01 June 2005

The Web

A time for reckoning

Europe is no utopia for Alfred Mallia-Milanes. With his feet firmly grounded in reality, he says EU membership was necessary but the country now requires a vision to steer it in the bureaucratic corridors of Brussels.
He believes adhering to membership is draining the country of its resources and insists Brussels has to relax on the number of directives it issues.
The former Malta Employers Association president says Brussels has to realise Europe is competing in a global market. Bureaucrats must stop stifling the economy with regulations that render the job market inflexible, Mallia-Milanes says.
An industrial relations consultant, Mallia-Milanes argues that the country has to undertake painful reforms to become competitive. He says Government was not committed enough to ensure the success of a social pact and insists that taxation needs to go down.

Government says tourism is picking up but operators paint a totally different picture. Government says its finances are on track and yet recent statistics show that expenditure for the first four months was Lm15 million higher than last year. Are we facing a crisis of trust?
It’s not a crisis of trust but more an issue of interpreting statistics as one pleases. It is not enough for the authorities to say that tourist arrivals have gone up. A tourist operator would interest himself in the money those tourists left in the economy. It’s not much help if tourist arrivals increased by 100 people and 60 of those were students.
The private sector is interested in the value of things. When Government says tourism arrivals have gone up, it is correct because numerically tourist numbers have increased but expenditure has gone down. The operator is more interested in the latter aspect.

Is it politically expedient for Government to stick to tourist arrivals because they can easily be ‘sold’ to the public?
Government remains a political animal. But the operator is interested in the business side of things.

In a winding down speech in Parliament last week, Parliamentary Secretary Edwin Vassallo hit out at bureaucrats for not being sensitive to small enterprise. What is the problem?
The civil service is losing its calibre. There is too much nomenclature but too little quality. It is made up of inflexible bureaucrats. But there is another problem. The European Union club is a very demanding one indeed. We are dedicating a lot of time and energy to meet those demands with the consequence that not enough time and resources are left to dedicate to this country.
Our resources are being used to catch up with what is expected of us in the EU but this country’s needs are not only those related to the EU.
Somebody once told us that it’s a big club, it’s a good club but it’s too big for Malta. We have to cope in the same manner as Germany.

Are you saying that we are wearing a shoe that is too big for us?
No. We are the smallest country and we have to implement the regulations. As a consequence we are using our resources to cope. The EU is a big monster and the changes came on us suddenly, even if the targets were necessary so as not to delay implementation of certain reforms.
The opportunities are there but we have to compete for them and to do so we need to have the right resources, which might be lacking.

Is this a handicap we will suffer from forever?
I am convinced Malta’s place is in the EU. But before the referendum I insisted that joining the EU had a heavy price tag. At the time I used to be criticised by those campaigning for the yes vote because I could have potentially scared off voters.

Is it fair that the 10 new entrants should be forced to implement directives in such a short time span when the ‘old’ 15 had 30 to 20 years to adapt?
That is the privilege of being a founder of the club. We will see the benefits in the long term but we have to work hard for them. Unfortunately after becoming members the country had no vision of where it wanted to go and which niche areas it could adopt as its own.

Which are the niche areas you envisage?
Undoubtedly the services industry is an important niche since manufacturing is on its way out. But we have to offer value. We cannot expect anybody to pay Lm20 or Lm25 to eat at a restaurant when the value of the meal costs around Lm8. Financial services is another growth sector.

But is this lack of vision coming only from Government?
My concern is that the private sector is relying too heavily on Government to get things done. Irrespective of what is said, restructuring hasn’t been done. The first thing Ireland did in the eighties was to reform its education system to make it responsive to the country’s needs. Malta is among the highest spenders in education and yet we still get a sizeable chunk of people who do not know how to read and write. Look at University: is it possible for students to be absent from the national debate on a myriad of issues? It’s just a glorified secondary school.

Did the French vote against the enlarged EU, given the threat being poised by Europe’s new entrants?
If France had put enlargement to the vote it wouldn’t have happened and today we would not be members. People vote according to the economy. People are worried about jobs and the euro. The single currency had promised prosperity but so far the European economy is not growing and we have double-digit unemployment.
What worries me is that the Brussels bureaucrats are living in a world of their own. In a Europe threatened by globalisation, Brussels cannot continue issuing directives that stifle the economy and the job market, at an average rate of two a month. Instead of pushing for liberalisation and flexibility, Brussels persists in burdening the economy with rigidity and inflexibility.
Take for example the Working Time directive and the current 48-hour limit with an opt-out option. When we are competing against countries like China and India or even the United States, how can you restrict the European job market in such a way? This is unsustainable. Europe is making its own economic structure unsustainable. There is no growth.

But is a social Europe possible within this context?
The mistake is that Europe wants to keep the social model created by France and Germany years ago and this is unsustainable. Take Finland; they have a good welfare state because the economy is growing but they are also at the forefront of innovation.

What is the single most important measure that needs to be taken to boost competitiveness in Malta?
It is a pity that the social pact didn’t materialise. For a country to become competitive a number of measures have to be taken. It has to be a broad agreement between all parties. Wages are an important and tangible issue in any social pact but it has to be much more than that.

Why did the social pact fail?
Because the MCESD has been a talking shop since its inception. It was simply a consultative forum and never a key player in the economy.

Should government have taken more of a leading role?
Government should have taken a more active role in the debate rather than allowing the social partners to discuss things between them. It is useless appointing a top civil servant to represent Government.
Finally, when they did not agree Government had to take its decisions. But Government should have put in more commitment in this social pact.
A social pact has to be reached with everybody’s input and there is no measure that will be taken without causing pain.
The pain has to be felt by everybody across the board for a period of three to four years. Government had to commit itself on various issues such as public expenditure, how it intended dealing with the deficit, taxation, inflation, the exchange rate and other issues that had to be included in the social pact.

Public finances have been an issue since 1995. There now seems to be a consensus that the problem exists and measures have been taken to address the high deficit. Are you content with the way the deficit is being tackled?
Government is stripping everyone bare to collect every cent, even arrears that cannot be claimed back by law. The methods used are counterproductive. They are not stimulating growth.
Growth will come about when new investment comes our way. When I speak with foreigners the single most important issue they raise is taxation. Look at most of the foreign companies that operate here. The tax holiday was a very important reason why they set up shop in Malta. There were other reasons such as a labour force that is hard working, easily trained and that honours deadlines, but the tax holiday was a major attraction.
We have to create tax incentives to attract investors. Today we are trying to address the deficit because we ignored it in the past and because there is the discipline imposed by the EU.

In his last monthly press briefing the Prime Minister said it was a misconception that Malta was heavily taxed at 35 per cent. He insisted that when the whole taxation package in Malta, including VAT and other taxes was taken into consideration, it compared favourably with tax regimes in other EU countries. What is your impression?
I am not so sure. The top tax rate in Malta is reached in no time. Even if there may be countries with a top tax rate higher than 35 per cent, ours is reached immediately.
Even VAT at 18 per cent is high. Obviously, Government needs revenue but that is why there is no alternative to pain at least for the time being.
If we do not take the necessary measures we will move backwards not forwards.

There is a drive to collect every cent but on the expenditure side there still seems to be a big problem…
The deficit is structural, created by recurrent expenditure such as wages not investment. And in front of us we have that blessed hospital. How are we going to manage to control expenditure in healthcare when we still stick to the concept that everything comes for free?
Even by introducing a nominal charge for parking in St Luke’s all hell breaks loose. We cannot continue with medicines being given out for free. Should somebody with an income of Lm50,000 be given the same free medicine as somebody who earns Lm1,000?

Alfred Sant had tried to introduce a surcharge of 50c on medicines but at the time everybody lambasted the move. Wasn’t that a step in the right direction?
That was a move in the right direction because it sent out the signal that medicines had a cost to them. It wasn’t enough because even to collect the 50c cost us more than the measure itself but it gave the signal that not everything came for free.
If patients are asked to pay a minimum of Lm5 for a prescription that entitles them to free medicines, which will be refundable to those who do not have the means, it would reduce expenditure on medicines because abuse will go down. The situation now is ridiculous because people are entitled to free medicines and they collect them even if they do not need them.

Is the rigidity in the way wages are paid out in the civil service a chain tied to Government’s leg?
The civil service is structured in such a way that if Government decides to offer incentives to doctors, teachers will stand up to demand they be kept on the same scale. Any change has its ripple effects.
We have to see what output is given by civil servants. For example, simply removing half days will not solve the problem because lazy people will continue delivering a miserable output.
The collective agreement does not do justice with civil service employees who give their utmost and it would be unfair to generalise because there are sectors that are literally operating with their tongue out trying to implement EU directives. These are not being compensated and yet you find other departments such as the public works who seem to be above the law.

In Eastern Europe there is this movement towards a single rate flat tax system. Should Malta adopt this approach?
That was our dream and it was a nice dream that will remain so for some time. It was John Dalli’s idea to move towards a single tax rate of 15 per cent across the board to create an incentive for people to work because irrespective of their income they only paid 15 per cent. The withholding tax of 15 per cent on bank deposits is an attractive option.
But at this stage Government needs the revenue and cannot afford to lose income. However, there hasn’t been an impact assessment study on the effect such a measure could have on public finances if it were implemented. Not even the private sector has conducted such a study. I wouldn’t expect Government to conduct such a study. It should be the Federation of Industry, the Employers Association and other employer organisations who should be pushing for this.

There was similar criticism when George Bonello Dupuis lowered income tax from 65 per cent to 35 per cent in the late eighties. Instead of losing revenue, Government’s take increased…
That was a time when we were truly a Switzerland in the Mediterranean because the economy flourished. The circumstances today have changed and that is why we need to have a study to determine what impact a change in personal and company taxation will have.
When I meet foreigners taxation is the issue they raise and we have to be careful because most of the tax holidays granted in the past are soon going to expire. Companies are heavily tempted to move to China and if tax holidays cannot be granted anymore because of EU competition laws we have no option but to lower company taxes.

ST Microelectronics is a big player in our economy and dark clouds are hanging over it. Is it an impending disaster for Malta?
Rumour has it that they will be keeping just the technical staff here and the processes requiring unskilled staff will be shifted to Morocco or China. If this happens it is another pointer that no jobs will be available for the unskilled. We have to spruce up our education system. Every student has to finish school with some form of certificate.
If ST buckles it will be a disaster for Malta and that is a continuous threat for our economy because we depend heavily on just one company.

Wages are a major bone of contention with industrialists saying they represent a major cost factor while employees complain that their pay is not enough to cope with the cost of living. Is it justified to freeze wages, where do you draw a line?
That is why we need a social pact. If we expect unions and employees not to demand higher wages, we cannot put up the price of fuel, or introduce an eco-tax. A social pact requires commitments from all parties involved.

The cost of living has been shooting up for more than a year now. Where are we going?
Our inflation is one of the highest in Europe at the moment. We’re getting rammed from all sides and we risk witnessing a lowering in the standard of living.

Do you foresee a retraction in the standard of living in the coming years?
Unless we do something about it, yes. Unemployment will go up and automatically our standard of living will dip since the unemployed will have to be sustained. Social problems will also increase putting an additional financial burden on the State.

Mata has joined ERMII with the likeliness of adopting the Euro in 2008. What is your reaction?
My preoccupation with the introduction of the Euro is that it will raise the cost of living once again as happened in other countries. The Euro last week dipped to its lowest level in 18 months because of the French vote and a slow economy. The benefits of the Euro have not been felt yet. It’s useless to dream about the benefits, we should not be carried away. So far the European economy is stagnated with two-digit unemployment. Let us stay with our feet on the ground. This does not mean I am being negative, it means I am living reality.
On 1 May 2004 all levies were removed, but have prices gone down? Wine and pasta may have experienced lower prices but look at the rest of the shopping basket. Medicines have simply jumped up in price. There is no seriousness and my fear is that prices will be rounded up when we introduce the Euro.
An educational campaign on pricing in Euro has to start from now and not on the eve of adoption.

Alfred Mallia-Milanes was interviewed by Kurt Sansone

The Malta Financial & Business Times is published weekly on Wednesdays.
Website is updated weekly on Thursdays at 15.00CET
Copyright © Newsworks Ltd., Malta
Editor: Kurt Sansone
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
Tel: (356) 2138 2741 | Fax: (356) 2138 5075 | E-mail