Companies facing uncomfortable choices

Several companies are mulling over the unenviable choice between reducing profit margins, putting up their prices or shedding workers, a week after the cost of water and electricity was raised dramatically in the budget.

With the surcharge now standing at 55 per cent, plus an additional mark-up of 1.1 per cent coming in from January, companies' costs have shot up in line with the cost of generating power due to rising oil prices.

Several companies contacted by The Times yesterday described the Lm21,000 capping on the surcharge for industry as a futile initiative which would benefit no more than a handful of firms.

Saint James Hospital managing director Josie Muscat said his organisation was facing an overwhelming yearly increase of Lm50,000 in its costs.

"Most of us will have to raise prices or slash costs... and if we cut costs, isn't it the workers who will ultimately suffer? I'm going to put a gun to my head," a frustrated Dr Muscat said.

He envisaged that the surcharge would inevitably have a ripple effect and could lead to redundancies in various sectors.

Malta Employers' Association director general Joe Farrugia said the real effect of the surcharge hike depended on several factors, especially the elasticity of demand. Among other things, operators would have to analyse whether the competition is coming from overseas or from Malta.

"Companies are currently weighing whether they can factor in the surcharge in the form of higher prices and, if they did so, could it risk driving them out of the market," Mr Farrugia said.

Ultimately, he said, companies would need to reduce profit margins, charge higher prices or shed workers, an opinion reflected by those contacted. Manufacturing companies which use heating were dealt a particularly heavy blow in their operating costs, especially laundry companies.

Federation of Industry director general Wilfred Kenely believes that anybody who has the opportunity to increase retail prices will do so.

"But a lot of companies are not in a comfortable position to increase prices, and there are others whose prices are dictated by the market. In the meantime, most export companies will have to absorb costs," Mr Kenely said.

Consolidated Biscuits managing director Joe Pace confirmed that the surcharge would deal a heavy blow to the company's exports, adding that it could potentially drive several companies out of business.

He said employers had been slapped twice on the face with the surcharge and the weekly 50c cost of living compensation. The measures would mean an additional yearly cost of Lm20,000 for Consolidated Biscuits.

He described as "ludicrous" the Lm21,000 cap, saying that all companies which received a yearly bill under Lm38,000 would still have to foot the entire surcharge.

"Ultimately, the surcharge will affect all small and medium sized enterprises - which gives a rather contradictory message," Mr Pace said.

Joe Preca, managing director of the Preluna Hotel, said his company would be dealt a Lm14,500 yearly blow as a result of the surcharge.

Mr Preca explained that the majority of hotels had fixed contracts until October 2006, which meant prices could not be passed on to clients.

"Our industry is already suffering from low profit margins and companies on the borderline will face huge problems," he envisaged.

In a bid to cushion the impact, the Preluna has introduced a reverse osmosis system and a Power Factor Corrector, which reduces energy, saving up to 10 per cent of the cost.

The Shopwise Group, which owns Sliema's Tower Supermarket, has invested in the same system plus energy saving tubes in the underground car park but director Philip Borg believes this is just a drop in the ocean of expenses.

Mr Borg claimed his group was facing a yearly Lm40,000 bill, Lm12,000 alone on the Sliema outlet, which requires a large amount of electricity to run.

Supermarkets were faced with the same dilemma as suppliers, who were confronted with the same escalating costs because of transportation and refrigeration.

"As much as I try to leave my prices unchanged, I'm bound to feel the pinch from suppliers. Discounted prices might need to go up, but we also have to remain competitive. It's such a struggle," Mr Borg said.

The managing director of a major manufacturing company operating in the plastics sector said a decision has been taken to increase prices by 10 per cent.

"Apart from the surcharge, we've had an increase in the price of raw materials because of the oil increase - we now have an additional yearly bill of Lm30,000," said the managing director, who preferred to remain anonymous.

He said his company was operating on a shoestring profit, and the noose was tightening with the emergence of China.

He accused the government of setting a dangerous precedent by factoring in a 50c-a-week compensation to make up for the surcharge.

"We're assuming the government knows what it's doing," he added.