The European Regional Development Fund aims to provide support for investment in SMEs to create sustainable jobs, infrastructure linked to innovation, energy and transport and financial instruments to support local development as well as technical assistance.

On the other hand, the aim of the European Social Fund is to improve employment by promoting training, education and lifelong learning, enhancing social inclusion for job seekers and combating poverty.

Finally, the Cohesion Fund finances activities related to trans-European transport networks and the environment.

Cohesion policy is implemented through programmes that run for the duration of the EU seven-year budget cycle. The current programming period ends in 2013 and the new one starts in 2014 and stretches to 2020.

The most significant idea put forward by the European Commission for the new programming period is that of linking the allocation of funds to the Europe 2020 objectives. Malta received a total financial package of €776 million from the EU budget for cohesion policy.

Within this context, the Malta Business Bureau conducted a report with two major objectives. The first was to identify whether the private sector is a better alternative to the public sector to make use of EU structural funds to meet the country’s thematic objectives. The second objective of the report was to put forward recommendations for more efficient use of structural funds within a system that facilitates the take-up of EU funds by the private sector.

During the 2007-2013 programming period, the largest financial instruments benefiting the private sector were the ERDF funds managed by Malta Enterprise.

Businesses benefit from grants for start-ups, innovation actions, e-business development, research and development, energy and international competitiveness.

Other ERDF funds tapped by the private sector included grants for childcare facilities and sustainable tourism projects that were managed by the Department of Social Welfare Standards and the Tourism Sustainable Development Unit respectively.

Over and above these, private enterprises could benefit from the Jeremie initiative in the form of a loan guarantee scheme.

At the same time, ESF aid schemes offered private enterprise the opportunity to tap funds for the training of staff as well as the employment of disadvantaged persons.

Together, the schemes allocated for direct use by private enterprise amounted to about €70 million, accounting for about eight per cent of the total EU cohesion policy funds allocated for Malta for the current programming period.

The loss of Objective 1 status and the categorisation of Malta as a transition region adds to pressure on the Maltese Government to revise its strategy to concentrate future EU spending on priority areas to maximise the positive impact of such spending on the country’s economic development.

It is widely accepted that public investment can create favourable conditions for private investment. In fact, some studies show that the impact of business incentives would be weak in the absence of preconditions for exploiting the entire potential of such support. Therefore, investment in infrastructure, the upgrading of industrial parks and the expansion of educational institutions (particularly Mcast and the University of Malta), among other projects carried out during the current programming period, are all welcomed by the private sector as these may improve the productivity of private investment and, ultimately, result in economic growth.

However, at the same time, there are a number of reasons that lead us to believe that there are aspects related to the allocation of funds that could and should be improved such that funds are most beneficial to the private sector. For instance, the small market constraint of the Maltese economy necessitates that economic growth is mostly export-led. Such export-led growth can only be the result of further investment in/by the private sector.

Public investment can create favourable conditions for private investment

Another reason is that investment in the private sector yields high rates of economic growth.

Finally, boosting private investment when the economy is in distress is likely to have a significant and permanent positive impact on the country’s potential growth.

The way forward, therefore, is to enable the private sector to drive Malta’s growth, job creation and competitiveness. In this respect, the MBB report makes a number of recommendations.

First and foremost, the Government needs to ensure an efficient and sufficient allocation of structural funds that target areas which best meet the private sector’s investment needs. Estimates suggested in the report indicate that, in the 2014-2020 programming period, about €180-200 million should be allocated for direct use by the private sector. This figure is estimated on the assumption that the level of Maltese private sector investment as a percentage of GDP should converge with that of the EU-27.

On average, between 2007 and 2012, Maltese private sector investment as a percentage of GDP was around 3.2 per cent lower than that of the EU average. This figure should provide the right balance between reducing the gap with the EU average and ensuring sufficient demand from the private sector for the allocated funds. Such an allocation would avoid having to turn down eligible project proposals by private enterprise because they are outcompeted by other applicants.

A second recommendation is for continued public sector investment that enhances the country’s absorptive capacity without crowding out private investment and with due consideration to public-private partnership (PPP) opportunities.

This would ensure greater involvement by the private sector which typically leads to faster project completion rates, higher return on investment and enables risk sharing between the private and the public sector. In addition, PPPs offer a unique opportunity for the Government to cut down its Budget deficit amid the challenges that it is facing.

The third recommendation calls to ensure adequate access to finance.

Malta’s only financial engineering instrument (FEI) to date was the Jeremie scheme, used for purposes of investments and capital expenditures undertaken by a wide spectrum of industries. This proved to be a big success in terms of take-up, effectiveness and efficiency.

On the basis of this success, there is potential scope to allocate more funds to support FEIs. Preliminary estimates suggest that as much as €20-25 million of ERDF funds would be necessary to meet the demand over the next programming period.

Other recommendations call for the Government to entrust private sector non-profit intermediaries with the implementation and management of part of the structural funds allocated to Malta, also referred to as “global grants”; increased support for businesses with export potential to tap foreign markets; investor readiness programmes; improved institutional quality, elimination of bottlenecks and reduction in delays of reimbursements.

The MBB report was recently presented to the Government as part of the public consultation that was launched with stakeholders in view of the 2014-2020 programming period.

The full report – Allocation of EU Funds in Aid of Private Enterprise: Programming Period 2014-2020 – can be downloaded from www.mbb.org.mt.

president@mbb.org.mt

George Vella is president of the Malta Business Bureau.