Ministerial discretion is the issue

There is a distinct element of deja-vu in the ongoing spat between government and opposition regarding the SOCAR hedging agreement.

Energy Minister Konrad Mizzi has now come under fire for personally intervening in the matter. On Mizzi’s instructions, the national energy provider last year entered into a hedging agreement with Azeri company SOCAR – and following an unpredicted crash in the price of crude oil in 2014, Malta ended up committed to a fixed price that was significantly higher than international market prices.

Enemalta registered an €8.6 million loss with respect to crude oil hedging and a €5.5 million loss with respect to unleaded petrol and diesel hedging, for a total of €14.1 million.

More significantly, the National Audit Office report observed that a direct order on six months’ hedging on unleaded gas and diesel was “detracting from the process’s accountability and a shortcoming in terms of governance.”

The Opposition has seized on both these issues – the lack of accountability, and the losses arising from the hedging agreement – to go onto the offensive: with PN leader Simon Busuttil describing the hedging agreement as “the biggest scandal we have before us”.

However, the two issues are separate and should not be confused. Ministerial intervention in a public procurement procedure is one thing; the effectiveness of Enemalta’s actual purchase agreements is something else entirely.

Regarding the latter point, it bears remembering that governments enter into hedging agreements not as a form of price speculation, but rather to guarantee long-term price stability. In this case, the exchange worked against Malta’s economic interests; but this is a risk that all governments take when they buy at pre-determined fixed prices.

The Nationalist government took the same risks in its own day: in some cases the risk paid off, in others it didn’t. The important thing for governments of all hue is that their recurring expense, for better or worse, remains at a predictable fixed rate. This ensures that there are no sudden economic shocks to withstand, and permits long-term planning.

Moreover, it is not possible to accurately predict all market fluctuations. In this case the NAO report itself conceded that the drastic crash in crude oil prices at the end of 2014 had been central to Enemalta’s hedging losses, and that “such significant market movements were not and could not have been anticipated when the hedging agreements were entered into”.

Ironically, it was Nationalist MP Marthese Portelli who correctly observed that “the issue here is transparency, lack of documentation and accountability”… i.e., not so much the negotiated price, but rather the way these negotiations were conducted.  

Was Konrad Mizzi justified in involving himself by recommending one company over another? Mizzi himself points towards a clause in the Enemalta Act that permits ministerial intervention in certain circumstances… and while Portelli argues that this clause is only intended for the minister to provide policy direction, it remains a fact that past Nationalist administrations had all interpreted it precisely as Mizzi interprets it today.

Hence the deja-vu. Back in 2012, the National Audit Office made similar remarks about ministerial intervention – this time by Minister Austin Gatt – in the internal processes of Enemalta. In its 2012 report, the NAO quoted from an email circulated by Gatt: “I would like to make clear that the direction to go for tariff stability in 2010 is a ministerial direction and therefore I assume responsibility for any variances between the actual market price and the SWAP price in 2010.”

Gatt’s intervention continued in the setting of electricity tariffs, which according to the NAO impacted Enemalta’s hedging strategy.

The Auditor General was unequivocal in his statement that ministerial intervention at a strategic level, such as Enemalta’s hedging deals, was “unwarranted and should be averted”.

The truth, however, is that both Nationalist and Labour governments have failed to heed this advice. Konrad Mizzi himself has admitted that the Auditor General was right in pointing out a lack of documentation vis-à-vis correspondence with SOCAR; but in the same breath he also insists he was right to intervene. 

“We have taken on board the NAO’s proposals… but I will keep giving direction for cheaper prices,” were his precise words.

This shifts the focus away from one instance of ministerial intervention, to the principle itself. The NAO finds ministerial discretion to be objectionable because it automatically detracts from transparency and accountability. This newspaper can attest that ‘ministerial discretion’ is often cited as an excuse to withhold information of public interest.

With government already in the process of reforming Enemalta, perhaps the time has come to go one step further, and remove ministerial discretion from the Enemalta Act once and for all. 

This may become a necessity for other reasons. The government has since 2013 partially privatised Enemalta: it remains a majority shareholder, but Malta’s national energy provider can no longer be regarded purely as a state-owned asset. Is a system of ministerial discretion even compatible with a company that is now in part privately owned? 

But the prevailing argument remains good governance. Both parties claim to agree with the principles of transparency and accountancy. Surely, then, they should also agree to strip ministers of their discretionary powers altogether.