15 March 2006

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Business Today

Shifting sands

He is just out of a local election round that gave his party an astounding absolute majority but it is business as usual for Labour leader Alfred Sant. Interviewed for the first time in Business Today he is quite frank about the peoples’ verdict; “People want a change.”
He is not impressed by the latest economic data published by the National Statistics Office which indicated a growth rate of 2.5 per cent for 2005. Sant says there are too many conflicting messages about the state of the economy and from the reactions gauged on the ground, an economic turnaround does not result.

The Labour Party has won a majority in the last three local election rounds covering all localities in Malta and Gozo. Can the party maintain this winning momentum until the next general election?
We have every intention of sustaining this momentum. It is our target to show that Labour can bring about a difference in people’s lives on a political, social and economic level.

Why is there this shift towards the Labour Party?
People want a change. They want a change in the way this country is run. This government promised a lot of things and failed to deliver on its promises.

Opinion polls constantly show that your popularity is below that of your party. Does this worry you?
I don’t discuss polls. They are unreliable, especially when they are conducted by newspapers. Up to a few weeks ago opinion polls, including those published by MaltaToday (a December poll showed the PN enjoying a relative majority which changed to a Labour majority in January) showed the Nationalist Party enjoying a relative majority over Labour. Compare that with the result last Saturday.

But does it worry you that people do not see you in a good light?
Do people see Dr Gonzi in a good light? We are the political party with the biggest following at present and that does not worry me.

On Friday the National Statistics Office published the economic indicators for 2005 which showed a GDP growth in real terms of 2.5 per cent. The Parliamentary Secretary Tonio Fenech went on record saying this was a sign of an economic turnaround. What is your interpretation of these statistics?
I wish to see the statistics in more detail because there are moments when they tell us our growth rate is negative and a couple of weeks later it suddenly turns into positive growth.
We have suddenly become one the best performing European economies in terms of real growth. With all due respect it has all become one big joke.
Last year exports dropped by some Lm90 million, tourism jammed and the country has not moved ahead in terms of job creation. We need a thorough re-evaluation on the way we draw up statistics.

This debate on the veracity of statistics is interminable. For how long can politicians doubt official statistics?
It’s not a question of doubting statistics. If you were to look at the updated convergence plan published in December by government and the statistics published by the NSO some two months after, there is total divergence. If the EU is happy with these statistics or if bankers are content then so be it. But if people, businesses, industrialists, tourist operators are talking to us about their problems, if exports are falling and tourist numbers are not increasing, isn’t it time to reflect seriously on the statistics being produced?

Do you see a turnaround in the economy?
No, I’m not seeing it.

Banks have registered huge profits. The Prime Minister has said these profits are a sign of how well the country is performing. What is your reaction to Dr Gonzi’s statement and would you advocate a windfall tax on bank profits?
We need to have a close look at the duopolistic system that exists in the banking sector. I do not agree with the Prime Minister that bank profits are a sign of a performing economy. These profits are partly due to the duopoly in the banking sector which permits service charges to increase and allows a wider spread of loans that is among the highest in Europe. This is leading to higher profit takings by the banking sector at a growth rate that is higher than that of the economy in general.
I am surprised how the Central Bank has not yet scrutinised the methods by which charges are being meted out by the commercial banks.
As for the windfall tax, I have absolutely no comment to make.

But the Labour administration between 1996 and 1998 had applied a windfall tax on bank profits…
The context back then was different. In today’s circumstances I have no comment to make.

The Labour Party is constantly harping on the importance of hedging when it criticises government for imposing a hefty surcharge. Experts say that hedging will give you price stability but it does not necessarily mean prices will go down. Will a future Labour government be reducing the price of utilities for consumers?
Hedging will be used as a tool in a three-point programme tackling the issue of oil purchases for electricity generation. Another point would be to carry out a serious study to determine whether the increase in the surcharge is a true reflection of increased prices in international fuel. Once our experts would have reached a conclusion, which I am confident will prove Labour right, we would be able to adjust utility prices accordingly.
The third point would be to carry out a social impact study. It is not enough to say that a number of families are exempt from paying the surcharge. There are a number of middle and low income families that are feeling the squeeze and once the social impact of the surcharge is evaluated families can be given some form of help
As regards price stability brought about by hedging, in the current climate it is a necessity. In November and December last year oil prices dipped slightly and every indication was pointing towards a renewed upward push after that. Government itself had in its updated convergence plan made provisions for a higher oil bill in 2006. It knew what was going to happen but acted irresponsibly and steered clear from hedging. Hedging would have been crucial then to block the price at a certain level that would have been definitely lower than what we are experiencing today.

What is the Labour Party’s policy vis-à-vis regulatory authorities?
Government needs to be streamlined across the board to make the country more competitive. As regards regulatory authorities, they need to be streamlined and when an authority is not functioning well the person responsible should be removed or in some cases given adequate legislative backing to be able to take the necessary action.
As regards food and medicine prices, our policy is clear on the issue. A Labour government would require the authority to present a report to parliament every six months. On the basis of that report we would take the necessary corrective measures.

Does streamlining government also include shedding of excessive employees?
That is not the problem. Reducing labour is a red herring. It is bureaucracy and the efficient delivery of services that need to be tackled in a serious way. Let’s face it government has introduced a host of IT systems in its departments and certain bureaucratic systems seem to take longer to deliver an answer.
There is no serious management. But there is also an element of ministers who have stagnated. Dr Gonzi should have at least made a cabinet reshuffle last year but he let that possibility go by.

Government’s expenditure is primarily driven by civil service wages and social benefits. How will a Labour government reduce its expenditure to be able to deliver a tax cut in tourism and implement other costly measures?
We have to go for growth. If expenditure is increasing by zero to two per cent and the economy grows by four to five per cent that will give us a leeway because over a period of time it would shift the balance. Beyond that we have to control expenditure by applying brakes across the board.
Similar to what we did in 1996-1998 we have to insist on maximum expenditure increases that do not surpass two per cent. We can then work from a contained platform. It is not something that will create headlines but it can be done. However, it requires top-level commitment to scrutinise every expenditure item.
The problem with this government is that it has not introduced the accrual accounting system and so the real picture of government’s finances can never be determined. I do not understand those who say government is controlling its deficit. A cash-based system like we have today allows for certain manoeuvring. A bill might not appear in government’s expenditure accounts if the head of a department has objected to it for one reason or another.

Government has launched its proposals for pension reform. What is the Labour Party’s position?
Allow me to point out that the criticism levelled towards Labour that it had no official position on pension reform is unjust. It is only now that government has announced its own proposals so much so that the document published by the Gingel commission was repeatedly disowned by Nationalist Party functionaries.
But the reform announced says nothing of the second pillar pension and how this will be administered. The Prime Minister has said the time is not yet right to introduce the second pillar reforms because the economy is not yet performing as it should. This sounds very similar to what the Labour Party has been saying all along that the first priority should be to get the economy back on its feet.
The proposals as announced, lack a serious rationale behind them apart from being regressive in their nature.
Our priority has always been economic growth since it is the only way we can ensure a decent quality of life. The Labour Party agrees that pension reform needs to be discussed but in its own time.
In 1998 we had started the discussion on pension reform by commissioning a report. We were not oblivious of the need to start discussing pensions. At the moment we have our own studies in the making and in the next two months we would be announcing our proposals and reactions to government’s announcement. It took government 10 whole years of studies and reports to finally come up with its own blueprint. We will be doing the same in only two months.

Do you agree with increasing the retirement age to 65?
It is something that needs to be discussed. On a purely personal level I would prefer receiving a pension at 70 because it means that I would be considered a pensioner at that age and not before.

Do you agree with mandatory private pension schemes as government has suggested?
The model used by government to arrive at such a conclusion is dubious. To have private pensions in the context of a second pillar provided by various private agencies competing between them to offer their services is not desirable. The State has to retain a central role. This is my personal position on the issue and it is informed by the big debates going on abroad on what role should the State play within the context of private pension schemes.

Government’s intention is to adopt the Euro by 1 January 2008 subject to satisfying the Maastricht criteria. Do you agree with this timescale?
I believe it is a premature timescale. Before we achieve certain targets, especially healthy economic growth rates we would be putting the cart before the horse by introducing the Euro. Up to one and a half years ago it was the European Commission itself that was giving us similar advice. Government can ignore that advice, after all it is there to govern and take decisions, but it also has to shoulder responsibility for its decisions.

If the Euro is introduced on 1 January 2008 and Labour is elected to govern after that date what will you do about it?
I don’t like to discuss hypothetical situations.

But it could be a real situation...
If it becomes reality we will discuss it. But if the Euro is already in place then there isn’t much to do.

On what basis are you saying government’s timing is premature?
The main point remains economic growth, job creation and competitiveness. If we have an economy that is on par with other EU countries, then it is alright to introduce the Euro now that we are members of this bloc. But if our economy is underperforming and the national debt remains way above the EU average, the Euro can create problems.

Do you believe the introduction of the Euro will lead to higher inflation?
It depends on the context at the time of adoption. We are talking about 2008, which is still almost two years down the line. What I see at the moment is a falling growth rate irrespective of the latest statistics, plunging exports and an uncompetitive tourism sector. We have to ask ourselves what impact will the Euro have on our competitiveness.

The Labour Party talks a lot about restoring the country’s competitiveness. One issue often raised by the Federation of Industry is the unique situation whereby wage increases are not linked to an increase in productivity pushing up costs every year irrespective of a company’s performance. Tackling such an issue would put you at loggerheads with the unions. What is the MLP’s stand?
Unions do not represent all sectors of the labour market. If we look at tourism many employees are not unionised and have particular working conditions that sometimes border on the exploitative side. In these situations lack of competitiveness is not linked to wages. I believe we have to look elsewhere to understand what is making us less competitive. It has to do with bureaucracy and the way we are managing our assets.

Do you agree with the cost of living compensation system as it is?
Definitely yes. Our families already have a negative balance in their daily transactions and the statutory compensation at least attempts to keep them going. We cannot allow the law of the jungle to prevail. We don’t need to touch wages to restore competitiveness.

How do you do it?
Government has to do its part to push things. In tourism, for example, we are proposing a review of the tax burden on the sector shortly after getting elected.

By reducing taxation you are deciding to forfeit revenue. Can you afford it as a government without reducing expenditure from other areas?
Reviewing taxation on tourism would enable the sector to take off the ground. Our economy rests on three pillars; tourism, manufacturing and financial services. Tourism is the sector which is more likely to give us returns in the shortest time possible if given the space to operate. It will kick start the economy and a growing economy means government’s tax take will still be bigger despite having reduced taxation.
It does not mean we will be ignoring the industrial sector or financial services but tourism has a lot of spin offs and the impact can be felt almost immediately.

What taxes will you review?
I will not mention any particulars. We will review all tax structures and that will be one of the first areas we will be tackling.

Tourist operators clamour for the arrival of low cost airlines. What is your position?
So long as there is a level playing field, why not? If low cost airlines are given certain advantages, other airlines including Air Malta need to have the possibility to benefit as well from those advantages.

Has politics reduced itself to which political party can be the better manager of public affairs? Is it devoid of the ideological soul?
Being the better manager is a part of doing politics. But there is still space for ideological differences. One such example was the issue of EU membership, not in terms of the PN as being pro-Europe and the MLP anti-Europe but in terms of having two ideological ways of crafting a relationship with Europe.
Ideological debate evolves and today, I believe a major difference is globalisation and restructuring. The Nationalist Party does not seem to consider this a problem. It pays lip service to globalisation and restructuring but real planning to achieve that does not happen.
The Labour Party is committed to mapping out its strategy to deal with globalisation. A delegation of the party will be in China next week. We do not fear China, we consider it to be an emerging market but we need to have a plan on how to transform a potential threat into an opportunity.

Can the business community, industrialists and investors trust the Labour Party?
They can’t trust the Nationalist Party because they’ve been promised pie in the sky and over the last three years most of them are paying for it. They’ve got to decide. We’ve always said what we believed in and put before us achievable targets.
Back in 1996-1998 we had flagged the need for restructuring and in tourism we delivered. In industry we also tackled issues head on. There were two big firms including ST that didn’t know where they stood with the Nationalist government since they had pending tax relief arrangements that needed approval. When we went into the driving seat we just set the ball rolling. ST needed the space to expand. We identified a site and in six months the factory was developed. Labour delivers.
Businessmen need to decide. It is true that quite a number of businessmen are Nationalists but at the end of the day it is the country which counts and the balance sheet. And we are interested in their balance sheets because if they are good, they will employ people and the country will move ahead.
Alfred Sant was interviewed by Kurt Sansone

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