Budget speech nod to The Times interview

I found last week’s interview in The Times Business with the heads of three leading manufacturing companies disturbing as well as provocative. Coming days before the presentation of the Estimates of Income and Expenditure for 2012, it made me wonder whether the Finance Minister would react in his Budget Speech and, if so, how.

If Malta wanted to attract new investment, it had to identify ways to restore competitiveness- Lino Spiteri

I found the thrust of the interview disturbing because it posited that new investment by those mature companies was being discouraged by circumstance, though surely not by intent. Since economic growth depends on investment that was a picture the authorities have to react to. Thursday’s tri-interview is worth summarising as a background to Monday’s Budget speech.

The three CEOs, all completely apolitical, concentrated on decreasing competitiveness, constant piling of unrealistic costs, and a lack of specific focus on the manufacturing sector. Their plants have been operating in Malta for decades. They are committed to the country but prohibitive rents for office space and shop floors, the proposed service charge, and escalating utility rates are stripping Malta’s business case of competitiveness.

They recently wanted to expand and employ more people. Their projects stalled. Forty years ago, the main priority was job creation. “Now the priority for the government seems to be how many costs it can pile on us.” The proposed service charge on factories was of common concern. Why talk of that now, when electricity, rent, transport, labour, and raw materials costs are going up? There could be a slow retreat (by the companies) eventually.

The executives recalled the government’s crucial support in 2009 when orders slowed. Now an opportunity existed for all stakeholders to nurture the sector into a powerhouse for Malta. If business development and the identification of new customers stalled now, a disaster could be on the cards in the short-term.

One of the companies recently sought to establish a showcase plant on the island. A basic agreement was reached with the government but the costs turned out to be prohibitive. This year the group will witness growth of more than 15 per cent but little will come out of Malta because of lack of competitiveness.

Facilities in Bulebel (Malta’s main industrial centre) are falling apart. A company considered building a new factory. The government pledged its support, but the new rent would rise to €1 million and the electricity bill has increased by €1 million. Now the government is talking about a service charge which is unrealistic. Customers will direct business to our other plants where costs are lower.

Another executive said the Malta plant could end up paying up to double what its 17 sister plants around the world pay for electricity (five per cent of costs) when all the subsidies are eventually removed. When a decision was taken to build a new factory alongside the existing one, the rent for 2,500 square metres would have turned out to be higher than what the company was paying for 20,000 square metres. Operations moved back into Sweden and some were channelled into Poland. High electricity costs eat into the labour cost advantage.

The electricity issue was not going to be solved quickly or easily. The feed-in tariffs on energy put back into the grid by green solutions resulted in a payback of up to eight years, too long-drawn to be attractive to the group’s board. The company had invested heavily in equipment for a plant rebuilt by the government. Now the authorities were seeking to put a value on the land when it had been specifically earmarked for the creation of jobs, and no other purpose. It was the manufacturing players who had created the existing infrastructure. The three manufacturers give work to a supply chain of many small businesses.

“We need quick decision-making because we need to finalise business plans. We are being taken for granted. It does not mean we will leave Malta, but we will not grow, and if we do not grow, we move backwards. Much of the new business which comes to Malta comes partly thanks to the testimonials of the longer established companies. New investors would rather listen to entrepreneurs and learn of their experience of the country.”

The industry leaders said it was important to ask whether the factors which attracted these three major players to the country in the first place still existed. If Malta wanted to attract new investment, it had to identify ways to restore competitiveness.

The Finance Minister nodded towards the concern about the service charge in his Budget speech, but showed no commitment to withdraw the proposal. He did not refer to new high industrial rents, or elaborate on electricity rates and other factors impacting on competitiveness. He implicitly contradicted the assertion that Bulebel was falling apart.

The minister was full of good intentions, but pronounced little that is definite, and no timeframes to that little. He intends to continue to dialogue with business representatives, which is good. Before his votes come up for discussion, seeing that they cover the whole economy, including industry, he might do worse than find time to re-read The Times Business interview in detail.

It is right that measures are taken to attract gaming and financial services. But new, rejuvenating and expanding investment in manufacturing, which has been declining, as well as in tourism, is a must.