The Malta Independent 20 August 2019, Tuesday

Financing a much-needed new road infrastructure

Thursday, 13 October 2016, 09:38 Last update: about 4 years ago

Angelo Xuereb, chairperson of AX Holdings Limited, who for more than a decade has been arguing in favour of an underground system aimed at addressing better the increasingly worrying traffic issues, has recently reiterated his plea in this direction.

During the initial stages of the present administration there was also talk on the possibility of a monorail. Additionally, discussions started picking up on initiatives towards better connectivity between our two main islands and the need to study all possibilities in depth.

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The indications are that it is far from easy to see a healthy consensus being reached on a long-term holistic plan, which responds adequately to the needs of present and future generations and has the guarantee of an intelligent implementation by successive administrations, irrespective of which political party is in power.

The partial solutions we have today are the Kappara project and the Marsa project which may potentially have a number of not so welcome effects and therefore may prove to be less than we are hoping for vis-à-vis the long-term solution that we all look forward to. It would appear that Malta needs to rethink the way the country addresses the on-going needs of certain aspects of the national infrastructure. 

We must, for instance, think more of solutions away from direct government reliance and the problems this approach foments mainly due to political differences and the big headache of bureaucracy. The most developed countries have all moved away from governments spearheading such infrastructural initiatives.  They had a very good reason for doing so. They understood that, especially in today's world, governments are there to give direction and not to implement everything themselves. Malta is moving in this direction, but its pace in doing so could be much faster.

The sukuk approach

A good and efficient road infrastructure would surely have its good benefits also with regard to the country's efforts to attract more private investment. The example of Dubai is a case in point.

Prime Minister Dr Joseph Muscat stated that Malta can be like Dubai. Yet, so far, in Malta's case the "Dubai direction" was exclusively that of high rise buildings, which probably is not exactly what the Prime Minister had in mind.

Dubai was nothing but a desert. However, it had a visionary leader who used intelligent and effective financing mechanisms to build the hub we all talk about today. He did not have a magic wand. He did not have unlimited oil reserves and the country's economy had no other significant revenue channels. The vision, however, was there. It included a plan on how to finance all the required infrastructure. It all boiled down to one word: sukuk.

Many think of sukuk as if it were a bond or rather an Islamic bond. However, it is not a bond.  I would associate it more to an asset-based equity or quasi equity mechanism. 

Although the mechanism follows Islamic principles and is therefore limited in what areas it can invest, it certainly would not have any issues with road infrastructure projects. Indeed, a few years back an interest emerged in the possibility of structuring a mechanism to finance the Gozo Tunnel project.

From a political perspective, the sukuk approach may not be very attractive due to certain popular feelings. However, one needs to keep in mind that sukuk has nothing to do with religion but is a system of finance based on certain principles.

Another issue could be the perception that with sukuk the roads may be privately owned.  People might think that Malta will be having road tolls or a similar revenue generation system.

Obviously, the project would need to finance itself and the private venture must therefore have some sort of revenue generation. However, certain patterns in this direction are already in operation.

If one takes the example of the transport system between Malta and Gozo, one would immediately see that:  a) Maltese and Gozitans already pay for their trips between the islands; b) the State supports financially the ferry service and c) government will eventually, perhaps shortly, need to finance a new fleet of vessels for the Gozo Channel.

With these three factors in mind then one may see how a substantial part of the Malta-Gozo tunnel project may initially be financed. Moreover, if properly managed, such a project should help to increase economic activity between the two islands, which in itself would allow for better tariffs as the economy prospers. 

Additionally, the venture may be exempt from tax given its social and economic benefits.

Certain financial institutions in Malta might lobby to see government itself engaging into the project and financing it through bond issues, which would obviously be in their financial interest. However, following such approach might mean that Malta would have to face certain EU concerns over and above the national debt issues.

Luxembourg, an EU member state in the Eurozone circumvented all this through the issuance of a sukuk structured in a way which responds properly to all EU-related affairs and general public perceptions. The country issued the first ever sovereign sukuk in euro currency. If tiny Luxembourg managed to do all this with success, Malta could surely move on in the same direction. 

The Luxembourg example is not the only one. London did the same thing although in the wake of Brexit it may not be the best of examples. Moreover, a region in Germany, Saxony Anhalt, introduced the first ever euro-denominated sukuk in the world.

The Labour Party in government referred to sukuk in one of its initial budgets. However, no further reference was made in the following budgets.

Perhaps following the fresh study that has been announced on the Gozo tunnel idea, government will open itself to consider this mechanism. This may also coincide with the apparent upcoming changes in the financial services sector in Malta.

Such a move could also boost other economic activities because the Maltese government would be giving a strong message to the Islamic Finance World that it is open for business. It would also assist the valid work that the Malta Stock Exchange is doing and contribute to boosting the stock exchange. A sovereign sukuk issuance would certainly start a new era for projects in Malta without the need of total reliance on EU mercy and on straining national finances. The opportunity is there to be taken.


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