Malta's governance problem is a moral hazard problem. Liz Barbaro Sant made a strong case in the Times of Malta on 27 September. Malta, she argued, does not need another report. It needs the will and the capacity to act on the ones it already has. Her proposals were practical: verify who really owns the companies winning public contracts, keep a public record of how contractors perform, and make the government answer National Audit Office findings to a deadline. I agree with almost all of it.
I want to add one thing, because I think it sits underneath everything she described. From the Enemalta oil procurement affair to the hospitals concession, the same failures kept returning under governments of both colours. Rules were broken, yes. Underneath that, the incentives were wrong: people kept doing these things because, on balance, it paid.
What economists call moral hazard
Kenneth Arrow described it in 1963 when writing about health insurance: when someone else carries the cost of a risk, people take on more of it. Bengt Holmström, who shared the 2016 Nobel prize in economics, showed how contracts can be designed so that the people making decisions also carry enough of the consequences. Wherever gains stay private and losses are shared, behaviour shifts. People are not wicked for responding to that. They are being rational.
Transparency tells us what happened. Accountability names who answers for it. Governance writes down how things should work. None of them, on their own, changes what someone expects will happen to them next time. That expectation is where culture is actually formed.
The signals we have been sending
On wrongdoing, the message has been that consequences are slow and uncertain. The public inquiry into the assassination of Daphne Caruana Galizia concluded in 2021 that the State should bear responsibility for creating an atmosphere of impunity. Impunity is moral hazard in its purest form. When the chance of a consequence reaching the person responsible is close to zero, it drops out of their thinking.
On planning, every regularisation scheme that lets illegal development be sanctioned for a fee tells the next developer that the rule is a price, and a negotiable one. The builder who waited patiently for his permit learns he was the one who got it wrong.
On public money, the signal is quieter but travels further. For years, households and businesses have been shielded from international energy and fuel prices, at a cost reported at around €350 million a year. In January 2024 the IMF advised Malta to phase these subsidies out and put the money into targeted help for vulnerable households. As a shock absorber, the support was defensible. As a permanent setting, it tells the pensioner in a small flat and the owner of a villa with a heated pool exactly the same thing: the real price is somebody else's problem.
The Covid wage supplement was the right call in 2020. The trouble begins when emergency tools become habits, and every sector that has a difficult quarter expects a scheme with its name on it. A subsidy that arrives whatever you do stops being support. It becomes a subscription.
Business is not innocent here, and I say that as someone who runs businesses. Barbaro Sant was right that employers should ask for fair rules even when those rules bind them. The same applies to support. A sector that lobbies for its own scheme every budget is asking the state to carry its risk. We cannot demand discipline from government while asking to be exempt from it ourselves.
These signals do not stay in separate boxes. A country that teaches its citizens that the state will absorb every cost should not be surprised when some contractors assume it will absorb their overruns too, or when some officials assume nobody will follow up.
The case for support, and why design decides it
The counter-argument deserves a fair hearing. Subsidies protect the vulnerable. A small island economy is exposed to shocks it did not cause, and cushioning them keeps firms alive and people in work. Amnesties can clear backlogs that would otherwise clog the system for years. I accept all of that. Denmark and Singapore, hardly careless countries, spend public money generously as well.
The difference is design. Denmark pairs generous unemployment support with a real obligation to retrain and look for work. Singapore's SkillsFuture credit pays towards courses, but only when the individual turns up and does the learning. The state invests and so does the citizen. Support is targeted, time-limited and conditional, with a visible exit. It treats people as adults who respond to incentives, and it protects the budget for those who genuinely cannot help themselves.
Four questions for Budget 2027
So alongside the registers and deadlines Barbaro Sant proposed, I would put four questions to every measure in Budget 2027. Who carries the downside if this goes wrong? Is it aimed at those who need it, or at anyone who asks? When does it end, and does everyone know the date? Does it reward effort, or simply presence?
On enforcement, the evidence corrects a common instinct. Criminologists such as Daniel Nagin have found that the certainty of being caught deters far more than the severity of the punishment. We do not need harsher laws. We need predictable ones. A fine that is always collected does more than a prison term that is rarely imposed.
Culture is a question of capability
Culture is built by people. It starts in a public service where the official who refuses a favour is protected and promoted, not quietly moved aside. It needs regulators and prosecutors trained and confident enough to act without waiting for a nod, and classrooms that teach young people that rights and obligations come together. Above all, it needs leaders, in government and in business, who own their decisions when they go wrong as readily as when they go right.
Targeting support is also the most caring choice available to us. Every euro spent cushioning those who could adjust is a euro not spent on the child with complex needs, the family carer or the elderly patient waiting for a bed. Care for the weak and fiscal responsibility depend on each other.
Barbaro Sant is right that we know what is wrong. Part of what is wrong is what we choose to pay for. A country gets the behaviour it rewards. Budget 2027 will show which behaviour we still intend to buy.
Common questions
What is moral hazard?
Moral hazard describes what happens when someone else carries the cost of a risk: people take on more of it. Kenneth Arrow set out the idea in 1963 when writing about health insurance, and Bengt Holmström, who shared the 2016 Nobel prize in economics, showed how contracts can be designed so that the people making decisions also carry enough of the consequences.
Why will transparency alone not fix governance in Malta?
Transparency tells us what happened, accountability names who answers for it, and governance writes down how things should work. None of them, on their own, changes what someone expects will happen to them next time. As long as consequences stay slow and uncertain, and costs keep landing on the public purse, behaviour does not change.
What did the IMF recommend on Malta's energy subsidies?
In January 2024 the IMF advised Malta to phase out its energy and fuel subsidies, reported at around 350 million euro a year, and to put the money into targeted help for vulnerable households instead.
How should Budget 2027 test a subsidy or support scheme?
Four questions: who carries the downside if it goes wrong; is it aimed at those who need it or at anyone who asks; when does it end, and does everyone know the date; and does it reward effort, or simply presence.
Sources: Liz Barbaro Sant, “We know what’s wrong. Now act”, Times of Malta, 27 September 2026; Kenneth J. Arrow, “Uncertainty and the welfare economics of medical care”, American Economic Review 53(5), 1963; Bengt Holmström, “Moral hazard and observability”, Bell Journal of Economics 10(1), 1979; Daniel S. Nagin, “Deterrence in the twenty-first century”, Crime and Justice 42, 2013; Board of Inquiry into the death of Daphne Caruana Galizia, final report, July 2021; MaltaToday, “IMF recommends phasing out of energy subsidies”, 30 January 2024 (IMF recommendation and the reported annual cost of around €350 million). The subsidy cost is a reported estimate and subject to revision.