The financials

Every government of this country has argued that where job-creating investment is concerned it is the government's role to facilitate that investment. Hence, all governments have practised a policy which rents out factories, office spaces and land for hotels for peanuts as long as these generate investment and jobs.

Applying those criteria to SmartCity, given that Tecom are investing $300 million and guaranteeing to generate 5,600 jobs, the ICT and commercial areas should attract no premium and a nominal ground-rent. It should be said that the 5,600-job commitment is also associated with unprecedented provisions on penalties in case of failure. We stuck to that policy line because it makes sense for a country like Malta. Since a good 75 per cent of the gross built-up areas in SmartCity will generate jobs (ICT and media offices, hospitality and entertainment), this policy would have meant that the government could not expect any return from the investment and instead be satisfied, as it should be, with the employment generated; after all that employment will generate Lm12.5 million annually in taxes, not to mention the revenue that will be raised from corporate taxation.

The government also argued that this is a long-term investment that is not aimed solely at generating revenue for its coffers but also aims to leverage the economic transformation of Malta. Technology is the future and if we do manage to establish ourselves as a primary ICT location in the EU, SmartCity will take us a long way in upgrading our economic profile. That is why we also looked at the project from a visionary perspective and kept part of the equity rather than claimed a high ground rent. Ground rent may help the nation's recurrent financial position (in the short term) but will do little to keep the government as an active player in the project.

This is the reasoning that led us to take a nine per cent equity stake in the project (totally financed by Tecom) and go for a nominal ground rent. We preferred the long-term and the strategic role to the short term, certain that in time dividends will come our way that will by far exceed what we would have received by way of ground rent. We wanted a seat where the decisions will be taken - on the board of directors of SmartCity.

To all practical terms, Tecom are paying $30 million as a premium: $20 million to finance the government's share of equity and $10 million in investment in public spaces. Certainly nothing to be sniffed at considering that the gross built up area for lodging will be about 70,000 square metres of floor space.

In my view, what is actually more important is the method with which we have structured the investment. The government's nine per cent share is paid up by Tecom with that payment covering any increases in paid-up share capital up to $220 million. In the extremely unlikely event that the company is capitalised higher than that, the government has pre-emption rights on new share issues, obviously using its own money. In simple words, the nine per cent is there to stay and going by the Dubai experience it should also reap dividends.

One of the problems with this type of investment is the gearing ratio adopted by the investor: How much will come from the banks (usually leveraged on the land itself) and how much from the shareholders. In this case the answer is that Tecom has agreed that by the 14th year of the project (the contracted date for completion) the minimum paid-up share capital will be $100 million or 33 per cent of the minimum projected investment.

With all these parameters in place motivating the investment, we did not feel we should go for a high ground rent. It did not make sense once we were holding equity and the lost income was being indirectly provided for both from new tax income coming from employment (Lm12.5 million yearly), corporate taxation as well as from future dividends.

Of course, there will be those who will argue otherwise and second guess a deal on grounds that they would have done things differently. It is mostly a choice that needs to be made and we believe ours to be the best serving of the national interest and the choice that will allow our children to exploit their potential in SmartCity.

The agreement provides for the transfer of the title to third parties as well as for the redemption of ground rents. These provisions are in line with what has already been negotiated in other major developments such as MIDI, Valletta Waterfront and others.

However, in this case we have also ensured that notwithstanding any transfers Tecom will remain responsible for the completion of a building or phase as well as for the relevant portion of the employment obligation and any relative penalty associated with it. Similarly, redemption of ground rents may only take place if all ICT-related buildings in the phase in question are completed. Obviously, public areas are not transferable.

In this series of articles I have attempted to give an overview of the principal agreements reached. I have left out the final detail but very soon the Maltese public will have access to all the documentation and may see for itself what has been agreed to.

I believe we have struck a good deal that serves our national interest and economy, not merely because it is financially sound but because a financially-sound deal has been used to create part of our future in a Europe that will henceforth look at Malta as the centre of ICT excellence of the European Union.

Dr Gatt is Minister of Investments and IT.

Concluded