Issue link: https://maltatoday.uberflip.com/i/1075590
17 maltatoday | SUNDAY • 27 JANUARY 2019 INTERVIEW might not be a perfect analogy, but I think it captures the es- sence of what is happening… If I may pre-empt objections to that analogy (by the people in the driver's seat): while the 'car' was old and cranky when we started out… it has been upgraded continuously ever since. Institutionally speaking, Malta in 2019 is not quite the same thing as Malta in 1964… We have upgraded the car, yes, but we are going faster and faster. The upgrades have not been enough to cope with the acceleration. Let me give you one concrete example. There is a strange disconnect between our economic growth rates, and the results we get in the World Bank's 'Ease of Doing Business' survey. It's as though we're about two differ- ent countries. You'd expect a country that can achieve these growth rates, to also be in the Top 25 in that list. But we come in very low [Note: Malta is currently ranked at 84 out of 190 countries]. Some of that is admittedly due to communication issues. For instance, one of the sur- vey questions might be: 'How long does it take for an indus- trial warehouse to be granted a permit in your capital city?' In- evitably [because our capital is a World Heritage Site] the an- swer for Malta is either 'not ap- plicable', or 'never'. As a result, we lose a lot of points in the rankings; because the World Bank uses an algorithmic ap- proach that makes a lot of sense for most countries… but which sometimes hits snags in excep- tional cases. But apart from factors such as these, there are also indications that we make things unnecessarily difficult for ourselves. There are still a number of delays in setting up a business locally. To be fair, the situation has improved quite a lot re- cently, especially with 'Business First' having been set up to pro- vide a one-stop shop. But it's still an uphill struggle. From that point of view: yes, my feel- ing sometimes is that we do follow the 'Brussels approach' a bit too closely: requesting all sorts of extra paperwork that isn't really unnecessary… Yet there are other areas where Malta actively resists the Brussels approach: and one which has direct relevance to the local economy is tax harmonisation. How serious is this threat in reality? It depends: how seriously is the EU committed to tax har- monisation? I have my doubts. When push comes to shove, Malta might find it has more allies in Europe than many people seem to think. But there Is another aspect: up to a point, your question implies that foreign investment is di- rectly and exclusively linked to taxation concerns. I have my doubts about that, too. Let's be frank: just offer- ing low tax rates, on its own, would not have created the economic miracle that is Mal- ta today. Other countries also offer low tax, but they are not growing at the same rate as Malta. You also have to offer a functioning infrastructure, a labour model that works… it's a whole package, and tax is only part of it. Another consideration is that, while you might succeed in attracting foreign companies through attractive taxation re- gimes… it doesn't follow that, if the tax incentive disappears, the companies would automat- ically just up and leave. They would have established an en- tire network of relations here; logistically, it might still be convenient for them to stay. It is simplistic to think that there is 'one thing' that sustains eve- rything; the reality is more complex than that… Perhaps, but companies do 'up and leave' from time to time… even the fact that so many chose to come here, implies that they left other tax jurisdictions. What happened once, can surely happen again… True, but even their deci- sion to leave might have been prompted by more than just tax concerns. Our own past experience suggests this. Our first opening to the world economy did not happen yes- terday, or the day before: it be- gan to happen towards the end of the 1950s… even before In- dependence. A policy decision was taken – and it was retained by all future governments, in- cluding the Colonial ones – to create a long-term alternative to emigration: which, by that time, everyone could see was not a satisfactory solution to Malta's employment issues. So in 1958, Malta adopted the first legislation that offered certain tax concessions – 'tax holidays', they called them at the time – by exempting raw materials, if intended for re- export, from any duties. That made it possible for the State to subsidise factory space: given that foreign investors prefer to invest in equipment, than in stone. And it worked: Malta Rubber, Dowty, and lat- er Trelleborg… those invest- ments weren't made yester- day. They started happening in 1959. And most of the major companies which came at the time, are still here today. Some of them do things that many Maltese might think aren't even possible: like exporting industrial products to South- east Asia, for instance. […] Then, in the early 1970s, some things happened that were bad for Europe, but good for us. The price of steel shot through the roof; the cost of labour in the metal trade also skyrocketed; and a lot of Eu- ropean companies – especially German ones – started look- ing elsewhere. But their mar- ket was still Europe, so they couldn't look too far away. Besides, some had bad experi- ences in certain third coun- tries; so what they wanted was somewhere on the periphery of Europe, where they could do business without (among other things) language barriers. We were lucky in that we speak English… and for this reason alone, I think we should keep it that way. But by 1979, there had been waves upon waves of foreign companies setting up locally… and over the years, we always retained the more important ones. In- cidentally, in around 1972/3, then Prime Minister Dom Mintoff had caused shock- waves by declaring that Malta would do away with certain tax concessions. He argued that, if foreign companies came here, it should only be to make profits. It was probably the first major, radical knock on the head for tax incentives in this country… yet nobody left. And little by little, the legislation passed by various governments (of both hues) to administer incentives got in- creasingly watered down. To some extent, today's situation is nothing like what it used to be. But I don't recall anyone leaving because of that… Malta may have successfully kept all those companies here… but at what cost? Doesn't Malta's economic model also expose us to the risk of corporate blackmail? I don't think our model is anything to be ashamed of; unless, that is, we want to go back to the days of going to Sicily to buy basic goods. I'd like to think those times are firmly over. But ultimately, the situation you describe is the simple cost of survival. Malta is not unique in this regard, either. I've worked most of my life in MDC, formerly Malta Enterprise… and I can assure you that a lot of the recent in- vestment that came in, did not come in because of taxation… nor were we blackmailed into giving them everything they wanted or required. There were negotiations, naturally. But it's not always under du- ress. Having said this, when an election comes along… well, these are big players, and they will do their best to play around. You can't be too soft. But at the end of the day, they are here to make profits. We tend to forget that some- times… PHOTOGRAPHY BY JAMES BIANCHI