Innovative manufacturing – a Renaissance | PKF Malta

Grey clouds may overshadow our financial services sector amid challenges coming out of the PANA report issued in Brussels on the rule of law and the Panama Papers, yet one is relieved to note that steady progress is being registered in our manufacturing sector.

Few will notice how smart technology is being transferred inwards, following efforts made by the Government to attract new industries in diversified areas such as aviation, oil rig repairs, pharmaceuticals and high security currency printing.

The recent attractions include a unique aviation cosmetics company which spray paints aircraft (such as A380) while massive strides are being made in technical services such as repair and maintenance of complex aircraft engines. We may overlook the six-year dip following the 2007-2013 economic crisis which saw us being chased by the Commission to rein in an excessive deficit position in our annual budgets and we no longer need to look backwards to those days.

It appears that as if by stealth our manufacturing strength is seeing a revival and this can be complimentary to our economic growth blessed with high employment. The list of expats working here keeps growing by the day. Fitch warns us that on-going labour shortages are likely to put pressure on wages. Quoting its latest report, it states inter alia, “Unit labour costs are set to increase despite improved labour productivity and could dampen Malta’s price competitiveness in the medium term”. Be that as it may, we are still improving our productivity and due to moderate direct taxation wages, inflation is bearable.

At this junction, one may ask how much of the growth of 7.2% in GDP last year was due to exports from the manufacturing sector. It is encouraging to observe that after three years in the making, we now have an active Development Bank which is expected to support expansion in industry. What can be the cause of this turnaround? Many in the past discounted the importance of manufacturing due to the gradual rise in wages and the relative lack of research and development hosted locally. Perhaps the effort of the Government to recognise the importance of getting MCAST and university to work closely with industry is slowly yielding results.

MCAST has reached a high standard in teaching technical subjects and proudly reported close to one thousand graduates in one of its many diplomas and degrees. It has revived apprentices’ schemes in various technical areas and is also making steady progress in vocational courses as a catch-all for early school leavers. Still, we clamour for a higher cohort of trained workers with skills involving science, engineering and maths (STEM) as facts show that we have not yet achieved our targets in higher technical education.

Each year, our political leaders share with us their sacred creeds to turn the island into a Utopia where they promise us to build a platform for collaboration between government, industries and individuals to train workers in cutting-edge technology. It is true that we invest millions in education from kindergarten to tertiary levels yet we still have some way to go to solve the skill mismatch in particular sectors (such as Igaming and Life Sciences).

Indeed, other factors play a big role in manufacturing and one acknowledges the advantages of a paradigm shift in Malta Enterprise policy to provide custom-built factories. Previously manufacturing suffered as potential investment had to wait due to lack of ready-to-use factories. The recent building of custom-made factories for the extension of PlayMobil and Crane Currency speaks volumes on this aspect.

It goes without saying that our geographical mass limits us where large-scale manufacturing is concerned yet with the modern use of robots and specialised machinery factories are becoming smaller in size albeit more capital intensive. Government mutely plans to help this revival in manufacturing as it will prove a safe alternative to financial services which is currently fighting its way tooth and nail against the Greens lobby in Brussels.

What is the quickest way to attract FDI and make it work successfully? This brings in the question whether the drive to run Public Private Partnerships (such as Vitals Hospital group, BARTS Medical School and to a lesser extent - AUM) is working. Should government attract new manufacturing business by entering in partnership with the private sector? Can we learn the lesson following the collapse of Carillion (the second largest UK contractor and services provider) which entered into a private public initiative (PPI scheme) propelling it into a legacy of a debt? The group collapsed with £29m in the bank, a €1.3 bn debt pile and a massive pension deficit.

Previously the Labour government in Britain loved to attract fat investors to run big-spender departments such as roads construction, healthcare and schools. It did this by signing so-called public-private partnerships, and PFI’s – private finance initiative. This happened at a time when over-crowded hospitals could not cope with the number of patients waiting in gloomy corridors for medical attention. Then the popular remedy was not to laden the country with debt in order to build new hospitals but to subcontract such onerous contracts to the private sector.

As can be expected due to competition, health services were invariably procured at cut-throat prices which saw the private sector sweat under the rising costs of nefarious fixed-rate contracts. One is not surprised to notice how in Britain this vast dependency on the private sector did lead to complacency on the monitoring of quality of services. Furthermore, the procurement mechanism encapsulating Britain’s public services explains why mounting cash flow strictures grasped Carillion and sent it penniless to the liquidator’s arms.

Back home, can we rest on our laurels that manufacturing sector is turning the corner. Certainly not – we require a quiet revolution in learning new skills through a different mind-set; one focused towards innovation, research and development. These are the building blocks of present and future technology where young businesses compete to provide cutting-edge services and products – having access to an innovation philosophy leading to proficiency in manufacturing.

George M. Mangion

[email protected]

The writer is a partner in PKF an audit and business advisory firm.