The Chamber of Commerce is about to embark on a silent campaign with European counterparts and authorities to allow the same treatment to all islands irrespective of whether they are regions or states. Last year, the chamber commissioned a team of renowned expert consultants to research the matter objectively and scientifically and to produce a study which could be presented to the pertinent authorities in advance of the review.

The study is now complete and quantifies the added costs in-curred by operators in remote, small-island states. It also highlights certain inconsistencies in the treatment of various peripheral and island regions and states by the EU in its state-aid regulations.  Most importantly, it proposes some constructive recommendations for resolving the current situation which penalises island member states.

The chamber believes that Europe must allow permanent compensatory measures that neutralise added costs incurred by businesses located in island states.  These are already allowed in all island regions, irrespective of their level of economic prosperity.

Whether an island is prosperous or not, if it is small, isolated and distant from the economic core of Europe, industrial operators in an island location will always incur added costs compared to those of the mainland.

Malta’s economy is resilient and dynamic, but its island conditions impose a high degree of open-ness and vulnerability. Suffice it to mention that the sum of our imports and exports typically exceeds 150 per cent of GDP.

The sustainability of our economic prosperity is, therefore, dependent on export-led activity in well-diversified sectors, including manufacturing.

In these circumstances, Malta must ensure it is export competitive. Our manufacturing companies have no option but to sell products outside our national confines. In doing so, we are hampered by economies of scale restrictions, which are further compounded by additional burdens like transport costs to ship raw materials in and the finished product back out to its intended market. Besides, economies of scale also come into play to increase costs in an indirect manner, for example, via the relative limitation of skills or the cost of water and energy.

We fear that further erosion of Malta’s limited cost advantages, together with the development that bars us from using state aid compensatory measures like investment tax credits, could lead to further investment loss, leading in turn to further deterioration in competitiveness.

Manufacturing decisions today are made on the basis of reason, not emotion

Manufacturing decisions today are made on the basis of reason, not emotion. Investment decisions are taken by people sitting in front of dashboards showing cost comparisons in various locations. We must safeguard our interests, because no one owes us a living, and decisions will be made in favour of regions that yield the highest returns. Due to our relative declining competitiveness, new product lines are being lost to other, more competitive locations.

If product lines go elsewhere, investment goes elsewhere, and the competitiveness of local factories declines even further.

A vast proportion of manufacturing in Malta is foreign owned, and the report we commissioned quantifies the risk of “back-shoring”, which is likely to occur when the factors for investment become less favourable and head offices may take decisions to relocate their plant or facility elsewhere to an alternative (typically lower-cost) location inside or outside of the EU.

A ‘liability of peripheral location’ materialises when managerial judgement on whether ‘to stay or to go’ can be affected gravely by a sudden quantum change in country-level incentives provided to firms. This liability of peripheral location should be assessed in particular against the backdrop of the EU policy objective of reaching 20 per cent manufacturing value added as a percentage of GDP.

The present (2015) EU average is 15 per cent, whereas Malta’s manufacturing sector represents only nine per cent of GDP (down from 22.4 per cent in 2000).

The main conclusion of the report we have commissioned based on research and in-depth interviews with industry CEOs is that the Maltese economy displays substantial vulnerability to potential relocation of economic activities involved in exports to other European countries.

The danger of back-shoring to hub locations is an unfortunate reality for many of the peripherally located economic activities involved. The potential effects of moves of Malta-based economic activities to better locations show that exports from Malta could drop by €451.3 million, or 19 per cent. This would reduce Malta’s GDP by 5.1 per cent. Clearly, this would not bode well for our future.

Our report goes on to make recommendations that fit with Europe’s own Industrial Renaissance objective of manufacturing contributing directly to 20 per cent of GDP in Europe by 2020. The recommendations also tie in with the general belief that the commission must seek a less inward-looking approach.

EU member states are often not competing against each other, but together and through the cross-border value chains we all contribute towards, we are competing as one strong economic bloc against another, something which the European Commission would do well to constantly remember.

We believe that EU-level and national policies should be engineered in such a way as to promote European industry as one whole value chain, with particular consideration for those countries that are small or on the periphery.  The policies should encourage (not discourage) these countries to provide their specialised contribution.

I am certain that we can safeguard the economic future of our industry and our islands if we find the full cooperation and support of the authorities and stakeholders through the necessary policies and actions. This will bring us back on the same level playing field, and we will recover the competitive ground that we have lost because of our location.

Our requests are merely for justice in terms of costs and equal treatment among islands.

Anton Borg is president of the Chamber of Commerce.

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