Last week I argued that energy moves like an aircraft carrier. Decisions taken today on generation, an interconnector or the distribution network may take five, 10 or 15 years to show their full effect. The same is true when decisions are postponed. You save the money today. The consequences arrive years later.
To understand what happened next, it is necessary to understand the financial position Enemalta was already in by 2007. The Corporation was not generating enough cash to sustain itself, let alone finance what was becoming the largest investment programme in its history.
The deterioration had been building for years. Borrowing had risen from around €171 million in 1994 to more than €319 million by 2006. The more important problem, however, was not debt on its own. Enemalta had reached the point where the cash generated from its operations was no longer sufficient to finance its normal investment programme, while much larger investments in generation, transmission and the interconnector were becoming unavoidable.
By November 2007, Standard & Poor's assessment was stark. Funds from operations were negative, something it described as unprecedented among Western European utilities. Internal funding was negative, and Enemalta was increasingly dependent on bank borrowing and overdrafts to keep going.
There were three reasons for this, and all had their origins in policy.
The first was tariffs. Fuel prices had risen sharply, but the surcharge intended to recover that increase was not allowed to follow the formula. When the formula required 84%, the surcharge was initially set at 55%. Between 2004 and 2007, the resulting shortfall approached €56 million. The contemporary assessment within Enemalta went further: the tariff policy being applied did not meet the requirements of the Enemalta Act, which required tariffs to cover operating costs, maintenance, debt servicing and reserves for future investment.
There was nothing new about the politics of electricity tariffs. When the Sant administration in 1997-1998 sought to bring tariffs closer to the actual cost of electricity, it was attacked from all sides, led by the Opposition. "Gvern bla kuxjenza soċjali" - a government without a social conscience - became a central Opposition battle cry, and the tariff increases became an important factor in the government's electoral defeat. Yet, once elected, the new government retained those tariffs. It was only later, as costs continued to rise and the gap became increasingly unsustainable, that it was itself forced to increase them.
The political lesson was difficult to miss. Higher electricity prices could cost votes. Successive governments therefore had a powerful incentive to postpone or suppress the full cost. But suppressing the price did not suppress the cost. Fuel still had to be bought at the international price, and somebody had to pay the difference.
The second problem was how that difference was financed. In the run-up to Malta's adoption of the euro, the government was working to meet the Maastricht criteria. Cash was taken from Enemalta and, in part, replaced by property, including the former Sea Malta building. On paper, Enemalta had been compensated. In cash terms, it had not.
That distinction mattered enormously. Fuel is paid for in cash. So are wages, suppliers, loan repayments, cables, substations and generating plant. You cannot burn a title deed in a boiler. The Sea Malta building illustrates the problem rather well. Enemalta could not simply turn it into cash when cash was needed: attempts to sell it became caught in administrative processes and, when it was eventually put to tender, no bids were received. The property remained; the liquidity problem remained with it.
There was another problem. The g valuation of property transferred to Enemalta was not accepted by the auditors. This was not an academic disagreement about accounting. If the asset transferred in place of cash could not support the value attributed to it, Enemalta had neither received the cash nor necessarily received an asset worth the amount being recorded. The resulting impairment issue became sufficiently serious to delay closure of the accounts.
I believe this was one of the fundamental weaknesses in the policy. Government could pursue its fiscal objectives and protect consumers from the full increase in electricity prices, but the cost did not disappear. It was pushed into Enemalta's cash flow and balance sheet at precisely the time when the Corporation needed financial capacity for what was coming.
The third problem followed from the first two. Enemalta increasingly financed survival rather than investment. Over the relevant period, the financial shortfall reached around €72 million when the corporation should have been reducing debt and accumulating reserves. Eventually, a €45 million loan was required not for a new power station, an interconnector or the network, but for recurrent expenditure.
The response was predictable. Oil suppliers provided around 60 days of credit. Other suppliers waited. Debtors were squeezed. Overdrafts moved towards their limits, and investment was postponed. This is how a utility can continue operating while its capacity to renew itself is being steadily eroded.
And the bill had a legal due date. Under the EU Large Combustion Plant Directive, the old Marsa Power Station - commissioned in the 1960s - was capped at 20,000 operating hours from 1 January 2008, with closure required by 2015 at the latest. Demand, meanwhile, was growing at around 3% a year. The arithmetic was not subtle: Malta had to procure new generating capacity, and a route to the European grid, and do both against a countdown, funded by a Corporation that a rating agency had just described in terms reserved for basket cases.
That was the inheritance of 2007. Not a crisis that erupted - a crisis that had been scheduled, annually, for over a decade, by governments that chose cheap electricity today over secure electricity tomorrow.
The honest question is how it got to that point. The answer is not a single villain but a lost decade - roughly 1994 to 2006 - in which Malta built almost nothing while its plant aged and its demand grew. That decade is next week's subject, because without it nothing that followed - the rushed tenders, the political warfare over the new plant, the delays that stretched risk into the 2020s - makes sense.
David Spiteri Gingell is a Governance, Institutional, and Digital Transformation Consultant