George M. Mangion | Wednesday, 22 April 2009

Is the Malta Enterprise Act working?

This week, the National Statistics office meekly announced that the 2008 deficit rose to €233 million. On its own, this may not surprise many since the deluge of bad news from CNN and other media on how the global economies are being squeezed by the credit crunch has left us in no delusion that we may run away unscathed by the financial turmoil. It goes without saying that it does not rain, but it pours when the notice how the prognosis for this year is again not so rosy given that the shortfall during the first two months of this year amounted to €199.5 million. Still, public enemy number one for our young and energetic finance minister is not the deficit but the maintenance of healthy employment prospects. Tonio Fenech is putting a brave face when asked by the press how he justifies the unexpected shortfall in his deficit projections. He stoically replied that while keeping reign on the deficit is vital, the creation of more jobs to stabilise those lost by the recession takes priority. No sacrifices will be spared. This all sounds promising but in real terms the situation on the ground tends to be different. Jobs can be created and remain sustainable if the right level of confidence is maintained by all stakeholders. This involves the collaborative pull of the government, the private sector, banks and other providers of capital such as the heightened use of the local Stock Exchange. Can it be that a sense of deja vu is setting in when young and not so young entrepreneurs set their mind to undertake a new venture. One of the causes that retards the grass shoots from appearing is definitely the proliferation of bureaucracy. Many times we read in successive budget speeches that excessive bureaucracy is the leech within our economy and successive governments tried (without much success) to do their utmost to eliminate it. Without a shadow of a doubt, bureaucracy slows down our entrepreneurial culture. It goes without saying that start-ups must find the necessary encouragement possibly within the realms of the Malta Enterprise Act and other incentive legislation. This piece of legislation is a vast improvement over the Business Promotion Act which some still quiver when they remember its complicated mathematical formulae obligatory to qualify for assistance. Still many complain that acquiring seed capital for those who do not form part of the “landed gentry” is as painful as pulling out teeth. Banks are still (and more so now after their profits plummeted) making up lending strictly conditional on signing up by borrowers of collateral in the shape of brick and mortal.
GRTU director general and PN MEP Candidate Vince Farrugia last week wrote in Malta Today that banks must be more egalitarian towards their clients more so now in time of need. On a positive note, the setting up of ‘Malta Enterprise’, which follows the merger of three government agencies of METCO, IPSE, and MDC, has done a decent effort to pilot a Malta Enterprise Act meant to revive aid programmes to business. This includes the provision of subsidised services such as that of mentors providing business diagnostics. Another practical idea to spur innovation has been the setting up of an incubation centre. But why do we need to lend a helping hand to small and medium sized entities? In the past, politicians were more inclined to attract the creation of mega companies and ignore the fiddly little applicants. The simple answer is that due to globalisation and a steady inflation of local wages it is becoming more and more difficult for the island to attract high–value added manufacturing units which by their own cost cutting norms are fast taking an East European or Asian location. Unfortunately, locally there is still a lingering doubt that SMEs do not provide stable employment opportunities. Job seekers still ask why they should work for a small company. The answer is that working conditions in a small entity can in some instances be comparable if not better than those offered by a large organisation. To their advantage, small businesses tend to offer an informal atmosphere, an all-for-one camaraderie, requiring more on-the-job versatility. Usually they offer better opportunity for career advancement and salary increases may be rapid in a growing company. Workers are involved in the entire organisation rather than being channeled in a department. The environment is less bureaucratic, however practice shows that during such troubled times when the world is facing a recession, workers’ perception of failure is exacerbated. They cannot be blamed for saying that theirs is not a job for life as can be enjoyed with government organisations. Still the government already employs over 41,000 workers for a somewhat small island the size of a village or a minor town in Europe. There is no room for more placements here.
It is pertinent to ask how successful the implementation of the Enterprise Act promulgated last October was, and how it integrated its trade policies within the European Charter for Small businesses. One positive aspect is the unbridled success to co-ordinate an educational reform at a technical level thus ensuring mobility of trained recruits at MCAST college. One sure thing is how some of the EU funds earmarked for 2007/13 are being allocated to MCAST in order to promote better prospects in the training of technical workers. Considering the unmitigated claims by EU members to finance more assistance and approve a higher financial stimulus to generate sustainable jobs, it is no surprise that we need to save our pennies in order to better job creation. With a deficit that is not easy to tame, releasing more funds in the economy means untying precious funds that are unremittingly collected in taxes. A timely reminder provides us with a reality check that government debt at the end of the year stood at €3,525.20 million, but who is counting? In a bold manner, the reinvestment tax credit (income tax) rules issued on 11 October 2005 were a welcome move to award entrepreneurs who brave the tide and reinvest their profits (instead of taking the proverbial Caribbean holiday with the family). Thus, the law states inter alia, that a person entitled to a reinvestment tax credit in respect of a year of assessment shall be entitled to deduct it from the amount of tax which is due on qualifying profits for that year of assessment. In order to qualify for the benefits under these rules, a person shall, in the base year: (i) have had a turnover of not more than €585,000, and (ii) have had a minimum of three but not more than ten employees of whom at least three were full time employees. This is certainly focused to aid micro companies and rebuts any criticism that Malta is probably the only country in the new accession countries without a smaller corporate tax rate for micro enterprises. Another interesting aspect of the law deals with the investment aid. This is designed to assist by supporting investment and job creation.
This incentive provides tax credits expressed as a percentage of the investment in qualifying expenditure. Eligibility is not open to all sectors yet for those who qualify the total amount of investment aid is scaled down in proportion to the size of the enterprise. Fair enough, small companies qualify up to 50 per cent of eligible expenditure while the percentage goes down to 30 per cent in case of larger entities. One must fine tune such incentive schemes to make them accessible to all not merely for larger claimants who invariably, through paid consultants, can fend for themselves. In my opinion the Act is well drafted and it is now up to the government agencies to promote its availability particularly to the lower end of the applicant scale.
Typically, the times call for any type of stimulus the island can possibly afford so that new jobs are created. Growth in new enterprises is to be encouraged. In turn, these need to start pulling their socks up to compete in international markets. Only this will we be able to weather the storm that is expected to visit our shores this year.

George Mangion
Partner at PKF – an audit and business advisory firm



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22 April 2009

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