Economically-effective subsidies

The Times and a few commentators suggest that tariff increases might need to be "cushioned" by setting a tariff that is lower than actually required, an indirect subsidy that is obviously either financed by Enemalta directly or by the government paying the difference to Enemalta.

There is a point of principle involved, which, I believe, is fundamental to understanding how tariff shifts should operate.

The first principle is that tariffs of whatever nature should cover operational costs and provide an operator with an adequate return on investment. This is not simply a matter of EU regulation (the Electricity Directive) and local law (the Enemalta Act), which specifically direct the regulator on what to consider when establishing tariffs, but also a matter that makes economic sense.

When the operator does not recoup from the tariffs what it spends to operate, it does not invest in new technology. It resorts to bank borrowings to make up for shortfalls that increase its interest payments, which, in turn, are paid for by the consumer. It is a vicious circle that leads to bankruptcy unless interrupted at some stage. However, having tariffs set at the proper level does not mean that the government cannot subsidise. Indeed, to cushion the impact of the present rise in tariffs, the Ministry of Finance is topping the €6 million fund for social assistance beneficiaries with a €10 million fund for households (which, in effect, will mean that 97 per cent of households will be receiving some form of subsidy) and a €2.5 million for industries that require assistance.

A subsidy should not go to Enemalta but should go directly to the consumer. This may seem an academic point but subsidies should address problems of social inequalities or economic imperatives and should certainly not benefit those who do not deserve them. Let me quote some concrete examples.

In 2008, the government and Enemalta jointly subsidised the tariff base to the tune of some €140 million: the Ministry of Finance passed €70 million in cash to Enemalta while Enemalta made a €70 million loss on tariffs because the tariff (although considered high) was not enough to even cover costs.

Since the "subsidy" went directly to, or originated from, Enemalta, the circa 250,000 account holders all benefited equally by €560 each. All of us - whether on the minimum wage, unemployed or earning €50,000 a year, whether two persons in a villa or five persons in flat, whether on social assistance, on a minimum pension or well off, whether at home or at a mostly unoccupied summer residence, whether it is a small corner shop or a large factory or hotel employing hundreds - we all got the same subsidy of €560. That, in my view, is wrong because it is socially unjust.

That is also why we have changed our policy and, from this year, all subsidies to households go directly in the pocket of the consumer and this year some €16 million will be going that way.

The same argument can be made from an economic point of view.

Leaving aside for the moment whether you are legally allowed to subsidise commercial operators, should subsidies be showered far and wide or should they be directed at what the government considers economically crucial, unless the pot is infinite - and we all know that it is not - then choices have to be made in order that subsides become economically effective. I do realise that representative organisations have their patch to defend but simply giving each and every one of the 42,000 commercial account holders a subsidy of €560 (as we did in 2008) does not make economic sense.

It does make, however, a lot of economic sense to identify - as the Minister of Finance wisely did last year - those enterprises that are exceptionally vulnerable and need temporary assistance to get over a bad patch. This is where assistance - rather than subsidies - should be directed. This policy, once again, directs money straight into the operators' pockets and not to Enemalta and, for this purpose, this year there is a pot of €2.5 million.

There are, of course, other arguments that can be brought forward, foremost among them that "hiding" a subsidy in an artificially-low tariff induces the consumer to ignore how much electricity he uses and discourages careful consumption or investment in alternatives. Similarly, subsidising consumption is a never-ending game, which no market economy can win.

This, I believe, is sound policy. It does not remove subsidies; it allows the government to decide what amount of money it wants to direct to energy subsidies but it re-directs the pot to the deserving. We are, however, so weaned to the concept of subsidising the tariffs directly to keep them artificially low - with most of the consequences mentioned in The Times editorial - that very few seem to want to even think outside the box.

Dr Gatt is Minister for Infrastructure, Transport and Communications.