The Governor of the Central Bank, Josef Bonnici, has identified a number of models for the Development Bank being proposed by the government, stressing that it could impose a discipline on the repayment of capital expenditure.
“I have been looking at our financial infrastructure and we have a gap there if you compare what we have with Germany, France and Italy, for example.
“There are areas which take priority in terms of economic policy, such as environmental investment, SME funding and micro-investment where we basically have two sources of funding: either government borrows more and provides a programme; or the commercial banks provide a programme.
“Neither are the best sources for this kind of funding. As a public sector bank, the Development Bank would be able to develop specific programmes to fill this gap,” he told Times of Malta Business.
He explained that in Malta, the government is basically financing infrastructural projects through the deficit or debt, so the Development Bank could introduce more discipline.
“You have to look beyond the financing and remember that the interest and capital also have to be repaid, even if this is done over the longer term. Failure to do so leads to problems.”
He explained that assets could be transferred to the Development Bank which could then use them to generate revenue, which would reduce the need for government borrowing – driving down the debt in the process – as well as providing a stream of cash to pay off the loan.
“In Germany, for example, in the state of North Rhine–Westphalia, all the state housing stock has been passed on to its version of the Development Bank, NRW Bank, which funds the social housing sector not directly from the Budget but in a self-funding way, although it can still borrow with the government guarantee.
“There is a revolving fund, administered by NRW Bank, which is based on the housing stock of the state with payments received used to refinance new developments,” he said.
He also explained that a development bank would complement – rather than compete with – the activities of commercial banks, not just for state projects but even for private ones.
“There are projects that commercial banks are – quite rightly – hesitant to get involved in as they have constraints about the size of the loans and for other reasons. In Germany, the Development Bank complements commercial bank funding and therefore enables big infrastructural private sector developments.
“I think the concept of having this missing layer in the financial sector is an important one. The government and the Opposition accept this and their programmes have the same kind of proposal, basically,” Prof. Bonnici said.
He explained that the government will need to discuss this with the European Commission to ensure that it does not infringe state aid rules. It will then require specific legislation to be passed.
“Then it will probably need to consider what assets it is going to have – and I believe that there are many government assets that are underutilised.”