Interview | Wednesday, 26 September 2007

Potential for growth

As Malta Federation of Industry (FOI) Director-General Ray Muscat explains to Charlot Zahra, the Maltese economy has the potential to grow at a stronger rate in view of recently-announced investment projects, continuous investments in infrastructure, improvements in the educational system and effective utilisation of EU funds

You have been appointed FOI director-general since last July. What are your first impressions of the FOI as an organisation and your job as Director-General? Have these been up to your expectations?
I knew the Malta Federation of Industry and many of its members long before my appointment, from my previous employment at Malta Enterprise. It is an organisation whose reputation has been built over many years of serious interactions with stakeholders on various issues of concern affecting its members and those of policy. Internally, it is built on trust, dialogue and dedication, involving some of the leading names of our industrial context. As with other similar positions, the job entails various tasks, ranging from the day-to-day managing, communication with members, stakeholder interactions to policy development.

What is, in your view, the state of the Maltese economy at present? Which are those sectors which have shown growth and which have shown decline in the last few years? How does the Maltese economy compare with the rest of the EU-25?
The international scene has been dominated by globalization with the intensification of competition and by adverse shocks to oil prices and to demand for our exports. The economy had to undergo extensive restructuring to face these events, not least because it sought EU membership as an effective means to meet a number of these challenges. Restructuring is an on-going process which is to continue over the coming years in the wake of global economic dynamics.
In general, knowledge–based sectors which offer a competitive advantage in relation to our operating costs are expanding; the country has become uncompetitive in low-skilled sectors, which can operate more cheaply elsewhere. This is the relevant dichotomy nowadays, which is fast replacing that which used to exist between manufacturing and services. Thus, the crucial emphasis needs to be made on skills development, labour market activation and technology transfer.
In 2006, Malta ranked in the 18th position out of the 27 EU Member states in terms of the level of per capita Gross Domestic Product (GDP), which stood at 73.8 per cent of the EU average. This has slid down from 74.6 per cent in 2001, due to the fact that Malta did not keep up with the average growth rate of the EU in the first half of this decade. We have a better than average performance in our international market integration and attraction of foreign direct investment, and a lower than average performance when it comes to labour market participation and development of skills.

Does the FOI believe there is room for the country’s economic growth to improve? In which sectors of the economy? In your view, what measures should be taken by the Government to promote further growth of the economy?
There is potential for the Maltese economy to grow at a stronger rate, in view of the opportunities which are presenting themselves through the recently announced investment projects and others that are being expected, continuous investments in infrastructure, the improvements in the educational system and the effective utilization of EU funding.
Growth is to be expected in those sectors which are increasingly knowledge based and innovation-driven, which can therefore output a distinguishable product / service offering to international markets. The potential for growth may not only be “new economy” activities but also in more “traditional” areas, provided that they can restructure their business operations towards knowledge-based activities. There is also the huge potential for collaborating firms to direct their output and services to the successful export-oriented sectors.
Urgent measures which should be undertaken include: the activation of measures within the industrial Strategy document, including more targeted approaches to support small enterprises with the ambition to pursue growth; an effective approach to research, technology and innovation and focus on the European Innovation Scoreboard to benchmark our innovative capacity with other regions; more emphasis on the performance arising from the National Reform Programme exercise; continued and more focused investment in education; measures which mitigate costs of energy; better operation of the business environment and infrastructure to reduce the costs of operating in Malta; and continued restructuring of the public sector towards efficiency and effectiveness. We need to produce goods and services with the greatest efficiency possible and need to remain focused in building success in international markets. The latter is a vital determinant of our long-term success.

What is the situation of the manufacturing industry in Malta at present, especially in view of the recent mass redundancies from Bortex and VF? Do you agree with the statement that this industry has no future in Malta? Why? What action has the FOI taken in response to the problems faced by the manufacturing industry?
As indicated earlier on, dichotomy between manufacturing and services is no longer relevant. There is a section of manufacturing with a bright future because it is knowledge-based and competitive and a section of services which may face difficulties if it does not offer a distinctive product. The section of manufacturing with potential for growth is not restricted to the so-called “new economy” activities because there are important sub-sectors, ranging from printing to food to furniture which, through restructuring are managing to make headway in the market.
Industrial strategy should not be much oriented at sub-sector discrimination as much as trying to create appropriate operating conditions on a horizontal basis which would benefit all business with a potential to grow. We must also keep in mind that our labour force is not all oriented to work in the new economy sectors.
In this context, I absolutely do not agree that industry has no future in Malta. This way of thinking is a marginal view of our economic development. Manufacturing plays an important role in our economy as a driver of productivity and change. It provides key inputs to the wider economy and satisfies a broad range of demands with significant multiplier effects.
Over the years, the FOI has voiced its opinion and submitted its researched views on matters affecting industry. This has been done at the international, national, sectoral and enterprise levels. For instance, last year, the FOI was instrumental to assist Government to develop the Industry Strategy 2007-2010. The FOI is looking ahead and it will be seeing how best to better assist its members to make use of modern approaches to enable them to pursue growth.

In its reaction to the Pre-Budget Document, the FOI insisted that the Government should take measures that promote growth and not dent the country’s competitiveness. Can you explain further? Does the FOI have in mind any specific measures in the pre-Budget document which would affect the country’s competitiveness?
It is the view of the FOI that the Budget is an important tool towards attaining the primary goal of economic policy in Malta, which remains that of promoting economic growth.
Social cohesion is another important goal, but this should be sought in ways which are complementary to the promotion of economic growth out of which social measures are ultimately to be financed.
Incentives towards labour market participation and skills development are conducive towards promoting growth and social cohesion at the same time. Universal benefits and unduly generous and costly welfare measures are not. Thus, utmost care should be taken not to introduce measures which would in any way affect Malta’s competitiveness.
With reference to specific measures, these were made public during last week’s FOI press conference on the subject.

On the adoption of the Euro on January 1, the FOI said in its proposals for Budget 2008 that the Government should “monitor implications of (the) Euro for inflation and financial costs”. Does the FOI therefore believe that the introduction of the Euro will bring about inflation and added costs for the economy? Why?
The FOI believes that if properly managed, the introduction of the Euro in Malta should not bring about price inflation and should actually result in lower financial costs to business due to increased transparency and the potential for competition in the financial services sector.
Based on this premise, the FOI is urging Government to monitor the situation and take measures as may be appropriate. Of course, we will be monitoring the impact, if any, after January 1, 2008.
Inflationary effects due to the current international crisis in agriculture with regards to cereals and other food products must not be confused with the adoption of the Euro.

How are the ever-rising energy costs impacting the operating costs of Maltese companies? Which are those sectors which have been hit most hard? Can you quantify these costs? How have these spiralling costs affected the competitiveness of these companies? What action has the FOI taken with the authorities in view of this problem?
Energy costs remain an important issue, especially for firms which are not large enough to benefit from the system of capping. Thus, medium-sized SMEs are the most affected. It also appears that the threats of higher energy costs might be intensifying over the coming months with the rise in the international price of oil.
The FOI is advocating a scheme to generate benefits to the country by increasing energy efficiency through the deployment of public funds to support the undertaking of energy and environmental audits within business and for the implementation of the recommendations arising there from. This approach is likely to be more cost effective than the introduction of general subsidies, because it would have the potential of deriving customised business solutions.
It is imperative, though, that on a national scale, every effort is made to invest in the most suited renewable energy sources and to provide effective incentives to the domestic user to generate energy and sell excess.

Do Maltese companies spend enough on research and development, especially when compared to the rest of the EU? What is the FOI doing concretely to encourage companies to spend more on R&D?
R&D expenditure represents one of the major drivers of economic growth in a knowledge-based economy. Good levels of R&D expenditure provide key indications of future competitiveness. It is essential for making the transition to a knowledge-based economy as well as improving production technologies and growth. The Barcelona European Council (March 2002) set the target of increasing R&D expenditure to 3 per cent of GDP by 2010, two thirds of which should come from the enterprise sector. Business R&D expenditure refers to the formal creation of new knowledge within firms and is particularly important in the science-based sectors.
The business R&D expenditure as a percentage of GDP (EIS2006, basis 2004) stood at 0.45 per cent, while that of the EU25 was 1.2 per cent. The public R&D expenditure as a percentage of GDP (EIS2006, basis 2005) stood at 0.19 per cent, while that of the EU25 was 0.65 per cent. In this context, the business R&D intensity is low and is mainly undertaken by the large companies.
Another crucially important dimension to accelerate economic growth is the degree of SMEs that introduce new or improved processes, products or services. In essence, this is the extent of those SMEs that are innovating in-house, whether through technological advances and/or organisational improvements.
For the past years, the FOI has been pronouncing its views on the importance of R&D and innovation. Recently, the FOI has been appointed the SME national contact point for the EU Seventh Framework Programme. More is planned for the near future. Furthermore, the FOI, together with the University of Malta, were the Maltese partners to an Interreg IIIA Italia-Malta project entitled METIC. This project aimed at strengthening the collaboration links between enterprise and academics operating across a range of sectors so as to channel knowledge from university research into industrial applications.

What are the major difficulties encountered by businesses in Malta with bureaucracy and excessive red tape? Which departments and entities are the major culprits in this respect? What are the FOI’s proposals to deal with this problem?
In line with EU practices, Better Regulation needs to be strengthened so as to achieve an effective reduction in the burden of legislation and regulation on industry, particularly on SMEs. Bad regulatory governance may discourage potential entrepreneurs to invest within a specific sector and competitiveness is hampered, which as a consequence reduce the ability of businesses to react to dynamic demand.
The FOI recommends the development of methods to evaluate the impact of regulation on businesses, whereby ‘command and control’ type of regulation shall be substituted with alternative procedures, mainly through ongoing consultation. Any proposed legislation ignoring administrative burdens, as well as the failure to compensate an administrative burden, should be blocked. Further, the total value of administrative burden per Government department or public entity should be linked to the budgetary system.
The FOI is currently collating over-regulation related information from its members and has initiated on-going discussions with the Better Regulation Unit at the Office of the Prime Minister.

Now that Malta has been a member of the EU for more than three years, what impact has EU membership effectively had on Maltese companies?
EU or no EU, the restructuring of Maltese business was and continues to be inevitable to meet the forces of competition. With EU membership, this process has been accelerated because of the dismantling of import levies and facilitated through the access to the single market, the use of Structural Funds and the participation in EU programmes. Further indirect benefits arise from improved business environment and EU-monitored macro policies, including public deficit, environment, better regulation and business simplification and NRP. Business has in general benefited from these issues.

Are Maltese companies satisfied with the skills that graduates are coming out with from the University of Malta, or are there skills mismatch between supply and demand of human resources? What links are there between the University of Malta and the FOI? Do companies sponsor students certain skills?
The skills of university graduates are of a good technical level and have a degree of flexibility, which local industry definitely needs. The problem lies with the number of science-based and ICT tertiary students – industry requires more technically trained persons to fuel growth. The links between the FOI and the University are good, but links could be improved at the institutional level.
But when one talks of skill requirements, we cannot forget the crucial role of MCAST, in producing technician-level qualified persons, which enterprises require across all sectors. Additionally, the re-training of experienced people is crucial. To this extent, the FOI is very keen to collaborate with National Qualifications Council to see how best the recently launched National Qualifications Framework will be implemented.
The FOI is insisting upon the need for better and more effective student placement programmes with industry also at a tertiary level. This will benefit the professional and academic formation of the student and make academia and business more aware of each other’s needs.

Last February, it was reported that the FOI and the Chamber of Commerce were “considering” a merger. What has been the progress on this mooted merger between the two rival employers’ organisations? Is it still on the agenda of the new FOI council?
Rival organisations? Nowadays, we have a number of projects that are being undertaken jointly. Indeed, discussions are still progressing at a steady pace. The merger would yield enhanced benefits to the combined membership and to the country – we simply cannot afford anymore to fragment our efforts, but need to collaborate more to compete better. The aim is to give members of both organisations a better service. It will be up to the members of both organisations to decide whether the merger is in their best interest or not, but the advantages of such a merger are there for anyone to see.

Why is the FOI concerned about proposals to integrate the Medicines Authority within the Malta Standards Authority?
The fact that the Medicines Authority in Malta, similar to the situation in other European countries, is distinct and autonomous raises the international perception of the Authority’s strength and reputation. How this Authority is viewed by the European agencies is crucial to this business and ultimately can play a strong role on the resultant confidence level established with these authorities. Thus, intrinsically linked to this autonomy is the credibility of the Malta-based pharmaceutical manufacturing sector.
The FOI feels that the credibility that Malta has gained by operating within an EU regulatory framework and under the control of an independent credible regulatory authority is already showing benefits to Malta’s international standing, resulting that more companies are interested in investing in Malta and those already present are experiencing real opportunities for growth.
Indeed, the experiences of FOI members with various other foreign authorities indicates that such a loss of autonomy on the part of the Medicines Authority would be dimly viewed, both by the European Medicines Agency and other medicines agencies with which, Europe has a mutual recognition agreement; this could ultimately result in extra costs related to increased external audits by these authorities, as well as longer lead times to be assigned a marketing authorization.
Moreover, with the Malta National Laboratories also being integrated within the Malta Standards Authority (MSA), the reputation of the Medicines Authority in view of its GMP inspections and certifications of laboratories providing crucial analytical testing services to the pharmaceutical manufacturing sector, may be also put to question, should the Medicines Authority be integrated into the same Authority (MSA).

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