Edward Scicluna

Tonio Fenech’s ‘no crisis’ policy

It may very well be that Finance Minister Tonio Fenech is following a strict vote of silence on the harsh economic realities being faced by the local industry.

Albeit tacit, he affronts the situation with unparalleled confidence and optimism. But is this approach really leaving its desired effect onto the industry? Should we buy it?

In his first term as minister, Tonio Fenech’s abilities are being tested by baptism of fire in what seems to be one of the harshest political challenges he has ever faced. Fenech is stuck between a rock and a hard place. He is afraid of exposing his strategy in affronting the economic downturn because he thinks that the economy will be alarmed and react negatively to future prospects, thus catalysing a recession. He should also worry about the pressure being exerted onto him by the industry to implement an organised plan aimed at boosting a slowing economy. His apparent torpor to such calls may be in fact worrying stakeholders further, and in itself, constitute a contrasting effect from that desired. Fenech immediately admits that 2009 “will be a very challenging year on all fronts as the ministry must walk on a very tight rope.”

“The world economy is passing through a very rough period, and although we haven’t been affected directly, banks are still facing international problems with toxic accounts, lack of liquidity, lack of investment and lack of demand,” he said. “As government, it is not our role to protect the local industry, but rather to support certain sectors passing through a period of stress. We are not looking at every sector either, since not everyone has a future.

“Not all firms are going through the same stress as those in the automotive, semi-conductor and mechanical industries. If we look at the pharmaceutical industry for example, we are still seeing growth.

“The problem is not only tied to manufacturing either. We are also seeing a plummeting demand for travel, so inevitably, tourism is being affected. This crisis is predominantly hitting the UK, which is one of our core tourism markets. “But this situation aside, we are also responsible for maintaining macro-economic stability. So when we enact support measures, we are also facing the risk of blowing up our deficit – which is something we are doing our best to avoid.” Which leads us to argue that if international manufacturing firms like STMicroelectronics had to relocate their plants from Malta, our deficit could still blow up to massive proportions as unemployment soars, and so would costs pertaining to social benefits.

“ST has not decided to leave Malta, and I think this is very important,” he pointed out. “Now our role is to see where the right opportunities are. This is the right time to invest further, so once this period is withstood, firms in Malta would be able to reap their fruits at a later stage if they invest now. We would like to see businesses in Malta come out stronger than ever before once this period is over.”

Fenech moved on to promise further effort in attracting foreign companies to come to Malta “since we are still regarded as an attractive destination in many respects.”

“We are in fact discussing with credit card manufacturers interested in setting up a factory in Gozo, while another pharmaceutical company is setting up in Malta,” he said. “There is also a lot of work that is being done in the financial services sector, from which Malta has come out with flying colours. There was already a tall order on the agenda, and of course this crisis has added a pinch to it.”

Indeed, and perhaps not just a pinch. The Finance Ministry is looking at 1,200 employees being put on a four-day week, 450 people being laid off at ST and an overall crash in export figures. Isn’t Fenech worried? “I appreciate the fact that some people are anxious. I fully understand this, because these people are passing through tough times at first hand. But one must also appreciate that although government can support the industry, it cannot stop it from facing such problems,” he replied.

Employer organisations laid out a fully-fledged proposal for a stimulus package which, if enacted, government can help both industry as well as the economy in general. In spite of their recommendations, all they got was the Prime Minister’s claim that the 2009 budget measures should do for now.

“A stimulus package is when a government takes certain action aimed at creating demand,” he explained. “This way, factories would be able to start producing again, save jobs and regenerate the economy. Certain companies are finding it hard to invest further because of lack of liquidity – so the French government for example, has given a soft loan to Peugeot and Renault. Governments have also launched a programme to give out €2,500 to people who buy new cars. Such strategies would safeguard jobs and promote consumption. But frankly, this is a type of strategy that will certainly not work for us in Malta. The problems we are facing here are directly tied to a drop in international demand. In Malta we have a good number of companies producing sub-components for other factories abroad. So unless their international clients start ordering again, there is no stimulus package I can implement to make it all better.”

This message may be the attitude worrying stakeholders most. What happened to being of assistance to companies to keep them from relocating to other countries where they get to operate more comfortably?

“Who gives out the impression that government is not worried or is not doing anything to improve the situation is simply wrong,” he defended. “Our role is not to fill people with worries but rather to work in the best interest of economy and the society. Government is fully aware of its challenges, and of course, I am worried for everyone whose job was lost. “We must understand that government has a very tight balancing act. Any subsidy needs to be paid by the tax payer at some point. We need to be very careful when it comes to splashing out money.”

Employer organisations however, never proposed any splash-out. They never proposed fiscal incentives the French way either. They enlisted concrete measures which government may adopt to ease the stress. Wouldn’t it be dangerous for government not to take this with the seriousness it deserves?

“Government is considering taking up some of the suggestions made by employer organisations, but we are not going to implement any blanket measures. We are working on a micro-economic strategy. In simpler terms, we are going door to door, talking to the firms in order to see what companies have a future. We are there to act as a bridge for certain companies, but we certainly cannot throw money at a company without a future. I am now heading an inter-ministerial task force, in which the MFSA, Malta Enterprise, the Employment and Training Corporation, the Labour Office, the Planning and Priorities Co-ordination Division are also represented. With this task force, we are discussing the best ways to invest in support measures but with a very careful and focused approach to public finances. The companies whom we can help we are helping.”

Would the speeding up of MEPA applications be considered as a blanket measure? And the proposed execution of government investments? GRTU’s Vince Farrugia went as far as proposing the construction of hotels near the Mediterranean Conference Centre and another next to the Casino di Venezia. He argues that government should handle the initial investment and then lease out the property to the private sector.

“I agree that MEPA needs to speed up its processes on certain applications, and we know that the office of the Prime Minister is working closely on this issue. We also want to see government projects executed faster. That said, the five ERDF schemes worth €20 million have already been launched. We have also launched the €10 million programme for alternative energy – and we are still in February. However, I do not think that investment in infrastructural projects – such as hotels, would be realistic. Such projects take time to build, whereas we need to look at actions which could give an immediate return.” Incidentally, many are blaming the hikes in utility bills as the source of a good number of problems, but Fenech thinks this is a “wrong perception.” Meanwhile, employer organisations would like to see an immediate cut in utility tariffs.

“No government in the EU subsidises electricity rates to anyone,” Fenech said. “All energy companies in the EU are private – and they simple transfer any cost increments onto their customers. That said, all factories on a four-day week, along with a number of other industrial firms still have capping on electricity, so they’re protected. When Enemalta accounts are published, we will know what debts it is facing. Enamalta is now seeing variations in the price of oil, and it has therefore approached the Malta Resources Authority for a reduction of rates by mid-March. But rest assured that government has always made a loss from energy.”

Reaffirming his stance on how state aid should be viewed in Malta, Fenech said: “The basic question we need to be asking is whether actions are viable. We are only willing to support a viable enterprise with a future. Better than that, I don’t know what can be done. Shall I start subsidising raw materials? No. I will instead help with investment that may lead to job creation but whatever shape government assistance takes it must definitely be in a temporary form.”

As the conversation moved back to STMicroelectronics, Fenech was asked to elaborate on the amount that had been offered to the firm to stay in Malta, which reportedly, the company refused, discounting the offer as a pittance.

“I cannot divulge any such amounts,” he said. “What I can tell you is that about two years ago, we were approached by ST with the issue of cost differential between Malta and Asia. They basically told us that they were not seeing a future here in Malta. So government proposed its support in value added investment projects. We offered restructuring support to assist the firm in diversifying their production into items with a higher intrinsic value. The issue with ST is that their plants in Europe are more geared towards design, research and development. Their only European plant handling back-end production is in Malta – as they relocated all other European back-end plants to Asia, where operational costs are far cheaper. For ST’s operation to become viable in Malta, we must address issues related to their product – with an aim to add value on what is produced.”

The General Workers’ Union (GWU) recently sent out a letter to the Prime Minister, giving him flak for being left out of discussions government had with ST in relation to redundancies. But Fenech categorically denied the union’s claims. “No this is not true,” he said. “I have called for the General Workers Union a number of times on the issue. Every time ST changed its decisions, I communicated with the unions. The thing is that with this crisis, things may change within a matter of a week.”

Commenting on ST’s announcement to cut its workforce in Malta by 450 employees, Fenech also played it down. “ST is envisaging 30 to 40 per cent less output, so production capacity will obviously go down,” he said. “So far, we know about its plans to downsize by 400 to 450, although our indications come closer to 400. Now, 250 to 300 of these will be natural losses in retirement and temporary contracts. There are about 100 left – which will be reduced from ancillary services rather than the actual core production. It is not as bad as it may look. Added to this is the fact that we have already convinced them to stay – whereas the same company shut its plants in Morocco and Singapore. This is of course positive.”

In a comment he had given to Business Today, economist Edward Scicluna had made a rough calculation that “for every job lost at ST, it is estimated we lose the equivalent of a job and a half in other sectors elsewhere in Malta.” But Fenech begs to differ.

“OK, here I am looking at facts and not just statistics,” he said. “In 2007, ST employed 2,600. Without having to fire anyone, in a matter of two years, its work force shrank to 1,927. During the same two-year period, Malta had the highest employment levels ever. With the same reasoning, we should have lost 1,500 employees over the last two years. If we have lost them, has our economy managed to replace them? My interpretation is different. Remember that ST’s sub-contracts are few and far between…”

But what about the adjacent plant supplying ST with industrial gas? “…it seems that Multigas will not be affected by job losses due to ST’s downsize,” he affirmed. “Certainly, there will be transport companies that will be affected. Box manufacturers will suffer, surely. But I cannot see how for every employee lost at ST, Malta will lose one and a half others. Let me see the workings and I will analyse them, that is as much as I can do – I am not an economist but an accountant. Then again, past experience has shown that this will not be the case.” Whatever the case, Fenech is not expecting an alarming rise in unemployment levels.

“This year, in spite of it being a difficult one, we must be resilient in creating new and alternative employment as soon as possible,” he said. “But 100 employees on the market is certainly no big deal. They will be replaced.”

Upon the publication of NSO statistics signalling a downward trend in tourism figures for the fourth quarter last year, Fenech’s counterpart in tourism held a press conference to outline his strategy in an attempt to comfort stakeholders and inform the public. Why hasn’t Fenech done the same with all the bad news being splashed in the media? Does he intend holding a press conference to explain his strategy any time soon?

“I have had different opportunities to inform the public about what government is doing, and this interview is one of them. But do you honestly think that it would help if I were to organise a press conference? Certain governments are over-exposing. You will see that when a snow storm hit a particular country, and the media reported different news, its economy started doing better. I will act when I need to act. When we needed to issue strong statements of reassurance we issued them – because we felt the need for it and we did it. I have no intention of going all out though.

“My role is not to play the prima donna. We are working hard, although we are not very public about it. You just need to look at situations abroad to see what the repercussions of alarming the public could be. Look at Obama – as soon as he said that the situation is likely to take a worse shape – the markets responded with an immediate negative trend. We need to emerge, not promote fear. I don’t want to be a cowboy. My intention is to remain grounded.

“I will let results speak for our silent actions, without the need of showing any pessimism. Ultimately, we must be cautious of not running away from reality, because if truth be told – there is no crisis in employment – we are floating in the same figures. There is no doom and gloom – just a little bit of pressure. There is no crisis – but a challenge in manufacturing and tourism.”
Interview by DAVID DARMANIN | Wednesday, 18 February 2009

maltese

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