27 April 2005

The Web

An ‘intelligent’ industrial revolution

Despite the general clamour that manufacturing is on the way out, Adrian Bajada, fresh at the helm of the Federation of Industry, believes this is not the case. With a hefty contribution to the country’s economic wealth, manufacturing will still play an important role in the foreseeable future but Bajada argues that the country has to do more to attract manufacturing industries with a high element of value-added.
He insists the education system has to be geared to respond to the economy’s changing needs and cautions that an industrial base geared towards research and development would require a higher number of science graduates, something the island has not yet managed to achieve.
Bajada says Government has no choice but to focus its energies on reducing the deficit and points out that extensive expenditure control has to be exercised in the health and social services sectors.

What is your vision for the Federation of Industry?
The Malta Federation of Industry was set up to be the independent voice of the small, medium and large industry in Malta. Way back in 1946, when this organisation was born, the industrial landscape was somewhat different and has been continuously evolving ever since. We have moved from the low-end, labour intensive industrial activity competing mainly on low cost to a more investment-driven environment, competing more on efficiency rather than cost. The FOI was ever-present in this restructuring exercise by way of participation in the national debate and by representing the collective voice of our members.
As we move towards another economic reality that of an industry based on value and innovation, the FOI continues to play a vital role as one of the three sides of the social dialogue triangle, alongside trade unions and government. Together we need to ensure that the country becomes and stays competitive in the global scenario, that we secure our existent industry and be attractive enough to draw new ones.
Over the last months, the FOI was actively involved in the discussions within the Malta Council for Economic and Social Development in a bid to agree on a social pact. I strongly believe that our competitiveness can be better safeguarded by means of a stable social dialogue. The Federation of Industry is ready to resume discussions to this effect.
At the organisational level, the FOI itself is going through a growth process, which allows us to provide our members with additional and more specialised and researched services.

Employers, industrialists and businessmen are represented in different organisations; the FOI, the Chamber of Commerce, the GRTU and the Malta Employers’ Association. Does this fragmentation weaken the voice of business in dealing with Government and the social partners?
Every organisation has its own focus and its own membership base and that, I believe, is a positive thing. Most of the time we support each other’s opinion rather than ‘weakening the voice of business’ as you put it. Having said this, I do not find it a problem to collaborate on specific issues with other organisations when the need arises. The FOI has an on-going collaboration with other employer organisations on issues concerning the consideration and adoption of EU legislation and the diffusion of information to members on such issues. This is being done through the Malta Business Bureau that operates through a Foundation which was set up by the FOI and the Malta Chamber of Commerce and Enterprise. We have now been joined by the MHRA. The GRTU and MEA have a standing invitation to join us and we hope that if this happens we shall have all five major employer organisations collaborating on EU issues.
The experiment of the Malta Business Bureau has provided a model of how the fragmentation can be counteracted. Business organisations can identify common challenges and address them as one front, without running the risk of losing their own individual identity in the process.

Earlier this year Government went ahead with the proposal to ban public holidays falling on a weekend from being added on to employees leave entitlement. The move was intended to boost competitiveness but will it be enough?
It is true that ways could have been found to render the measure more effective and acceptable if it was agreed upon with the Unions and presented as part of a much larger package in the much talked-about social pact. Negotiations on that agreement, as everybody knows, fell through at the 11th hour and Government decided to go ahead and legislate on the question of public holidays.
We believe the measure will contribute, to an extent, to the enhancement of productivity. However this will definitely not be enough. The Federation of Industry still believes, and will continue to advocate a national social pact, which will include other measures that will be more effective in regaining some of the lost competitiveness of Maltese enterprise. As a result the economy will start creating wealth at a higher rate and more jobs will be available to the benefit of all social partners.

What is contributing to Malta’s lack of competitiveness?
According to the Competitiveness Index published by the World Economic Forum late last year, Malta slipped from the 19th place in 2003 to the 32nd place in 2004, and from 42nd to the 48th place in the Business index placing. This is attributed to a number of factors. The failure to curb the Government deficit and the escalating public debt, the negligible spending on R&D, the higher cost of production, government-induced costs, higher taxation rates, the failure of our education system to upgrade and cater for the needs of the labour market, scarce collaboration between enterprise and the education system, higher cost of energy and even certain new compliance costs brought about by EU legislation.
At the enterprise level, other factors, such as the lack of cluster development and the inexistence of mergers and acquisitions are also highlighted. All these indicators are pointing towards the need for more restructuring which would include technological innovation and R&D.
Of course we cannot lose sight of certain business facts: in a race it does not simply depend on whether you are moving ahead. It also depends on the speed of your competitors.

Employees fear that talk about boosting competitiveness means a loss of work conditions, lower wages and job uncertainty. Can a happy balance be found between employees’ aspirations and employers’ exigencies?
There is a general misconception, unfortunately also among employees that competitiveness is all about cost containment. Cost plays a huge role in retaining one’s competitiveness but it does not need to come from lower working conditions. This is where efficiency and higher productivity come into play.
Local industry had, for a number of years, derived some competitive advantage from low labour costs. As the economy progressed, and Malta was overtaken by liberalisation and exposure to globalisation its enterprises had either to move to higher value-added activity, or else relocate to cheaper countries. Malta’s future in both manufacturing and service industry lies in its ability to attract FDI of this type. This shift required also a continuous effort towards higher efficiency, higher productivity and better quality of the end product or service. Moreover, today’s reality is calling for yet more significant changes by demanding that industry and the whole economy moves more towards technological innovation to what is known as the knowledge economy. This transition would definitely require a bigger effort and better results in the educational sphere, more science and technology graduates, ongoing re-training of the country’s workforce and finding synergies on a national basis to overcome the problem of our small size.

Even if restructuring does take place, is there any future for manufacturing?
Manufacturing constitutes around 23 per cent of all the wealth produced in Malta. I cannot envisage a scenario in the foreseeable future, where this sector does not play a primary role in our country’s economy. There is a widespread misconception that manufacturing is on its way out. Unfortunately, this idea was spread around even in Europe for some time in previous years. Everyone is now regretting the de-industrialisation that happened. Moreover, there are very few people who are aware that several thousand jobs in the service sector are intrinsically tied to the existence of the manufacturing sector. The tide is turning in Europe with a strong emphasis on manufacturing activities. There is no reason why this sector will not be even stronger in future, provided the business infrastructure is right, our education gives more results in the right direction and that we manage to attract the upcoming type of industry in high technology.

Government exponents speak of the need to attract new industries in the research and development field such as the pharmaceutical sector, which are less dependent on the wage factor for their competitiveness. Is enough being done to attract such industries?
The pharmaceutical sector is one of those areas of high-tech industrial activity which can contribute to our country’s move towards an innovation-driven economy. We have already had a number of success stories in this field, auguring well to this strategic approach. However we have to be very careful when we talk about attracting research and development. While there is some very elaborate research and development being conducted both at industry and university levels, the country is not producing enough science and engineering graduates, particularly at doctoral levels to be able to grow fast in this sector. The facilities for research and innovation are also not there. The Innovation Scoreboard, published regularly by the European Commission clearly shows that Malta is way below the European average in this regard. The Federation believes that this is one area where the country has not done enough.
The present university stipends system is not conducive to students taking science as a career and unless something is done now, we will not be in a position to seriously move towards the high-end knowledge-based industrial activity. The Federation of Industry welcomes the re-introduction of the MCAST and has been promoting the idea of introducing part-time University course that would lead to a post-graduate Diploma and/or Masters degree in applied science for the pharmaceutical and related industries.

Despite the creation of Malta Enterprise industrialists still complain of excessive bureaucracy. Where has Government gone wrong?
The creation of Malta Enterprise was a move in the right direction. It was intended to create a one-stop shop for present industrialists and to facilitate the attraction of new foreign investment. If we want to be realistic, we have to say that we have seen a lot of changes and improvements since the introduction of Malta Enterprise. There is definitely a more synergetic approach and more visibility to Malta’s industrial potential.
Unfortunately bureaucracy seems to be ingrained in our culture and is creating obstacles for the existing industry and even more for the targeted foreign investors. The Federation has repeatedly urged Government to simplify procedures within its structures while ensuring accountability and good work practices. We recognise the fact that Government has placed the eradication of excessive bureaucracy very high on its priority list. The introduction of electronic government should be of immense help in this regard and I expect industry will start reaping the benefits of provision of quicker services in general by Government.
The Federation has had the occasion in the past years to bring to Government’s attention the need for conducting regulatory impact assessments of all new legislation. This will be a conscious exercise to make sure that EU legislation that is being adopted is kept to the bare requirements, that any necessary new legal provisions will not be an excuse for producing further layers of bureaucracy that are detrimental to our enterprises’ efficiency and to their cost structure. Unfortunately, Government has still not taken this matter seriously although other EU countries have established this as a regular feature and are finding it of great help to keep bureaucracy and related costs for enterprise to a minimum.

Lawrence Gonzi has made it his mantra to focus on Government finances and bring the deficit within manageable levels. What is your assessment to date of Gonzi’s performance in this regard?
I would say that Government had no choice about this. Good financial governance has long demanded that attention was needed to bring down inflation, the deficit and the national debt. The FOI in the past several years repeatedly drew Government’s attention that Government expenditure was out of control and that additional taxation was not a solution. Matters came to a head as soon as Malta started working its way towards membership of the EU. Moreover, as members of the European Union, we are now expected to comply with the parameters established by the Stability and Growth Pact.
I believe that the Prime Minister has created a much-needed awareness with regard to this matter and that there has been a positive shift in the expenditure control mechanism. We are also observing more accountability introduced in the public sector and one hopes that all this will lead to government reaching its targets. This drive, I believe, has to continue with the same force and in an uncompromising way. However, my sincere assessment tells me that Government’s biggest problem is the expenditure commitments on Health and benefits under the provisions of Social Services legislation. It will be a major challenge for whoever is in the prime minister’s seat to introduce a reform programme in these areas. But it will have to happen.

The decision whether to join ERMII is just round the corner. Should Malta adopt the Euro at the earliest possible date in 2008?
The decision as to whether Malta should adopt the Euro in 2008 is also tied with the fiscal deficit, which is considered to be the biggest challenge in this regard. This is the first obstacle that needs to be surmounted. Joining ERMII will give us a short transition period intended to give the local economy enough time to converge smoothly to the euro exchange rate.
In this regard, the Federation of Industry has already made its position clear over the last years. The adoption of the Euro is beneficial to the local industry since it can boost competitiveness and will give us an opportunity to maximise on the Internal Market.

Will industry be watching with a close eye the Labour Party’s discussion and eventual decision on what to do with the European Constitution? Will a ‘no’ create instability?
We will be following closely what’s happening around the European Constitution locally and within the member states. It is still early to anticipate how the discussion will evolve and even more early to predict what will happen should any country reject it. I believe that the discussion at a local level will be another opportunity for all political forces to find a convergence point and save this country from unnecessary instability.

The Central Bank has recently raised interest rates. What impact has this decision had on industry?
The Federation of Industry fears that the rise on the base rate by 25 basis points will be counterproductive on the industry’s competitiveness. This move will prompt commercial banks to start charging higher borrowing costs for customers – both households and businesses, while it will become more costly for customers to service their existing loans. The cost base of the manufacturing industry is therefore bound to rise, leading to a heavier burden at a time when further investment in plant and machinery is even more necessary.

Would you advocate a flat tax system similar to those adopted in some eastern European countries where a single tax rate has replaced graded income tax levels for both personal and corporate income?
The Federation has never considered this possibility. We are, and have been, insisting on a lower tax regime for both direct and indirect taxation. The FOI considers that low rates of taxation will benefit both entrepreneurs and employees. Employers will find it more attractive to invest in the hope of better returns, while workers will find it less attractive to work in the ‘black’ economy.

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