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Business in Malta: An integrated strategy - Interview with Jose Herrera

Malta Independent Thursday, 24 July 2014, 09:30 Last update: about 10 years ago

I start by asking, perhaps the obvious question, which is what is government currently doing to make Malta more competitive, and while the government is working in a number of areas, the key point that Dr Herrera, raises, to begin with is in promotion and branding. This is an innovative point to make and Dr Herrera is happy to explain that over the last few years a number of regulatory bodies have been created, such as MCA, Mita and the LGA. However, while “We had regulatory bodies we didn’t have promotional entities” such as FinanceMalta. Therefore government is implementing its Integrated Marketing Strategy. Understanding that a government needs to market its regulatory services and products to international business, it then makes sense to create marketing and representative bodies to support this. Which is to say, as Dr Herrera explained, that FinanceMalta will soon be joined by Gaming Malta, Property Malta and ICT Malta.

In the same spirit of “joined-up” and proactive government they are also developing the blue print for the Blue Economy, which will coordinate the efforts of all maritime initiatives. As the minister points out “Malta has always been recognised as a maritime centre, and the maritime sector currently contributes 14% of GDP”. So the Blue Economy strategy seeks to expand the overall contribution of the maritime sector to Malta’s economy overall. This strategy will see the development of a number of Malta-centred maritime products such as bunkering, yachting, ship registration and financial services in the maritime sphere.

However, the minister adds that government was aiming to expand the scope of the maritime sector from a juridical perspective. We currently offer corporate service. As Dr Herrera explains, Malta is “looking to expand the Malta Arbitration Centre and is also holding discussions to try to reintroduce Admiralty or Commercial courts.” (Admiralty and Commercial courts are specialist courts that deal more specifically with business and maritime affairs, often arbitrating on disputes, and generally operating with just a judge.) Why is this judicial upgrade so important? Well Malta has the “largest ship registration office in the whole of Europe” and is also a key player in financial services. We have tens of thousands of companies in Malta with foreign beneficiaries, therefore, have to upgrade our judicial instruments in this sphere of activity”.

Why do ships register in Malta? Apart from the best-on-planet expertise, explains Dr Herrera, there are a number of reasons. As a Maltese shipping group you aren’t limited in the number of extra-Europeans that can be employed. Then, even though you need to file your returns, they don’t need to be audited. There is also the cost since you only need to pay a tariff on the tonnage and so it is relatively cheap. Furthermore, the register is not seen as a flag of convenience and Malta’s legislation is fully compliant with the standards of the International Maritime Organisation. Finally, once registered Malta ships are then allowed to trade freely in Europe.

Dr Herrera also points out that the Global Investor Scheme is also making Malta more competitive by attracting more European investment and extra European investors. And for the benefit of traditional industries they are trying to “annihilate bureaucracy” in a number of ways. Malta Enterprise’s Business First initiative creates a one-stop-shop combining everything you need for planning, starting, running, expanding, and then closing a business. The new government also created a Commissioner for Simplification and Reduction of Bureaucracy.

Dr Herrera also mentions current initiatives to improve Malta’s telecommunications strategy, by “exploring means to improve our links to the Internet such as through Marseille as opposed to through Sicily”, since Malta is a banking, finance and a gaming hub and all these sectors rely on high-speed Internet access. Then there is the audio-visual part of the strategy. Currently Malta’s audio-vision content is not available for consumption globally by satellite: “In Malta you can watch Chinese TV, however, you can’t watch Maltese TV in China,” which is why the MCA recently published an expression of interest to attract investors to develop satellite uplink facilities.

In the case of E-commerce government’s approach is slightly different, now seeking to develop the online capability of Malta’s existing business to strengthen their presence online. This seems to be much in need, since, as Dr Herrera observes, “statistics show that only 39% of the [Maltese] retail industry is online while 61% are not”, yet “initial indicators show that e-commerce is being used by a majority of consumers” who are “opting to purchase abroad”. Indeed this is a problem faced by many traditional brick-and-mortar business whose clients are abandoning them for cheaper online stores which generally exploit advantageous tax loopholes.

This point ties into a story that The Malta Business Weekly covered in a recent edition, which is that while all firms in Malta pay the same level of tax, any firm that distributes a dividend to a non-Maltese entity can claim to have 6/7 of the corporate tax then reimbursed. This is a delicate matter: if there are two supermarkets, for example, one of which is owned locally, while the second is owned overseas, then while their operations and profits in all other ways may be the same, the foreign-owned supermarket can distribute a dividend and recover most of its taxes. Consequently the foreign-owned business can charge lower prices to earn the same profits. However, the other side of the coin is that having a tax regime that offers low taxes for offshore firms is absolutely essential for a country that sees itself as a business or finance hub, as Malta does.

When asked about this Dr Herrera is very open: “The current tax regime is fully compliant with EU law and it is a radical reform of the legal system existing a few years ago.” As the system stood a few years ago companies were only asked to pay 3.7% tax, however, the EU objected on the grounds that it was discriminatory against Maltese firms, “so we revamped the system so that everyone had to pay the same tax, however non-Maltese residents could claim the rebate. The financial services sector contributes 12% of GDP and gaming contributes another 12%. Any regime has its pros and cons which you have to weigh.” Dr Herrera points out that there are around 9,000 people employed in the gaming and finance sectors, all of whom earn upmarket salaries. The 7,000 foreign workers employed in the gaming sector buy upmarket accommodation, flood the restaurants of St Julian’s and Paceville.

Referring respectfully to a question posed to the Prime Minister, by an Opposition MP, at the recent Malta Business Weekly business breakfast, Dr Herrera recalls that the opposition MP “said Malta was always successful because it was one of the world’s avant-garde economies” adding that “You always have to be at the forefront of innovation to create new niches and from new niches come new industries… [he] asked what the next big thing would be [for Malta’s economy] and the PM gave a brilliant reply: it is logistics.”

Tourism and manufacturing were Malta’s niches in the 1970s and logistics will be one of our new niches for the 21st century explains Dr Herrera. “Why is the Freeport the fourth biggest in the EU? We are 4km from one of the busiest shipping lanes in the world and the Mediterranean carries 40% of world shipping.” So, blessed by geography Malta has a clear competitive advantage in terms of sea-based logistics. By expanding on this advantage Malta can create an e-commerce hub whereby it can operate as a base from which to sell goods to North Africa, for example.

By exploiting logistics, explains Dr Herrera, Malta can also strengthen its traditional manufacturing industries, which are still an important part of the economy. However, it has to be a redefined form of manufacturing, as they are doing in Germany, whereby products are essentially assembled in the particular EU country: “We can never compete with Asia manufacturing except for the fact that we are in the common market and don’t have to pay duties.” 

However, Freeport needs to be expanded, explains Dr Herrera, since it is currently reaching its limit, this year being set to handle around 2.8 million containers. Luckily, however, around the Freeport there is a lot of space and there is also the option of reclaiming land. Dr Herrera finishes by emphasising that the government is also looking to support new local businesses financially, using EU funds, through BOV and the Jeremie initiative. Dr Herrera explains that Malta Enterprise also has support schemes while the government is also exploring the possibility of crowd-funding, venture capital, and, working with Mita and the MCA to create new angel investment initiatives.

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