22 March 2006

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Business Today

Flying the flag for industry

Having been recently confirmed for a second term as president of the Federation of Industry, ADRIAN BAJADA insists it is high time the country adopted an industrial policy that provides an integrated framework for the development of the manufacturing sector.
For too long, he laments, the country has had different policy documents not working in synch with each other. Competitiveness issues, education and the environment are three key areas for industry that require a holistic strategy to be tackled together for the benefit of the country.
Bajada is a firm believer in the development of human resources and argues for the judicious use of EU funds by government to secure longer term growth.
“If we want to see our children and their children enjoy the fruits of EU funding we should be directing those moneys into education and innovation,” Bajada says.
He also addresses the issue of competitiveness and puts his finger on a thorny issue for unions. “Unlike the trend in modern economies our wages increase more than the country’s productivity,” Bajada says, expressing a long-standing worry for industrialists.

During the Federation’s recent annual meeting you reiterated the importance of the country adopting an industrial policy. Why this insistence?
The Federation has been insisting on this need for years and the closest we ever got to formulating an industrial policy was in 1998 when the document ‘Prosperity in Change’ was published. The Business Promotion Act had materialised as a result of that document and a number of other papers on human resources, the environment and the key areas of focus for the MDC at the time were identified. The problem was that the various aspects were not integrated into a single policy.
We have this habit of publishing various reports, each with there own targets and strategies but which fail to offer a single integrated approach to issues.
Malta Enterprise has its priorities on which sectors to focus and what initiatives to take to attract foreign investment and help consolidate operators that are already in the market. In education and the environment we have made great strides as a country but the time has come to integrate these different sectors and make them work hand in hand.
An industrial policy would seek to identify the target markets, the required human resources, the environmental issues linked to that industrial activity and provide a holistic framework to deal with the problems and challenges that may arise.
One example that comes to mind is the pharmaceutical industry. We’ve been hearing it for years that the country is an attractive base for pharmaceuticals. It is a good niche and the companies have been investing in Malta. But now we find out that the country does not have the necessary human resources to keep up with the demand. We cannot do these mistakes.
The country has to have a vision, know where it is going and have the strategies in place to reach its goals. An industrial policy is long overdue and this is not something the Federation alone is talking about. A couple of months back EU Commissioner Verheugen spoke about the need for an integrated industrial approach for Europe.
The Prime Minister has signalled to us his commitment to have an industrial policy and that the Federation would be involved in its drafting. Hopefully by June we will see a draft policy included with the pre-budget consultation document.

There are a number of tax incentives under the Business Promotion Act which are soon going to expire. How crucial is it for this aspect to be also integrated into the reform process?
I personally believe that the BPA is an important tool to attract foreign direct investment and there may have been companies that decided to come to Malta because of the BPA but I insist that a far more important element is to have a competitive climate in the country that allows companies to generate profits.
It is important to have a BPA but most probably a decision on whether a company will come to Malta or not is primarily made on the potential of the company to be able to generate profits from its operation in the country. It is only after assessing the country’s competitiveness that a company takes into consideration the incentives offered by the BPA.

What does the FOI have in mind when it talks of the need for the country to become more competitive?
Firstly we need to focus on human resources. We Maltese have been a resourceful nation since Neolithic times managing to survive on a small rock with no natural resources in the middle of the sea by the sole capability of the people who inhabited the island.
We have been innovative utilising our geographic position well and adapting to the changing environment around us. Considering the natural limitations we have a good standard of living.
But we need to have a consistent and constant focus on human resources to make sure we have a work force that can easily shift from one industry to another and adapt to change.
Another issue that worries us is the lack of a direct relation between wages and productivity. Unlike the trend in modern economies our wages increase more than the country’s productivity.
By no means am I suggesting lowering wages or eroding the standard of living but we have to be conscious of the fact that if wages go up unrelated to the country’s productivity we will be raising the standard of living in an unsustainable way. The most successful European Countries also have the highest wages which indicates a direct correlation between efficiency and economic success.
And the manufacturing industry in Malta can be competitive. Only last week I visited a company that following an intensive exploration by the parent company of relocating to China decided that it would retain and expand the Malta operation.
These companies are innovative; they invest in research and development programmes. And by innovative I do not mean rocket science. They manage to find creative ways of lowering their unit production cost.
Having said this we have to realise that some low-end manufacturing industries may be facing a slow death because they will find it difficult to compete in the prevailing environment.
It would be folly to believe that the textile industry can survive if it operates in the same way as it used to 20 years ago. No textile company can compete against Chinese firms if it goes for long production runs based on cheap labour. But there are modern textile companies, which produce customised garments or branded items which therefore have a high value added content targeting an upmarket audience that shies away from mass production.
As our standard of living goes up manufacturing industry has to go up the value chain as well.

What impact do government induced costs have on industry’s competitiveness?
The impact is enormous. Over the last two years, industry has been badly hit by a number of new direct costs – eco-tax, electricity surcharge, waste management costs, airport taxes. It is not just a question of government induced costs only. Our port charges are too high and it is made worse because we are an island totally dependent on our ports for imports and exports. These also hit at our competitiveness.
There are also the costs in terms of lost opportunities created by excessive bureaucracy. It takes months to set up an FDI interested in coming to Malta when abroad we hear of situations where companies can be up and running in a couple of weeks.

What is the FOI’s expectation of the port reform being implemented by government?
I expect to see a significant reduction in port charges although I have read in newspapers that they will probably remain the same if not increase. If this happens we would be getting nowhere. We have to understand that being an island our port charges have a direct impact on our production costs and therefore competitiveness. The Federation also expects to see the removal of archaic work practices and the introduction of better and more efficient management of our ports.

Bureaucracy is everybody’s favourite punching bag. What is the root of the problem?
What we disagree with is the excess of bureaucracy. Foreign investors expect to be serviced by a one stop shop from beginning to end with Malta Enterprise being given a fast track approach when dealing with government entities. Recently there have been attempts to create this fast track but it still needs to be refined. I believe that this can facilitate more investment.
Furthermore, we need to have a specialised unit that scrutinises every law and regulation to determine what level of bureaucracy will be created and any excessive red tape introduced will need to be compensated by cutting it from elsewhere.
Bureaucracy is stifling not only for the manufacturing industry but for all businesses and this hits at our competitiveness.

I have heard industrialists complaining of the holier than thou attitude adopted by Maltese institutions that has led to EU funds being lost. How factual is this?
EU funds are not easy to come by and are themselves regulated by reams of bureaucracy. I need to point out that the FOI, the Chamber of Commerce and the MHRA formed the Brussels-based Malta Business Bureau, which has helped many of our members in their quest to tap EU funding opportunities.
But what preoccupies me is the internal bureaucracy that can be conducive to industry losing crucial funds. Almost a year ago a particular industrialist managed to secure EU funds to expand his factory only to find out during the construction phase of the project that close to the factory there was a low wall that might have had some historical value. MEPA simply stopped all works instead of trying to find a practical solution by amending the plans to go round the wall without damaging it. As a consequence there is a possibility that the EU funds will be lost.

Government is currently conducting a consultation process over the best way to spend the EU funds that will be coming Malta’s way between 2007 and 2013. The FOI has insisted on projects that invest in human resources, training, education, research and development, as opposed to infrastructural projects such as roads and bridges. Is government sensitive to this longer term strategy?
I sincerely hope government is sensitive to our suggestions. The FOI has already pointed out the difference in the way Ireland and Portugal have utilised EU funds.
Portugal definitely took the larger share of funds and they went for short term growth by investing heavily in roads, bridges and similar infrastructural works. They did experience phenomenal growth but it was not sustained in the longer term.
On the other hand, the Irish invested heavily in human resources, innovation and education apart from infrastructural works. GDP growth was marginal at first but it was a steady increase that continued even after the funds started drying up.
The FOI is clamouring for the longer term model adopted by the Irish even if for the politician the short term gain may seem more attractive. If we want to see our children and their children enjoy the fruits of EU funding we should be directing those moneys into education and innovation.

From industry’s point of view how has the experience been with Grimaldi after the liquidation of Sea Malta?
The FOI has always been in favour of privatisation since it believes that government should have less of an operative role in the economy. We had numerous meetings with Sullivan, the representatives of Grimaldi and last summer we had expressed our satisfaction with the deal after the Italians drew up a schedule that was satisfactory for our industry. The Federation is in constant contact with the service provider and with our members and we are working hard to iron out any initial difficulties which this operation could encounter. Grimaldi have also shown interest in increasing frequency of their service by later on this year and this should therefore provide the local manufacturer with an even better service.

Is the high price of oil and consequently the exorbitant surcharge something we have to learn how to live with or are there other solutions we are not exploring?
The FOI was interpreted wrongly by government when it issued a statement questioning Enemalta’s efficiency levels and querying the amount of theft in electricity. Even if these two aspects are not calculated in the formula to determine the surcharge we shouldn’t be kidding ourselves because Enemalta is also funded by taxes at the end of the day.
I am in favour of an independent audit that also covers the aspect of how Enemalta buys its oil requirements.
But I am amazed how a country surrounded by the sea and drenched by the sun has not yet embraced investment in wind, wave and solar energy. With oil prices at the levels they are today it probably makes sense now to invest in these alternative modes of generating electricity. Another crucial aspect is the need to become more energy efficient in our construction, lifestyles and industrial activity.

Adrian Bajada was interviewed by Kurt Sansone

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