Investment incentives

How can we attract investment if the EU does not let us offer investment incentives?

It is not true that the EU would not let us offer incentives to attract investment.

Incentives for investment are available in other EU countries and there is no reason why they should no longer be available in Malta if it joins the EU.

What the EU does is regulate state aid which is granted by way of investment incentive. In other words, it does not permit unlimited aid. But it does allow aid to be granted under certain conditions.

We usually refer to state aid as "subsidies" which are direct grants. But of course, state aid can take other forms, such as tax exemptions or soft loans.

We also have the impression that state aid is only paid to state-owned companies - which again is not the case. State aid is often included in a state assistance package that seeks to attract new investment.

Malta has traditionally relied on tax incentives largely because these do not involve a cash hand-out but a tax revenue that is relinquished by the government in favour of the company that invests in our country.

Strictly speaking, state aid can distort competition because it gives an unfair advantage to those companies that are subsidised at the expense of others that are not. This is why there are EU rules that apply to regulate state aid.

But this is not to say that all state aid and all subsidies are prohibited. The EU acknowledges that state aid should be allowed if it gives the necessary impetus for particular problems to be addressed, for particular businesses to be promoted or for the economy of less-developed areas or countries to be assisted.

As a result, EU rules make allowance for state aid that supports wide-ranging objectives, such as aid to promote investment, job-creation, training, restructuring, environmental improvement or research and development.

EU rules also allow for more flexibility when the beneficiaries of the state aid or incentives are small businesses. Moreover, in certain countries or regions, such as Malta, with a lower level of economic development than the EU average, the flexibility goes up one or two notches higher.

It is therefore wrong to conclude, as some have done, that Malta cannot offer state aid or incentives to attract foreign investment if it joins the EU. Indeed, EU rules on state aid would apply to us irrespective of whether Malta joins the EU or opts for a free trade arrangement. This was made abundantly clear by the EU in its February 1998 communication to the Maltese government, which at the time was not pursuing membership.

But because EU rules regulate state aid, it is clear that aid is only allowed if it is compatible with these rules.

During negotiations, Malta wanted to ascertain that the state aid granted under the former Industrial Development Act to companies that invested in Malta could continue to be allowed even after membership. As a result, it was agreed that state aid that has already been granted to small businesses would continue to be allowed until expiry in 2011.

In some limited cases that involve larger companies, the aid must be converted so that it could be considered as justifiable under EU rules. This would allow the aid to be quantified and capped.

In practice, however, the amount of aid involved from which the companies involved benefit should not change.

It is important to note that besides giving continued legal certainty to existing state aid, this arrangement allows these companies to benefit from other incentives in future, such as support for new investment or for training, as the case may be.

The Industrial Development Act has now been superseded by the new Business Promotion Act (BPA). This new law introduces new incentive schemes to support Malta's economic development taking into account the country's specific handicaps, such as its island status and its geographic location away from mainland Europe.

The law also extends incentives to enterprises engaged in business that was not previously eligible for assistance. However, it removed previous incentives, in particular export-related incentives, that are blacklisted under EU and WTO rules.

During negotiations, Malta again sought assurance that the new incentives under this new law are compatible with EU rules on state aid. As a result, it was agreed that support schemes under the BPA that assist investment through incentives such as soft loans, interest subsidies and investment tax credits are in line with EU rules.

On the other hand, operating aid in the form of reduced income tax and the value added scheme posed a problem because they went beyond allowable limits.

Malta argued that operating aid was necessary to offset the disadvantages that arise from Malta's island status and the additional transport costs incurred by companies investing in Malta. The EU accepted this point and it was agreed that this operating aid can continue to be made available until 2008.

Of course, state aid can only be one of the factors to encourage enterprises to invest in Malta. Other factors include the skills of our work force, our telecommunications infrastructure, our geographic location and even our language skills.

But EU membership itself is also often listed as a factor that attracts investment. This is readily acknowledged, not just by EU countries themselves, but also by international credit rating agencies.

For one thing, the EU often supplements state aid incentives provided by individual governments with generous funding of its own. But more than that, EU membership gives legal certainty - unparalleled in other arrangements - that the company would have guaranteed access to the EU market of four hundred million consumers. After all, without a guaranteed market, there is little scope to invest in the first place.