‘Attractiveness’ is in the eye of the investor | Ronald Attard

The recent EY-Partheneon Malta Attractiveness Survey suggests that investor confidence in Malta seems to have bounced back, since hitting an all-time low over the past two years. Nonetheless, it also points towards several ‘concerns’: including possible future changes to Malta’s taxation regime; and the impact of economic growth on the country’s environment, and infrastructure. This seems to echo recent calls by the Finance Minister, that Malta needs to ‘change its economic model’. Would you say, then, that the results of your survey validate that suggestion?

It’s an interesting way of looking at it: but I see what you mean. In a sense, you’re right to point out that connection… because it’s true that the survey delves into the issues you mention.

But let’s take a step back, and look at what the survey was trying to gauge. When we talk about ‘investor confidence’: what are we talking about, exactly? Very simply, it’s an answer to the question: ‘Do you find Malta attractive, or unattractive?’

Historically, Malta used to enjoy very high levels of confidence, in that regard. If you go back around 10 years, for instance: foreign investors would say [in answer to the above question] that part of what made Malta attractive, was its people: the fact that we are English-speaking; that there were certain skill-sets present on the island, and so on.

Now, however, ‘skills’ are among the challenges identified by the survey. If you look at the ‘People’ section of the questionnaire – and compare it to previous years – you will note that certain factors that used to be at the top of the list, are now in the middle.

‘Flexibility of labour’; ‘local labour skills’; ‘labour costs’… these have all moved down, in the list of positive factors; and another area that has deteriorated, in recent years, is the ‘Stability of Transparency of Legal and Regulatory Environment’.

But to answer your question more directly: our survey also asked about the “environment and social factors that Malta should prioritize to increase investment attractiveness.” The answers speak for themselves: “Quality of built and urban environment, including recreational spaces”; “Preservation of rural and natural areas”; “Green spaces outside urban areas”…

So yes: the survey does indicate that the ‘quality-of-life’ issues Maltese people so often complain about – traffic; overdevelopment; the lack of open spaces, etc. – are beginning to feature, also as a factor influencing investor confidence in Malta…

Another thing that emerges – from the same ‘Environment’ section – is a concern with ‘waste management’; ‘water quality and conservation’; and other issues pertaining to Malta’s infrastructure. Doesn’t this also tie in with an economic policy that depends so heavily on population growth?

I’m reluctant to answer that, because I don’t want to be misinterpreted as saying that ‘I don’t want foreigners in the country’. On the contrary: I think that what Malta has achieved, by bringing in more foreigners, has been very positive; it has transformed us into a more diverse, cosmopolitan country.

Now: could we have done a better job of integrating those foreigners, and making them feel more part of the Maltese community? Yes, of course I think that…

The issue goes beyond a mere concern with ‘foreigners’, though. It’s also a numbers-game. It is hardly surprising, for instance, that Malta experienced power failures in the peak summer months. Our population has almost doubled in 20 years; and so, too, has ‘demand for electricity’.  That concern would remain the same, even if Malta was populated only by Maltese citizens…

Exactly, I couldn’t agree more. In fact, in our surveys we never refer to ‘Maltese citizens’; we only ever talk about ‘people residing in Malta’… and I think that’s what we should strive to achieve.

But still, the question remains. In a county which is enjoying full employment; and which is so small – we even make a point about Malta being ‘one of the most densely populated countries in the world’ – shouldn’t we be trying to change our economic metrics, in terms of what we are trying to achieve?

Let me put it another way: historically – and probably, because of the size of the country – we have always emphasised ‘employment’, only in terms of ‘the number of jobs’. And it’s the same with tourism: we tend to measure success, in the tourism industry, by the ‘number of tourists arriving each year’. It’s always ‘numbers, numbers, numbers’… in a nutshell, ‘quantity’.

But should quantity be the only measure? Because as you pointed out: numbers have repercussions. Not only on roads, traffic, waste-management, and so on; but also, on our social services. Schools, for instance. Are there enough of them, to cater for the growing population? And eventually, the question will extend to the health services, too. Will one hospital continue to be able to cope, with a much higher demand? And the same, naturally, goes for retirement homes, and so on.

So if you take a long-term approach to Malta’s economic development – which is what we try to do (and let’s face it: it’s not exactly ‘rocket-science’, either) – the implications are inescapable: yes, a growing population – regardless whether of ‘foreigners’, or ‘Maltese’ - is going to place further strain on our infrastructure.

But then, the question becomes – and it’s not for me to answer – ‘what is our vision, for Malta’?

It might not be your call to make: but how would you answer that question, if it was?

Well: let us, for argument’s sake, imagine that one possible vision for the country, was to make Malta ‘the best place to live in the Mediterranean’ – for anyone: Maltese, or foreign. I’m not saying it’s the only vision; but let’s say we make that our objective, for now. How, then, do we go about achieving it?

Perhaps – given everything that emerges from this survey, for instance – it could be by pushing for a better ‘quality of life’; by focusing more on the environment and infrastructural problems that we’ve already mentioned.

But there’s another factor that comes into play: as I said earlier, one of the areas where Malta is losing its ‘attractiveness’ concerns the skills of its workforce. People are no longer finding the skills they are looking for, among the local population, when deciding whether or not to invest here.

Bearing in mind that we have full employment, anyway… is the current economic objective to ‘create more jobs’, the right one for Malta at the moment? Or should we focus more on ‘upskilling’ the workforce… and potentially, Malta could start outsourcing other functions, to other countries, like others are doing?

Ultimately however, it boils down to the same question of ‘quality’ versus ‘quantity’…

On the subject of labour, though: part of Malta’s attractiveness to foreign investors, is surely the fact that their wage-bill would be a lot lower here, than in other parts of Europe. Doesn’t this create a contradiction? On one level, we are attracting investors here on the strength of our ‘cheap labour’… and on the other, we expect the quality of those workers’ lives to somehow ‘improve’ (without also improving their salaries….)

To be honest, our survey didn’t ask that question, in so many words. The most relevant answer is probably the one about ‘labour costs’; and what emerges is that we are actually NOT all that competitive, on that score.

Malta is in fact, becoming expensive, when compared to other jurisdictions. If you just look at Eastern Europe, for example; the wage-bill will be higher in Malta, than in a number of those countries. Partly because wages here have gone up, over the years – relative to other jurisdictions - but partly because the cost of living has also increased…. and this, of course, is an issue that is affecting not just Malta, but all of Europe.

All the same, Malta can probably no longer be regarded as a ‘low-cost destination’, today. We certainly can’t compete on labour costs, alone. But that only means that we have to look at the other advantages that we still have...

Before turning to those advantages, however: the ‘elephant in the room’, so to speak, remains taxation. For several years, Maltese governments (of all political hues) have been battling an international drive towards ‘tax harmonisation’ – which would effectively nullify any competitive advantage Malta currently enjoys, on that front. How serious a threat is this, to Malta’s investor-attractiveness?

First of all, I think there are a lot of misunderstandings, with respect to what ‘tax harmonisation’ means. For instance, we need to establish which initiatives we are talking about; because there are at least four initiatives, which all fall under the ‘harmonisation’ umbrella.

Let’s start with the [proposed cap of] 15%: that measure, known as the ‘Pillar 2 directive’, is aimed only at multinational corporations – companies with a turnover of over E750 million. As such, it won’t hit all Malta’s investment sectors; but only those groups which, at global level, exceed this threshold.

Then, there’s another initiative called the ‘Unshell Directive’ – also known as ‘Anti-Avoidance 3’. This is aimed at all companies, which lack ‘significant person-functions’ in their host countries: in other words, companies which don’t have a very large local footprint.

This second proposal may raise matters which need to be understood more deeply than the first; because it will hit more or less every single company, under the sun. This proposal blackballs’ these companies, by saying: ‘They are not entitled to the benefits of double-tax treaties; they are not eligible for the protection of European tax directives’… and what’s worse, their profits will be ‘recaptured’, in the country of the shareholder.

So if, for argument’s sake, there is a German company with a presence in Malta: in any case, the profits of the Maltese company will be taxed again, in Germany.  The most they will get – if anything at all – is a deduction, on the tax paid in Malta.

On top of that, there is another proposal: the so-called ‘DEBRA’ directive. This one’s a bit more complex – it’s mostly about tax deductions – but again, it will probably place a limit on the deductions that can be offered in Malta.

The real problem, however, is this. Put yourself in the shoes of an investor: to make your Maltese presence work, you will have to think about all the current directives, and also the ones being proposed. And there are many more than the ones I’ve already mentioned. Already being enforced, for instance, is ‘DAC 6’ – and there’s a ‘DAC 7’ and ‘DAC 8’ in the pipeline. Then, there’s ‘ATAD 1’, ‘ATAD 2’ and ‘ATAD 3’…

I’m assuming all these are taxation directives which will likewise affect Malta’s competitiveness; so I won’t bother asking what any of that stands for…

… the point, however, is that there are already overwhelming obstacles that investors have to deal with - and as times goes by, there will be even more – before they even take their first trip to Malta. And as the Italians say: ‘il gioco vale la candela’? [Is all this hassle, worthwhile?] Because even if those companies do manage to ‘tick all the boxes’: the process itself is so long, and so exhausting, that they might still conclude it’s not worth their while anyway.

And this, I think, is the main concern here: it’s not so much the one individual proposal – the Pillar 2 directive – that everyone is so concerned about. It’s that there are so many of these proposals, all at once, that it makes multi-nationals lose their appetite, to relocate to countries such as Malta.   

When government officials talk about the same concerns, they tend to project it is an example of how other European countries are ‘jealous of our economic success’. They argue that – having been so successful, at attracting companies from, say, Germany… the rest of Europe wants to put a stop to it, once and for all. Is there any truth to that perception?

Well… it is an issue about ‘competition’, at the end of the day.

Tax has always been used to attract foreign direct investment, all around the world. But what we need to be conscious of is that there are other jurisdictions which use the same forms of tax-incentives, as Malta – such as Luxembourg, Belgium, and the Netherlands – and my concern is that some of these measures grant much more protection to those jurisdictions, than to jurisdictions such as Malta and Cyprus.

For example: in practice, the Unshell Directive may not impact Belgium, Luxembourg and the Netherlands, in the same way as Malta; because it is easier to shift people around, on mainland Europe. One may question whether there are indeed additional implications for peripheral island nations, which do not enjoy that luxury.

At the same time, however: we need to remind ourselves that we are, in fact, on the periphery of Europe. And for all the disadvantages this brings… we tend to forget, sometimes, that being a small island state also has its advantages.

This is why, ultimately, I think we should also focus on all the aspects which DO make Malta more attractive: our people; the ‘social stability’ of the country… all the qualities which we, ourselves, appreciate as a ‘good life in Malta’.

Naturally, we also have to look into those areas where we are no longer as attractive, as we used to be. Some of those – like taxation, and labour costs – may be difficult to address, right now. But others – like labour skills, or improving the quality of our built environment – are clearly within our reach, as a nation.

Which brings me back to the question of ‘what makes Malta attractive’, in the first place: it’s a jigsaw puzzle, really. Tax is certainly one of the pieces, but… do we want it to be the most important one?