25 April - 1 May 2001
The Federation of Industry has a key role to play as Malta adapts to the changing economic market. FOI secretary general, Edwin Calleja, spoke to MIRIAM DUNN on EU accession, the fringe benefits controversy and other topical issues
The Federation of Industry was one of the social partners that criticised the fringe benefit controversy. What is the latest development on this issue and has the FOI changed its stand at all?
We have not been questioning the principle of fringe benefits and we understand that the government has to close off all avenues of tax evasion.
Our concern is the manner in which this has been done and the intensity of the regulations, which have even, in some instances, made procedures impractical. An example of this is how laborious it would be to keep a logbook of mileage done on business for petrol allowance purposes. We felt this was splitting hairs, and would have preferred simply to have a certain ceiling.
We also felt there were some anomalies; for example, at one stage we found that boats, which are rarely essential to a company, had greater benefits of depreciation than cars.
On top of this, I think the middle class is peeved about the taxation of fringe benefits because people feel they are over-taxed. After all, our rate of taxation stood at 36% - equivalent to GDP - at the beginning of the year, and this could well go up even more by the end of the year.
People have been doubly hit over two years, first by changes to the tax brackets and then with this higher rate of tax to fringe benefits.
Apart from this, the middle classes are very aware of the wasteful expenditure that has been taking place in the public sector over the past decades.
The FOI has long called for benchmarking in certain areas of public expenditure, where there is obvious waste, alongside the exercise planned for the private sector. Our view is that at a time when the finances of the country are really in trouble, the government should limit the increase of public expenditure to not more than the rate of inflation. This is a standard practice in other countries facing our situation.
The MCED has been criticised for being nothing more than a rubber stamp for the finance ministers policies. The minister has now described it as a melting pot for ideas. What is your own view of this forum?
Im pleased with the enhanced status the MCED had been granted by the government; it has come a long way from the days when it was a "coffee shop" for discussion.
I had always said that initially it was a good idea to have somewhere for the social partners to exchange ideas on the economy and social measures, but we soon realised that we needed to move beyond just talking about things, while the government continued on its own course. There were also some problems relating to insufficient financing and flexibility for studies to be undertaken at the MCED.
Our concern now is the way in which the legislative changes planned for the newly-named Malta Council for Social and Economic Development is being pushed through parliament, even though all the unions and employers organisations are unhappy about the fact that their proposals are not being taken on board.
We are hoping that the government will reconsider its legislative plans and also change its attitude.
After all, this is a tri-partite system and the rules by which we are going to play must, at least, be agreed between all three parties. The government imposing the rules by which we are all going to play is not the answer.
We would particularly like to see more active participation from the government representatives on the council. Up till now, they have not really participated at all in most of the debates we have held.
We would like to see the government representatives getting involved and giving clear indications about the line of policies rather than just sitting back and observing the debate between the unions and employers and then implementing decisions that are not acceptable to us. This is not the way to do things.
None of the social partners is attempting to take an executive or legislative role, but we firmly believe that opinions expressed by those involved in the MCED, especially when theyre mutually agreed upon by unions and employers, should be taken very seriously by government when it makes its decisions on the same matters.
On certain issues, unions and employers have traditionally been pitted against each other. In your view, is there now a sign that both sides have realised the way forward in the new economy is working together and finding solutions?
I believe that both the employers associations and the unions have certainly found that through the dialogue created at the MCED, we are understanding each other better.
Although we may have different methods of arriving at certain decisions, what is significant is that our ultimate objectives seem to be the same.
I think that the clashes we have with the unions are mostly due to decisions we have all arrived at where there is, perhaps, a lack of empirical evidence to support our opinions.
For example, if were discussing privatisation of certain public entities, its implications and perhaps the consequences of their over-manning and inefficiencies, everyone is trying to envisage the outcome, but without the facts and figures to support their line of argument.
I believe that the MCESD will, in the future, be a good melting pot to really get these ideas more into focus, through the gathering of evidence and economic studies which are badly needed.
If these are forthcoming, it will enable all the partners to thrash out the best way forward to improving the economy and increasing efficiency.
Many entrepreneurs say that business isnt bad, but cash flow is a real problem. Have you received the same feedback and if so, what can be done to remedy the problem?
A problem with cashflow is a symptom of whats happening in the economy. It became more noticeable when the economy started decelerating back in 1995.
Many companies have bills pending going back months, even years, and this is causing a chain reaction in the cashflow situation.
We have now reached the stage where you hear of a company going under, with amounts owed to creditors running into almost Lm1 million. This means there is a spiral effect of other companies possibly being dragged down, rather than getting their money back.
As is evident, this situation could be harmful and pull down many businesses, so it must be tackled.
The lead should be taken by the Central Bank, but also with the collaboration of the banks, perhaps on the way they lend money to people.
The government could do with setting an example, as well. It is not unheard of for government departments and corporations to leave payments pending with contractors for lengths of time, so perhaps they should show the way ahead.
Do you believe the lack of consensus on EU membership is creating uncertainty in the country and to the economy? If so, will we suffer any serious repercussions until a referendum is held?
The lack of unity in purpose on the EU issue could undoubtedly be influencing investment in Malta, although it is admittedly not the only factor.
We have heard of companies keeping certain decisions on new investment or expansion on hold, on the grounds that whether Malta enters the EU or embarks on a different arrangement makes a difference for them.
Some companies could be considering investing here because they believe that through membership, they will gain better access to the European market.
Others, especially foreign companies, feel more secure about their future with the thought that Malta will be an EU member.
We have also spoken to certain companies who have said that they would up their investment if Malta becomes an EU member.
Some said that if Malta chooses against EU membership, they might consider going to a central or eastern European country because of the doors it will open.
On the local scene, restructuring has been continuing as a matter of course, with businesses adjusting to the global market in which they operate.
But we are finding that entrepreneurs are being very careful about whether to invest. The fact that the question of whether Malta will or will not become an EU member is still in the air doesnt really help them in focusing on the eventual scenario in which they would operate and making crucial decisions on investment.
We believe that highly focused studies, done in a way that would enable us to pass on the information to our members in small, specialised amounts would help. In this way, they will be able to digest the findings and decide if they want to make changes.
In the lines that were protected, the pace has, as one would expect, been slower. Here, the problem is that some enterprises, especially the smaller ones, do not have clear ideas of how they will be accommodated in a liberalised, global scenario.
One factor that has become evident is that certain units have become fragmented and might need to join together for support, in ventures such as a marketing activity or an exchange of technology. Perhaps they were just feeding on protection and dont have a vision of how to turn their business around in a liberalised market.
But these companies have to address their problems and tackle restructuring, irrespective of the EU question.
So what aspects of EU membership concern you most and where do you think Malta stands to gain?
The FOI has pronounced itself in favour of EU membership subject to the right conditions being achieved.
So far, the negotiating team has been doing a good administrative job, but now we believe that its time to concentrate on the more detailed and technical aspects of the issues at hand.
We have been asking the government to conduct economic impact assessments which should focus on the sectors that are going to be hit.
There are many aspects of membership that affect the business world, such as liberalisation and compliance costs, which will impact peoples competitiveness. At present, they are trying to weigh up the effect of these eventual extra costs, but to do this, they need to be more informed about what the two options the free trade zone v full membership - offer.
My concern is that this is primarily an economic matter, being addressed on an economic level, but so far, no one is supplying the real economic evidence to help people make a decision.
People need sufficient empirical evidence, backed up with proper studies, showing them what each option entails.
If one addresses where the costs, problems and pressure points are going to be, then there will be a better debate on the issues that matter.
Are you satisfied with the rate at which restructuring of the economy is taking place? If not, where would you like to see the tempo increased?
We had certainly hoped that privatisation would go at a faster tempo than we have witnessed so far.
Things seem to have stalled over the past 12 months, which is rather surprising considering that the companies mentioned Malta International Airport, Malta Freeport and Bank of Valletta appeared relatively straightforward. And while I am aware that preparations are underway and the groundwork is being laid, much of the planning seems to be veiled in secrecy so we dont know really know much about whats happening.
I think an increase in the tempo of privatisation would help in that although we talk about trying to achieve efficiency in the economy, we wont get there with liberalisation alone.
The public sector corporations have to be put into the equation when we talk about a liberalised and fully-functioning free market economy. And this means a greater efficiency in the way government finances are managed.
This could even be a factor in determining how successful private industry is going to be in the restructuring of its own enterprise. After all, part of the private sectors cost factor is extraneous and out of the control of its own internal efficiency objectives.
For the private sector, there are two factors to do with the restructuring of industry liberalisation and possible EU membership - that have to be weighed against the costs that it has to incur. Industry will, primarily, be looking to increase its efficiency in line with liberalisation, while widening the market perspective of local firms. For those that have been protected, the crux is seeing how they will adapt to exporting goods and services as the way ahead.
Photos by Paul Blandford