14 June 2006

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Business Today

Of madness and irresponsibility

It possibly came late in the day but the Green Party’s opposition to government’s plans to extend the development zones was a foregone conclusion given the environmental impact cabinet’s decision is bound to have. But it is not just an environmental problem for Green Party spokesperson for the economy, EDWARD FENECH. He insists that government’s plan is economically “irresponsible” since its intention is to create the next property boom at a time when there are vague indications of a break in property prices.
“Government is trying to re-stimulate the construction industry on the mistaken belief that Malta is completely dependent on the property sector. Government is trying to rekindle the sector to try and kick up the slow growth in the economy. This is a false way of going about things,” Fenech says.
He insists that the importance of the property sector in the economy is over-rated and would like to see more investment being channelled into productive activities that generate sustainable growth. The Green Party has been late in reacting to government’s proposals to amend the development zones. Why?
We are reacting on a territorial basis, garnering opposition at grass roots level in various localities. We’ve been to places like Attard and Mellieha to launch our complaints along with those of residents in the designated areas. I beg to differ that we didn’t react. There have been numerous contributions to the press by Harry Vassallo where he has expressed the Green Party’s complete disapproval and shock at what has happened. The extension of the development zones has been a shock to everyone and what I am pleased about is that unlike many years ago when if government would have carried out something similar it would have been only the Green Party to react, today there are strong rejections not only from NGOs but also from people on an individual basis.

What are your main objections to government’s proposals?
The environmental considerations are there for everyone to see and many have voiced their concern in relation to this aspect. But as spokesperson for the economy I need to object to the extension of the development zones even on an economic level.
Government is trying to fuel the next property boom and the dangers this poses to the economy are tremendous. Property prices in Malta have put a tremendous social cost on many people. There are indications that property prices are somehow trying to reach a break, even if it is not yet clear but with the addition of more development zones we will only witness another boom.
Government is proposing to add 2.4 per cent in land area to development zones. This may not seem too impressive but if translated into monetary terms the figure becomes tremendous. We are talking of adding an area of around 2,200 tumuli to development zones. If one were to calculate each tumolo at Lm250,000 the government is attempting to create wealth of around half a billion Maltese Lira.

What is wrong about fuelling another property boom?
The country needs investment apart from property. Too much investment is being channelled into property because businessmen are not being enticed to invest in productive sectors anymore. Every businessperson I know is doing one of three things; either developing on the side, planning to develop on the side or is hoping to develop on the side.
Government is trying to re-stimulate the construction industry on the mistaken belief that Malta is completely dependent on the property sector. Government is trying to rekindle the sector to try and kick up the slow growth in the economy. This is a false way of going about things because there are clear alternatives to what government is trying to attempt.
We have around 23,000 vacant properties and enough available space in designated building zones for about 92,000 extra properties. We are talking about a spare capacity of almost 120,000 households in the zones as they are today before the proposed expansion. That is enough to house the Maltese population all over again. In Malta there are currently 125,000 households.
Why is this government intent on expanding the development zones given the spare capacity that is available? On an environmental level it is complete madness. On an economic level it is very irresponsible because a lot of activity can still be generated from the zones as they exist through rent reforms, tax breaks for renovation, subsidies for urban regeneration and other schemes.

George Pullicino said this redefinition of development zones is being done to redress injustices that were created in 1988 when the current zones were delineated. Shouldn’t injustices be redressed?
Let’s us assume that there are injustices but what about the injustice perpetrated against the thousands of property owners whose buildings are under controlled rent and who have endured this injustice for decades?
The word injustice is being used as an excuse. We are not denying there were any injustices. We know that there are people who suffered because of decisions taken on the spur of the moment by Michael Falzon in 1988. But we need to look at the plans since what government is proposing goes way beyond addressing the injustices perpetrated against people who had purchased plots in areas that were eventually struck off from the development zones. Government is proposing building zones in the middle of the countryside. This is another environmental tragedy and a mad economic decision.
I hate using the expression a ‘bag of corruption’ but when the general population is looking at a situation where there are 23,000 vacant properties serious doubts arise about government’s intentions. And the figure of 23,000 is based on the 1995 census because the 2005 census has not yet been made public and to my mind that figure could easily have doubled.
Do we need the additional building zones to house our people, our society? The answer is a clear no. The role the minister has taken upon himself, practically interfering with MEPA’s work is not too dissimilar to what we had in the eighties, where planning was the sole remit of the minister in charge at the time.

Could the new development zones help to lower the price of property in the short term?
The chances are that it might not lower prices because there is no cost for keeping a property vacant. If you’re going to build a block of flats and it’s going to cost you Lm250,000, it is simply an investment that has gone into property rather than a bank account where the return today is not what it was years ago. The property developer can wait and sit on his investment.

Prof. Edward Scicluna has suggested that people who have properties in these new zones earmarked for inclusion should be subject to a windfall tax on the profit they will make on their land given also the amendments to the property tax last year. Would you advocate a windfall tax?
Today, probably we understand better what government had in mind last year when it changed the tax regime on property sales. It would have been politically difficult for government to tell people it was putting their property back into the development zone but at the same time asking them to pay 35 per cent tax.
Like Prof. Scicluna is saying most of the money to be made from this property is going to be profit because there is no cost to it. It is property that was probably bought at a very low cost or inherited at a very low value.
It is a windfall profit so I do agree with a windfall tax. But if a windfall tax is applied I would like to see a clear government policy of where these funds are going to be invested such as a fund to enable the vacant dwellings to be put back on the market.
Government had promised a white paper on rent reform by October last year and then January. These deadlines have lapsed, we are in June and nothing is going to be done by the end of summer. Government has its priorities skewed. Increasing the development zones was not a national priority, it was an electoral priority.

Alternattiva Demokratika had promised to collect signatures to force government into organising a referendum on rent reform. You’ve missed your own deadline by almost a year. What has happened to the campaign?
It is still ongoing but we are not bound by time. We’re not there yet and we still have a long way to go. The process is slow but it hasn’t stopped. What we find very hard to comprehend is how government has failed to do anything about rent reform when there is so much suffering. Government talks about redressing injustices with the new development schemes but what about redressing injustices by embarking on rent reform?
In Mellieha, government is proposing an additional piece of land for development not because it falls within the cabinet criteria but because it wants to compensate individuals who claim an injustice was made against them 18 years ago. Why not compensate land lords, who have been suffering for 60 long years? Despite promising some form of fiscal incentive in the last budget to encourage the rental market, government has done nothing about it.

We have grown up in the belief that the economy functions well when the property market is booming. What is the problem with having an economy that is propped up by property and construction?
I challenge the notion that construction is crucial to our economy. Its input in our economy is of just four per cent. The feeling that people have that our economy is completely property driven is artificial. Our economy will not stall without construction. It is more dependent on exports and STMicroelectronics. The contribution of Bank of Valletta alone to the economy is larger than the construction industry.
Obviously, the construction industry is more visible. You walk past a crane and assume that the economy is doing well but the contribution of the construction industry as a whole is just four per cent, slightly less than BOV’s contribution. But we don’t see the bank’s contribution because they work in air conditioned offices and do not destroy our quality of life.
The Green Party is not proposing a moratorium on the construction industry but a re-channelling of resources. The amount of vacant dwellings alone will generate enough work for the construction industry in terms of renovation, plastering, tile laying, fitting of apertures and general maintenance works, which have a higher value added.
But if people have no alternatives where to invest their money they will obviously invest in property and this is the case in countries where the export-side of the economy is faltering. The same thing had happened in Ireland before the economy boomed because of higher exports and investment into value added services and products.
We need to create alternatives by encouraging local companies to grow. The major handicap remains capital and government needs to promote the listing of more small and medium-sized companies on the Malta Stock Exchange to enable them to take the next step into exporting.

If you have companies and family businesses reluctant to take the plunge and go to the stock exchange what can you expect government to do?
There are human issues that any government would find difficult to deal with. It is also true that there is little government can do to influence the economy. The only tool available is fiscal policy. We think the government should use the next budget to discriminate in terms of taxation between one company and another.
Economist Karm Farrugia last week argued in The Times that there are certain companies today that enjoy oligopoly power such as the two major banks and other privatised parastatal companies such as Maltacom, which operate in markets where there are too few players. He questioned whether these companies should be paying the same rate of tax as any other company. My answer to that question is no because they are enjoying a privileged position in the market.
The barriers to enter the banking sector are enormous given the huge capital required and the strict regulations in place, hence competition cannot simply sprout up. But the there are absolutely no barriers when it comes to the wholesale and retail sectors. Our SMEs have absolutely no insulation from competition, whereas the larger companies are practically protected from it. In these circumstances is it right for the banks to be paying the same rate of tax as the grocer shop round the corner?
The Green Party has suggested the higher tax rate should gradually go up to 40 per cent for companies operating in a privileged market position and down to 30 per cent for SMEs.
Most European countries have tax regimes that operate in this way. If we allow medium sized companies to operate with a lower tax rate, it might be an incentive for them to list on the stock exchange and create alternative avenues for investment money.

The Central Bank has raised interest rates by 0.25 basis points for the second time in just over a year. What is your reaction to this decision?
It was inevitable. Unfortunately it is a necessary evil. The Central Bank has responsibility for inflation and seeing that this has been increasing to a level that might also jeopardise our chances to join the Euro, it acted to try and stem the increase.
On an individual level the interest rate hike will have an impact on mortgages. Those who took out a house loan over the past three years enjoyed the lowest interest rates ever. Fixed interest rates only apply for the first two years of a loan and after that they fluctuate. And the interest rate hikes now could start eating into the repayment levels of home loan clients.
On a corporate level, higher interest rates will also have an impact on those who have hefty loans and overdrafts since they would need to find ways of financing the higher costs. But a 0.25 per cent increase will not cripple the economy as some have suggested.

But given that our economy is not booming with the risk of overheating and inflation is not consumer driven, will the Central Bank’s decision have an impact?
Our inflation is mainly imported because of the higher fuel costs and is also a result of lack of imagination to tap alternative energy sources to lessen our dependence on fuel oil.
We had an energy crisis eight months ago and unfortunately, government has done little to go down the route of alternative energy. It will not solve our problems over the next year but the longer we defer the problem the longer we will depend on imported fuel.
The Central Bank’s decision might effect inflation in the wrong way by curbing consumer expenditure, which has only just started to increase. This could stall the economy.
But the remit of the Central Bank is primarily focussed to control inflation.

The Central Bank also took the decision to raise interest rates to protect the country’s currency reserves. Given that we have locked 100 per cent to the Euro it is only obvious that the CBM would need to increase rates to maintain the differential with the Euro. Does the decision taken last year to maintain a fixed peg with the Euro seem more problematic today?
The Green Party is in favour of joining the Euro but last year when Malta joined ERMII at a fixed parity with the Euro we thought it was unwise not to leave any room for manoeuvre. We advocated a margin of fluctuation ranging between one and three per cent.
We needed to give our exporters a little leverage. Industry exports in large volumes and a margin of one or two per cent is what wins you an order and makes the difference between making a profit or not. A one per cent differential in the exchange rate can make the difference. On the other hand, for importers a one to two per cent difference would not have made much of a difference since they would be able to absorb the cost by cutting some overheads, waste and economising on expenses.
Although the Central Bank’s decision last year was intended to send out a message of stability to the market, commercially it tightened the wrong belt.

The election is two years away. How is Alternattiva Demokratika preparing for this appointment in terms of policy and strategy?
Our intention is to start working on our manifesto during the summer. We normally have the most detailed manifesto and we intend to update certain policies, especially in the economic field where we will present a more detailed platform. The election is obviously a big milestone for any political party. Electoral reform hasn’t happened but we will not be giving up and we are preparing a strategy which I will not disclose. This time around, however, we will be working more on a door-to-door level.

Is it true that during electoral reform talks the Green Party had agreed with the Labour Party’s suggestion to award a majority prize to the party that garners the most votes even if it is just a relative majority?
We proposed a dual threshold system that would have put the other two parties’ minds at rest over the governability issue. We insisted that governability and representation were two different issues.
If a political party garners 50 per cent plus one of the votes there will never be an issue of governability and so we proposed a low threshold of say three per cent to ensure reasonable representation for any third party or more. However, in the case that no party alone manages an absolute majority, hence raising concerns of governability, the threshold for representation would rise to say 7.5 per cent.
Unfortunately, the Nationalist Party was the first to ditch such a proposal. We did not agree with Labour’s suggestion for a majority prize but in effect what we proposed would have given the Labour Party peace of mind.
Our proposal would have given the country the comfort of governability but given the people the chance to vote for a third party with a reasonable chance to obtain representation.

Edward Fenech was interviewed by Kurt Sansone

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