An Accountant with vision - Interview with Tonio Fenech

Tonio Fenech is a Fellow of the Malta Institute of Accountants. He started practicing the profession in 1992 with Naudi, Giorgio, Leone Ganado (eventually PwC), where he remained until he left the profession in 2004 to occupy his current position of Parliamentary Secretary in the Ministry of Finance. The Prime Minister’s ‘right-hand man’, Tonio will certainly be remembered in the years to come for his hard work in relation to Malta’s adoption of the euro, and for making this important milestone a reality. More recently Tonio also won the 2007 Junior Chamber International (Malta)’s Outstanding Young Person of the Year Award.  

Jonathan Dingli met with Tonio Fenech, as fresh as a Parliamentary Secretary can be on a Monday morning, to learn more about this outstanding personality and his achievements over the years.

When did you start studying accountancy and eventually started practicing the profession?

I have been studying accountancy since Form 3 and all the way up to University, from where I graduated in 1992. In that same year I joined a firm called Naudi, Giorgio, Leone Ganado, which eventually became Pricewaterhouse and subsequently, following the merger with Zammit Tabona (i.e. Coopers), it became what we know today as PricewaterhouseCoopers.

I had initially joined the firm’s audit department, where I stayed for a period of seven years, up to the grade of senior manager. It was then that I decided to go into consultancy. In reality, even during my auditing career, I very often ended up carrying out consultancy-related jobs. However in 1999 I switched over to consultancy on a permanent basis, until I started occupying this position.

What made you go into politics?

Politics was never really something I thought of. I never had the ambition, or even aspiration, to go into politics. Rather, my main line of ‘extracurricular’ activity saw me working with youths, not on a political but religious level. So politics was never really on my radar screen.

However, when the Nationalist Party lost the 1996 general election, I had approached Dr Eddie Fenech Adami and offered to start helping out the Party in some organisation, committee or whatever. Even then, I did not have in mind contesting the general elections. In reality the Party started pushing me to run for the Birkirkara Local Council elections, which I did in March 1997. I achieved a good result, a year later I ended up as Mayor, and the rest is history! Ten years later, here I am occupying the post of Parliamentary Secretary.

The accountant’s primary role and responsibility is to serve the public interest. How different is serving the public interest as an accountant, and as a politician?

Obviously, as a politician, it is more evident. Clearly, today, my primary role is to serve the public interest – that is the oath you have to take when you are elected to Parliament and appointed to occupy the role of Parliamentary Secretary or a Minister.

However, on the other hand, having had a CPA warrant for a number of years, it was always clear to my mind that even as a professional you are there not just to serve your clients but also to serve the public interest. That is also the auditor’s role. The auditor does not audit the books for the managers, but for a wide range of users such as shareholders, creditors, and for the people who will actually be involved in that business.

However, I think the most important lesson I learned from the profession is how important it is to safeguard your integrity which is, in my opinion, the primary factor that distinguishes you as a professional. Integrity is of the utmost importance in our profession, and it certainly cannot be compromised. I think that only if you safeguard your integrity you can effectively serve the public interest.

In your opinion, how valuable is your academic training and experience in accountancy to the current Cabinet? Do you think your position should always be occupied by an accountant?

I personally believe that it is indispensable. But does it always have to be an accountant? Experience worldwide shows that, in general, persons who occupy the position of minister of finance had a financial and economic background. In most countries, very often, the position is occupied by an economist or someone who has experience in the financial sector. I cannot say it is impossible – you can have people from other professions, who have a flair for finance and economy, who can be successful ministers of finance. I cannot say it should be exclusively reserved to accountants and economists. However a finance or economic background is an asset and it gives you an added advantage, even more so in today’s world where the financial services sector is becoming ever more complex and specialised.

The Prime Minister has, on a number of occasions, referred to you as his ‘right-hand man’. To what extent is that statement true?

He has referred to me in that way on a number of occasions and obviously I feel honoured in that respect. In reality, in addition to the work I carry out in relation to my position, there were also a number of very important projects which the Prime Minister has entrusted directly to me, that were not necessarily or traditionally the competence of the Minister of Finance but he felt that he wanted me to be involved directly and report directly to him on those fronts.

Three such projects that come to mind is the completion of the new Mater Dei Hospital, the planning of the utilisation of EU funds and the euro changeover project, obviously in addition to the recurring duties in relation to the ministry of finance and the preparation of the annual budget. I work very closely with the Prime Minister and on many occasions we put our heads together to discuss important issues.

Obviously the Prime Minister is always the Prime Minister and I can only give my advice, in the best way possible, but the rest is up to him. As regards the day-to-day running of the ministry of finance, the Prime Minister effectively gets involved either on issues which I bring to his attention because I need guidance or signed approvals in relation thereto, or on issues which he brings on the agenda.

In all honesty I never expected that, only a year after I was elected to Parliament, I would be given this role and work so closely with the Prime Minister and most of all, trusted and relied upon so much by him. I feel honoured and I always did my best to deliver on all fronts.

What were the major challenges and achievements in your career as an accountant, and more recently, as Parliamentary Secretary within the Ministry of Finance?

I think that, the fact that I have spent twelve years in what is today PricewaterhouseCoopers, and having been promoted to senior (audit) manager and eventually senior consultant, was indeed an achievement in my career. Also, when I took the tough decision to leave the firm to occupy my current position, the firm’s managing partner John Bonello had made known to me what my opportunities in the firm were, and I can openly say that I would have been offered to become a partner in due course. So you can appreciate that it was not an easy one –the fact that I knew how my career would have progressed within the firm makes it even more difficult because you know that you’re leaving behind something which possibly (financially) was much better rewarding.

When it comes to political achievements, I honestly think there is plenty. The major one is the changeover to the euro, which personally is the most gratifying, not only because it falls directly within my line of responsibilities in the ministry of finance, but also because we managed to meet the Maastricht convergence criteria only in three years. This was indeed a huge challenge. No one should assume that it was a foregone conclusion. Today one can very easily think that the process was an easy and straightforward one. Well it was not!

Even in the early days several people were sceptical and seriously doubted that we would ever make it, especially when it comes to the country’s deficit and the government’s ability to manage it and bring it down to sustainable levels. Today everyone, even the EU, acknowledges that Malta has made a commendable and exemplary progress, and I am pleased to note that this is being taken very positively as the results go to show.

The fact that the country’s financial position is sound, and the economy is stable, has increased the attractiveness of our country as a base for foreign direct investment. This is manifesting itself in results achieved in various sectors where investment is constantly coming to the island, even more so in the financial services sector where I am told from members in the Profession that ‘we couldn’t have it better’ as the financial services sector is outperforming everyone’s expectations as we speak.

Drafting the amendments to our tax regime, negotiating these with the EU, making sure  that these are in line with the requirements of the Code of Conduct for Business Taxation, and still retaining the attractiveness of our economy, all of which I was responsible for, was also a major challenge and an achievement.

There remains one major challenge in relation to the euro – that is that we have a successful and seamless changeover – which is also not an easy task especially when keeping in mind that economies worldwide are going through a period of instability at the moment, not only in the financial markets but also in the markets of certain commodities, as a result of which we are experiencing inflation attributable not only to the increasing price of oil but also to the prices of certain foodstuffs. As our country is certainly not immune to this, we run the risk of having this inflation associated with the changeover, rather than associated with the realities of the day on which we have no control whatsoever.

I am also pleased to note that we were the first country to conclude on negotiations with the EU on the usage of €855 million of funds that we have managed to secure for Malta over the coming seven years. The negotiations entail a detailed and laborious process nevertheless Malta was the first country to conclude in this respect and we have now started rolling out the projects in order to start availing ourselves of these funds and see them being put to good use.

Mater Dei Hospital is I believe another major achievement. We all know that the project was many a times under controversy, which resulted in undue delays in its completion. However, after having concluded negotiations with Skanska, for which I was also initially responsible, (though reporting back to the Prime Minister who only got involved in the final stages), we set a target date which we managed to achieve. Moreover, once we sealed the agreement and clearly defined what our needs are (as a major dilemma with this project was constant change in demands due to uncertainty as to what this hospital ought to be, that is constantly moving goalposts – both for the contractor and therefore for the country’s finances) we crystallised the cost and managed to keep to our targets. I think we all agree that today we have a hospital which is state-of-the-art, which our country deserves, and we have now started to reap the benefits.

Finally I think that the ability to propose three consecutive budgets that, not only did these not introduce additional taxes but, also reduced tax burdens considerably, is also an achievement directly for the ministry of finance. And one has to see these in the context of meeting the Maastricht convergence criteria. As a matter of fact, there was quite some concern when we were proposing the 2007 budget, as it was the one on which the euro convergence assessment was going to be made. Thus, on the one hand we wanted to put the European Commission at ease and show that our revenues were stable, and that the targeted reduction in deficit was going to be reached, but on the other hand we still proposed a budget that implied a decline in income tax.

In reality that was not a gamble but the result of a clear decision – we wanted to incentivise the private sector to expand and it was therefore necessary to take such tax measures, which took some courage to propose, but which are now yielding the desired results.

Following its accession to the European Union on 1 May 2004, Malta joined the Exchange Rate Mechanism (ERM) II, the last phase before a Member State joins the euro zone, only a year later on 2 May 2005. Why have you opted for such a short timeframe?

We did not want Malta to be one of the first wave member states (2004 ‘new joiners’) to adopt the euro as, first and foremost, we wanted to see our economy stabilise itself and make sure that the opening of our economy post EU accession did not have any major repercussions. In fact there were not. But on the other hand it was also clear that, if we wanted to increase the confidence in our country and our economy on the international playing field, we had to send clear signals – that we are capable of having a stable and sustainable economy. And the euro would send those signals. The fact that we set a target date, 1 January 2008, by when we had to reach certain targets and adopt the currency, was sending very important signals internationally that Malta is on the right track and that by 2008 it would have a stable economy, hence one in which it is safe to invest.

If on the other hand, we had decided to postpone the event to a later date, the international signals would have been interpreted as if we are not willing to face the challenge. But Government wanted to show decisiveness on the economic front. And that decisiveness has given the desired results. I think the signals that we had sent to the world at the time, which eventually brought investment to our economy, was at that stage more important than adopting the euro itself. It was clearly a strategy to get the economy to grow.

Nevertheless I cannot say it was an easy ride. There was an element of sacrifice from those concerned, and there were obstacles along the way, such as the unexpected rise in oil prices. And I can also add that, despite the size of our economy, we managed to overcome such hefty increases only because both the consumer and government took on their share of the load.

In August 2005 the Government had set up a euro changeover steering committee, chaired by yourself, the sole purpose of which was to make the necessary preparations for changing over to euro on 1 January 2008. An ambitious move that has evidently become a reality, and sound foundations have been laid for as smooth a changeover as possible. What was the role of this committee?

The Committee is chaired by myself and is composed of the Principal Permanent Secretary, the NECC chairman, the Permanent Secretary to the Ministry of Finance, the NECC Executive Director, and the Governor of the Central Bank. The main remit of this committee was the coordination of the changeover to the euro practically on all fronts. This committee dealt with practical and logistical aspects of the change that needed to be made in the public, private and financial sectors.

The National Euro Changeover Committee (NECC) was also set up, to act as the interface between Government and all society in implementing this very important project, particularly in terms of the information campaign that was required and the changes that needed to be made in the private sector. A number of sub-committees were eventually set up under the umbrella of the NECC in order to get as much people involved as possible in the changeover, not only from the business sector but also from the consumer side and the disadvantaged groups.

I can proudly say that the model we adopted was effective and the European Commission recognised that fact and declared the information campaign used by Malta as ‘best practice’. The Commission will in fact be financing a kit that may be used by other Member States intending to adopt the euro, which kit will be based on the Maltese model. I wish to thank and congratulate Joseph FX Zahra, Alan Camilleri and all the team at NECC who, through their meticulous and laborious planning of the information campaign, literally managed to reach all interested parties and left no corners untapped.

How challenging was leading the steering committee made up of such high profile members and make them agree to a common consensus on extremely important, and probably sometimes contentious, issues?

There were slightly difficult moments. At first there was the fear that the changeover to the euro would be turned into a political issue. There were some disputes with organisations representing various interests, that not always coincide, and there you have to intervene in order to come to a consensus. It is a continuous process. You have to keep everyone on board. And the more important thing was that everyone believes that 1 January 2008 is €-day.

Before we passed our ‘exam’, we experienced some scepticism from people contending that we will not make it and advising us to start thinking of plan B. Especially when, due to the hefty increases in the price of oil, which in turn led to inflation, there were fears that we will not meet the inflation convergence criterion. Finally it was imperative that we remained focused and that we kept on sending the right signals that I January 2008 will be the date.

Then we had also those sweet controversies, such as what symbols to put on the Maltese coins, and how to spell euro in Maltese.

Definitely the most difficult task of it all was making sure that the Maltese economy meets the Maastricht convergence criteria, and in the short timeframe afforded. How demanding on you was convergence to the criteria? What was the strategy adopted, what organs were available? In other words, how did you turn changeover to the euro from ambition to reality?

Clearly that was the biggest task. Meeting a deficit target at all costs is not easy, especially when coming from a culture in which keeping to a deficit target was important, but in the event that something extraordinary crops up, then government had to deal with it and the deficit suddenly used to get relegated and other issues and challenges took the lead.

We still had other priorities in our run up to the euro, but we had to adopt a different approach and ask ourselves where can we cut down costs in order to address these upcoming priorities. And that was something a bit new. I remember that, six months after taking charge, one of the very important meetings we had in cabinet was to try and address a cost cutting exercise of Lm10 million because we saw that in 2004 we were not going to meet the budget due to certain increases in expenditure and the way in which revenues were performing at that time. We had to address it and we had to take tough decisions, even to the extent of not carrying out a project which was budgeted for. It was now more important to have a sound financial position for the country. I remember that first meeting was very difficult – no minister likes to see his budget eroded.

We also turned on the public on very limited occasions where, unfortunately, Government was not collecting what it had planned for. And therefore the taxes we introduced, which are not substantial in all fairness, that is the tax on mobile telephony, the doubling up of the airline tax, and other minor measures, were necessary to fill the gap. But these were only meant to serve as temporary measures. We could have opted to increase VAT from 18% to 21%. But that is permanent. Once you increase that, it is extremely difficult to reverse. Therefore we decided to introduce measures that, once we get the results, the economy starts growing and the main revenue taxes start recovering, we can do away with.

The most difficult task was going to ministers during the budgetary process and telling them what their ‘envelope’ would be. Whereas normally they would expect a 5 to 10 per cent increase in their budget, they found the same kitty, if not reduced from the previous year’s. The strategy was to contain costs, and not burden the economy with more taxes. This would therefore give the economy room for growth, as a result of which the government’s revenues would also grow, and the deficit targets are met because tax revenues would have increased without increasing income tax.

So much so that in the consecutive budget (the second budget in which the Prime Minister and I were involved) we have not introduced any further taxes. In the third budget we have reduced income tax, as we also did in the last budget, by extending the income tax brackets. We have also given some benefits as we had finally reached our targets and we could have afforded to do so, also to incentivise economic growth. I think that strategy worked in practice.

One of the responsibilities that your current position entails is the regulation of the Accountancy Profession, which is becoming increasingly demanding mainly due to European and international developments on this front. Do you think that the recent amendments to international standards, which come mainly in reaction to scandals on the international scene, and the more recent changes to EU directives, are proportionate to size of the local profession and economy?

As you certainly know, over the last 18 to 24 months, we have introduced new structures in order to ensure that the profession remains in the forefront both in terms of its regulatory responsibilities and also of the public perception of its integrity and professionalism. I’m obviously referring to the Quality Assurance framework that we have introduced.
 
You may be asking if this could be over burdensome for the size of the local profession. Well in reply to that I would say that if we truly believe that the financial services sector, by the year 2015 (or even before), would become an important pillar of our economy, the Accountancy Profession has to be top-notch and perceived to be so internationally. We want our local profession to be on the forefront, and we want our deliverables to be taken at their face value – it is a certificate given, it is an opinion given, by a recognised professional internationally. This can only be achieved if we ensure that nobody brings to doubt the local Profession. Quality Assurance adds credibility to the profession and gives us the attestation we require to be an international centre. It is very critical to our success.

The financial services sector has grown even because the professionals themselves didn’t go for the easy buck. We don’t run after shady companies but we run after companies that have a certain level of integrity. When we name companies the like of BMW and Lufthansa, both of which are established in Malta, that would be sending clear international signals that our country is a reputable jurisdiction in which one can invest. Prospective investors would in fact find out that we have a good legal framework, a good regulator, good accountancy professionals and, equally important, Malta looks for business that is of integrity, that will not discredit our reputation.

On the other hand, we do not want to be over burdensome. As a matter of fact, this afternoon, we will be launching a set of accounting principles that we are proposing for adoption by smaller entities. Do these need to apply the full International Financial Reporting Standards? I don’t think they do. They are not reporting internationally – it is for the local market – as long as we are able to ensure that the level of information that is given is what is required by the market, and has nevertheless been adequately opined upon by the auditors that those results are true and fair, then I believe that should suffice.

So we want to reduce the regulatory burden and the cost of auditing to small businesses, but on the other hand we still want to retain our current level of IFRS knowledge which gives us as professionals a competitive edge when compared to professionals on the continent. I sincerely believe that the local profession is, and is perceived to be, above other professionals on the continent (with the exception of our UK mentors), and we should definitely retain that competitive advantage.

Finally, how do you see the profession changing in the years to come?

I hope much bigger than it is today. We recognise that this is a challenge and we are starting to publicly talking about it again, and it needs to given the political profile in a positive sense. We need to encourage young people to go for the financial professions. We have lately pushed heavily the ICT sector, and a lot of people are going for it, but we need to ensure that this will not be detrimental to the financial sector, which is growing at a faster pace in my view.

We need more people to join our profession. There is a bright future ahead, not only for accountants but also for economists, bankers and insurance people. We need to start training people in hedge fund administration, trust administration, etc and clearly the profession has huge prospects and we need to tell parents to encourage their children to go for this great profession!