With €18 billion in overnight deposits, Malta green bonds could finance metro

Financing the massive infrastructural investment in a metro would be possible through the issue of private sector bonds, leading economists Philip von Brockdorff and Joe Falzon told MaltaToday.

Finance minister Clyde Caruana this week said there will have to be an “extensive discussion” on the financial aspects, but insisted the proposal so far was a matter for public consultation. “The issue will eventually boil down to taking the necessary decisions and on how realistic certain commitments will be,” he said when asked by MaltaToday whether the exorbitant outlay was a headache he would want to avoid as finance minister.

MaltaToday asked two senior economists whether the country can afford such an enormous investment and whether this expense would be sustainable and in line with deficit restrictions imposed by the European Union.

Asked about the impact of the project on the country’s finances, Prof. Philip Von Brockdorff, the deputy Dean of the Faculty of Economics, Management and Accountancy replied that this will depend on whether the project will take the form of public-private investment, public investment alone or an entirely private investment.

If the project is funded through private investment “the financial implications for government expenditure would be limited”.

However, it is also likely according to Von Brockdorff, that government will have to intervene to subsidise the price paid by consumers, as in the case of existing public transport. “That is likely in my view given the huge outlay involved in the project and the return investors will be expecting from the project.”

In this case subsidised pricing would be allowed under EU rules on the same lines as current arrangements. Moreover this policy would help support the modal shift necessary to justify the investment.

Asked on the specific financial mechanism to finance the investment, Von Brockdorff believes that the project should be financed from the issue of private green bonds, with the government adopting a subsidised pricing policy to indirectly support the modal shift.

A green bond issue in line with EU taxonomy would provide opportunities for higher returns and possibly encourage investment from outside the EU as well. “Green bonds would also highlight the green credentials of the project itself and its environmental objectives. They have the potential to yield significant economic benefits for both the issuer and investors alike.”

Equally important is applying the EU taxonomy for such an investment, allowing it to meet the do-no-significant-harm (DNSH) and minimum safeguards, with the green credentials being achieved alongside social protection and safeguarding of human and workers’ rights.

Even if privately financed, the project may still have an impact on public spending for if the project is successful one has to factor in the lost revenue from car registration taxes and licence. “Overall, however, the welfare benefits of reduced emissions cannot be downplayed in any way.”

Prof. Joe Falzon from the Department of Banking and Finance concurs that the way forward is to finance the project through the issue of bonds. “Financing €6.25 billion for the metro system would be possible if spread over 20 years.”

This must be seen in a context where the current value of all equities listed on the Malta Stock Exchange is €3.95 billion, while the current value of all private-sector bonds is €1.96 billion. Moreover, the current value of the Malta Government bonds is €7.38 billion, while the value of the Government Treasury Bills is €0.72 billion. And there are currently €18.3 billion overnight deposits from Maltese residents in the commercial banks earning close to zero interest rates.

“Raising €313 million each year through bonds or equity would certainly be possible if we expect that the economy would continue to grow in the next 20 years. €313 million is just 1.7 % of the current €18.3 billion overnight deposits.”

The main issue according to Falzon would be the repayment of the interest on the bonds issued or the expected dividend to be paid on any equity issued. Currently, private sector bonds are issued at around 3.5% per annum on the Malta Stock Exchange. However, there is no guarantee that interest rates will remain this low in the next 20 years.

Falzon warns that if interest rates will rise in the next 20 years, higher interest payments will be needed to be made to the bondholders, on new bonds issued and on old bonds when these mature and need to be rolled over. “All these interest payments and any dividends will have to be paid from the future income stream of the metro system. So it all depends on the economic feasibility and profitability of the whole project.”