Issue link: https://maltatoday.uberflip.com/i/1418273
9 maltatoday | SUNDAY • 10 OCTOBER 2021 INTERVIEW All the same, it would be inter- esting to have an actual value. You mentioned that there are 'cost-evaluation techniques': what sort of techniques would apply to this scenario? If you don't mind a quick digres- sion to explain: a former student of mine has undertaken a valua- tion project applied to Pretty Bay in Birzebbugia. The idea was to try and quantify the value of the bay itself: not the combined val- ue of the surrounding proper- ty; but rather, how much of the surroundings themselves - the beach, the view, etc. – contribut- ed to that value. Let's say, for example, that a seafront apartment, with a nice view, will sell on the market for 1 million euros. Naturally, the view will have contributed to that value; and one simple way to find out how much, would be to find a similar property without the same view, and compare the dif- ference. If it's, for argument's sake, half a million… then you can value the view of Pretty Bay at approxi- mately E500,000. But I stress 'ap- proximately', because it can nev- er really be 100% accurate. The project also featured a sur- vey asking people of that locality – and also visitors – how much they would be willing to pay for access, if the beach were to be privatised. And there were a lot of other such measurements used. In any case: on that basis, there is the possibility that if the beach were to be degraded and lose its appeal, Malta would lose as much value as if the Freeport were to close down… If I'm understanding correctly: a similar exercise could be carried out to quantify how much the the construction industry COSTS the Maltese economy… rather than how much money it pumps into it… Yes, it could. And again, some of the expenses are already known. For example, each time a new apartment block, or high-rise building, goes up, anywhere on the island… it will most probably be blocking such a view for many other properties in that area, and reducing their value. These are costs which affect property owners directly. And yet we never factor in that loss – the quantifiable drop in price of these properties – when it comes to evaluating how much construc- tion really contributes. Besides: there are other good reasons to want to diversify away from the construction indus- try, as an economic motor. An- other aspect that we don't talk about enough is the risk of an oversupply: which, if it happens, would result in dramatic losses, in terms of property value, across the board… Excuse me for interrupting, but there has been talk of the 'prop- erty bubble bursting' for years now: but every time the issue has been raised, we are always assured (mostly by property ne- gotiators) that 'it will never hap- pen'… It hasn't happened yet, true; but that doesn't mean it can't happen at all. It has already happened in other countries like Ireland, Spain… and if we carry on the rate we're going, I see no reason why it can't happen here. In fact, there may even be indications that it has already started… One thing to bear in mind, however is that the housing sec- tor is quite exceptional, in some respects. If, for instance, there is an oversupply of perishable items – like fish, fruit and veg, and so on – the price will au- tomatically drop the next day. Non-perishable things like con- struction, on the other hand, don't have that effect. The price will not plummet from one day to the next; the market will con- tinue to operate, with prices af- fected by demand and supply l… but at a slower rhythm and it may take years, even decades, for the effect of oversupply to be felt. But when it happens, we will not be able to cry over spilt milk. We have to start preparing for that eventuality, from now… You mention 'indications' that the bubble may already be bursting: like what? As an economist, I cannot but attach a lot of weight to the pos- sibility – possibility, please note - that we might have an oversup- ply. I can't say when it will hap- pen; but I can say is that certain indicators are already in place. First of all, the sheer number of development projects in the pipe- line: including all the new ones that are being approved now; and the ones being submitted for ap- proval as we speak. But there is also the concern – yet another 'cost' to be added to the list – with money-laundering. Today, with all the heightened scrutiny of Malta's financial sec- tor… many people are realising that it it may be better to have 'empty buildings', than to have lots of cash-in-hand. To 'invest in stone', so to speak. So it's per- fectly possible that a developer would invest his profits in more buildings… rather than depos- iting them in the bank: and, in a nutshell, 'uncovering his ass'… Construction is, in fact, often regarded as simply another 'stor- age for wealth'; and I assume that this is another reason the Finance Minister might be keen on diver- sifying. Then, there's the issue of the banks. It is not exactly a secret that some contractors are up to their eyeballs in debt. As is well known, many IMF reports on Malta say that 'Malta's banking sector is at risk'. Why? Because it has too much debt tied in with the construction sector. Although measures have been taken to reduce this major risk - which is big enough to sound in- ternational warnings - the bank's dependence on the sector is still high, even though it sector itself generates its own funds. Fortu- nately the banks themselves are now doing everything in their power, to diversify away from property. But for the present, they are still exposed to those risks. And that is a factor that has to also be included in the cal- culation… And lastly, there is also the issue of… let's call it, 'bad behaviour'. You mean it gets worse? That there's more 'bad behaviour' than what you've already men- tioned: money laundering, banks exposed to risk, etc? To be fair, I've mentioned most of it already. It's the same 'social cost' Minister Caruana alluded to in that statement – the dust, the noise, etc. But it goes beyond all the arrogance of blocking roads, and simply inconveniencing everyone. Because let's face it: the con- struction industry has a very bad reputation. So bad, in fact that… let's just say, nobody really trusts the system anymore. When the PA dishes out permits, there is always suspicion of foul play… and let's be clear about this. It is not for nothing. Recently we even heard a well-known developer telling us that he 'consults with ministers'… and another com- plaining about political parties 'running after him for donations'. We all know what the situation really is. Meanwhile, if you ever try to complain to any contractors or developers, they get angry… they get threatening… you end up too scared to talk to them… There is, let's be honest, an au- ra of 'untouchability' around this sector. They can do whatever they like, and no one can do an- ything about it. And now, we are coming to the second generation. There is a new breed of younger contrac- tors rising through the ranks… and already, it looks as though they are going to be no different from their fathers. So this arro- gance, this 'untouchability', is be- ing inherited, from generation to generation… Now: admittedly, this part of the 'cost' is very difficult to quan- tify. But it is a cost all the same: and it is measured by its impact on the rule of law. Because when one contractor sees another breaking the law with impunity… he is going to reason that he can do the same himself. And this is precisely what is happening: a culture has set in, that it is possible to inflict damage on the rest of society… real damage… and keep getting away with it, every time. In brief, construction has a large, let's say social and environ- mental cost; and that expense has to be included in the net contri- bution of the construction sector as a whole. And something tells me that, if it were to be actual- ly quantified… we may discover that construction actually costs this country a lot more than it contributes.