fiscal consolidation and discipline to meet our targets.

We need a stronger euro and there is general agreement at EU level to have tighter rules and ensure fiscal consolidation. Some would argue this approach would reduce our flexibility. But if by flexibility they mean throwing our problems into the future and ignoring the deficit, that would be irresponsibility.

Some countries have been irresponsible. In our case there was a period when we had to invest in our economy so our debt was justified but we also need to make an effort to restrain the increase in public debt. The European benchmark is 60 per cent and Malta has a debt level of 70 per cent. This means we have to accelerate our efforts to reduce our debt. This is important if we want to maintain investor confidence in our economy.

In 2007 you had said it made financial sense for the Central Bank to transfer its reserves to government after adopting the euro so that the money could be used to offset part of the national debt. Are you still of the same opinion, more so when governments are being pushed to lower their national debts by the EU Commission?

At the time the discussion had focused on the adequate level of reserves necessary. The European Central Bank's reserves are the cumulative reserves of the central banks of national governments so there is a significant portion of reserves that need to be maintained as part of our obligation to maintain the euro.

Whenever the euro is issued by the ECB it is based on the reserves of the member states. There were those who said the reserves were possibly not enough. I had said we were studying the issue with the Central Bank and in effect the Central Bank did upon the changeover to the euro release some of the reserves to the government. It was not a significant amount, something in the region of €40 million, but it was deemed to be in excess of requirements.

It is always nice to think that somebody can bail you out with easy money and so problems need not be solved. This is not the case. We have to address problems and make sure we are sustainable. Malta was one of only two countries last year to have reduced its deficit. We hit 3.9 per cent from 4.5 per cent. We are very confident we will reach our target again this year, which is about 3.9 per cent.

What is next year's deficit target?

We have to make the effort and come closer to the three per cent mark.

Does the effort mean cost cutting?

It has always been my philosophy not to address the deficit through significant tax increases. On the contrary, the budgets I have been involved in have decreased taxation because lower taxes increase economic activity. This means that to bridge the gap we have to look at costs.

I believe we can do much more to be efficient and be more judicious in how we spend our money. I firmly believe the government is not there to subsidise everything. If we want government to subsidise everything we have to be a Denmark or a Sweden where income tax rates are as high as 55 per cent and VAT is at 25 per cent.

Which subsidies will the government remove next year?

We have already reduced significant subsidies such as the shipyards and water and electricity. Our aim was to ensure that resources are used to help those who really need them. This is why we introduced the energy benefit. But clearly we have to continue looking at areas where the government does not necessarily have to continue providing support in the same way we have done in the past. I always look at the areas where it seems logical that someone should pay.

Are there any particular areas you will be considering?

We always list a number of ideas for discussion and in the budget process we highlight the priorities for the coming year.

Lower taxes lead to economic growth but will the government include its electoral pledge to reduce the top income tax rate to 25 per cent for those who earn less than €60,000 in the next Budget?

That is a pledge we believe in and at one point in time we would have to consider its implementation. Obviously, we have to appreciate that since that pledge was made there have been significant changes in the world economy that have impacted government revenues.

It is too early at this stage to say when we would be able to honour that pledge but I still believe that it can help to generate growth. If the deficit was already under the three per cent mark, for example at 1.5 per cent and the measure would take me up to 2.5 per cent, it would give me the flexibility to consider it.

Next year I might not have that flexibility because I have to go down from 3.9 per cent to under three per cent. It would be difficult to adopt a measure that would mean a significant cut in revenue, something to the tune of €40 million. I would have to cover that by further cost cutting that in turn can harm the economy. It is a very tight balancing act.

So people can forget for now.

I am saying it is a bit difficult for now.

Watch excerpts of the interview on timesofmalta.com