Providing a catalyst for change

Economic Services Minister Josef Bonnici speaks to DAVID LINDSAY on a wide range of subjects including EU membership’s impact on trade and industry, the recently launched National Industrial Policy, the setting up of Malta Enterprise, the impact of the removal of levies and the effect of the Iraq conflict on Malta’s industry

What aspects of the economy are at the forefront of government’s electoral campaign?
From an economic viewpoint one of the most crucial aspects is certainly investment. There is a good deal of investment taking place at the moment, partly as a result of the Business Promotion Act.
In addition to the two companies that were inaugurated last week – Arrow Pharm and electric vehicle manufacturers Innovative Transport Systems Malta Ltd - there are also a number of other projects in the pipeline and many expansions taking place.
Dowty, for example, is carrying out a large expansion project involving some 16 factories at Hal Far. Baxter is also building a new factory, while STMicroelectronics is also looking at developing their local operations further.
What we are looking at is the issue of investment and how it would be negatively affected if Malta remains out of the European Union. There is no doubt that the reaction from investors to such a development would be negative, especially from those in the manufacturing sector.
Is this derived from information from companies present in Malta and those considering investing in the country?
Yes. In fact the electric car concern launched last week was actually waiting for the referendum result to announce their investment.
The way in which many companies are structured today means that their input originates from so many places that the conditions under which one operates as an EU member are much easier to operate in than if one stays outside.
So if you’re building a car, as in this example, and you need to receive some parts from the EU and others from outside the EU, it’s a definite disadvantage to not be an EU member.
Apart from this crucial aspect, there is, of course, the question of security in terms of forming part of a bigger block with known rules and known conditions, which together create a known environment for potential investors.
The large amount of bilateral agreements the EU has signed with countries outside the trade block is another crucial aspect.
For example, we have been trying to negotiate free trade agreements with other Mediterranean countries and it is only now that we are close to accession that these countries are really becoming interested in establishing such agreements.
The reason is not difficult to see. If you take a country like Malta with close to 400,000 people and a country with millions such as Egypt, Algeria or Tunisia, our market is so small to these countries that their priority lies in the bigger markets that can have an impact on their activity levels.
Each country has limited resources with which to negotiate. If one were to negotiate with a country where the impact on one’s exporters would be insignificant because it’s a very small market then the natural tendency would be to look elsewhere, to locate in larger markets where the impact would be much more significant.
This is a constraint that we face due to our size and the agreements the EU has signed with other countries have provided us with an excellent opportunity to penetrate, with greater clout, these markets that could be extremely important for us.
So as far as industry is concerned, there is little doubt that membership is the more desirable option from the other path suggested for the country?
If one looks at the manufacturing sector there is no doubt that the superiority of being an EU member is clear and could be so critical for our future development. This is evident in terms of the upgrading of our industry, in being able to attract new investment and in retaining the investment we have attracted.
A lot of investment has adopted a wait and see attitude. This is because as an EU member Malta’s attractiveness is higher, while as a non-EU member it could very well be that such investors would be reluctant to invest as quite much or that they might go elsewhere.
The National Industrial Policy was recently launched. What general aspects does the document deal with and how is it expected to provide a boost to the sector?
The National Industrial Policy has a number of aspects to it. The first is to lay down the kind of strategic direction that the Maltese economy is expected to follow and that which we would like it to follow.
When one looks at our economy, one finds that there are the three main sectors of manufacturing, tourism and a whole group of ‘other services’.
Manufacturing will, by and large, continue to grow and tourism should also continue to grow. But realistically speaking we have to look at the ‘other services’ sector to provide new opportunities such as further developing Malta into a regional centre for companies and their activities.
A good example here is the aviation sector. With Lufthansa Technik locating in Malta and currently servicing aircraft from a Spanish airline, we are seeing in a very short time the diversification of the market from what it started from – just the Lufthansa and Air Malta fleets.
This, to my mind, is very significant. What we need to do if this country is to continue improving its standard of living and creating more opportunities is to look closely at this other services sector.
There is also the EU link in this respect since there is a much higher likelihood of being successful in the other services sector as an EU member in terms of attracting companies to base their regional office in Malta and co-ordinate their activities from Malta. This doesn’t involve only manufacturing but also includes marketing, distribution and the organisation of work.
This is what other countries such as Luxembourg, Singapore and even Hong Kong have done with success and the next phase of development has to be in this direction. We have to position ourselves in such a way that the maximum benefit is derived from our location.
At the same time we also have to exploit the fact that within a southern European context, as an EU member we would be the country most fluent in English, with a reasonably high level of education, with a very well developed tourism sector and the amenities that go along with it. So if you have a company locating here to manage its regional business, it needs good schools, a good environment and an attractive place to work from. Here we will see some of the strengths from different activities reinforcing each other.
As such the Prosperity in Change document first of all sets the scene for this type of development.
It then deals with the whole aspect of analysing the industries we have, what the value added is, where the most investment is taking place and which are the export oriented companies.
Finally there is the whole discussion of how to best promote these sectors through the Business Promotion Act, through the work of the Economic Services Ministry and through the setting up of Malta Enterprise.
Which brings me to my next question, how would you gauge the progress of the setting up of Malta Enterprise?
The setting up of Malta Enterprise has progressed reasonably well. It is never easy to set up a new organisation that will essentially absorb the present organisations, which are still functioning and I insist that they keep functioning effectively, and which involves a certain movement of people from one organisation to another with a different mentality.
This is complex and we are being sensitive to the human resources employed within the three organisations, many of which are very valuable. But there are, of course, a certain amount of these resources that are less productive and one has to see if these can be used better in this new organisation or elsewhere.
However, it’s not a question of throwing people away, it’s quite the opposite. It’s a question of trying to maximise our resources. I’ve always said that the development of Malta Enterprise must be seen in terms of what the nation requires, which is a very dynamic organisation that runs after business and has a ‘can do’ mentality. This organisation must also seek partnerships with other like-minded organisations such as Enterprise Ireland - a relationship we are currently trying to enhance since Malta as a country can offer a number of services to Ireland.
For example, I held a meeting with the Irish Deputy Prime Minister a few months ago and it was mentioned how a lot of indigenous Irish companies were not exploiting the North African and Gulf region at all. Others weren’t even exploiting the southern European market. This is one distinct area in which we can provide a service.
At the same time the Irish agency can provide us with very good information from the US market, for instance, and from other European markets that tend to look at Ireland because it’s better known. Although the economics of the situation are such that Malta at the moment is attractive to certain types of operations in terms of costs and productivity in the way that Ireland was some 15 or 20 years ago.
That means there’s an opportunity there that, with a proper linkage between the two organisations, can be greatly capitalised upon.
But comparatively speaking there is no reason why we can’t be as effective as Enterprise Ireland, with some 1,500 people, and this is the whole scope behind Malta Enterprise. Malta needs an organisation that can map future development and actually influence the development of the country as a business enterprise and not necessarily only in terms of exports or investment promotion in manufacturing, or the SME development of indigenous companies. What we need is a business-oriented organisation.
How do you see local industry reacting to the removal of levies in their respective sectors? Which sectors have found a solid footing and which are still tweaking their operations?
Quite frankly there have been very few casualties. Many companies have taken the opportunity to look around themselves and have upgraded, ventured into new products and have explored new markets. At the end of the day this is part of the dynamism that the country needs, which is why we titled the National Industrial Policy ‘Prosperity in Change – The Way Forward’.
In terms of industrial levies I believe the results have been quite good, while the sector dealing with agricultural products is of going through the same levy reductions at the moment.
This sector stands to benefit from one thing that we didn’t have before, which is access to other markets for our food-related products. Up to now we have had very limited access, if any at all. Sometimes a window opens up through which certain types of products such as potatoes can go through but as soon as a certain date goes by, up goes the tariff and the product ceases to be competitive.
Other products, such as biscuits being exported to Germany, for example, were held back because they had to absorb a 28 per cent tariff on its exports. If such companies can break even in that situation, then what could happen if that tariff were to be removed? In fact we are trying to have that tariff removed even before accession so as to give them enough time to establish a presence in their overseas markets.
Last week I visited a factory that produces bacon and ham products and I was very impressed by the upgrading taking place. This company is for the first time setting up a plant that is up EU standards so that any importer from within the EU can inspect this plant and be satisfied that all the conditions of an EU plant are met.
This is good for Maltese consumers, for the workers and for the company. The point is why should we be satisfied with a limited type of product when upgrades are possible to make?
This is what the change is all about and I believe that with the removal of levies we will also be seeing a dramatic improvement in the quality of the product, the end consumer price, the in the market that can be reached and in the overall competitiveness of the product.
How do you counter the Opposition’s claims that workers’ employment stands at risk with EU membership?
The Opposition has actually been saying this since we started the liberalisation process back in the late 1980s. Those jobs were not lost, in fact unemployment was reduced rather than increased. This exact same argument was repeated in 1999 when we began the levy reduction and removal process.
The point is that the loss the Opposition had anticipated over the last four years never took place. So the same argument goes for membership. Why should EU membership involve job losses? I would say that it would involve job increases.
What the country needs is outward-oriented activity and to avoid getting side-tracked into being content with doing something very limited with very limited potential.
With the international price of oil on a rollercoaster due to the Iraq crisis, how is Enemalta geared to buffer these fluctuations?
About three months ago, given that there was so much talk about war, we adopted a type of insurance scheme whereby the price of oil at which Enemalta buys most of its fuel was maintained and a premium was being paid for that.
This was a very different structure to that which was practised before, in which a price was agreed with companies that hedge funds and if the price ended up less than agreed you would have to pay them the difference. If the price that was agreed was indeed higher, then they would pay you the difference. But there were no limits and the tricky part in this kind of process was choosing the right price and it becomes similar to playing a guessing game.
Instead what we did was we adopted a system in which there is a small premium but which protects Enemalta if the price goes beyond a certain level. This is not open ended in the sense that we know how much is being paid. That can be factored in and it provides you with a type of protection, especially if there are spikes in prices.
We had already adopted a system of averaging so that when Enemalta purchases its oil it doesn’t pay the going price on a particular day, but instead pays an average over a certain period of time. Some averages are calculated over three months, other over one month depending on the source. This method provides a greater stability.
Apart from all this, there is also the fact that oil prices are listed in the US dollar, which has declined by 10-15-20 per cent over the last six months or so.
However, this doesn’t mean that Enemalta has not been impacted, it has but that impact has also been contained.
Do you foresee any problems for Air Malta as a result of this conflict?
First of all I must say that Air Malta also went into a scheme quite some time ago that protects it from very high fuel prices. It had never done it before so it was tried out. Once again it involves a scheme through which a small premium is paid, you know where you stand and it is not a question of rolling the dice.
But then the question becomes one of whether the company should, over time, average out price fluctuation or whether it wants to protect itself in case there is a very unusually situation, such as the war in Iraq.
Our experience is that very often when you have a major buyer of oil such as Enemalta, the kind of averaging process it introduces adds a lot of stability because it’s purchasing frequently and the price is averaged in any case.
But with regard to Air Malta, of course, the biggest uncertainty is whether tourists will be affected in terms of being afraid to fly. Luckily Malta is considered to be a safe country, but there is still an element that could lead some people to be disinclined to fly at this point in time.
We went through this in 1991, but 2001 was much worse because, in the latter case, a lot of passengers were simply too afraid to fly, which led to a snowball effect. US tourism collapsed in Europe. Tourism around us such as in Turkey and Tunisia also declined and this led to a huge fall in prices.
What other sectors of the economy would you expect to run into difficulties if the conflict with Iraq is extended longer than estimated?
Remember that Malta exports almost 100 per cent of its GDP so demand for most of our production comes from international markets.
As such, any economic instability in Singapore, the US, Japan or in Europe affects us.
What happens on the international stock markets also affects us. If there is a lot of wealth, investment and demand being created, we are positively impacted, but if a lot wealth being destroyed, that also impacts us in terms of lower demand and investment. Some of the products are highly specialised but there are also many products manufactured locally for the mass market, such the switches Methode produces for the automobile sector. If US consumers are not buying as many cars, not as many cars are being produced and we are effectively impacted.
Today the Maltese economy is so integrated with the rest of the world that any fall in world economic activity will be felt very quickly here.