Note to reader The titles in the GMB series of Doing Business with… guides for each of the 10 countries that joined the European Union on 1 May 2004 were first published in hard copy over the 18 months preceding entry. Since publication, there have been changes in the law and regulatory environment in each country, both in the period up to accession as countries strove to complete the harmonization of their systems with the EU’s acquis communautaire body of legislation and directives and during the 18 months since. In some countries there have been changes in the taxation regimes or in accounting regulations. Change has occurred in political environments too, following parliamentary elections or in the balance of coalition governments. The economic climate of some states has been affected by the continuing malaise of the EU15 economies. Six of the EU10 (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovakia) have entered the EU exchange rate mechanism 2, the eurozone’s ante-chamber, and expect to join in 2007 or 2008. The Central European states are less advanced in meeting the eurozone entry criteria and previous plans for early entry have been modified with entry dates slipping to 2009–2010 or later. All of these developments are reflected in the revised ebook editions, which GMB now offers in its online EU10 collection. The texts of the revised editions have been amended accordingly and the changes are tabled in the accompanying updates to each ebook for the benefit of readers who have been working with the original edition. Further updates are programmed at regular intervals and readers purchasing ebook editions now have the opportunity to take out annual subscriptions for the update services. In this edition of Doing Business with Malta, updates are included for the following chapters: 1.1, 1.4 and 4.4.
Doing Business with Malta
GLOBAL MARKET BRIEFINGS
Doing Business with Malta
Consultant Editors: Marat Terterov and Jonathan Reuvid
GMB
Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published in 2003 and updated in 2005 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors Hardcopy ISBN 1-905050-26-7
E-book ISBN 1-905050-63-1
British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library
Library of Congress Cataloguing-in-Publication Data Doing business with Malta / consultant editor, Marat Terterov and Jonathan Reuvid. p.cm. – (Global market briefing) “In association with: Malta Financial Services Centre, AVMT Advocates, Malta External Trade Corporation Ltd.” Includes index. ISBN 1-905050-26-7 (Hardcover) 1. Malta--Commerce. 2. Business enterprises--Malta. 3. Investments, Foreign--Malta. 4. Malta--Economic conditions. I. Terterov, Marat. II. Malta Financial Services Centre. III. Series. HF3590.5.Z5D65 2003 330.9458’5--dc21 2003013320
Contents Foreword Edward Fenech-Adami, Prime Minister of Malta
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List of Contributors
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Map 1 The Maltese Islands: Malta, Gozo and Comino
xxxi
Map 2 Malta’s Capital: Valletta and Surrounding Districts Introduction Marat Terterov
xxxii xxxiii
Part One: Background to the Market 1.1
The Republic of Malta: a Country Profile John Portelli, Enterprise Consultancy Services Updates are given at the end of this chapter
3
1.2
The Republic of Malta: a Political Overview John Portelli,Enterprise Consultancy Services Legal Framework AVMT Advocates The Republic of Malta: the Economy John Portelli, Enterprise Consultancy Services Updates are given at the end of this chapter
15
Foreign Trade Malta External Trade Corporation Ltd Malta and the European Union Simon Busuttil
44
1.3 1.4
1.5 1.6
24 28
59
Part Two: The Scope of the Market 2.1 2.2
Tourism and Leisure Malta Tourism Authority Telecommunications Malta Communications Authority
69 75
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2.3 2.4 2.5
2.6 2.7
2.8
Contents
Malta Freeport and Related Commerce Malta Freeport Ship Registration AVMT Advocates Information Technology: its Use and State of the Industry in Malta Pierre Mallia, Enterprise Consultancy Services Limited Printing Industry Compiled by METCO Agriculture Dr Philip von Brockdorff, Permanent Secretary, Ministry for Rural Affairs and the Environment Furniture Industry Stefano Mallia, Director, EMCS Ltd
84 94 101
111 115
120
Part Three: The Financial Sector 3.1
3.2 3.3 3.4 3.5 3.6
Regulatory Framework for Financial Services and International Business Michael Xuereb, Director Business Development, Malta Financial Services Authority Maltese Banking within the Financial Services Sector Timothy H Fitzpatrick, COO, HSBC Bank Malta plc Monetary Policy Central Bank of Malta Insurance Business Dr Anton Felice, Malta Insurance Association Investment Funds and Investment Services Angela Carabott, Valletta Fund Management Limited Case Study: Blevins Franks William Boyle
137
145 149 154 160 165
Part Four: Getting Established: The Taxation and Legal Environment 4.1 4.2 4.3
4.4
4.5
Business Structures AVMT Advocates Property Legislation AVMT Advocates Investor Incentives Stephen Zerafa, Communications & Public Relations, Malta Development Corporation Taxation System and Business Environment Deloitte & Touche Updates are given at the end of this chapter Accounting and Auditing Deloitte & Touche
171 176 179
183
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Contents
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Part Five: Business Development: Operating an Enterprise 5.1 5.2 5.3 5.4 5.5
Arbitration AVMT Advocates Intellectual Property: Patents and Trademarks AVMT Advocates Residence and Employment Permits for Foreigners AVMT Advocates Trusts AVMT Advocates SME Sector Enterprises Institute for the Promotion of Small Enterprise Limited
201 206 215 220 226
Part Six: Appendices Appendix 1: Useful Web Links and Website Reviews Appendix 2: Contributors’ Contact Details
231 233
Index
237
Other titles in this series from GMB
245
Foreword Malta has an established and thriving manufacturing sector with over 250 foreign-owned companies representing about one fifth of the labour force and accounting for about a quarter of Malta’s GDP. Malta also has a growing services sector, increasingly geared towards providing a wide range of financial and other services in support of business activity within Europe, North Africa, the rest of the Mediterranean region and even beyond. Malta’s principal attractions as a business location are its strategic geographic position, its excellent communications with the rest of the world, a stable and pro-business political context, a secure and socially welcoming environment, a skilled and flexible English-speaking labour force that is cost-effective, and an efficient tax system. Company law in Malta is based on British and EU practice and all relevant legislation is also published in English. Businesses can rely on a modern digital communications infrastructure and efficient air and transportation links. A number of international banks and other financial institutions operate directly from Malta. Business incentives are clearly stated and are integrated within one legal framework – the Business Promotion Act. Malta’s main resource and its principal strength has long been, and remains, its labour force. It is competitively priced and indirect social costs are very low. The labour force is generally highly skilled and well educated, multilingual, flexible and very open and ready to receive additional training. Business labour relations are particularly good with almost no industrial unrest. It is a resource in which the Government of Malta is continuously investing. The educational system in Malta has a long-standing tradition and is largely based on the British model. Over the last few years, there has been a large increase in the number of university graduates and there is also a particular focus on other opportunities for post-secondary education to reach an even greater number of potential beneficiaries. At the same time, the Employment and Training Corporation has expanded its activities to provide further opportunities for additional training to the existing workforce.
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Today, there is an additional and very important reason for doing business with Malta – its imminent membership of the European Union. Malta is now an EU accession country, with membership negotiations expected to be concluded before the end of 2003 and with EU accession expected around January 2004. This is a crucial and determining moment for Malta. It is also a time of great opportunity for doing business with the country. Edward Fenech-Adami Prime Minister of Malta
List of Contributors Dr Anton Micallef graduated as a Doctor of Law (LLD) from the University of Malta in 1984 and as Doctor of Philosophy (PhD) in 1991 from the University of London. He is currently senior lecturer in International Law at the Law Faculty of the University of Malta and is managing partner of the Law Firm AVMT Advocates with offices in Malta and London. He practices international and commercial law in Malta and overseas. Over the last decade he has advised a host of European companies on cross-border commercial law matters and has experience in corporate law issues arising in a number of countries, mostly in Italy, but also within other member countries of the EU, the Middle East and the US. In 1989 he acted as international law consultant to UK Government Inquiries appointed by the Home Office and since that date has been involved in advising Government Ministries & Agencies on international, commercial and community law issues including drafting of legislation. In privatization work Dr Micallef leads a highly proficient and experienced team of lawyers and business consultants with an in-depth knowledge of the transport, aviation, energy and telecommunications sectors. He is a member of the American Society of International Law, the British Institute of International and Comparative Law, the University of Malta’s Senate, the Malta Chamber of Advocates and the national supervisory committee responsible for Lawyers’ professional conduct & ethics. Dr Micallef is fluent in Italian and English. Dr Andrea Gera de Petri BA, LLM (Lond), LLD graduated with a BA in Legal & Humanistic Studies (Summa Cum Laudae) in 1996, Doctor of laws in 1999 from the University of Malta, and in 2000 obtained the degree of Masters of Law (with merit) from the University of London (UCL). At Masters level he specialized in international commercial and maritime law. He is a Chevening Scholar and has been in legal practice with the firm for three years. His main areas of practice include: corporate law and finance, contract law (including sale and purchase & share sale agreements), commercial law, mergers and acquisitions, maritime law, property law, international trade, aviation law, tourism law and alternative dispute resolution. He is fluent in English, Italian and Maltese.
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Dr Audrey Mc Cormick LLD, Mag Jur (Eur Law) graduated as a Doctor of Law in 1997 from the University of Malta, and in 1998 obtained the degree of Magister Juris in European Law from the University of Malta, specializing in company law, taxation, and intellectual property law. She has been in legal practice with the firm for six years. Her main areas of practice include: corporate law and finance, intellectual property law, commercial law, maritime law, international trade, probate law and trust law. She is fluent in English, Italian and Maltese. The Central Bank of Malta was formally established in 1968 in terms of the Central Bank of Malta Act. In terms of the Act, the Central Bank has exclusive responsibility for the formulation of monetary policy in Malta, with the primary objective being that of safeguarding price stability. The bank is also responsible for safeguarding financial stability and payments systems in Malta, issuing notes and coins, and advising the government on economic and financial matters. In particular, it is also responsible for making its recommendations to the Minister of Finance on matters related to exchange rate policy. The Central Bank of Malta also collaborates with other bodies to promote the collection of statistics and the analysis of economic issues. The highest decisionmaking body of the bank is the Board of Directors. Mr Michael C Bonello and Mr D A Pullicino are Governor and Deputy Governor, respectively. Deloitte & Touche Tohmatsu is one of the world’s leading professional services organizations. The member firms of Deloitte & Touche Tohmatsu deliver world-class assurance and advisory, tax, and consulting services. With more than 100,000 people in over 140 countries, the member firms serve over one-half of the world’s largest companies, as well as large national enterprises, public institutions, and successful, fast-growing global growth companies. Their internationally experienced professionals strive to deliver seamless, consistent services wherever our clients operate. Deloitte & Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity. Their firm is the Maltese member firm of Deloitte & Touche Tohmatsu. This gives the firm access to a network of specialists all over the world. With more than 150 people, Deloitte & Touche, Malta is a leading provider of auditing, taxation and consulting skills to an extensive client base. The firm serves large significant international and national clients as well as numerous smaller family type businesses which all benefit from our policy of personal partner involvement. As a member firm of Deloitte & Touche Tohmatsu, they consistently use integrated methodologies and technology with a view to providing high-quality services that meet their clients’ needs. The origin of the firm can be traced back to one of Malta’s first accountants whose portfolio of clients comprised a number of Malta’s leading family-owned businesses. Over the years the practice
List of Contributors
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expanded steadily and is now firmly established as one of Malta’s leading providers of professional services. In 1989 their firm was the first Maltese practice to become a full member of one of the Big Four (then Big Six) international accounting firms. Mark Grech was educated at the University of Malta where he obtained a degree in Business Management and later on became a qualified accountant. He joined Malta’s public service in 1986 and in 1993 was appointed deputy head of the Maltese Inland Revenue’s International Tax Unit. He was actively involved in drafting Malta’s tax legislation in the financial services sector, especially the insurance tax legislation in 1998. In 1999 he became a member of Malta’s tax treaties negotiating team and also participated in the screening process relating to the direct taxation chapter in the context of Malta’s successful bid to become a member of the European Union. Mark joined Deloitte & Touche, Malta as tax director in October 2000 and has assumed responsibility for all the tax functions within the Malta firm. He is an active member of the Direct Taxation sub-committee of the Malta Institute of Accountants and an examiner in taxation for The Association of Chartered Certified Accountants of the UK. Paul Mercieca is currently the managing partner of Deloitte & Touche, Malta, having held this position for the last five years. He also acts as the lead client service partner for a large number of clients operating in various sectors of the economy. In 1980, having previously qualified with Turquands Young & Co, Paul founded Manduca, Mercieca & Co, when together with Andrew Manduca they took over the practice of a sole practioner. Over the years, Paul was instrumental in building up the practice to what it is today and was particularly responsible for the firm being accepted as a full member of Deloitte & Touche (then Touche Ross) in 1989. Throughout his career, Paul has been directly involved in a variety of disciplines and service lines including in particular corporate services, taxation and auditing. Paul is also responsible for the firm’s risk management programme. Paul served as a member of the Accountancy Board for eight years between 1988 and 1996 and has served on various subcommittees of the Malta Institute of Accountants. Currently he serves on the Independence and Ethics Committee and the Disciplinary Committee. Economic and Management Consultancy Services Limited (EMCS Ltd) specializes in the provision of economic research and management consultancy to private enterprises, government and institutions in Malta and overseas. Over the past decade, EMCS Ltd has established a sound reputation as one of the leading management consultancy firms in Malta. The company currently offers a full range of complementary management consultancy services tailored to each individual client’s specific requirements, by combining the different specialized areas of
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expertise of staff members and the firm’s collective experience and indepth knowledge of the various sectors of Maltese economy as well as a thorough understanding of the Mediterranean region and the European Union. The service portfolio offered by EMCS Ltd is not solely limited to performing the higher level, strategic analysis and preparing recommendations, but also offers clients the support in turning plans into concrete action. While each assignment is tailored to the specific requirements of the client, the main categories of services offered by EMCS Ltd can be listed as follows: economic and business environment analysis, strategy design and development, new venture development, marketing strategy formulation and management, financial management, EU consultancy and lobbying, and ISO 9000-related services. Stefano Mallia is director and consultant at EMCS Ltd. Whilst at EMCS, Stefano has worked on a number of management consultancy jobs with a number of leading firms in both the manufacturing and services sectors. Over the past two years he has focused exclusively on EU-related work and has been involved in a number of EU impact sectoral studies (eg furniture and meat processing) as well as firm specific studies. Stefano also provides private sector firms with EUrelated training and provides consultancy to a number of government ministries. Pierre Mallia is a director of Enterprise Consultancy Services Limited, (www.enterpriseconsult.com) a consultancy organization based in Malta that has carried out assignments in Europe, Africa and the Middle East. Pierre has been active in the IT industry for 14 years and holds a Bachelor’s degree in Computer Science from Kingston University. He is also the managing director of SoftAccess International, (www.softacc.com) a software development company based in Malta. John Portelli has been involved in human resources management and development for over ten years. During this period he has conducted training and development programmes as well as HR consultancies overseas. He is engaged at Malta Freeport Terminals were he is presently undertaking a series of HR related assignments and departmental restructuring in what is one of the major container terminals in Europe. He has been involved with Enterprise Consultancy Services Ltd since 1998. Through ECS he has undertaken a number of assignments for and on behalf of a number of organizations, notably the Chartered Institute of Logistics and Transport, the Bahrain Institute of Banking and Finance, the Malta International Training Institute, the Commonwealth Secretariat, Europa Publications, the EU Documentation Centre, Drewry Shipping Consultants and the World Bank. He has also designed and run a number of management development programmes for public officers. He is a visiting lecturer and examiner at the University of Malta’s Faculty of Economics, Management and
List of Contributors
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Accountancy. In 2000, he was appointed Executive Secretary of the Privatisation Unit. He was and still is involved in the privatization programme underway in Malta. Also in 2000, he was appointed Chairman of the eMalta Commission, the unit entrusted with the development of an information society and economy in Malta. Doing Business with Malta is his fourth international publication. The HSBC Group expanded its operations in Malta in 1999 with the acquisition of a 70 per cent shareholding in HSBC Bank Malta plc (formerly Mid-MedBank plc). The bank is Malta’s largest financial institution, with a history dating back to 1882, and offers a comprehensive range of financial products and services through its network of branches and offices. Institute for the Promotion of Small Enterprises Limited (IPSE) was officially set up in 1998 through a venture involving the Chamber of Commerce, the Federation of Industry and the Central Government. Originally, a department within the Malta Development Corporation catered for the needs of small enterprises. The Ramboll Report, which was commissioned in 1996, identified the need for the setting up of an independent and autonomous organization in a bid to address the evergrowing needs of small enterprises on the island. IPSE was initially established to assist enterprises in restructuring their operations in the context of the removal of levies and the impact of a liberalized market. Manufacturing firms were to be the core target group of the Institute. In addition, IPSE was also earmarked to assist enterprises to become compliant with various directives and practices as advocated by the European Union through the Acquis Communitaire. As part of its brief, the Institute also encourages and assists in the formation of new startup ventures particularly those nurturing innovative concepts to the island. New entrepreneurs can turn to IPSE for access to finance that is so vital in the initial stage of a business start-up.The Business Incubation Centre is another tool operated by IPSE that seeks to promote the growth and success rate of new start-ups. The incubator targets industries that operate in information technology, renewable energy resources and biotech projects. Most of IPSE’s programmes of assistance are subject to the submission of a business plan from the client. Enterprises benefit from a wide range of services that also includes business counselling, human resource development, the upgrade of operations and management systems, and export marketing initiatives. Backed by a team of professionals, the Institute for the Promotion of Small Enterprise is also equipped with a resource centre housing books and periodicals dealing with business oriented subjects.
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The Malta Communications Authority (MCA) is the national agency responsible for regulating telecommunications, eCommerce and postal services. It was established on 1 January 2001. The main purpose of the Authority is to ensure a smooth transition to liberalized markets, to promote sectoral investment, to stimulate competition in the market and to safeguard the sustainability of those markets. The raison d’etre and indeed, the scope, of the MCA is to remove existing barriers with the overall objective of ensuring sustainable competition and consumers’ value for money. So, quite apart from overseeing full liberalization, the MCA’s role is strategic rather than interventionist, serving to shape the environment in such a way that competition will prevail, making for service choices. Malta Development Corporation is the government body that administers the incentives package as well as the 10 industrial estates throughout Malta and its sister island Gozo. The Corporation serves as a one-stop-shop for industrialists interested in setting up in Malta. However, since the Corporation places heavy emphasis on ‘investment aftercare’, the relationship between the MDC and its clients usually goes far beyond the initial setting-up period. Simon Busuttil was founding director of Europa Research & Consultancy Services (ERCS), a Valletta-based firm which specializes in European Union affairs. During the past four years, Dr Busuttil was seconded to the Government of Malta to set up the Malta-EU Information Centre (MIC) and to lead Malta’s information campaign on EU membership. Dr Busuttil also served as a member of Malta’s Core Negotiating Group during accession negotiations. Dr Busuttil has extensive lecturing and training experience on European Union issues and has also written prolifically on the subject. The Malta External Trade Corporation (METCO), set up as a joint venture between the public and private sector, acts as the national focal point for external trade. METCO’s role is primarily one of support to industry through the provision of a range of services to individual enterprises in their attempts to internationalize. Such support is delivered through practical services in a number of key business areas. With a membership base that traverses Malta’s manufacturing, trading and services industries, METCO acts as a contact point in Malta to those entrepreneurs wishing to establish business alliances with Maltese firms with a view of exploring the prospects of trade and transitional cooperation. The Malta Financial Services Authority (MFSA) is the single licensing and supervisory authority for financial services activities, including banking, investment services, insurance and securities listing.
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The Authority is set up by law and operates as an independent institution that reports to Parliament on an annual basis. The MFSA’s regulatory and operational functions are exercised within strict legal demarcations. Policy and general direction, licensing and supervision, and management and administration are separately controlled, with the three organs coordinating at top executive level. Regulatory policies are designed to promote fair competition and consumer choice in financial services. The Authority adheres to a rigorous quality assurance regime while embracing a quick-response style of regulation that gives space for innovation and encourages product development. Since its establishment in 1988, Malta Freeport has experienced remarkable growth and is now a major maritime transhipment logistic centre in the Mediterranean region. The three main activities that have been established, namely two container terminals, the distripark facilities and an oil products terminal are all functioning well and have amply proved their worth. Throughout its development the Freeport has invested heavily in a unique combination of state-of-the-art facilities dedicated to transhipment top-notch technology, as well as personnel development. The carriers using Malta Freeport as their transhipment hub enjoy a multitude of benefits including a strategic location with minimal diversion distances, cost-effective operations, proven track record, guaranteed productivity levels, regular worldwide network connections, all-year favourable weather conditions, an easily accessible port entrance, no congestion despite Malta Freeport’s rising traffic volumes handled and an unmatched quality service complying with ISO 9001:2000 standards. The step ahead is to consolidate the current traffic volumes and to take the business further in order to continue participating successfully in the Mediterranean containerization trade. The Malta Insurance Association (MIA) is a non-profit making organization. Its main objective is to represent, promote and protect the common commercial and trading interests of insurers in Malta. The Association also promotes a professional code of conduct within the insurance community, considers and determines any allegation of malpractice by a member and provides an arbitration service to the industry. The Malta Tourism Authority (MTA) has a diverse role, but one which in essence is all about creating and fostering relationships. They are the tourism industry’s regulator and motivator, its business partner, the country’s brand promoter, and are here to form, maintain and manage meaningful partnerships with all tourism stakeholders. Valletta Fund Management Limited (VFM) was the first company of its kind set up in Malta in 1995 following the 1994 Financial Services
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legislation and is one of Malta’s leading fund management companies with a client range of over 30,000 shareholders representing US$440 million funds under management/administration (as at 30 April 2003). VFM provides investors with a range of investment opportunities with access to the domestic and international bond and equity markets. The company also provides comprehensive administration and management services for the formation of investment funds, including professional investment funds for high net worth individuals. VFM’s clients include financial institutions, insurance companies, management companies and institutional investors.
Map 1 The Maltese Islands: Malta, Gozo and Comino
Map 2 Malta’s Capital: Valletta and Surrounding Districts
Introduction To much of the international business community, the Republic of Malta is one of the Mediterranean’s best kept secrets yet to be discovered. This tiny island country, strategically located in the heart of the Mediterranean Sea, is well renowned for its grand history. The reader will recall that the Knights of St John made the Maltese islands their home for over 200 years, a development resulting after the knights and the local Maltese population repelled a five-month long invasion waged by over 40,000 troops of the Ottoman Turkish empire. This major episode in Maltese history, taking place in AD 1565, became dubbed as the ‘great siege of Malta’. Far more recently, during the Second World War, Malta, acting as the major base for the British navy in the Mediterranean, withstood perhaps no less menacing an enemy, when it came under chronic bombardment from the might of the German Luftwaffe and allied Italian airforce. The people of Malta were subsequently awarded the George Cross for their valour in the face of overwhelming aggression by the British Monarch King George VI. Since the 1970s, the Germans, Italians and British have all been returning to the Maltese islands in even greater numbers than during their conflict of the 1940s, though on this occasion the primary reason for their presence has been to partake in Malta’s thriving tourism industry. While the sun, the history and the turquoise sea has drawn countless enthusiasts to this island country, since having acquired independence from the British in 1964, the Maltese government has taken great strides in duly developing Malta as a regional hub for international business. Malta’s former ‘fortress economy’ (having been so dubbed due to the significant British Naval presence on the island) has now been greatly diversified. A relatively tiny country with a population of less than half a million inhabitants, Malta is a fast-growing economy, where GDP has been increasing at around 3.7 per cent annually since 1995. Similar to other small, yet rapidly developing dominions of the former British Empire, such as Bahrain, the United Arab Emirates and Singapore, Malta enjoys a relatively high per capita income of some US$10,000. The country has inherited not only marvellous history and geographical advantages, but also – largely from the foreign powers that dominated its strategic territories – a highly adequate legal, institutional and
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political framework commensurate to the overall requirements of rapid economic and social development. The country today offers the foreign and domestic businessman alike economic stability, healthy economic indicators – inflation rate at around 3 per cent annually and unemployment at some 5 per cent of the labour force – and liberal government policies which, for the most part, work to facilitate the business process. The country’s legal system is founded on the British Westminster model, and the fact that the political system is essentially built along the lines of a Western democracy likens Malta to most states of the European economic area. In fact, membership to the European Union has been a primary topic area of Maltese domestic politics since 1990, when the country first applied to join the EU. While strong debates were waged in the Maltese parliament about the pros and cons of EU membership, the country finally voted in favour of joining the EU bloc in a referendum on 8 March 2003. The referendum was followed by a national election on 12 April 2003, which further confirmed the population’s willingness to join Europe, and Malta will become one of 10 new members of the EU in the next wave of accession scheduled for May 2004. From a business angle, Malta’s accession to the European bloc will mean that a foreign company considering investing in the country will henceforth have access to the entire EU market, including its wideranging array of trade agreements with around one hundred countries worldwide. A substantial boost for business in anyone’s language. However, it is already evident that in the manufacturing sector alone, over 250 foreign companies have established commercial enterprise and operate profitably in Malta. They join some 400 locally owned manufacturing enterprises already operating in the country. The manufacturing sector accounts for around 24 per cent of the country’s GDP, and wellknown international companies such as Dowty Auto, STMicroelectronics (formerly SGS Thompson), and Playmobil, produce a wide variety of goods ranging from GPS modules for mobile phones to car seat heating elements. The government of Malta, which has for some years been seeking to develop this sector, offers investors a wide range of incentives including reduced rates of income tax, investment tax credits and various incentives for job creation. The country has been particularly adept in attracting investment into electronics, light and precision engineering, food, plastics, up-market clothing and semi-conductors industries. Malta’s human resources are of a particularly high standard, and most of the work force is fluent in English and has command of several other European and regional languages. Furthermore, with over one million visitors arriving annually, the tourism industry is equally important to the country’s economy, with Malta generating over E625 million annually through expenditure spent by foreign tourists.
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The government of Malta has been reducing its regulation of certain spheres of economic activity and the scope of the market has expanded in several sectors, including telecoms and the IT sector, which have both grown dynamically in recent years. Both sectors have become highly diversified and competition has become intense. The penetration rate for mobile telephones is impressive and very few professionals on the islands would not display an email address on their business card. Furthermore, during 2002, the government of Malta has conducted several high profile privatization transactions, including the divestiture of a 40 per cent stake in Malta International Airport and a 35 per cent stake in Maltapost. Both of these transactions involved foreign investors. While the Phonecian ancestors of the present Maltese population are known historically as the great trading nation of the ancient Mediterranean, Maltese companies currently export some US$3 billion worth of manufacturing goods and services annually. Many enterprises established in the country have found Malta to be a particularly profitable location to service the Middle Eastern and North African markets. Malta’s impressive freeport, located near the town of Marsaxlokk, ranks amongst the leading transhipment ports in the Mediterranean and is recognized as one of the main ports in the European container traffic league. With assets of this nature, Malta is increasingly coming under the spotlight of international business, as more enterprises are starting to discover the many opportunities that this country offers. This is our first attempt at compiling a significant volume on the topic of Doing Business with Malta. The book is designed for all parties contemplating Malta as a market in which to do business and is primarily divided into five main parts. In Part One we discuss the general background to the Maltese market, where our contributing authors provide a general overview of the Maltese economy, foreign trade patterns and the country’s political system. We also give some historical and demographic background to the Maltese islands, discuss the basis of the Maltese legal system, and analyse the country’s successful bid to join the EU. In Part Two we turn to examining some of Malta’s diversified economic sectors, including high profile markets such as telecoms and IT, as well as the country’s mainstay industries, including tourism, shipping and freeport activities, agriculture, printing and furniture. Part Three of the publication engages in some in-depth business topics relevant to Malta’s financial sector, including banking and financial services, the investment industry, insurance, as well as monetary policy and other public policy topics relevant to Maltese finance. Part Four looks at the legal forms that corporate structures in Malta can take, the country’s taxation and auditing regimes, as well as the fiscal and other incentives which the Government of Malta has been offering investors when seeking to attract their presence to the Maltese islands. In Part Five, our authors look at other
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aspects of commercial legislation relevant to doing business with Malta, including arbitration, intellectual property, work permits and trusts. We also delve into the topic of Malta’s small to medium enterprise sector, significant in itself given the adjustments that many enterprises in this sector will have to make as Malta formally enters Europe in May next year.
Acknowledgements I would like to express my sincere gratitude to Pierre Mallia and John Portelli who hosted my research trip to Malta in September 2002 and made my visit to the Maltese islands both very enjoyable and logistically much simpler than it could have been (given the amount of physical and human territory I had to cover in a limited time). John and Pierre both contributed fine articles towards this publication and helped recommend many other authors of equal quality. I hope our cooperation over the next edition will be of equal enjoyment and effectiveness. I would also like to personally thank all of the individuals who gave their time in preparing articles for this book – which I feel were of a very high standard – as well as the opportunity to meet with them during my visit to the Maltese islands. Each company visit I conducted in Malta was extremely informative and allowed me to learn a great deal about this magnificent island country. Marat Terterov Oxford England May 2003
Part One
Background to the Market
1.1
The Republic of Malta: a Country Profile John Portelli, Enterprise Consultancy Services
Geography and climate Malta is an archipelago in the centre of the Mediterranean between Southern Europe and North Africa. The archipelago is located 50 miles (80.5 kilometres) south of Sicily, 180 miles (289.7 kilometres) from the nearest point on the African coast, 1100 miles (1770 kilometres) east of Gibraltar and 1050 miles (1690 kilometres) west of Port Said. The total area of the archipelago is 122 square miles (316 square kilometres), of which Malta, the largest island, occupies 26 square miles (67 square kilometres). Most of the population live on the island of Malta. The second largest island, that of Gozo has a population of around 30,000. The other islands are small and mostly uninhabited. The topography of the islands is low-lying to the southeast and hilly towards the northwest. At various points the shoreline is deeply indented, providing excellent natural harbours. The capital Valletta lies on a promontory between the two main harbours. Although there are some sandy beaches, the coastline is predominantly rocky. Malta has a typically Mediterranean climate, with warm, dry summers and mild winters. The average annual rainfall is 559 millimetres (22 inches), of which 521 millimetres (20.5 inches) falls between late September and March.
Historical overview c.8000 BC: The Maltese islands formed part of a causeway which joined Africa to Europe. Rising sea levels turned the causeway into a series of island stepping stones. Animal remains found in a cave in the south of Malta belonged to around 36 prehistoric and extinct animals. The bones
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found in the cave, known as the Cave of Darkness (Ghar Dalam), also included a couple of Neanderthal human teeth from about 40,000 BC. It appears that around this time there was a fairly sizeable cave-dwelling population in the Maltese islands. 7000–5000 BC: Possible immigration from south-eastern Sicily. 3600–2500 BC: The Ggantija phase, during which it appears that the agricultural communities existing in Malta developed into a highly articulated culture which led to the development of the megalithic temples of Ggantija, Tarxien, Hagar Qim and Mnajdra. It appears that these communities had an efficient yet primitive social organization. They also built an underground temple and dug burial grounds, implying a cult of the dead. The megalithic temples evidence a belief in the mother goddess represented by massive statues commonly referred to as ‘the fat lady’. Scholars conclude that around 2500 BC the whole civilization may have disintegrated due to illness, due to the disintegration of the social structure, or perhaps due to famine. 2000 BC: The Bronze Age. Most of the remains dating to this period are weapons, defended positions on hilltops or in impregnable places, and fortified villages – inferring that this may have been a period of great uncertainty. 900 BC: The Iron Age. 700 BC: Greek influence. 800–480 BC: Phoenician seafarers arrived on the island to colonize it. 480–218 BC: The Carthaginians took control of the islands when the Phoenician homeland was overrun by the Assyrians and Babylonians. The new rulers used Malta as a trading post as well as a training base for galley crews. Olives and carobs were cultivated. Trade also flourished, particularly in the production of textiles. It appears that the islands had a system of government similar to that of the Carthaginians. 264–146 BC: The three Punic Wars between Rome and Carthage. In 218 BC, Titus Sempronius invaded Malta and the country was incorporated within the Roman Empire. Under the Romans the Maltese enjoyed a certain degree of autonomy. 60 BC: St Paul was shipwrecked in Malta. His companion St Luke noted that the Maltese were ‘barbarians’, inferring that they spoke neither Greek nor Latin. Most probably, they still spoke a pristine form of
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Phoenician with its Cannanite origins. Malta became one of the first Roman colonies to adopt Christianity. AD 117–138: The islands were declared a municipality during Hadrian’s reign. AD 395–870: The Byzantines occupied Malta. AD 870: The commencement of Arab rule in Malta. The greatest legacy of their 200-year rule lies in the Arab words and phrases that played a part in the development of the Maltese language. 1090: The Normans invaded under Count Roger. After negotiations with Count Roger, the Arabs continued to govern the islands for an annual tribute. The Maltese islands were formally incorporated into the Sicilian Crown around 1123 during the reign of Roger II (1105–1154), son of Roger the Norman. 1194–1266: When King William II of Sicily (1154–1164) died, his aunt Constance, the wife of Emperor Henry IV of Germany, inherited the Sicilian Crown. However, Constance’s title to the throne was contested by Tancred of Lecce, who was elected King of Sicily by the Sicilian parliament, and both Sicily and Malta fell under German rule. Henry’s descendants ruled Malta until 1266. 1266–1283: The French Prince Charles of Anjou defeated the Swabians at the Battles of Benevento (1266) and Tagliacozzo (1268). Sicily and Malta fell under Angevin rule. The reign did not last long. In March 1282, the Sicilians rose against the French, and by September the French had left the island. 1283–1500: King Peter of Aragon became King of Sicily and at the request of the Maltese the sovereign of Sicily incorporated Malta into the Sicilian Crown. It was during the Argonese period that the islands were passed through a series of feudal lords. In January 1421, King Alfonso V pawned the islands to Antonio Cardona for 30,000 gold florins. In March 1421, Cardona transferred his rights to Gonsalvo Monroy. The Maltese revolted against Monroy and offered to pay him the 30,000 gold florins he had paid to acquire the Maltese islands. The revolt managed to extract certain rights under a Royal Charter dated 20 June 1428 by King Alfonso V. During the following century, the Maltese islands had a local government (universita) made up of government officials who carried out day-to-day administration, and a local council (consiglio popolare), which was void of any legislative power but could deliberate on local affairs.
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1350: King Ludwig of Sicily established the Maltese nobility. 1530: Emperor Charles V of Spain ceded Malta and Gozo and the fortress of Tripoli to the Sovereign Military Order of St John. The Order was in search of a new home having been expelled from Rhodes in December 1522. The Order selected Birgu as its base. After an incursion by Dragut in 1551, the Order strengthened the island’s defences. 1561: The Inquisition was established in Malta. May 1565: The Great Siege of Malta. Around 200 vessels carrying 40,000 men invaded the Maltese islands. The Turks laid siege for five months but failed to defeat the Maltese and the Knights. Conceding defeat they departed on 8 September. 1566: The founding of Valletta. The city was designed by the Italian architect Francesco Laparelli and funded by Pope St Pius V and the kings of Spain, France and Portugal. During the next two centuries, Valletta gained necessary amenities such as an adequate water supply, a hospital, law courts, a theatre, a library and a customs house. 1592: The Jesuits opened a college in Valletta. 1769: The University of Malta was founded by Grand Master Emmanuel Pinto. 1798: The Knights ceded Malta to Napoleon. The Knights were expelled and the Inquisition was abolished. The French carried out a number of reforms. However, a number of these reforms caused resentment among the Maltese. As a result, in September 1799 the Maltese rose against the French. The ensuing blockade lasted for two years. 1799: Following a request from the Maltese, the Maltese islands were placed under the protection of the British Crown. 1802: The Peace of Amiens decreed that the British were to evacuate Malta, which was to revert to the Order of St John. The majority of the Maltese objected to this decision. The Declaration of the Rights of Man in Malta stated that Malta was to come ‘under the protection and sovereignty of the King of the United Kingdom of Great Britain and Ireland’. The proviso was also added that ‘his said Majesty has no right to cede these islands to any power. . . if he chooses to withdraw his protection, and abandon his sovereignty, the right of electing another sovereign, or of governing these islands, belongs to us, the inhabitants and aborigines alone, and without control’.
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1813: 4,000 people died during a plague outbreak. 1814: Malta became a British Crown Colony following the Treaty of Paris. 1815: The law courts were reorganized. 1835: A Council of Government was established consisting only of nominated members. 1836: Following a visit by the Royal Commission, primary schools opened in various towns and villages. By 1880, there was a primary school in every town and village, although attendance was not compulsory. 1839: Liberty of the press was granted. 1849: The first elections took place for a Council of Government consisting of 10 nominated members and eight elected members. The Council was established by a new Constitution which remained in force until 1887. 1887: Following the granting of a new Constitution, a new Council of Government was established consisting of 20 members, 14 of whom were to be elected members. The 1887 Constitution was disbanded in 1903 in the wake of the language problem. 1914–1918: During World War I, Malta contributed as a hospital base, as a naval base and through services rendered by the Maltese in the British Army and Navy. As a hospital base, it became known as ‘the Nurse of the Mediterranean’, providing more than 25,000 beds for care of the wounded. 1919: In February, Dr Filippo Sceberas convened a national assembly to obtain better constitutional concessions. On 7 June, riots broke out due to general discontent. Four Maltese were shot by British troops called in to quell the riots. 1921: Malta was granted its first self-governing Constitution. This Constitution (known as the Amery-Milner Constitution) separated responsibilities relating to the island’s role as an imperial fortress (eg defence and foreign relations), which were retained by Britain, from domestic affairs, which were put into the hands of a senate and legislative assembly. Men over 21 with the requisite literacy and property qualifications gained the right to vote.
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1930: The Constitution was suspended in the wake of a politicalreligious struggle between Prime Minister Gerald Strickland and the Church over the latter’s interference in the general election. 1932: The Constitution was restored. 1933: The Constitution was withdrawn and Malta reverted to the Crown Colony status it had held before 1814. 1934: Maltese was made the official language of the courts. 1936: An Executive Council was established. 1939: The Macdonald Constitution provided for the setting up of a Council of Government in which half the members were to be Maltese elected representatives. 1940–1945: The island was heavily bombarded during World War II. In April 1942, King George VI awarded the island the George Cross for bravery. In January 1943, with the capitulation of Tripoli, the bombardments began to abate. In July 1943, the islands were used as a base for the Allied invasion of Sicily. On 8 September, the Italian fleet surrendered in Malta. 1947: The MacMichael Constitution provided for self-government for internal affairs. A unicameral system of parliament was introduced. Over-21s were given the vote. The colonial authorities retained control of ‘reserved matters’ such as defence, immigration, nationality, treaties, postal censorship etc. Elections gave Malta its first Labour government. A disagreement over economic aid split the Labour party. Dom Mintoff assumed leadership of the party. 1950: New elections were held. A minority government was formed, led by the Nationalist party leader and Prime Minister Dr Enrico Mizzi. He insisted on dominion status for Malta. Mintoff and the Labour opposition sought integration with Britain or self-determination. Mizzi died in office. Dr George Borg Olivier became prime minister and led two successive coalition governments with the former Labour Prime Minister Dr (later Sir) Paul Boffa. 1953: NATO established its regional headquarters in Malta. 1955: Elections returned the Labour party to government. The new premier, Dom Mintoff, proposed integrating Malta with Britain. An economic report on Malta served as the basis for the country’s first
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economic development plan. A political-religious quarrel between church authorities and the Malta Labour party soured relations. A referendum showed that of the 90,343 votes cast, 67,607 favoured the union with Britain. The result was declared unclear. 1957: Parliament approved the ‘Break with Britain Resolution’ on 30 December following a proposal to reduce the number of naval dockyard employees. 1958: The Labour government resigned in April. The Constitution was withdrawn. 1962: Elections were held under the Blood Constitution. In February, the ecclesiastical authorities declared as a mortal sin any participation in Labour party activities as well as voting in favour of Labour candidates. The Nationalist party won the election and George Borg Olivier was appointed prime minister. On 20 August, Borg Olivier presented his government’s formal request for independence. A referendum in May 1964 resulted in a majority vote in favour of independence. 21 September 1964: Malta became an independent state within the Commonwealth. 1964–1970: Soon after independence, Malta joined the United Nations and also became a member of FAO, WHO and ILO. In 1965, Malta joined the Council of Europe. In December 1968, Malta became a signatory to the European Convention on Human Rights. In 1970, an Association Agreement was signed with the European Community. 1971–1972: A Labour government was elected in 1971. The defence agreement was revised and a new agreement signed in 1972. 13 December 1974: The Constitution was amended and Malta became a republic. Sir Anthony Mamo became the country’s first President. 31 March 1979: British forces left Malta at the termination of the Defence Treaty. 1981–1987: Elections in December 1981 ushered in a period of constitutional crisis. The Nationalist party, led by Dr Eddie Fenech Adami, obtained the majority of votes cast during the election but failed to secure a majority in parliament. Labour continued to govern. Between 1981 and 1984, the Nationalist party boycotted parliamentary sittings. The period was characterized by serious political unrest and deteriorating economic conditions. In December 1984, Mintoff resigned as prime
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minister. Dr Karmenu Mifsud Bonnici succeeded him. In January 1987, parliament agreed that the party gaining the majority of votes was to have a majority of seats in parliament. The concepts of neutrality and non-alignment were enshrined in the country’s Constitution. Elections in May 1987 resulted in victory for the Nationalist party and Dr Fenech Adami became prime minister. 1989: At the Malta Summit, US President George Bush met Soviet Premier Mikhail Gorbachev. 1990: Malta applied for membership of the European Community. 1996: Led by Dr Alfred Sant, the Malta Labour party won the general election. The country’s EU membership application was frozen. The new government sought to strengthen its EU ties while maintaining the country’s neutrality. 1998: Dom Mintoff ’s opposition to Labour policies forced early elections in September. The Labour party was defeated and the Nationalist government reactivated Malta’s EU membership application. 1999: The Helsinki European Council decided to include Malta in accession negotiations. Negotiations commenced in February 2000. 2002: The EU formally concluded its negotiations with 10 applicant countries including Malta at the Copenhagen summit in December. 2003: The referendum on Malta’s EU membership was held on 8 March 2003. A majority of 54 per cent on a 91 per cent turnout vote in favour of accession. The ensuing controversy which arose after the Leader of the Opposition’s refusal to accept the outcome of the referendum, resulted in a snap election being called for 12 April. 13 April 2003: In the elections held on 12 April, the Nationalist Party secured a clear majority in the election which provided the mandate to the Government to sign the EU Accession Treaty in Athens on 16 April. 16 April 2003: The Prime Minister, Dr Eddie Fenech Adami, signed the EU Accession Treaty in Athens.
Form of government Malta is a parliamentary democracy. Sixty-five members elected by universal suffrage sit in parliament, which consists of a single House of Representatives. Elections are held every five years. The House of
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Representatives elects a president for a five-year term to serve as a constitutional head of state. The general direction and control of the Government of Malta is vested in the Cabinet of ministers headed by the prime minister. The prime minister is appointed by the president, and is usually the leader of the party with the greatest measure of support in the House of Representatives. The Cabinet is appointed by the president, upon recommendation by the prime minister. In December 2002, Malta concluded its accession negotiations with the European Union. The majority vote in favour of EU membership obtained during a referendum held in March 2003 was confirmed in a general election held on 12 April. Following its defeat in the polls, the Malta Labour Party, which until the general election had pursued a policy against EU membership, is expected to change its position. The country is also a member of the Commonwealth, the Council of Europe, the United Nations, the World Bank, the International Monetary Fund, the Convention for European Security Cooperation, the European Bank for Reconstruction and Development, the Berne Convention and the World Trade Organization.
Legal system The Constitution of Malta safeguards the independence of the judiciary. Judges are appointed by the president, upon recommendation by the prime minister. However, they cannot be removed prior to retirement at 65, except for a proven inability to exercise the functions of their office or proven misbehaviour and following a two-thirds vote in the House of Representatives. There are four principal jurisdictions: civil, commercial, criminal and voluntary. There is one Court of Appeal for all jurisdictions. The Constitutional Court is the ultimate competent court to assure the conformity of all laws with the Constitution, resolve questions relating to the election of members of the House of Representatives and review all decisions relating to fundamental rights. In 1987, Malta recognized the right of individual petition to the European Courts of Justice and in the same year adopted the European Convention on Human Rights as part of Malta’s domestic law.
Population As of September 2002, the estimated population of Malta was 386,200 of which 49.6 per cent were male and 50.4 per cent female. Approximately 76 per cent of the population was aged over 18. The population grew at an average annual rate of 0.8 per cent between 1990 and 2001. At 1,249 people per square kilometre, the country is one of the most densely populated in the world. At the end of 2001, 33 per cent of the
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population in Malta lived in the northern harbour district, while another 24 per cent lived in the southern harbour district.
Language The national language of Malta is Maltese. However, both Maltese and English are recognized as official languages. Official publications, including laws, are issued in both English and Maltese. Most commercial and banking documents are drawn up in English, as is most correspondence. Practically all Maltese are bilingual and many are also conversant in Italian.
Religion Most Maltese are Roman Catholics but freedom of worship is safeguarded by the Constitution. The Church still retains a strong though diminishing presence in the country’s cultural, educational and social development.
Social indicators Malta has a quality of life which compares well with that of Europe. Health and sanitation facilities are of very high standard and are provided by both public and private entities. Basic living standards are also secured through a comprehensive welfare system. This has resulted in a life expectancy at birth averaging 78.9 years and an infant mortality rate of 4.4 per 1,000 births as at 2001. The UNDP Human Development Index ranked Malta in 30th position out of 162 countries in 2000. The public and private sector run schools in Malta from kindergarten up to post-secondary level. In 2000, the literacy rate was estimated to be approximately 92 per cent for the whole country. The University of Malta is one of the oldest universities within the Commonwealth. During the academic year 1999–2000, some 5,554 students were enrolled in one of the full-time courses, while 808 students followed a part-time degree or diploma programme run by the University of Malta. In 2001, the number of university students enrolled in day courses reached 6,281. There are currently over 500 full-time international students following first or post graduate courses in Malta. The University of Malta also houses the Mediterranean Academy of Diplomatic Studies, the IMO International Maritime Law Institute and the International Ocean Institute Malta Operational Centre. The University of the Third Age, inaugurated in 1993, had a membership of around 769 during the academic year 2001–2002.
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Malta’s road to EU membership 1970–1990: Association Agreement Malta’s formal relations with the EU commenced in 1970 when the country signed an Association Agreement with the European Community. This Agreement was extended in 1977, first by agreement between Malta and the EC. After December 1991, this Agreement was automatically renewed on an annual basis without notification. In the late 1970s, a financial protocol and provisions for improved market access for Malta were added to the Association Agreement. Up until 1996, four financial protocols were promulgated between Malta and the EU.
1990: membership application On 16 July 1990, Malta submitted its application for EU membership. In 1993, the Commission, while expressing itself in favour of the membership bid, conditioned the start of negotiations to the completion of a wide-ranging economic reform programme. In April 1995, the Commission decided to commence negotiations in view of the implementation of the economic reform programme. Negotiations were to start six months from the end of the ongoing inter-governmental conference which resulted in the Amsterdam Treaty.
1996: freeze on membership The general election in 1996 returned the Labour party to government. The new government froze the country’s EU membership application. As an alternative, it sought to develop a close relationship short of membership. In view of these developments, Malta was excluded from the accession negotiations which opened on 31 March 1998.
1998: reactivation of membership Following a change in government in 1998, Malta reactivated its membership application. In October 1998, the European Council requested the Commission to prepare an updated opinion on Malta on the basis of its 1993 report.
1999: screening process In February 1999, the European Commission published its updated report on the Commission’s opinion on Malta’s application for EU membership. In its recommendations, the Commission called for the immediate screening of Malta’s legislation so that membership negotiations could start. In its report, the Commission stated that:
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Background to the Market l at a political level, Malta did not seem to have any major problems
in adapting its administrative and government structures for participation in EU institutions; l the reintroduction of VAT was welcomed; l a customs union should be established ‘as a first step’ and import
barriers removed; l the public deficit should be reduced; l industrial property law should be adapted to EU standards; l the financial sector should be completely liberalized; l state aid to the shipbuilding and ship repair industries should be
brought into conformity with EU rules; l markets enjoying a monopoly, such as telecommunications and postal
services, should be open to competition; l industry, particularly the SME sector, should be restructured in order
to compete in the EU environment. In June 1999, Malta participated in the multilateral political dialogue which the European Council had with the other applicant countries. In October 1999, the Commission proposed a pre-accession regulation for Malta amounting to Lm 16 million in pre-accession aid.
20 00–20 02: negotiations Following the decision in Helsinki in December 1999 in favour of the inclusion of Malta in the accession negotiations, on 15 February 2000 negotiations were officially opened. Together with the other applicant countries, Malta formally concluded its negotiations on 13 December 2002.
20 03–20 04: ratification and accession In January 2003, the Prime Minister set 8 March 2003 for a referendum on EU membership. The referendum resulted in a majority vote in favour of EU accession. On 16 April 2003, in Athens, Malta together with Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, signed the Accession Treaty. The signed treaty has to be ratified by the present and future member states, paving the way for these countries to formally join the European Union on 1 May 2004.
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ONLINE UPDATES - 6 August 2005 Business risk assessment (Chap. 1.1) Overview The main risk for Malta is that EU membership will not stimulate economic growth sufficiently to encourage fuller employment and revitalize household disposable income and private spending, especially when EU investment aid into infrastructure projects comes to an end. Adopting the euro will not damage the competitiveness of key export industries unless interest rates are increased or the exchange rate of the euro itself against sterling and the US dollar rises significantly.
Coface rating: A3 Strengths • • • • •
Protected status as an EU member and supported by financial aid. Strong exports in electronic and pharmaceutical products. Economic growth now positive and recovering. Joining the euro shortly. Politically stable.
Weaknesses • • • • •
Vulnerable to significant economic slowdown in EU. Public sector constrained by efforts to reduce large fiscal deficit. Higher public sector debt than Maastricht criteria. Chronic trade deficit. Weak consumer spending.
September 2005, Coface and the Editor
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1.2
The Republic of Malta: a Political Overview John Portelli, Enterprise Consultancy Services
Constitution President The president is not only the head of state but also holds the power of the executive in the sense that the Cabinet governs in the name of the president. Historically speaking, the president has inherited in Malta the position that was formerly occupied until 1974 by the governor general. The president holds the same function of office and enjoys the same powers that were formerly performed by the governor general. After 1964, the governor general became purely the monarch’s representative in Malta, ie he could only receive instructions from the Queen or from the Maltese prime minister. He would also act on the latter’s advice. In 1974, when Malta became a republic, the office of governor general was substituted by the office of the president. Now he no longer represents a monarch (head of state) but is head of state in his own right. Section 48 of the Constitution of Malta establishes the office of president. It sets out: l how the president will be appointed (Section 48(1)); l the persons not qualified to be appointed president (48(2)); l when the office of the president will become vacant (48(3)).
Hence, Section 48(1) specifies that the president will be appointed by resolution of the House of Representatives (via a simple majority). A person is disqualified from being appointed to the office of president if for example:
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Background to the Market l he is not a citizen of Malta; l he holds or has held the office of chief justice or other judge of the
Superior Courts; or l he is not eligible for appointment to or to act in any public office in
accordance with Sections 109,118 and 120 of the Constitution. The second disqualifying feature was included to guarantee the separation between the executive and/or legislature with the judiciary. The office of the president will become vacant: l on the expiration of five years from the date of appointment to that
office; l if the holder of the office is removed from the office by resolution of
the House of Representatives on the grounds of his inability to perform the functions of office (whether arising from infirmity of body or mind or any other cause) or misbehaviour. As far as the misbehaviour or inability to perform the functions of his office are concerned, they need only be alleged and not proved. One can contrast this position to that of a judge. The removal of a judge from office is conditioned in far more rigid terms. In order to remove a judge, the House of Representatives would need to have two-thirds of members voting for the removal. As far as misbehaviour is concerned, in the case of judges this behaviour must be proved. Section 49 deals with the discharge of the president’s functions during vacancy. These functions will be performed by such person as the prime minister after consultation with the leader of the opposition may appoint or, if there is no person in Malta so appointed and able to perform those functions, by the chief justice. The president’s powers pertain to three fields: executive, legislative and judiciary. With regard to the legislative function, the president is part of parliament. Section 51 states that there will be a parliament which will consist of the president and a House of Representatives. A resolution of the House does not become an Act of Parliament until it has presidential assent. Section 72(2) provides that the president is to signify that he assents without delay. With regard to the executive function, the president is also head of the executive, which authority shall be exercised by the president directly or through officers subordinate to him, in accordance with the provisions of the Constitution. Hence, although figuratively the government is run by the president and in the name of the president, in reality it is run by the prime minister and his Cabinet, answerable for the running of the government to parliament.
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In addition, the president normally exercises these executive powers on the advice of some authority, and it is very rare that he may do something without such advice. For example, it is the prime minister who decides when elections are to be held. There are instances where the president takes a decision independently of any other authority. Section 83 provides that the president is to authorize a member of the Cabinet to perform the functions of the office of prime minister if the prime minister is unable to perform them for whatever reason. Moreover, in Section 80, the president will appoint as prime minister the member of the House who, in his judgement, is best able to command the support of a majority of members of the House.
Prime minister The office of prime minister makes the incumbent the central political figure in the running of the country. An understanding of the office of prime minister is vital to understanding the system of parliamentary government existing in Malta. The functions of the prime minister include: l the appointment of ministers; l the removal of ministers; l chairing all important bodies having some say in the running of the
government – for example, he chairs the Cabinet, he decides the agenda and selects who to invite and not to invite into his Cabinet, and he decides when a vote is to be taken or not; l he can avoid having a vote taken in government which could go
against him; l he can postpone decisions.
Technically speaking, through his position he can control the whole government of the country. The prime minister is well above his fellow ministers, over whom he holds political authority. The prime-ministerial government concentrates the whole of the executive in one person. He is also the leader of the political party in power and this gives him political clout. Normally he is the person in whom the House of Representatives has expressed confidence. All this serves to strengthen his function.
Cabinet The Constitution specifies that there will be a Cabinet for Malta which will consist of the prime minister and such number of other ministers as may be recommended by the Prime Minister. The Constitution states that the Cabinet will hold general direction and control of the government and will be collectively responsible to parliament. The concept of
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collective responsibility is intertwined with the function of the Cabinet. Another related concept is that of individual ministerial responsibility. The question of ministerial responsibility can be divided into two: l collective ministerial responsibility; l individual ministerial responsibility.
These notions are intrinsically tied up with the permanence of the prime minister in office. The concept of collective ministerial responsibility is tied up with the idea of the growth and solidarity of the Cabinet government. The substance of this concept is that if upon submitting its policy to the House, the government is unable to defend it, it should resign. The concept of collective ministerial responsibility implies that all ministers (prime minister included) are collectively answerable to parliament for the conduct of the country’s affairs. It puts all ministers in one boat. It means that the government has to face the country with one voice and with one common policy for which the government takes full responsibility. Any disagreement in the Cabinet as to the policy to be adopted must not go beyond the limits of the Cabinet if that party wants to keep on forming a government. The notion of individual ministerial responsibility requires that each minister is responsible to parliament for the running of the ministry. Every minister is responsible to parliament as an individual for the work of their department. The minister has to inform parliament of the manner in which his ministry is being administered and unless he manages to retain the confidence of the House he will not be able to continue that particular office. Contrary to the notion of collective responsibility, the notion of individual responsibility does not bring about the collapse of the whole government.
Legislature The Maltese system of government is described as a parliamentary democracy because the government depends on the confidence of the House of Representatives. The prime minister remains prime minister for as long as he retains the confidence of the House, ie the executive is part and parcel of the legislature. The Maltese parliament is unicameral. It has mainly four functions: l legislative; l deliberative; l financial; l judicial.
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Legislative function In Malta, although parliament is sovereign it is subject to a supreme Constitution. Parliament can legislate only in a manner permitted by the Constitution. In fact, if a law enacted by parliament is inconsistent with the Constitution it will be declared void by the Constitutional Court. It may be argued that in reality the party in government holds the reigns of parliament as in truth it is the government that legislates, because it will make sure that only the bills that it wants will pass. This is possible because the party in government enjoys the majority of seats in parliament. However, this does not mean that the government can pass any law that it wants. Malta’s recent history has shown this to happen and it led to an early election. In 1998, the Labour government resigned after it could not rely on the support of one of its members. At that time, Labour had a one-seat majority in parliament.
Deliberative function This parliamentary function is usually performed by parliaments in all democratic states because it provides a control over the executive. The deliberative function is exercised through: l the possibility of passing a vote of no confidence; l question time; l debates on the legislative instruments; l debates on the motion of adjournment; l debates on special motions for venture; l debates on supply.
During question time, questions are put forward both from the government side and from the opposition. The opposition is likely to ask questions that deal with what may be seen as the shortcomings of a particular ministry, thus putting the minister in an uncomfortable situation. In view of the above, it would thus perhaps be more accurate to say that the function of parliament is to keep a check on the executive rather than to control it because the whole system boils down to a question of checks and balances between parliament and government.
Financial function The financial function is very much an appendage to the deliberative function. Parliament has to approve the expenditure and income of government. This is exercised in the annual debate on the budget which
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provides an opportunity for the opposition to criticize the government on its performance during the previous financial year and on the way in which the government intends to deal with expenditure and supply during the next financial year. The government can neither spend money without parliamentary approval nor collect any money from people without parliamentary sanction. All the money collected by the government goes into the consolidated fund and no money can come out of it unless it has parliamentary sanction. To do so, one needs either a specific law regulating and authorizing that payment or an Act of Parliament. Section 102 of the Constitution outlines, in part, the financial function of parliament.
Judicial function Parliament also has a judicial function. It has the right to adjudicate on matters concerning parliamentary privileges. Parliament can also undertake impeachment procedures, as is for example contemplated for the removal of a judge or magistrate.
Minor functions Parliament has other minor functions, such as the power to: l appoint committees; l commence inquiries into something they believe is of public interest; l receive petitions from individuals and groups as long as they are in
accordance with the standing orders.
Judiciary The judiciary is independent of the executive and legislature. Judges are appointed by the president acting on the advice of the prime minister. Individuals nominated for the bench are vetted by a commission for the administration of justice chaired by the president and which includes among its members the chief justice, the attorney general and members of the judiciary. Their removal from office before retirement age has to be on the grounds of proven inability to exercise their functions properly and following a two-thirds vote in the House of Representatives. However, in 2002, faced with allegations of improper conduct, the chief justice and a judge resigned from office rather than face impeachment procedures in parliament. The legal structure is based on the civil law pattern of continental Europe, but most administrative and fiscal legislation is based on well-tried British laws. There are four principal jurisdictions: civil, commercial, criminal and voluntary. There is one Court of Appeal for all jurisdictions. The Constitutional Court, however,
The Republic of Malta: a Political Overview
21
is the ultimate competent court for judgments on conformity of laws and administrative action with the Constitution. Chapter VIII of the Constitution (Sections 95–101) deals with the judiciary.
Electoral system Section 56 of the Constitution provides that the members of the House of Representatives will be elected upon the principle of proportional representation by means of the single transferable vote. The House is composed of an odd number of members elected from an odd number of electoral divisions, being not less than nine and not more than fifteen, each division returning either five or seven members each. The exact composition of parliament at any given time is determined by parliamentary legislation. However, these parameters are enshrined in Section 52 of the Constitution and therefore require a two-thirds majority if they are to be changed. The single transferable vote system implies a list of candidates and each eligible voter would mark his preference against the name of the candidate. A person can only vote in a particular electoral division if he is registered as an eligible voter in that division. A voter can mark as many preferences as there are candidates. The electoral commission first counts the number of valid votes cast and eliminates the invalid ones. The quota is then established for each electoral division. The 1987 constitutional amendments provide an additional bonus number of seats to the party obtaining the absolute majority of votes cast in an election – that is, if a party does not have a sufficient number of seats to control a majority in parliament but obtains an absolute majority from the first count of votes among the people, then an extra number of seats are allocated to that party. This amendment was included following the constitutional crisis that resulted following the 1981 election. In that election, the Nationalist Party, although poling the majority vote, did not obtain a majority of seats in Parliament. A further amendment has been introduced to the Constitution whereby it is no longer necessary for a party to gain 50 per cent of the first preference votes cast, but is sufficient that a party gains a relative majority of the first preference votes cast. If this happens, then the party with this majority is assured a majority of seats in parliament, irrespective of what the majority is.
Local councils Since 1993, 67 local councils have been established. They are primarily responsible for the provision of basic infrastructure and other services in the regions. Elections for local councils are held every three years.
22
Background to the Market
The Head of State President: PROF. GUIDO DE MARCO sworn in on 4 April 1999 Cabinet Prime Minister: DR EDDIE FENECH ADAMI Deputy Prime Minister and Minister for Social Policy: DR LAWRENCE GONZI Minister for Education: DR LOUIS GALEA Minister of Finance and Economic Affairs: JOHN DALLI Minister for Tourism: DR FRANCIS ZAMMIT DIMECH Minister for Transport and Telecommunications: CENSU GALEA Minister for Justice and Home Affairs: DR TONIO BORG Minister for Resources and Infrastructure: NINU ZAMMIT Minister for Gozo: GIOVANNA DEBONO Minister of Health: DR LOUIS DEGUARA Minister of IT and Investment: DR AUSTIN GATT Minister of Foreign Affairs: DR JOE BORG Minister for Environmental and Rural Affairs: GEORGE PULLICINO Minister for Youth and Arts: JESMOND MUGLIETT Parliamentary Secretaries Ministry for Social Policy: DR FRANS AGIUS, MARIA DOLORES CRISTINA Ministry of Finance and Economic Services: EDWIN VASSALLO, TONY ABELA Ministry of Justice and Home Affairs: DR CARMELO MIFSUD BONNICI House of Representatives Speaker of the House of Representatives: ANTON TABONE The Opposition Leader of the Opposition: DR ALFRED SANT Ministries Office of the Prime Minister: Auberge de Castille, Valletta CMR 02 Tel: 21242560 Fax: 21249888 Website: www.opm.gov.mt Ministry for Social Policy: Palazzo Ferreria, Republic Street, Valletta CMR 02 Tel: 21243166 Fax: 21243017 Website: www.msp.gov.mt Parliamentary Secretary in the Ministry for Social Policy: Palazzo Ferreria, Republic Street, Valletta CMR 02 Tel: 21243166 Fax: 21250143 Ministry of Education: Ministry of Education, Floriana CMR 02 Tel: 21225019, 21221401 Fax: 21221634 Website: www.education.gov.mt Ministry of Finance and Economic Affairs: Auberge d’Aragon, Valletta CMR 02 Tel: 21226263 Fax: 21250955
The Republic of Malta: a Political Overview
23
Parliamentary Secretary in the Ministry of Finance and Economic Affairs: Auberge d’Aragon, Valletta CMR 02 Tel: 21246031 Fax: 21245774 Ministry for Tourism: Auberge d’Italie, Merchants Street, Valletta CMR 02 Tel: 21225111, 22981221 Fax: 22981201 Website: www.tourism. gov.mt Ministry for Transport and Communications: House of the Four Winds, Hastings Gardens, Valletta CMR 02 Tel: 21225200, 21220604 Fax: 21248937 Website: www.mtc.gov.mt Ministry for Justice and Home Affairs: ‘Casa Leoni’ 476, St Joseph High Road, St Venera CMR 02 Tel: 21485100-5, Fax: 21493744 Website: www.mha.gov.mt Parliamentary secretaries within the ministry: ‘Casa Leoni’ 476, St Joseph High Road, St Venera CMR 02 Tel: 21485100-5 Fax: 21485109 Ministry for Resources and Infrastructure: Block B, Floriana CMR 02 Tel: 21222378, 21224501 Fax: 21243306 Website: www.mri.gov.mt Ministry for Gozo: St Francis Square, Victoria, VCT 112, Gozo Tel: 21561482-5 Fax: 21559360 Website: www.gozo.gov.mt Ministry of Health: ‘Palazzo Castellania’, 15 Merchants Street, Valletta, CMR 02, Tel: 21224071-7 Fax: 22992655 Website: www.health. gov.mt Ministry of Information Technology and Investment: 168 Triq idDejqa, Valletta CMR 02 Tel: 21226808, 21250685 Fax: 21250700 Ministry of Foreign Affairs: Palazzo Parisio, Merchants Street, Valletta CMR 02, Tel: 21242853, Fax: 21237822 Website: www.foreign. gov.mt Ministry for Rural Affairs and the Environment: Barriera Wharf, Valletta, CMR 02, Tel: 21225236/8 Fax: 21231294 Ministry for Youth and the Arts: Cavalier House, 158 Old Mint Street, Valletta, CMR 02 Tel: 21243275, 21241298 Fax: 21241032
24
Background to the Market
1.3
Legal Framework AVMT Advocates
A British colony until 1964, Malta’s legal system, like its language, is a reflection of the various foreign powers that have influenced the country’s development over the years. Malta has been ruled by the Arabs, Phoenicians, Carthaginians, Romans, Knights of the Order of St John, the French under Napoleon and the Kingdom of two Sicilies. More recently and most influential was Malta’s colonization by Britain between 1802 and 1964, when independence was achieved. Under its 1964 Independence Constitution, Malta remained a monarchy but became an independent parliamentary democracy. Queen Elizabeth II was retained as sovereign of Malta, and a governor general exercised executive authority on her behalf, while the actual direction and control of the government and the nation’s affairs lay in the hands of the Cabinet under the leadership of a Maltese elected prime minister. Malta became a full member of the United Nations in the same year. On 13 December 1974, the Constitution was revised and Malta became a republic with executive authority vested in the presidency. Malta’s legal system is based on a written Constitution largely founded on the British Westminster model. The head of state is the president, who is elected by parliament. Responsibility for government lies with the Cabinet of ministers led by the prime minister. The president appoints the prime minister, typically the leader of the political party with the majority of seats in the House of Representatives. The president also appoints, upon recommendation by the prime minister, the individual ministers to head each of the government departments. The Cabinet is selected from among members of the unicameral House of Representatives. This body consists of between 65 and 69 members elected on the basis of proportional representation. Elections must be held at least every five years. Maltese constitutional and administrative law and practice follow British laws and practices closely. Malta’s superior courts are the Civil Court, the Criminal Court and the Constitutional Court (the highest court in the land). The Court of Appeal hears appeals from decisions of the Civil Court, and the Court of Criminal Appeal hears appeals from decisions of the Criminal Court.
Legal Framework
25
The highest court, the Constitutional Court, hears appeals in cases involving violations of human rights, interpretation of the Constitution, and invalidity of laws. It also has jurisdiction in cases concerning disputed parliamentary elections and corrupt electoral practices. Malta also has a number of inferior courts presided over by a magistrate. Malta’s judiciary is composed of a chief justice, judges and magistrates, who are all appointed by the president on the advice of the prime minister. The courts are impartial and independent. All the normal minimum safeguards for fair judicial proceedings and due process are in place through the Constitution and through Malta’s adoption of the European Convention on Human Rights as part of its domestic law. Although Maltese public law is largely inspired by British legal traditions, Maltese private law is largely continental – ie European. Malta is in fact regarded as a civil law jurisdiction. Five codes of law provide the bulk of Malta’s civil and criminal rules and procedures, broadly modelled on the Napoleonic Code, a system that traces its origins to Roman law and which is still adopted in, among other countries, France, Italy, Belgium and Germany. This civil law system was introduced in Malta during the 19th century by the British administration. Since Malta follows the continental model of private law, English common law finds no application in Malta. Nevertheless, its influence is felt in local commercial practice and regulation, particularly in company, insurance and banking law which closely follow English practice. More recent legislation, including the various financial services laws, is largely modelled on British law and EU legislative enactments. The Investment Services Act and the Companies Act are based on the UK Financial Services Act of 1986 and English Companies Act of 1985 respectively, while the shipping, insurance, money laundering and insider dealing laws are influenced by EU legislation. In 1988, Malta also introduced into its Statute Book the English common law concept of trusts. Since 1988, Malta has established a legislative and regulatory framework for financial services activities and international business, aimed at establishing rules and safeguards appropriate for the development of Malta as an international financial and business centre, and the creation of a regulatory authority imposing international standards. The last decade has also seen changes in Maltese fiscal legislation, which included amendments to domestic and international taxation and to the administration and collection of tax. The financial services legislative framework establishes the Malta Financial Services Authority (MFSA) as the primary regulator for financial services. The MFSA regulates the setting up, supervision and licensing of collective investment schemes, investment services pro-
26
Background to the Market
viders, insurance business, banks and other financial institutions. It also provides for the registration of trusts as well as the listing of public companies on both the Malta Stock Exchange (primary market) and the Alternative Listing (secondary market). Malta has adopted OECD standards in respect of supervision and the prevention of money laundering and insider dealing. Maltese legislation ensures that the provisions on professional secrecy reassure foreign investment without hindering the supervision of fiscal and regulatory compliance and without obstructing money laundering and insider dealing investigations. The MFSA is a public authority set up by the Malta Financial Services Authority Act of 1994, which sets out the functions, responsibilities and structure of the MFSA. The MFSA comprises several units which together provide for the licensing and supervision of financial services activities. The MFSA has very broad powers and duties which include its duty to ensure observance of high standards of conduct and management in the industry; to keep under review and coordinate financial activities carried on in Malta; to investigate possible contraventions of the law or of licence conditions by operators; and to collaborate with other financial regulatory bodies both locally and overseas. The main elements of legislation administered by the MFSA (and which provide the legal framework for the regulation of financial services) are: the Investment Services Act of 1994; the Insurance Business Act of 1998; the Insurance Brokers and Other Intermediaries Act of 1998; the Banking Act of 1994; the Financial Institutions Act of 1994; the Trusts Act of 1988; the Companies Act of 1996; the Prevention of Money Laundering Act of 1994; the Insider Dealing Act of 1994; the Malta Stock Exchange Act of 1990; and the Professional Secrecy Act of 1994. Consideration of the Maltese Electronic Commerce Act of 2002 is imperative in a discussion of the legal framework for business. Largely modelled on the UNCITRAL Model Law for Electronic Transactions and the relevant EU directives covering electronic commerce and electronic signatures, the new law is intended to facilitate electronic commerce. It is technology neutral and is intended to stand the test of time in the face of ongoing technological change. The Act establishes the legal equivalence of paper-based transactions with electronic ones, the parameters within which electronic contracts are to be concluded and the regulatory frameworks for the provision of electronic signature, certification and intermediary services. It serves to ensure that the legal regime does not act as a barrier and that electronic transactions have the same legal validity as paper-based transactions. In addition, it establishes that any legal requirement to provide information may be satisfied through electronic communication, documents or records.
Legal Framework
27
The Act deals specifically with contractual agreements between consumers and suppliers and establishes the criteria that must be met for such contracts to be legally valid. In so doing, it establishes safeguards for consumers similar to those applicable within the EU. The Electronic Commerce Act amends the Criminal Code and introduces a number of offences related to computer misuse. It also establishes the legal framework required for e-commerce to flourish and thereby equips the Maltese islands with the basis upon which to play a key role in the Information Society.
28
Background to the Market
1.4
The Republic of Malta: the Economy John Portelli, Enterprise Consultancy Services
Economic growth Malta’s economy has grown steadily over the last decade. Inflation is low by international standards and the local currency is relatively stable when compared to other major currencies. The country’s per capita income was estimated to be around Lm 4,300 (US$10,000) in 2002. Between 1998 and 2002, Malta’s real GDP grew by an average 2.5 per cent compared to an EU average of 2.3 per cent for the same period. During 2002, the Maltese economy expanded by 1 per cent in real terms. Consumer and government current expenditure registered growth rates of 2.7 per cent and 2.5 per cent respectively. However, gross investment decreased by 4.2 per cent. Exports of goods and services recorded a negative growth rate of 4.7 per cent, reflecting the negative economic environment prevailing internationally, particularly in the electronics market. Imports of goods and services also declined by 5.5 per cent in real terms. Government projections set a growth rate for GDP in nominal terms of around 5.5 per cent per annum for 2003 and 2004.
Table 1.4.1 GDP growth, 1998–2002
GDP at constant 1995 prices (Lm million) Percentage annual change Source: National Statistics Office
1998
1999
2000
2001
2002
1,292
1,344
1,430
1,413
1,427
3.4
4.1
6.4
–1.2
1.0
The Republic of Malta: the Economy
29
Labour market Malta has experienced generally low levels of unemployment in recent years. From 1998 until 2002, the rate (under Part I of the Unemployment Register) ranged between 4.6 per cent and 5.4 per cent. This compares well with EU rates, which fluctuated from 9.8 per cent to 7.6 per cent. The increase in the unemployment rate reflects the impact on an open economy such as Malta of the slowdown in the international economy. It also reflects the restructuring of the local economy to improve its competitiveness in international markets. Employment figures point at the declining trend in public sector employment during the period between 1998 and 2002. This is attributable to the privatization of a major bank as well as the introduction of a voluntary early retirement scheme in major government enterprises. At the end of November 2002, public sector employment accounted for 35 per cent of the total gainfully occupied population. However, private market services increased their share in the gainfully occupied population, reflecting the shift towards a more service-oriented economy. At the same time, employment in direct production declined. The decrease is attributed to low intake levels in the manufacturing sector and the introduction of early retirement schemes in the shipbuilding and ship repair sectors. Employment in agriculture and fisheries remained stable. The self-employed share in the gainfully occupied population declined by 0.7 per cent over the period between 1998 and 2001. This share stood at around 11 per cent at the end of November 2002.
Social welfare The state’s welfare system provides for the payment of unemployment, medical and welfare assistance. The cost of social services and benefits is borne through general taxation and contributions payable in respect of both employed and self-employed individuals. All employed people are entitled, at the age of 61, to a national minimum pension based on the best three years of earnings over the last ten years of contribution to the social security system. The government is at the same time promoting a policy to encourage adoption of private pension fund systems with a view to decreasing the burden on the welfare system. Sickness, unemployment and injury benefits are payable at various rates. Unemployment benefits are paid for a maximum of six months, while sickness and injury benefits are paid for a maximum of one year. The rise in the number of beneficiaries, reflecting an ageing population, and the increase in various social policy initiatives taken over the years have resulted in substantial increases in government social
30
Background to the Market
Table 1.4.2 Employment status, 1998–2002 1998 Labour supply
1999
2000
2001
November 2002
141,186 142,608 144,016 144,929
144,978
29,088
28,707
28,970
29,143
28,894
45,462
49,042
50,059
50,004
50,513
49,730
47,422
47,992
48,417
47,587
Unemployed (under Part I of the Unemployment Register)
7,437
7,695
6,583
6,753
7,105
Unemployment rate (under Part I of the Unemployment Register) (%)
5.3
5.4
4.6
4.7
4.9
Unemployment rate (%) EU1 9.4
8.7
7.8
7.3
7.62
Employed: l Manufacturing (private sector) l Market services (private sector) l Public sector
1
EU unemployment rates are not directly comparable to Malta figures Figure relates to 2002 as a whole Source: Employment and Training Corporation, Eurostat 2
security expenditure. Expenditure in respect of the Department of Social Security and the payment of social security benefits represents the single largest share in government expenditure, accounting for around 38 per cent of total recurrent expenditure. The total bill for the 11 months to November 2002 was Lm 223.1 million. With regard to the number of beneficiaries, over the 1998–2001 period the average number of beneficiaries of certain types of pensions, Table 1.4.3 Government recurrent expenditure in social security, January–November (Lm million)
Social security Social security (benefits) Total recurrent expenditure Percentage share Source: The Treasury
1998
1999
2000
2001
2002
38.7 160.9 516.4
40.5 170.2 520.0
45.1 175.9 549.8
48.7 184.4 614.6
49.6 173.5 580.9
38.7
40.5
40.2
37.9
38.4
The Republic of Malta: the Economy
31
including those in respect of retirement, invalidity, widowhood, age/ visual impairment and disability, has increased by around 5,200 people (or 2.9 per cent) per annum. At the same time, the launching of new initiatives meant not only increasing the level of current and future social security expenditure, but also augmented the number of eligible beneficiaries entitled for arrears payments. Per capita average expenditure on these types of pensions increased by around 4 per cent per annum during the 1998–2001 period. Like other countries with an ageing population, Malta is likely to experience social security expenditure which will continue to rise, putting pressures on the public finance situation.
Table 1.4.4 Social indicators, 1998–2001 1998 Quality of life item/1,000 people Telephones Motor vehicle licences Education Number of schools Number of teachers Number of students Number of university students Electricity Generated (MWh 000) Consumers (‘000) Consumption (kWh mill) Social security (Lm million) Total payments Total contributions Welfare gap
1999
2000
2001
506 608
509 628
528 645
538 660
340 7,700 99,100 6,183
350 7,900 101,100 6,064
331 8,200 100,100 5,554
326 8,500 102,300 6,281
1746 207 502
1847 218 464
1903 227 540
1988 214 540
227 136 92
237 144 93
252 162 90
267 179 88
Source: National Statistics Office, The Treasury, Enemalta Corporation, Water Services Corporation
Government finances The government’s total revenue is composed of ordinary revenue, grants and extra-ordinary revenue. Extra-ordinary revenue comprises revenue generated from the sale of shares and sinking funds of converted loans. During the 11 months to November 2002, total revenue declined by Lm 44.9 million to Lm 643.2 million. Extra-ordinary revenue amounted to Lm 19 million, being the income generated from the sale of shares in Malta International Airport (MIA) plc. During the January–November
32
Background to the Market
2002 period, grants totalled Lm 1.2 million, coming from the European Union mainly as pre-accession funds. Ordinary revenue increased by Lm 31.8 million to Lm 613.1 million compared to the first 11 months of 2001. Tax revenue, comprising social security contributions, value added tax and customs and excise duties and other recurrent revenue remained the main source of revenue for the government. The increase in recurrent revenue during the first 11 months of 2002 was mainly due to an increase of Lm 12.3 million recorded under licences, taxes and fines, due to receipts from oil rental fees and duty on documents as well as receipts previously included under lotteries. Moreover, the duty on documents generated from the part-privatization of MIA plc also contributed to this increase. There was also an increase of Lm 10.5 million in income tax collected in this period, while revenue collected from value added tax increased marginally by Lm 1.1 million and reached Lm 107.1 million during the January–November 2002 period. Social security contributions yielded Lm 151.2 million during the 11 months to November 2002. During the first 11 months of 2002, total government expenditure increased by Lm 39 million to reach Lm 729.3 million. During this period, government recurrent expenditure increased by Lm 45.5 million to reach Lm 580.9 million. This was mainly attributable to higher outlays on programmes and initiatives and to higher contributions to government entities. It is pertinent to note that the latter was influenced by a change in accounting practice which was implemented in order to include certain operational outlays and debt-servicing outlays under recurrent rather than capital expenditure. Capital expenditure amounted to Lm 81.9 million during the January– November 2002 period, from Lm 86.7 million registered during the corresponding 2001 period. The share of productive investment in government capital expenditure stood at 36.3 per cent in the first 11 months of 2002. The major outlays were the financing of the early retirement scheme in the ship repair and shipbuilding industry, the financing of the construction works of the Gozo channel ferries and funds channelled to the Malta Tourism Authority. Capital expenditure on investment accounted for 31.1 per cent of total government capital expenditure. The share of social capital investment amounted to 32.6 per cent. A rise in expenditure was registered under this category, mainly due to higher outlays incurred in connection with the new Mater Dei hospital. The primary deficit consists of total government revenue less total expenditure, excluding public debt servicing, while the fiscal deficit includes public debt servicing. The primary deficit including extraordinary receipts amounted to Lm 86.1 million during the first 11 months of 2002. Public debt servicing reached Lm 66.5 million and as a result the fiscal deficit amounted to Lm 152.6 million.
The Republic of Malta: the Economy
33
Table 1.4.5 Government revenue and expenditure, January–November (Lm million) 1998
1999
2000
2001
2002
Revenue Extra-ordinary receipts Grants Ordinary revenue Licences, taxes & fines Consumption tax Income tax Social security Other
595.3 35.4 8.1 477.2 55.2 65.7 94.5 116.9 119.3
625.3 37.5 7.9 501.5 62.4 78.5 115.1 123.2 127.7
556.6 12.0 6.7 544.6 64.3 95.9 127.5 137.5 125.4
688.1 0.0 0.9 581.3 66.3 106.1 139.7 149.2 131.1
643.2 19.0 1.2 613.1 78.7 107.1 150.2 151.2 149.7
Total expenditure Recurrent expenditure Capital expenditure Productive Infrastructure Social
581.4 456.7 75.2 33.7 25.0 16.5
602.8 464.9 82.7 44.5 20.0 18.2
630.3 492.3 76.7 31.0 23.2 22.5
690.3 535.3 86.7 35.7 28.0 23.1
729.3 580.9 81.9 29.8 25.5 26.7
Primary deficit Public debt servicing Deficit
–14.0 49.5 35.5
–22.4 55.3 32.8
73.7 61.3 135.0
2.1 68.2 70.3
86.1 66.5 152.6
Source: The Treasury
Public debt In 1998, the fiscal deficit stood at Lm 126.9 million (9.3 per cent of GDP) but declined in subsequent years to reach Lm 98 million (6 per cent) in 2001. The deficits registered over the past years have resulted in an increase in government debt. Gross government debt including domestic debt and foreign loans is expected to have reached Lm 1,049.4 million by the end of 2002, compared to Lm 763.6 million recorded as at the end of 1998. This is estimated at 62.3 per cent of GDP at current market prices. As outlined in the budget speech for 2003, total government debt is expected to go down to 60.1 per cent of the projected GDP for 2005. The increase in government debt has resulted in higher debt service costs. Annual debt service costs rose from Lm 52.8 million in 1998 to Lm 71.4 million in 2001. Given the predominance of local debt, interest payments on the government’s external debt remained contained. Debt servicing costs are expected to reach Lm 67.4 million in 2005. Around 96 per cent of gross government debt represented borrowing through the issue of Treasury bills and government stocks in 2001. During the budget speech for 2003, the minister of finance announced the shift in
34
Background to the Market
government debt financing from an over-reliance on domestic borrowing in the medium term. To this end, the government intends to reach an agreement with the Council of the Europe Development Bank for the extension of the existing loan facility for financing part of the costs of the new Mater Dei hospital. It is expected that this facility will be extended up to 50 per cent of the total project costs. Projections presented in the last budget indicate that the share of foreign debt is expected to rise to about 9 per cent of total government debt in 2005. Table 1.4.6 Public debt and debt servicing costs, 1998–2005 (Lm million) 1998 1999 2000
2001
20021
20022
20033
20043
20053
Total 763.6 839.9 925.0 1,012.7 1,042.7 1,049.4 1,072.8 1,145.4 1,209.3 government debt of which domestic debt 717.1 795.5 885.7 972.3 1005.4 977.4 988.4 1048.4 1099.8 foreign loans
46.5
44.4
39.3
40.4
37.2
72.0
84.5
97.0
109.5
Debt servicing
52.8
64.8
67.8
71.4
55.3
63.7
59.8
66.8
67.4
Gross debt/GDP 56.1 (%) Debt servicing/ 3.9 GDP (%)
57.7
59.2
62.1
83.1
62.3
59.3
60.1
60.1
4.4
4.3
4.4
4.4
3.8
3.3
3.5
3.3
1
Figures as at September 2002 Revised figures for end of period 3 Projections for end of period Source: Central Bank of Malta Quarterly Review, December 2002, National Statistics Office, Diskors tal-Budget 2003 (Tables 21 & 22) 2
One of the government’s key objectives in the economic policy agenda is to restore sustainability in public finances. When presenting the 1999 budget, the minister of finance announced a six-year programme aimed at bringing the fiscal deficit to sustainable levels. The six-year programme aimed at reducing the fiscal deficit to around 4 per cent of the country’s GDP by 2004. This is to be achieved partly through tax reform and growth in the tax base and partly by means of efficiency gains in revenue collection. Economic growth is also expected to contribute to higher tax revenue. At the same time, more effective controls over expenditure will be implemented while several attempts are being made in order to increase the productivity levels of the public sector. The various measures undertaken in recent years have contributed to
The Republic of Malta: the Economy
35
Table 1.4.7 Public deficit, 1998–2005 (Lm million)
Recurrent revenue Recurrent expenditure Capital expenditure Deficit Fiscal deficit/ GDP ratio (%)
1998
1999
2000
2001
20021 20022 20033 20043 20053
539.1
562.3
617.7
668.6
505.6
746.3
770.5
786.3 806.6
516.4
520.0
549.8
614.6
471.0
657.4
677.4
687.8 701.5
96.8
106.1
98.6
80.6
71.0
103.6
108.2
100.4
94.4
126.9 9.3
128.6 8.8
98.6 6.3
98.0 6.0
91.7 7.3
78.5 4.7
74.8 4.1
68.7 3.6
56.6 2.8
1
Figures as at September 2002 Revised figures for end of period 3 Projections for end of period Source: Central Bank of Malta Quarterly Review, December 2002, National Statistics Office, Diskors tal-Budget 2003 (Tables 21 & 22) 2
reducing the level of fiscal deficit. The government is committed to ensuring that the programme for restoring fiscal sustainability continues on track.
Productive activities Manufacturing sector The manufacturing industry in Malta is largely characterized by a high number of locally owned SMEs and a number of relatively large foreignowned export-oriented subsidiaries. Activities include electrical machinery, professional instruments, paper and printing, clothing and footwear, food, beverages and chemicals. In 1998, micro, small and medium-sized enterprises accounted for around 99 per cent of establishments in manufacturing. Nevertheless, large firms account for most of the income generated through exports and investment. A restructuring process is currently underway particularly to enable domestic enterprises to face new competition arising from trade liberalization, developments in technology and more mobile cross-border capital flows. In particular, the protective levies imposed on imported industrial products were completely removed on 1 January 2003, while levies on agroindustry products are gradually being dismantled. In 2002, the negative performance in the international markets impacted negatively on demand for local exports, since around 80 per cent of local manufacturing turnover is exported. Hence, total turnover between 2001 and 2002 declined by Lm 8.3 million. Declines were registered in the machinery sector, notably the commercial equipment
36
Background to the Market
and apparatus sector, reflecting the difficult conditions prevailing in the international electronics market. Government enterprises providing support to firms operating in manufacturing include the Malta Development Corporation, the Institute for the Promotion of Small Enterprises (IPSE) and the Malta External Trade Corporation (METCO). The Malta Development Corporation is entrusted with implementing the government’s industrial policy, including the administration of an incentive package. The Malta Development Corporation also promotes the European Community Investment Partnership Scheme, which is a funding programme to encourage joint ventures between Maltese and EU companies. The Institute for the Promotion of Small Enterprises (IPSE) was set up in order to assist locally oriented SMEs to restructure and prepare themselves for the liberalization process. It also acts to promote investment and entrepreneurship in the industrial sector. The Malta External Trade Corporation (METCO) serves as the national focal point for external trade, trade promotion, export development and other forms of trans-national cooperation. The three organizations are to be incorporated into one structure, Malta Enterprise, in order to streamline their activities and further promote the strategic development of local industry.
Construction and quarrying Construction and quarrying employed 6,724 people in November 2002, accounting for around 4.9 per cent of the gainfully occupied population. The sector accounts for around 3 per cent of GDP at factor cost. Activity in the sector is largely dependent on major projects being undertaken. A particular characteristic of the construction industry is the multiplier effect that it generates in other sectors of the Maltese economy.
Agriculture and fisheries Malta is self-sufficient in fresh vegetables, poultry, fresh milk, eggs and pork, but relies heavily on imports for the supply of cereals, fruit, sugar, vegetable oil and beef. Agricultural production is limited due to the scarcity of land, limitations in the water supply, land fragmentation and an ageing agricultural labour force. The demand for land for other economic or social demands (such as tourism or housing) has further limited the availability of land for agricultural purposes. In view of the inherent disadvantages facing the local agricultural sector, the government continues to provide financial and technical assistance to farmers. Assistance includes funding self-employed farmers, fishermen and herdsmen who are members of cooperative societies with refunds to offset part of their social security contributions. Technical and professional advice is also provided via Extension Services Offices in Malta
The Republic of Malta: the Economy
37
and Gozo. In 2002, the government embarked on a Special Market Policy Programme for Maltese Agriculture. The aim of this programme is to secure a solid competitive base for agriculture in the coming years while providing adequate income for farmers. This programme aims at the gradual removal of levies on agricultural products but is balanced by subsequent provisions of income support mechanisms and investment assistance to farmers. In terms of fishing, two distinct activities characterize the sector: traditional fishing and fish farming. The latter activity is entirely export oriented. Fish-farmed exports amount to around 85 per cent of the total volume of exports. The agriculture and fisheries sector’s contribution to GDP stood at 2.8 per cent in 2002, slightly higher than the figure registered in recent years.
Service activities Over the past few years, the structure of the economy has gradually evolved to become more service oriented. The services sector’s contribution to GDP increased to 48.2 per cent in 2002, thus overtaking the manufacturing sector as the main contributor to GDP growth. The country’s strategic position, its developed telecommunications infrastructure and well-educated workforce have enabled the increases in tourism, financial services and transhipment activities. The market services category accounted for 46.2 per cent of the gainfully occupied population in November 2002.
Tourism Subdued international economic conditions coupled with the threat of international terrorism have had a negative impact on the local tourism sector. Thus, in the first 11 months of 2002, tourist arrivals fell by 4.6 per cent compared to the same period in 2001. Decreases were also registered in foreign exchange earnings per capita. Employment in hotels and catering establishments fell by 1.2 per cent during the 12 months to November 2002. This sector accounts for 7 per cent of the gainfully employed population. Tourism in Malta is seasonal in nature. During 2001, the period June to September accounted for 47 per cent of total tourist inflows. The Malta Tourism Authority is aiming to consolidate Malta’s popularity in its traditional markets while at the same time promoting the country as a cultural destination in the off-peak season. Recent years have seen a gradual shift in the composition of tourist nationalities. The share of tourists from the United Kingdom has fallen from 51.6 per cent in 1990 to 38.3 per cent in 2001. In recent years,
38
Background to the Market
notable increases were registered in new markets such as Scandinavia and the United States. A concerted effort is being undertaken to diversify the domestic tourism market. The cruise liner industry has been significantly developed and has registered considerable success over recent years. During the first 11 months of 2002, a 31.2 per cent increase in the number of cruise passenger arrivals was registered. The government, both through its own agencies and through public–private partnership programmes, is promoting Malta as a hub port for cruise liners. Efforts include the development of a cruise passenger terminal in the Grand Harbour and the development of an international yacht marina at Cotonera. Furthermore, measures will be taken to promote Malta as a base for cruiseand-fly tourism. Table 1.4.8 Main tourism indicators, 1998–2002 (January–November) Arrivals (‘000) Gross income (Lm million) Full-time employment Bed capacity (‘000) Cruise passengers (‘000)
1182.2 1214.2 1215.7 1180.2 1078.7 254.6 271.4 268.2 260.8 228.5 9,174 9,485 9,598 9,383 9,417 38.9 40.9 40.7 38.7 37.4 144.1 187.8 170.8 259.4 335.0
Source: National Statistics Office, Malta Tourism Authority, Employment and Training Corporation
Financial services The financial services sector in Malta is growing rapidly. It contributed to around 9 per cent of GDP during 2002, while it provided employment to about 4,900 people in November 2002. These figures exclude audit firms involved in the sector. The Malta Financial Services Authority (MFSA) succeeded the Malta Financial Services Centre (MFSC). In 2002, the MFSA assumed responsibility for the regulation and promotion of the domestic financial services sector. It is responsible for supervising and monitoring international commercial activities including trusts, collective investment schemes, investment service providers, insurance activities and offshore banking. In 2002, the MFSA also took over responsibility for banking regulation and supervision from the Central Bank of Malta. The MFSA is also responsible for the supervision and monitoring of insurance companies. During 2002, the government set up the Financial Intelligence Analysis Unit. This unit has been entrusted with analysing reports of suspected transactions that may involve money laundering. Also in 2002, the Malta Stock Exchange published its guidelines on corporate governance. These efforts will continue to strengthen Malta’s position as a financial centre of repute.
The Republic of Malta: the Economy
39
Transhipment activities The Malta Freeport container terminal has become the third largest trans-shipment centre in the Mediterranean and the twelfth largest container terminal in Europe. Transhipment throughput levels in 2001 reached 1.1 million twenty-foot equivalent units (TEUs), which is an increase of 12.5 per cent over the previous year. This increasing trend is expected to continue for 2002. Data for the period January to September 2002 reflect an increase of around 8 per cent over the transshipment throughput traffic handled during the same period in 2001. Major shipping lines call at the port, making use of its state-of-the-art facilities and connections to over 90 ports around the world. Malta Freeport is earmarked for privatization and the privatization process is presently underway.
Privatization Since the late 1980s, the government has been implementing a policy favouring privatization. As a result, the role of the government in the economy has been significantly reduced. The 1999 budget speech recast the government’s intentions for its privatization strategy and a White Paper was published in 2000. The objectives of this privatization programme include attracting strategic partners. The government has appointed a Privatization Unit to identify those public enterprises that could be prepared for privatization in line with government objectives and to manage the process. Over recent years, the government’s holdings in the direct productive sector have been privatized, with the exception of the shipyards. In the services sector also, a number of enterprises have been divested through sales of shares either to the public or to strategic partners. In particular, privatization has been implemented in the banking sector and in 1999 the government’s shareholding in a major credit institution was sold to an international bank, thus heralding the end of state control in this important sector of the economy. The government has also partially privatized Maltacom (the fixed-line telecommunications operator) by selling 40 per cent of its equity holding. The government intends to sell its remaining stake in the banking sector and in Maltacom. To date, the privatization process has included the divesture of 40 per cent of the government’s holding in Malta International Airport plc to the Malta Mediterranean Link Consortium made up of Vienna International Airport, SNC-Lavalin and Bianchi & Company (1916) Ltd. This sale was followed by the sale of a further 20 per cent to the general public. Also in 2002, the government sold 35 per cent of its holding in Maltapost plc to Transend Worldwide, the international arm of New Zealand Post.
40
Background to the Market
Work on the privatization of Mediterranean Offshore Bunkering Company, Kordin Grain Terminal, Malta Freeport container terminal and the National Lottery Licence is currently underway. In addition, the government is divesting its non-core operations by outsourcing functions previously carried out by public sector controlled bodies.
Table 1.4.9 Sectoral contribution to GDP, 1998–2002 (Lm million) 1998
1999
2000
2001
2002
Agriculture & fisheries 32.6 31.3 31.3 35.8 39.3 Construction & quarrying 36.1 32.9 37.1 42.0 47.0 Manufacturing 271.3 290.3 343.2 320.2 328.0 Transport & communication 75.8 86.6 87.0 90.7 86.5 Wholesale & retail 136.1 140.1 147.9 153.0 158.2 Insurance, banking & real estate 96.9 100.0 119.7 128.4 132.4 Government enterprises 93.7 99.8 81.3 86.1 92.5 Public administration 186.2 190.8 198.9 226.7 233.3 Property income 134.9 142.0 140.3 143.7 144.6 Private services 134.3 146.3 154.5 161.3 167.1 GDP at factor cost 1,197.9 1,259.9 1,341.2 1,388.1 1,429.0 Source: National Statistics Office
Trade The lack of raw materials and natural resources creates a dependence on imports, which impacts negatively on the country’s balance of payments. Furthermore, the small domestic market requires that the local manufacturing industry is export oriented. During 2002, Malta’s trade was influenced by a subdued international economic environment. Exports totalled Lm 919.8 million, an increase of 4.5 per cent over 2001. This increase was mainly spurred by higher re-exports. Domestic exports registered a slight increase over the level recorded in 2001. This was largely influenced by the performance of the machinery and transport equipment sector and in particular the subdued international demand for electronic components during the year. As a result of the performance in manufacturing, a decrease was registered in imports of industrial supplies. However, total imports increased by 0.2 per cent, mainly reflecting higher imports of consumer goods. Europe remains Malta’s main market for both exports and imports. During 2002, exports to Europe represented around 48 per cent of total exports. The EU’s share in total exports was 45.9 per cent. France is
The Republic of Malta: the Economy
41
Table 1.4.10 Foreign trade, 1998–2002 (Lm million) 1998 Imports 1,034.9) Consumer goods 238.5) Industrial supplies 589.3) Capital and others 207.1) Fuel and lubricants 39.3) Exports 712.0) Domestic 664.8) Re-exports 47.2) Trade gap (226.4)
1999
2000
2001
2002
1,135.8) 262.1) 646.9) 168.0) 58.8) 791.0) 712.5) 78.5) (344.8)
1,492.4) 277.7) 870.4) 238.0) 106.3) 1,072.5) 977.5) 94.9) (420.0)
1,225.1) 279.1) 644.9) 200.4) 100.7) 880.6) 790.8) 89.8) (344.5)
1,227.5) 297.8) 626.4) 200.5) 102.8) 919.8) 792.5) 127.3) (307.7)
Source: National Statistics Office
Malta’s leading export market within the EU; its share of total exports to the EU during 2002 stood at 28.5 per cent. The European Union also commands a large share of Malta’s import bill. Its share in 2002 stood at 67.2 per cent.
Table 1.4.11 Exports to EU trading partners, 2002 Country
Percentage share of EU exports
Major items
Italy
7.7
Machinery and mechanical goods, fish, textiles, electrical machinery, scientific instruments, plastics, apparel and clothing
Germany
22.2
Rubber, apparel and clothing, footwear, electrical machinery and equipment, scientific instruments, toys and games
France
28.5
Electrical machinery and equipment, plastics, rubber, apparel and clothing, textiles, machinery and mechanical goods
United Kingdom
26.6
Apparel and clothing, printed matter, machinery and mechanical goods, scientific instruments, electrical machinery and equipment, iron and steel articles
Source: National Statistics Office
42
Background to the Market
Table 1.4.12 Imports by EU trading partners, 2002 Country
Percentage share of EU imports
Major items
Italy
32.9
Mineral fuels, plastics, electrical machinery and equipment, apparel and clothing, textiles, scientific instruments
Germany
11.9
Plastics, paper products, machinery and mechanical appliances, electrical machinery and equipment, motor vehicles and leather
France
24.9
Electrical machinery and equipment, motor vehicles, mineral fuels and oils, paper products, aircraft parts
United Kingdom
15.5
Pharmaceutical products, printed matter, machinery and mechanical appliances, electrical machinery and equipment, motor vehicles
Source: National Statistics Office
Re-introduction of VAT In line with its electoral commitment, the government re-introduced VAT in January 1999. After being introduced in 1995, VAT was removed by a Labour government in 1997. The Labour Party has now decided in favour of retaining VAT if it is returned to government. The 1999 version retains most of the original features with some modifications in order to be more in line with the country’s demands. The rate of VAT is set at 15 per cent on products and services. Tourist accommodation, however, enjoys a preferred rate of 5 per cent. Food, medicine and education are exempt with credit, as in 1995. Exports, maritime services, air and sea transport and public transport are treated in the same manner. Small operators can opt to remain outside the system. Different threshold levels were also established on the basis of income, export share of total production etc. As a result of the government’s EU accession negotiations, upon joining no VAT will be levied on food and medicine until January 2010. If, however, the government decides to introduce VAT on food and medicine, it can apply a reduced rate of 5 per cent and can give a cost of living compensation. International and inland passenger transport between Maltese islands, water supplied by public authorities and new buildings and building land will remain exempt from VAT for an indefinite period.
The Republic of Malta: the Economy
43
Inflation Malta enjoyed relatively low inflation rates during the period between 1998 and 2002, ranging from a low 2.4 per cent in 1998 to a high 2.9 per cent in 2001.
Table 1.4.13 Annual inflation rates (Malta–EU), 1998–2002
Malta EU
1998
1999
2000
2001
2002
2.4% 1.7%
2.1% 1.2%
2.4% 2.1%
2.9% 2.3%
2.2% 2.1%
Source: National Statistics Office, Eurostat
Prospects The prospects for the country are encouraging. Studies conducted prior to the referendum indicated an annual growth rate of around 6 per cent over the medium to long term should Malta join the EU. Following the outcome of the referendum, Standard and Poor’s affirmed their A/ A-1 foreign currency and AA-/A-1+ local currency rating on Malta. The rating agency considers EU membership and the economic restructuring undertaken by the government in preparation for such an event as strengthening resilience and stability in the local economy. This positive outlook can be maintained given the expected high levels of inward investment, a well-educated workforce, high levels of public and private investment in the information technology and communications infrastructure, a strong financial and legal set-up, a stable business environment and a restructured local productive sector increasingly oriented towards high-value-added activities. These are among the factors that will ensure that Malta further develops its calling as a premier investment destination. Note: the authors would like to acknowledge the assistance of the permanent secretary and officials in the Ministry for Economic Affairs in the compilation and vetting of this chapter.
S2
ONLINE UPDATES - 6 September 2005 The economy (Chap. 1.4) Malta selected indicators
(USD millions)
2000
2001
2002
Economic growth (%)
6.4
-1.2
2.2
-1.7
1.0
1.8
Inflation (%)
2.4
2.9
2.2
1.3
2.9
2.2
-5.5
-5.2
-6.2
-9.7
-5.2
n/a
Exports
2,479
2,002
2,254
2,505
2,775
2,935
Imports
3,232
2,568
2,668
3,194
3,756
3,951
-754
-566
-414
-689
-981
-1,016
-13.2
-4.6
-1.2
-6.0
-6.2
-4.3
88.7
70.8
92.4
86.2
71.3
70.8
Debt service (%Exports)
4.1
5.6
4.5
5.4
5.2
5.1
Foreign exchange reserves (in months of imports)
3.5
4.9
6.3
6.5
6.2
6.4
Public sector balance (%GDP)
Trade balance Current account balance (%GDP) Foreign debt (%GDP)
2003 2004 (e)
2005 (f)
(e)estimate (f)forecast
Accession to the EU has not yet generated any marked improvement to Malta’s economy. However, financial aid linked to infrastructure projects has enhanced capital inflows and helped Malta to maintain foreign exchange reserves at an acceptable level and to ease foreign debt as a percentage of GDP from 86.2 per cent in 2003 to 71.3 per cent in 2004. The decline in GDP of 1.7 per cent in 2003 was reversed into positive growth of 1.0 per cent in 2004, which is expected to increase to 1.8 per cent for the full year 2005. On the downside, a higher inflation rate of 2.9 per cent in 2004, up from 1.3 per cent in 2003, and a weaker employment market took their toll on disposable household income and consumer spending. At the same time, government action to reduce the large fiscal deficit, down from 9.7 per cent of GDP in 2003 to 5.2 per cent in 2004, and public sector debt at 70 per cent of GDP impacted public spending.
S3
However, the inflation rate is moderating and a full year rate of 2.2 per cent is forecast. Both exports and imports have continued to rise, but the negative trade balance climbed from US$689 million in 2003 to US$981 million in 2004 and is expected to top US$1 billion at the end of 2005 as a result of higher oil prices and increased purchases of capital goods. Politically, Malta remains stable. In April 2004 the former prime minister, Eddie Fenech Adami, stepped down after 16 years and is now President. He was succeeded by Lawrence Gonzi of the centre-right nationalist party (PN). No election is due until 2008. The Maltese lira is currently pegged to a currency basket in which the euro represents 70 per cent and Malta expects to join the European exchange rate mechanism by the end of 2005. September 2005, Coface and the Editor
44
Background to the Market
1.5
Foreign Trade Malta External Trade Corporation Ltd
Within a relatively short time span, the Maltese economy has experienced a progressive shift in emphasis from the traditional high volume and low value manufacturing activities to a more specialist and high value orientation. During the past three decades, Malta has succeeded in attracting to the island a significant amount of foreign direct investment in advanced technologies. Concentration has also focused on the development of Maltese SMEs which produce specialized products for niche markets, supported by the availability of professional services and considerable international experience and expertise. The industrial strategy is broad based and the drive to attract foreign investment to Malta also includes a stronger focus on companies operating in biotechnology, health and medical industries, information and telecommunications technologies and energy. More than 200 international companies have established operations in the islands. This confirms the high quality and productivity levels that can be achieved in Malta and is evidence of the country’s capability to adapt to the demands of high technology production methods, marketing know-how, and research and development.
Hub for international business in the Mediterranean In recent years, North Africa together with other Mediterranean markets has been high on the national trade promotion agenda. Malta’s full potential for becoming a centre for international business in the Euro-Med region is clearly emerging as witnessed by the growing number of Malta-based companies that are using Malta as a base for operations in North Africa – particularly in Egypt, Tunisia and Libya. The economic and commercial linkages between the countries of the northern and southern shores of the Mediterranean have intensified during the past five years. In addition, Malta has historical trading links with both Southern Europe and North Africa. In this respect, a good
Foreign Trade
45
number of Malta-based companies have operations and activities in North Africa – particularly Libya, which is Malta’s most important trading partner in that region. Malta’s status as an applicant to full EU membership has considerably further enhanced the country’s attractiveness as a platform into North Africa. By establishing their trading, distribution and manufacturing operations in Malta, international firms targeting the North African, Middle Eastern and European markets benefit both logistically and economically. In many respects, Malta’s EU membership will continue to cement the advantages that the country enjoys as a natural partner for business in both Europe and the Mediterranean. Table 1.5.1 Economic indicators, 2001 Lm GNP at current market prices (million) 1,616.2 GDP at current market prices (million) 1,618.4 GDP per capita at current market prices 4,230 GDP annual increase at current market prices (%) 3.9 Exports of goods and services (million) 1,397.1 Services – net (million) 140.2 Current account – net (million) –80.9 Inflation rate (%) 2.93 Unemployment rate (%) 5.1 Exports (f.o.b.) (million) 881.5 Imports (f.o.b.) (million) –1,226.3 Trade balance (million) –344.8 Direct investment – net (million) 138.2 Portfolio investment – net (million) –200.3
US$ 3,592.1 3,597.0 9,401.6 – 3,104.9 311.6 –179.8 – – 1,959.2 –2,725.5 –766.3 307.1 –445.1
Note: Malta-US Average Exchange Rate (2001) Lm 1: US$2.2226.
Domestic exports, 1991–2001 Maltese domestic exports showed a gradual and consistent increase over the period 1991–2001 (Figure 1.5.1). Between 2000 and 2001, Maltese domestic exports (excluding electronics) registered an increase of 9.3 per cent. The annual average growth rate of Maltese domestic exports for the period 1991–2001 was 8.9 per cent.
Total exports, 1992–2002 With the exception of exports in the machinery and transport equipment category, Maltese exports have shown a gradual and consistent increase
46
Background to the Market
Domestic Exports
Domestic Exports (excl electronics)
2,500,000,000 2,250,000,000 2,000,000,000 1,750,000,000
US$
1,500,000,000 1,250,000,000 1,000,000,000 750,000,000 500,000,000 250,000,000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Years
Note: Electronics comprise products falling under: HS 8541: Other semiconductor devices HS 8542: Digital monolithic integrated circuits Source: National Statistics Office, Malta
Figure 1.5.1 Domestic exports, 1991–2001
over the last decade. Following a slump in 2001, Maltese total exports registered an increase of 2.8 per cent in 2002. The annual average growth rate of Maltese exports over the period 1992–2002 was 7.2 per cent. Although re-exports account for only a small proportion of Malta’s total exports, these have gained in importance over the past decade. Whereas domestic exports increased by 72.1 per cent between 1992 and 2002, total exports reported an increase of 84.4 per cent during the 2002 period – due to a three-fold increase in re-exports. Activity in re-exports is growing as more foreign firms seek to establish marketing offices in Malta to penetrate North African, European and Middle Eastern markets. Malta offers many advantages in this form of economic activity. The island’s strategic location is complemented by advanced transhipment, warehousing and oil-bunkering facilities at the Malta Freeport container terminal.
Foreign Trade
Domestic Exports
Re-exports
47
Total Exports
3,000,000,000 2,500,000,000
US$
2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Years
Note: 2002 = Provisional Malta–US Average Exchange Rate (2002): Lm 1: US$2.3100. Source: National Statistics Office, Malta
Figure 1.5.2 Exports, 1992–2002
Table 1.5.2 Total exports (US$)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Domestic exports
Re-exports
Total exports
Average growth rate (%)
1,043,024,543 1,101,282,331 1,264,052,651 1,454,660,100 1,316,484,835 1,302,697,655 1,535,721,040 1,645,737,689 2,256,681,659 1,826,865,792 1,795,085,287
90,961,741 96,047,585 104,442,587 104,466,791 125,124,890 150,119,665 108,963,950 181,298,664 219,242,982 207,430,338 296,449,990
1,133,986,283 1,197,329,916 1,368,495,238 1,559,126,891 1,441,609,725 1,452,817,321 1,644,684,990 1,827,036,353 2,475,924,641 2,034,296,129 2,091,535,277
– 5.6 14.3 13.9 –7.5 0.8 13.2 11.1 35.5 –17.8 2.8
48
Background to the Market
Total exports, 2000–2002, by category During 2002, Maltese exports reported a decrease in the machinery and transport equipment category, a trend which had started the previous year – a reflection of the subdued conditions which have prevailed in the international market for electronic components. In fact, between 2000 and 2002, total exports of machinery and transport equipment decreased by US$476.7 million, or 27.2 per cent, to US$1.27 billion, thus bringing down its share of total exports from 70 per cent to 61 per cent. On the other hand, total exports in the manufactured goods category continued to show a positive trend over this period. Between 2000 and 2002, exports of this category increased by US$44 million, or 11.8 per cent, to reach US$416.7 million in 2002. The total share of exports for this category has also seen a substantial increase, from a 15 per cent share of total exports in 2000 to 20 per cent in 2002. A positive trend was also evident in the food and beverages and tobacco categories, which together registered an increase of US$31 million, or 47.7 per cent, over the two-year period ending 2002. Together, these categories accounted for a 4.6 per cent share of total exports, or US$96.5 million. This underlies the increasing competitiveness of Maltese indigenous products within these categories.
Manufactured Goods 19.9%
Other 0.6%
Food, Beverages & Tobacco Fuels 4.6% 5.8%
Chemicals 2% Semi-manufactures 6.1%
Machinery & Transport Equipment 61%
Figure 1.5.3 Breakdown of exports, 2002
Foreign Trade
49
Table 1.5.3 Percentage share of exports by industry
Food Beverages & tobacco Crude materials Fuels Chemicals Semi-manufactures Machinery & transport equipment Manufactured goods Other
2002*
2001
2000
2.7 1.92 0.28 5.86 2.03 6.1 61.03 19.92 0.16
2.64 1.23 0.26 5.47 2.26 6.06 63.07 18.84 0.12
1.68 0.95 0.21 4.38 1.58 5.24 70.77 15.04 0.12
Source: National Statistics Office Note:* = Provisional data
Total imports, 2000–2002, by category During 2000–2002, total imports decreased by US$624 million, or 18.1 per cent, to reach US$2.8 billion in 2002. During the review period, imports into Malta continued to be dominated by products falling within the machinery and transport equipment category. However, this category decreased substantially from a 57 per cent share of imports in 2000 to 48.8 per cent in 2002. In value terms, imports of this category decreased by US$592 million over the two-year period to reach US$1.3 billion in 2002. However, nearly all the other categories reported an increase in their share of imports, with a notable increase reported for semi-manufactures – from a 9.7 per cent in 2000 to a 12.35 per cent market share of Maltese imports. Imports, in value terms, in this category saw an increase of US$13.8 million, to reach US$348.8 million. In value terms, the highest increase was reported for exports in the food category, which saw its exports increase by US$14.3 million between 2000 and 2002 to reach US$253.6 million. However, a substantial decrease in imports was registered for the manufactured goods category, accounting for a decrease of US$69.3 million over the two-year period to reach US$270 million in 2002.
Total exports, 2001 During 2001, total exports stood at US$2 billion. As Figure 1.5.4 illustrates, the EU remains the most important trade partner for Maltese exports, accounting for 47.8 per cent of total exports during 2001. Other significant partners include the United States and Singapore, which
50
Background to the Market
Table 1.5.4 Percentage share of imports by industry
Food Beverages & tobacco Crude materials Fuels Chemicals Semi-manufactures Machinery & transport equipment Manufactured goods Other
2002*
2001
2000
8.98 1.86 1.10 8.42 7.90 12.35 48.80 9.55 1.04
8.90 1.78 1.15 8.24 7.26 12.05 49.64 9.91 1.07
6.94 1.26 0.91 7.13 6.20 9.70 57.13 9.83 0.90
Source: National Statistics Office Note: * = Provisional data
Asia Other 8%
Other 7% European Union 47.8%
Singapore 11.8%
USA 19.8%
Africa 3.7%
Europe Other 1.8%
Figure 1.5.4 Total exports, 2001
together contributed 31.6 per cent of Maltese total exports during the same period. Taking a closer look at Maltese total exports to the 15 EU member countries, it becomes apparent that the major component is made up by exports of electronic machinery and equipment, with the majority being electronic components. This is followed by clothing, mechanical machinery and equipment, special instruments, and toys and games.
Foreign Trade
Other 25.5%
51
HS62 13.8% HS84 7.3%
HS95 4.3%
HS90 5.9%
Note: HS62: HS84: HS85: HS90: HS95:
HS85 43.2%
Clothing, not knitted or crocheted Nuclear reactors, boilers, machinery, etc; parts thereof Electrical machinery; sound recorders and reproducers, television Optical, photographic, cinematographic instruments, etc; parts thereof Toys, games and sports requisites; parts and accessories thereof
Figure 1.5.5 Total exports to EU member countries, 2001
The same situation is evident with respect to total exports to Malta’s other major partners, notably Singapore and the United States – total exports of electronic machinery and equipment, in particular electronic components, contributed 98.9 per cent and 85.8 per cent of total exports to the respective countries. Apart from electronic machinery and equipment, a significant share of Maltese total exports to North Africa and the Middle East includes products classified under the miscellaneous edible preparations heading, which accounted for 25 per cent of total exports. This testifies to the success of Maltese indigenous products in tapping these markets.
Trade, 2002, origin and destination During 2002, total exports increased by US$57.3 million, or 2.8 per cent, to US$2,091.4 million from US$2,034.1 million in 2001. The highest value increase from 2001 was reported in the manufactured goods category, which increased by US$33.5 million, or 8.7 per cent. The beverages and
52
Background to the Market
HS18 3%
HS21 25%
Other 26%
HS33 3%
HS85 32%
Note: HS18: HS21: HS33: HS62: HS71: HS85:
HS71 8%
HS62 3%
Cocoa and cocoa products Miscellaneous edible preparations Essential oils and resinoids Clothing, not knitted or crocheted Pearls, precious stones Electrical machinery and equipment
Figure 1.5.6 Total exports to North Africa and the Middle East, 2001
tobacco category accounted for the highest percentage change increase of 59.6 per cent over the previous year. Malta’s bilateral trade with the EU increased during 2002. Whereas exports increased only marginally, by US$2.3 million to US$975.5 million, the increase in imports was more substantial, reporting an increase of US$93.3 million, or 5.2 per cent, to reach US$1,892 million during 2002. In terms of share in Maltese trade, whereas exports to the EU decreased from 47.84 per cent to 46.64 per cent, imports originating from EU countries increased to 67.03 per cent from 63.58 per cent. The decrease in the share of imports originating from most of the other markets, albeit marginal, underlies the shift towards Maltese imports from the EU. In fact, imports from the African, American and Asian markets decreased by 0.92, 2.42 and 0.96 percentage points to 1.41, 10.42 and 15.14 per cent of market share respectively. The total value decrease for these three markets was US$123 million. This was partly offset by increases in imports from EU and EFTA countries, totalling US$108.5 million.
Foreign Trade
53
1,000,000,000 900,000,000 800,000,000 700,000,000
US$
600,000,000 2001
500,000,000
2002 400,000,000 300,000,000 200,000,000 100,000,000
er th
th O A si
a
O
er
e Si
ng ap
or
U SA
a ic fr A
O th er Eu ro pe
Eu ro pe an
U ni on
0
Countries
Note: 2002 = Provisional Malta–US Average Exchange Rate (2002): Lm 1: US$2.3100 Source: National Statistics Office, Malta
Figure 1.5.7 Total exports comparative analysis, 2001–2002
The largest increase in exports was reported for products destined for the Asian markets, increasing by US$134.6 million, or 33.5 per cent, to US$537 million. This brought about an increase in the share of Maltese exports to Asia, from 19.78 per cent to 25.67 per cent. Exports to Africa also saw a marked increase of 35.8 per cent, from US$76.2 million to US$103.4 million. As a result, Africa’s share in Maltese exports increased from 3.74 per cent to 4.94 per cent. However, there was a substantial drop in exports to the US market; in fact, exports to this market saw a 31.4 per cent decrease, from US$411.8 million to US$282.7 million. The shift away from the US market was notable, with its share of Maltese exports dropping to 13.5 per cent from 20.24 per cent. This can be attributed to a slump in the demand for electronic components, Malta’s major export to the United States, accounting for 86 per cent of total exports to the United States.
54
Background to the Market
Other 1.5%
Asia Other 10.9% Singapore 4.2% USA 9.4% Africa 1.4% Europe Other 5.5%
European Union 67%
Figure 1.5.8 Imports by origin, 2002
Asia Other 8.9%
Other 7.5% European Union 46.6%
Singapore 16.7%
USA 13%
Africa 4.9%
Europe Other 2.1%
Figure 1.5.9 Total exports by destination, 2002
Foreign Trade
55
Export growth When compared with EU, EFTA and EU candidate countries, Malta has performed well. In fact, Malta’s annual export growth in value between 1997 and 2001 was 6 per cent. That of the EU-15 was 1.2 per cent, that of EFTA 4 per cent, and that of the 10 EU candidate countries (including Malta) was 5 per cent.1
Selected sectors Agriculture and fisheries The Maltese islands constitute a low plateau, without lakes or rivers. Some 60 per cent of the total area of about 316 square kilometres is cultivable. The cultivated area has decreased since World War II. Although the soil is generally shallow and water scarce, a wide range of crops are grown. Most farms are small and the average holding is less than two hectares. It is noteworthy that Malta is self-sufficient in the production of certain fresh vegetables and fruits. The fishing industry in Malta consists of traditional fishing as well as fish farming methods. Fish farming in Malta is almost entirely export oriented, with sea bream and sea bass accounting for 84.7 per cent of the total volume of fish exports. During January–September 2002, exports of fish increased by 17.3 per cent to US$4.4 million.
Manufacturing Chemicals As in recent years, the turnover in the chemical sector has continued to be characterized by its export orientation, reflecting the activities of the cluster of firms operating in the pharmaceuticals and toiletries subsectors. In fact, exports in this sector accounted for 77 per cent of production in 2002. The sector also comprises the manufacture of paints, detergents and insecticides, which are largely destined for the domestic market. Total exports of chemicals during January–September 2002 accounted for US$42.5 million. Investment levels increased significantly and reached US$7.6 million. Rubber and plastics The rubber and plastics sector remains largely export oriented, with 81.4 per cent of turnover directed towards overseas markets. At US$55.2 million, domestic exports remained practically unchanged during the
1
Based on COMTRADE statistics: ITC (UNCTAD/WTO).
56
Background to the Market
nine months to September 2002 compared to the same period the previous year. Electrical machinery The electrical machinery sector is predominantly export oriented, with exports accounting for 97.6 per cent of its total turnover. This sector includes a number of firms engaged in the manufacture of electrical machinery. Communication equipment The communication equipment sector accounts for the largest proportion in total manufacturing output and exports. Turnover in the sector is heavily influenced by a small number of companies. Output by the sector is primarily composed of electronic components and other precision communication products that are essentially intended for external markets. During January–September 2002, domestic exports saw a decline of 9 per cent and stood at US$774.3 million. Nevertheless, it is noteworthy that despite the pressures exerted by the weak international demand for such products, the sector is showing signs of recovery, gradually picking up in momentum and growth. Net investment stood at US$24.9 million during the same period. Medical and precision equipment The medical and precision equipment sector comprises three main clusters of activities – namely, the manufacture of pharmaceuticals and other medical products, measuring and precision instruments, and spectacle frames and sunglasses. The three sub-sectors are all primarily export oriented. In fact, domestic exports accounted for 99.6 per cent of total sector turnover. During January–September 2002, turnover increased by US$8.3 million and stood at US$38.5 million. Clothing The clothing sector remains one of the most export-oriented industries, with 88 per cent of 2002 production exported. Typically, the sector produces upmarket ladies- and menswear, and casual wear intended primarily for the Belgian, German and UK markets.
Other Food and beverages With 84.2 per cent of production within the food and beverages sector being intended for domestic consumption, it remains one of the most locally oriented sectors within the manufacturing industry. Production of the food sub-sector is largely export oriented, whereas beverages are mainly directed towards the local market.
Foreign Trade
57
Although export-oriented beverages manufacturers are facing a liberalized trade environment thus exposing them to intense international competition, a number of companies have still managed to tap export markets. Indeed, this accelerated increase in domestic exports by the beverages sector in recent years is the end-product of improved quality of output and expanded product range by local firms which are successfully penetrating international markets. Export activity is being stepped up in the beer, wine and fruit juice sub-sectors. Furniture and other manufacturing This sector encompasses firms engaged in furniture manufacturing as well as firms engaged in the manufacture of toys, games and jewellery. It is pertinent to note that the large proportion of domestic exports registered by this sector is accounted for by the manufacture of toys and games. However, domestic exports of jewellery are also significant. Domestic exports totalled US$60.5 million during January–September 2002.
Services industry In recent years, the Maltese economy has increasingly become service oriented – a reflection of the fact that the market services category’s contribution exceeded by a significant margin that of direct production. More than 99 per cent of domestic enterprises are SMEs, concentrated in the services sector and employing less than 10 employees. Market services activity comprises transport and communication, wholesale and retail trade, insurance, banking and real estate, property income and private services.
Table 1.5.5 Balance of international payments summary
Goods Services Travel
Jan–Dec 2000 Credit Debit
Jan–Dec 2001* Credit Debit
1,087,697 216,934 268,192
899,485 416,402 260,745
1,418,691 233,438 87,971
1,155,395 238,782 81,234
Note: * = Provisional
With over 1 million arrivals per year, it is not surprising that the tourism industry alone accounts for 18.6 per cent of total goods and services exported, underlying the significant role this industry plays in its contribution to economic growth, job creation and foreign exchange
58
Background to the Market
earnings. Moreover, Malta’s potential as a cruise-line destination has been developed with considerable success. Other market-oriented service activities – namely financial services and Freeport-related activities – continue to be developed, thus consolidating Malta’s position as an international services centre. Malta Freeport presently ranks third among the leading transhipment ports in the region and twelfth among the top European ports. The high volume of containers being handled is a result of the Freeport’s track record and the positive international recognition that the company enjoys with global carriers as being a reliable and credible port. IT The government’s continued efforts to guide the strategic direction for the transformation of Malta into an information society and information economy has already attracted 16 consortia and prestigious multinationals, such as Oracle, Cisco and Microsoft, to establish a base in Malta. Financial services The privatization of leading banks and the liberalization of capital markets have led to a rapid development in the financial sector. Moreover, a gradual shift from traditional deposits to investment funds is taking place.
Malta and the European Union
59
1.6
Malta and the European Union Simon Busuttil1
Introduction With a population of less than half a million, Malta will be the smallest member state of the European Union when it accedes to membership on 1 May 2004. However, its prickly path to membership made the tiny Mediterranean country a unique case study drawing interest by far disproportionate to its size. It was no surprise, therefore, that when, on 8 March 2003, Malta held its long-awaited referendum on EU membership, foreign journalists trooped in like never before and the international media turned to look. For in none of the other nine new member countries was EU membership such a thorny issue. In Malta, EU membership deeply divided the island’s two main political parties and with them the entire society. Equally, in none of the other countries has EU membership with all its cultural, political, social and economic implications been debated so intensely and scrutinized so minutely. Yet Malta’s EU debate may not be as atypical as much as it may be a microcosm of a simmering discussion on the very essence of European integration now taking place in old and new members alike, not least in the context of the great debate on the future of Europe. For how else can one describe pointed arguments over sovereignty, cultural identity or standard of living that have raged in Malta for the best part of the last decade?
Chronology Malta’s European credentials are glorious and proudly held. The Knights of St John, later known as the Knights of Malta, who ruled the island 1 Dr Simon Busuttil was a member of Malta’s Core Negotiating Group with the European Union and Head of the Malta-EU Information Centre.
60
Background to the Market
for more than two and a half centuries, were the first embryonic council of Europe. Two important dates – 1565 when Malta successfully resisted the siege of the Ottoman empire and 1942 when Malta bravely held back Hitler’s advance to the south – are historical milestones that tie the island’s destiny intrinsically with that of Europe. Malta applied to join the EU in July 1990 but its relations with the then EEC go back to 1970 when the island was one of the first nonmember countries to sign an Association Agreement. The agreement was a crucial instrument for Malta’s plans to diversify its economic base from its former heavy dependence on its shipbuilding and ship-repair industrial sectors – a vestige of Malta’s role as a strategically located British colony in the centre of the Mediterranean. The Association Agreement provided for a two-stage approach towards the completion of a free trade area and, subsequently, a customs union over a 10-year period. In the event, neither of these objectives was achieved owing to a mix of political and economic considerations, not least the sharply contrasting European policies espoused by Malta’s two main political parties. As a result, the Association Agreement lost some of its relevance and although its benefits to Malta’s manufacturing base should not be underestimated, it had, as of late, generally become seen as an outdated instrument that needed to be superseded by a new relationship with the EU. The crucial question was, of course, whether this relationship should take the form of membership of the EU or some other partnership short of that. It is this question that raged fiercely in Malta during the 1990s and until 2003. EU membership was tirelessly pushed by the Christian Democrat ‘Nationalist Party’ (PN) led by Prime Minister Edward Fenech Adami, but vehemently opposed by the Socialist ‘Malta Labour Party’ (MLP) led by its leader Alfred Sant. In a small country with a bi-party system, this made the prospect of EU membership something of a crusade and the 2003 referendum and election polls a cliff-hanger appointment with Malta’s destiny. Malta’s chances of membership took a false turn when, unsurprisingly, the EU forged ahead with its 1995 enlargement (Austria, Finland, Sweden) leaving Malta and Cyprus behind. Disillusion and recrimination along with unpopularity over EU-induced domestic reforms soon led to a defeat of the ruling PN Government in 1996 in favour of the anti-membership MLP. As a result, Malta suspended its membership application and sought a different relationship. In so doing, Malta emulated Switzerland which had also put its membership application in abeyance, albeit under different circumstances – soon after its bid to join the European Economic Area (EEA) was rejected in a referendum held in 1992. However, an unexpected collapse of the MLP Government after less than two years in office opened a new ray of hope for the supporters of
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61
the European cause. In the event, early elections were called in 1998 where EU membership dominated the campaign and won, putting the pro-membership PN back in office. Malta’s membership application was swiftly put back on track and accession negotiations were launched in February 2000. However, the 1998 general elections did not settle the EU issue. If anything, the division deepened. The MLP, now in opposition, intensified its anti-membership campaign and capitalized on the pain of adjustment that soon started to bite in as a result of Malta’s programme for adoption of the EU ‘acquis communautaire’. On the negotiations front, having lost ground and been overtaken by the new candidatures from Central and Eastern Europe (CEECs), Malta now found itself in the second batch of six countries, known as the Helsinki Group, having to catch up with the first batch (the Luxembourg Group) that had launched negotiations two years earlier. But the sheer size of the task of adopting the acquis and of negotiating the terms of accession did not dent the government’s determination to negotiate an adequate package. Quite the contrary, the continued political division on membership made the conclusion of a good membership package that could muster sufficient popular support quite simply compelling. Ironically, this specific political reality made Malta, along with Poland, one of the toughest negotiators among the countries of the 2004 enlargement. Rather than weaken Malta’s negotiating position as many would have thought, the Opposition’s hard-line position against membership at all costs may well have helped Malta win with Brussels a number of key negotiating points that would otherwise have been virtually impossible to achieve. All the while, an intensive information campaign was launched in Malta to take Europe to the people. Long considered as an airy-fairy ideal remote from the man on the street, the European Union and EU membership had started to lose popular appeal. The government’s strategy was to hit back by deploying a marathon three-year-long information-based communications strategy that avoided propaganda hype and sought instead to increase awareness by addressing real concerns and dispelling common myths. In the short term, the campaign appeared to deepen concerns on membership as the public learnt more about the country’s poor record on areas such as the environment and on the need to undertake painful reforms, such as restructuring. In the medium-to-longer term, however, the strategy started to pay off because the public appreciated the availability of information and came round to accepting the need for change. The bottom line, many came round to agreeing, was that EU membership was simply rendering inevitable certain reforms that were, in any case, long overdue.
62
Background to the Market
Referendum On 8 March 2003, Malta (the most sceptical of candidate countries) was the first to hold a popular referendum on EU membership. The referendum was announced shortly after the conclusion of accession negotiations at the historic EU Summit held in Copenhagen in December 2002. The actual referendum campaign was a brief but intensive five-week propaganda battle largely fought on the media by the two main political parties, along with different organizations from civil society. Yet, unlike other countries where no mainstream political party officially opposed membership, Malta’s political scenario made the starting point for the referendum very much a 50-50 affair. In the event, the result was a clear victory for the yes camp by 53.6 per cent to 46.4 per cent from a very high turnout of almost 92 per cent. And although this was one of the lowest margins of approval for membership – save for Sweden – it was by far one of the largest margins in Malta’s keenly contested polls. But it was not over. Having long expressed strong reservations on the holding of a referendum, the Opposition leader quickly denounced the result as a victory for the no camp because, he claimed, the yes vote had not attracted an outright majority of eligible voters. Thus the inevitable happened. Hot on the heels of the referendum result, the prime minister called a snap general election, to seek confirmation of the result. On 12 April 2003, the Maltese electorate went to the polls and reelected the incumbent government, making a clear choice for Europe. For the prime minister and leader of the pro-membership Nationalist Party, Eddie Fenech Adami, this was a crowning moment in an outstanding, if often tortuous, political career. After a long political struggle spanning more than three decades, Malta had finally decided on Europe.
Main negotiating issues One of the strongest, and perhaps most persuasive, arguments against membership that had long been made by the Opposition was that EU laws, common to all EU countries, would put Malta in a legal straitjacket that took little or no account of the inherent socio-economic vulnerability of a tiny island. The government retorted that EU laws presented common solutions to common problems faced by a group of like-minded countries and went above any ‘large versus small’ divide. In any case, it added, EU laws were sufficiently flexible to take into account the specific needs and concerns of individual member states.
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63
This put the onus firmly on the government to prove, during the negotiations phase, that it would be willing and able to extract from the EU flexible terms that took account of Malta’s particular concerns. In the event, Malta came out of negotiations with an impressive package of 77 special arrangements that would either provide the country longer phasing-in periods (transitional periods) to adapt to the acquis or, more exceptionally, that would provide tailor-made solutions for Malta. The main negotiating issues ranged from the right of EU citizens to freely purchase property in Malta to more sectoral concerns in specific sectors such as fisheries, agriculture and the ship-repair sector. On property, Malta achieved a permanent derogation from EU rules to continue to apply restrictions on the right of foreigners, including EU citizens, to purchase more than one property in Malta. The ingenious solution to a problem that went in the face of established (and fundamental) internal market principles based the acquisition of the right to purchase property freely on a non-discriminatory, yet mandatory, fiveyear residence requirement. Significantly, the solution was an exception to EU law that was not limited in time – the only permanent derogation conceded by the EU during the entire accession process. On the free movement of workers, Malta walked away with a double victory. Whereas, on the one hand, it ensured immediate access to the EU labour market for Maltese citizens from the first day of membership – without any of the restrictions placed on the eight CEECs – on the other, it secured a seven-year window to continue to restrict the inflow of EU workers into Malta should this cause a very serious disturbance to the local labour market. On agriculture, a tiny yet crucial sector, Malta obtained special arrangements ranging from higher subsidies for its farmers to exemptions on the size of battery cages. Equally, on the heavily-subsidized ship-repair sector, Malta negotiated authorization to pay a €1 billion state hand-out to help the sector undertake a long-delayed restructuring programme. Unsurprisingly, in the EU’s common negotiating positions for Malta, one can find frequent references that specific concessions for Malta were meant to take into account its unique circumstances and that they should not set a precedent for other candidate countries. However, the icing on the cake came at the Copenhagen Summit when Malta turned a dismal EU financial package offer into a significant one. Having been originally placed in the group of candidate countries that would be net contributors to the EU budget were it not for a so-called budgetary compensation mechanism, Malta protested strongly that the financial deal needed to be improved. Crucially, it called into play its domestic political considerations – the need to win a difficult referendum – to extract a deal that sent it to the top of the league of net beneficiaries, after the Baltic states.
64
Background to the Market
Political implications of membership It is axiomatic that in a small country the discourse on the political implications of membership centred around issues such as sovereignty and influence in the EU decision-making process. In this respect, Malta was not atypical. But Malta’s specificity came out again on another, keenly debated political issue. This related to Malta’s status of neutrality. Although the EU made little of Malta’s intention to retain its constitutionally enshrined military neutrality, in Malta opponents of membership mounted powerful arguments on an eventual erosion of Malta’s neutrality and the consequent infringement of the Constitution. Relying on recent memories of history as a strategic military base, they also drew up spectres of a forced participation in wars and a return to the use of Malta’s harbours for military purposes. On its part, the government sought to negotiate an undertaking that the country’s neutrality was not incompatible with membership. In so doing, it rode on Ireland’s declaration on neutrality that had been agreed in Seville in June 2002. However, Malta’s declaration on neutrality, a brief and simple announcement of a state of fact, may not have gone far enough to assuage domestic concerns.
Economic implications of membership With a GDP of around 56 per cent of the EU average, Malta ranks as the fourth most prosperous candidate country after Cyprus, Slovenia and the Czech Republic. But wealth, like poverty, is relative and it was clear therefore that one of the chief objectives of membership had to be a concerted effort to bridge this gap in economic development – and in standard of living – over a shorter time frame than would have otherwise been the case outside the context of membership. The economic case for membership remains compelling even for a country with Malta’s population. Access to the EU market and to its interesting network of trade agreements with some 100 countries around the world makes Malta an attractive base for investment in the Mediterranean – and more so, in view of the approaching deadline for the establishment of a free trade zone with Southern Mediterranean countries under the aegis of the EU’s Euro-Med Partnership. Equally, Malta’s access to EU financial assistance – just under €400 million in the first three years of membership – goes a long way in making ends meet. Among the national priorities for spending EU funds, identified in the so-called Single Programming Document, is a focus on the need to upgrade Malta’s road infrastructure – a sore point for locals and tourists alike – as well as a heavy investment in meeting higher environmental standards in areas such as air quality, waste manage-
Malta and the European Union
65
ment and the quality of drinking water and sea water. The competitiveness of industry and small enterprises as well as further investment in human resources are also among the major priorities. The economic case for membership was best made in a report by EcoMod (Global Economic Modelling Network), which found that should the country opt for membership, Malta’s GDP would grow by an additional 6 per cent per annum whereas it would decline marginally should the country opt for non-membership. Interestingly, the report also found that in the event of non-membership, the CEECs would steadily catch up with Malta and eventually overtake it, thereby widening rather than reducing the economic gap with the EU. On a sectoral basis, the report found that production would increase substantially in the electronics sector and also in other sectors such as construction and services. Consumption would also rise dramatically whereas employment would again fare best in the electronic and construction sectors. On the down side, the sector that was most at risk was agriculture, which was the only one expected to register a decline in production and employment. As the business community stopped to listen to the findings of the report, published just prior to the referendum campaign, the no camp was surely seeing the final nail being struck in its coffin.
Conclusion The double defeat at the polls for the no camp appears to have finally settled the EU issue. Malta will join the EU at the next (and greatest) enlargement, due to take place on 1 May 2004. That is a statement of fact – even if few could ever believe that such a statement could ever be made with such finality. Crucially, the decision on EU membership removed at a stroke an embedded uncertainty that had exerted a heavy price on the economy and had even been noted by major international credit-rating agencies. The unequivocal decision in favour of membership was immediately greeted with a newly found sense of economic security and serenity that augurs well for the future. No sooner had the results been announced than the Opposition started to signal a dramatic u-turn on its European policy. Should a national consensus truly emerge on Malta’s EU membership, Malta would be well placed to open a new era in its political history. Yet, the elusiveness of consensus on major national policies had come at a heavy price, with scarce and limited resources being spread too thinly. A healing process is therefore required to enable the country to unite and rally around a new destiny within the European Union. This will require the defeated to make major policy changes – a process which will not be easy but which has already been made by other Socialist parties in Europe (such
66
Background to the Market
as in Greece and the United Kingdom). But if a national consensus on EU membership is to be entrenched, it will also require the victors to reach out to their opponents and involve them in the new experience of EU membership in a spirit of national reconciliation. From the turbulent debacle on EU membership, a new beginning beckons for the political and constitutional development of a tiny Mediterranean country that has finally made its choice.
Part Two
The Scope of the Market
2.1
Tourism and Leisure Malta Tourism Authority
Having experienced a 40-year cycle of economic booms and slumps, the tourism sector has become a strong pillar of the Maltese economy. The opportunities for socio-cultural interaction on an international level have increased. Tourism development has also had an impact on the spatial and physical environment of the country. Over the past 10 years, Malta has attracted over 1 million tourists annually. Malta International Airport welcomes 95 per cent of incoming tourists, with the remaining 5 per cent arriving by sea at the sea passenger terminal. In the past five years, the average annual increase in arrivals was 2.9 per cent. Cruise business has been growing, particularly since 1996 when tour operators entered the market. Over 259,000 cruise passengers were registered in 2001. With an average length of stay of nine nights, over 11 million guest nights are generated annually. Seventy per cent of these guest nights are registered in serviced accommodation. The foreign earnings generated through the expenditure of visitors amounts to over Lm 250 million (€625 million) each year.1 The average annual increase in nominal gross earnings from tourism over the past five years has been 3.2 per cent. Close to 10,000 people are employed in hotels and catering establishments. A study of the economic impact of tourism in Malta estimated that in 1998 19,362 full-time equivalent jobs were directly involved in tourism, together with a further 6,200 indirect full-time equivalent jobs being supported through tourist expenditure. The direct employment accounts for 12.79 per cent of national full-time equivalent employment. Five per cent of jobs in the European economy are generated by tourism and a further 8 per cent are dependent on tourism. As a result of the economic stimulus from tourist expenditure, the number of jobs supported by such expenditure increases to over 41,000 full-time equivalent jobs when the full multiplier effects are taken into account. Thus, the
1
This excludes expenditure on international transport.
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The Scope of the Market
full employment impact of tourists’ expenditure is 27.37 per cent of total employment in the Maltese economy. A study2 conducted during 2000 indicates that 35 per cent of fulltime employees and 46 per cent of part-time employees working in accommodation establishments are female. Twenty-one per cent of catering establishments’ full-timers are female, as are a further 34 per cent of part-timers. Travel agencies and destination management companies, which due to the nature of their work do not require large numbers of employees, stated that 11.5 per cent of their full-time staff and 10.7 per cent of their part-time staff were female. The Institute of Tourism Studies (ITS) opened in 1988 and provides training opportunities on both full- and part-time bases. The courses available range from a higher diploma in hotel administration to certificate courses relating to hotel services and food and beverage preparation. Over the past 11 years, more than 760 students have graduated from the institute. Some 78 per cent of these have remained in the industry, 1 per cent work abroad, while the remaining 21 per cent have opted for non-tourism-related jobs.3 The University of Malta has been offering a two-year first degree course for students who graduate from the ITS higher diploma course in hotel administration. The university now offers a full-time first degree course in tourism studies. Given the cost structures of local suppliers and the level and patterns of tourist expenditure, tourism contributes to 10.45 per cent of GNP at a direct level, which increases to 24.29 per cent when all transactions and multiplier effects are taken into account, and 21.7 per cent of government income is generated through tourism earnings. The percentage of imports and outflows as a result of tourism activity in Malta is 13.69, while 27.37 per cent of full-time equivalent employment is stimulated by the initial stimulus of tourism expenditure and 12.79 per cent of full-time equivalent employment is directly generated through tourism expenditure for accommodation, catering, car hire and other services, including those provided by Air Malta.4 Due to the comparative lack of resources and the economy’s structure, the contribution of tourism to the Maltese economy is much higher than that for the European economy, for which 1998–2000 figures indicate that 5 per cent of GDP is generated by the core elements within the tourism industry and a further 7 per cent by other tourism-related activities. Tourist expenditure surveys5 indicate that 40 per cent of all expenditure incurred by tourists is generated by accommodation establishments, 2
Malta Tourism Authority 2001, The Employment and Training Survey. Ministry of Tourism 2001, Tracer Study Summary. 4 Malta Tourism Authority 2000, The Economic Impact of Tourism in Malta. 5 Malta Tourism Authority 1996–2001, Tourism Expenditure Surveys. 3
Tourism and Leisure
71
with a further 22 per cent of expenditure being incurred for aviation and 2 per cent for handling services. Catering establishments attract 16 per cent of tourist expenditure. During their stay on the Maltese islands, tourists go shopping and entertain themselves, with the result that 8 per cent and 6 per cent of their expenditure is incurred on these activities respectively. Transport services account for 4 per cent of tourist expenditure and a further 1 per cent is incurred for purchases of goods and services rendered. The United Kingdom remains Malta’s main tourism source market, accounting for 35 per cent of annual arrivals. Seventeen per cent of incoming tourists visit from Germany, 7.6 per cent from Italy, 6 per cent from France and 5.3 per cent from the Netherlands. The other 10 EU member states account for a further 11 per cent of tourist arrivals. The EU accounts for over 82 per cent of arrivals. Over 36 per cent of Malta’s tourist arrivals visit the islands during the peak summer months of July to September (Schedule 7). The shoulder months of March to June and October are popular, with slightly more than 44 per cent of tourists. The four months November to February account for just 19 per cent of arrivals, with the result that hotel occupancy rates during this winter period are generally low. Malta offers a diverse product, which results in various interests being captured to tap the outbound travel market from source countries. Tourists visit Malta for a number of reasons. The majority of visitors come on holiday, seeking rest and relaxation. The main attractions for new visitors are its novelty value, culture and history, seas and agreeable climate.6 Other tourists visit for diving, language learning, conferences and incentives, walking tours and nature, archaeology and a multitude of other reasons. Malta attracts a truly diverse mix of visitors, from the sun and sea visitor to the city visitor, the diving enthusiast, the professional archaeologist and the active sportsman. Malta is equally popular with couples, families, senior citizens and groups alike. Tour operators and charter flights have made the islands more accessible. It is estimated that 80 per cent of incoming tourism is generated through tour operators. Major international tour operators have established a stronghold in Malta, often consolidating business. Although these tour operators mainly operate in the mass market, they are also entering into other areas such as city and short breaks. Package holidays composed of flight, accommodation and possibly car hire and/ or tours are characteristic of this major segment. One of the drawbacks of the current situation, however, is that tour operators do not have a long-term commitment to the country because they have no investment in the plant as they have in other tourist destinations. Foreign operators can operate local travel services for their own clients however. Tour 6
Malta Tourism Authority 1992–2001, Tourist Profile Surveys.
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The Scope of the Market
operators can move their business away from Malta as soon as they can earn a better return elsewhere. The majority of tourist accommodation is owned by Maltese nationals. Some of the larger hotels are run on management contracts with multinational chains, implying a leakage out of the economy. Malta’s national airline, Air Malta, carries 54 per cent of air passengers through its scheduled and chartered operations. Other scheduled airlines, such as Lufthansa, British Airways and Alitalia, offer direct flights to the major European airports. Tour operators, besides chartering flights from Air Malta, also provide their own chartered connections. Air Malta has been instrumental in opening up new sources of tourism and in some cases this has meant offering capacity at less than economic prices over a period of years until Malta becomes an established destination in foreign markets. Air Malta has also, in some cases singlehandedly, played an invaluable role in maintaining air links with certain foreign sources of tourism in the winter months when other scheduled airlines, and more so charter operators, withdraw from the market. Over 45,000 beds are registered as tourist accommodation. An additional 8,000 beds are planned. A number of unlicensed beds are also placed on the market particularly by holiday furnished premises. Eighty-eight per cent of beds are offered as serviced accommodation. Almost 4,000 beds are offered by 11 five-star hotels, a further 14,300 beds by four-star hotels and over 11,500 beds by three-star hotels. The country now has an excess supply of bed stock and it is government policy to direct tourism to a controlled growth scenario to discourage further increases. Accommodation is mainly concentrated in the Bugibba/ Qawra/St Paul’s Bay, Sliema/St Julians areas in Malta, and in Mgarr, Xlendi and Marsalforn in Gozo. Occupancy rates for hotels and similar establishments in the past five years have ranged between 54 per cent and 58 per cent. Due to the seasonal nature of tourism, these rates increase in summer and decline in the off-peak months. Different categories of accommodation also face varying occupancy rates. Not surprisingly, lower category accommodation generally attracts lower occupancy rates. Most of the investment which has taken place by local entrepreneurs in the past decade has been made in large-scale fourand five-star hotels. Most of these hotels are run under international brand name management contracts. The lower category accommodation segment is characterized by small enterprises; 24 per cent of three-star and 44 per cent of two-star establishments are family-owned businesses7 and this serves to limit the availability of capital for reinvestment. The main centre for leisure and recreation is located at Paceville, while Valletta, Mdina and Rabat (Gozo) are the main cultural centres. 7 Malta Tourism Authority 2000, An Assessment of Three, Two and One Star Accommodation in Malta and Gozo.
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The country possesses numerous sites of national heritage, including six World Heritage sites. The western coast of Malta is characterized by open space and countryside. This is even more widespread in Gozo. This facet makes Gozo unique, more attractive and diverse than many other destinations, and thus helps to boost Gozo’s image and popularity. Valletta and Sliema in Malta and Rabat in Gozo are the main shopping districts. Places of interest, culture, archaeology, history and nature are spread throughout, from the southeast tip of Malta – Birzebbuga – to the northwest of Malta – Mellieha – and to the whole of Gozo. The numerous sites and attractions though widely visited by tourists require strong management and investment in order to ensure that the tourist, whatever age or nationality, is well informed about the site being visited. More attention to the preservation and management of the islands’ heritage is essential. The independent traveller is normally more adventurous and seeks to discover the islands in more depth. The Internet and other direct modes of booking are providing an additional opportunity to tap into this market segment. The independent traveller is generally more prone to having a specific interest (such as diving or walking) to pursue during his holiday in Malta. Specialist tour operators are increasingly focusing on such markets. Gozo is a prime destination for this segment. Seventytwo per cent of tourists take a day visit to Gozo. Gozo also benefits from repeat business, with winter 27 per cent, spring 42 per cent, summer 25 per cent.8 However, this still does not provide a steady flow of business for the accommodation segment as only 2 per cent of tourists spend an overnight in Gozo and just a further 4 per cent opt for a Gozo-only holiday. Gozo has its own attractions, such as Ggantija, which is the oldest free-standing monument in the world. Gozo’s sensitivity is high and therefore management of day visitors and other tourist flows should be a priority. An important role in the provision of better communications between Malta and Gozo has been the operation of helicopter services by Malta Air Charter, which substantially reduces the transfer time between Malta International Airport and accommodation in Gozo. This helicopter operation is run at a substantial loss, but is essential in order that Gozo is made more accessible. Getting around the islands by land means either using public transport or renting a car, motorbike or bicycle. Eighty-eight per cent of tourists make use of the public transport system at least once during their stay. Over 4,000 cars are available for rent. A regular ferry service is available between Malta and Gozo and between Valletta and Sliema. Support from other sectors of the economy is necessary in order to maintain an active tourism industry. Basic infrastructure providing
8
Malta Tourism Authority 2001, Gozo Ferry Surveys.
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The Scope of the Market
energy, water, sewage treatment and waste reduction and management are imperative. Direct tourism activity accounts for 8 per cent of total energy consumption. Demand for such services is increasing annually. Tourism also draws from other economic activities, such as agriculture, food and beverage production, fuel consumption and service industries. The overall service provided to the visitor is therefore dependent not solely on the basic tourism facilities but also on the service and offering provided by other tourism-related activities. Most investment within the tourism industry has been concentrated on the accommodation sector and leisure activities. Banks have strongly supported these investments and these segments of the industry have reached an acceptable standard. Foreign direct investment is slow. In the past few years, leading international hotel chains have entered into management contracts with local hotel consortia. The management contract itself is an outflow for the economy but the international name has, of course, its own intrinsic value for the destination. The tourism industry described above is set in a 316 square kilometre destination which is highly urbanized. Twenty-three per cent of Malta and 11 per cent of Gozo are developed. In Malta 30.5 per cent of the coastal zone area is built up and in Gozo 7.5 per cent is built up. The population density on the island of Malta is 1,409 people per square kilometre, whereas that of Gozo is 423 inhabitants per square kilometre. This situation is more characteristic of a city than a country. However, the archipelago is visited as a country and visitors may therefore have specific expectations. Malta’s small size results in a magnification of problems that need better management to ensure that they are minimized.
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2.2
Telecommunications Malta Communications Authority
Maltese telecommunications in a global context In global terms, telecommunications constituted one of the leading economic growth areas in the 1990s, in turn fuelling activity and trade in all sectors from manufacturing to the provision of financial services. Telecommunications continue to represent one of the critical underpinnings of a nation’s economic and social development. It is the major vehicle for the transmission of knowledge, information and, increasingly, business transactions. This is even more pronounced in the case of an island economy such as Malta where telecommunications remove the physical constraints of isolation and enable participation in a global economic milieu with its attendant opportunities. Malta has made immense progress in recent years in the development of a telecommunications infrastructure. However, the need for continued investment remains. The government’s liberalization programme for telecommunications, announced in 2000, sets out in clear terms an ambitious national agenda designed to end existing monopolies in fixed and mobile telephony, as well as in cable TV services. As a result, paging services and cable television have been divested of their exclusive rights and a second mobile telephony operator has been actively competing in the market since December 2000. The last hurdle to market liberalization fell on 31 December 2002 when international gateway services, data services and the fixed telephony sector became open to new entrants. The government’s liberalization programme is intended to increase investment in the sector, with a view to enabling a wider choice of options in service provision, improved services, and most importantly, lower costs with the reassuring concomitant benefits of added communications redundancy and resiliency.
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Introduction to Maltese telecoms With very minor exceptions, the telecommunications sector (and particularly fixed telephony) has traditionally been a public sector monopoly. Introducing and sustaining competition in such markets is thus a tall order and a preponderance of national regulatory agencies has emerged in recent years. The evolution from public service departments to autonomous authorities started out rather slowly in the early 1980s but has gathered momentum in recent years. Presently, in excess of 100 countries worldwide have a telecommunications-specific regulatory body. Increasingly, the mandate of these is evolving to a broader regulatory one, to include other media such as the Internet and broadcasting, the result of technology convergence. Autonomy in regulation is meant to ensure freedom from vested interests to enable a higher degree of independence in decision making. In line with its commitment towards the creation of a strengthened regulatory structure, the Maltese government enacted the Malta Communications Authority Act of 2000, which establishes the Malta Communications Authority (MCA), sets out its terms of reference, mode of operation, appointment of officers and financing. The MCA is identified as the entity that is responsible for the administration of the Telecommunications (Regulation) Act of 1997 (TRA). The TRA establishes the framework for a liberalized telecommunications market, sets out the obligations of telecommunications operators, provides for the protection of consumer interests and delineates the appeals framework with regard to decisions of the MCA.
Regulatory framework The current Maltese regulatory framework for the telecommunications sector was essentially designed to bring about the liberalization of the market and to cater for the transition from a monopoly to a competitive market. It was also designed to be in line with the Telecommunications Acquis of the European Union. The rapid developments in the sector, both as a result of technological changes as well as liberalization, require a constant review of this legal framework to ensure that it is conducive to the promulgation of competition in the sector and to the provision of improved services to consumers. The MCA is mindful of the recent introduction of the new EU Framework on Electronic Communications, which places great emphasis on the need to remove any remaining barriers to entry in the telecommunications market and on the application of regulatory measures that are proportionate and effective in achieving a freely competitive market.
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In fact, in March 2002, a task force was constituted to analyse the implications of Malta’s adoption of the new EU framework and specifically how it impacts extant legislation, present structures of government and current licensing regimes. This task force has gone on to make recommendations to government for adoption of the new directives by the time of Malta’s anticipated deadline of 1 May 2004 for EU membership. The current licensing regime in Malta, in terms of the TRA, allows for individual licensing or general authorizations as a basis under which an operator can legally operate. No general authorizations are as yet operative. The new EU framework will require the implementation of a licensing regime based on general (class) authorizations. To ensure a smooth transition to an authorization regime, the MCA has devised an appropriate framework which will be implemented in stages.
Importation of equipment In order to place on the market any radio or telecoms equipment, one should use, for reference, the Radio & Telecommunications Terminal Equipment (R &TTE) Regulations (Legal Notice 329 of 2001) issued by virtue of the Product Safety Act (Cap 427). Manufacturers or authorized representatives are required to affix the CE mark, issue a declaration of conformity, keep technical documentation and affix the Alert sign on radio and telecommunications terminal equipment products which are subject to certain restrictions. Given the above information, no testing will be required to import R & TTE goods.
Local backdrop Malta is a highly attractive country in which to operate telecommunications services. It has a stable political environment and a vibrant economy, while the Maltese population has proved eager to invest in telecoms products and services. Telecommunications revenue as a percentage of GDP in 2000 was 3.11 per cent (source: ITU 2001), among the highest levels seen in Western Europe, and this in spite of the limited number of operators in the sector. Malta’s geographical position renders the need for global connectivity an absolute must for the development of its society and economy. Now that the monopoly of the international gateway, enjoyed by the incumbent fixed-line operator Maltacom plc, has ceased, other operators are in a position to establish and maintain telecommunications systems between Malta and other countries. An additional gateway will afford critical redundancy in the event of a breakdown in the existing single
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The Scope of the Market
link and will create the impetus for the generation of further competition in the market. Moreover, having the requisite resilience in the international link will render Malta a more attractive inward investment destination. Typically, prospective investors need to see a clear regulatory landscape far into the future. They need to know not just what the rules are today, but what they will be in 10–15 years from now. It is precisely the definition of this landscape that the MCA has been largely preoccupied with in the past year. A strategic plan was drawn up that will constitute the MCA’s highlevel plan of action for the next three years. The essential thrusts of the plan are: l to achieving liberalization and sustainable competition in the telecom-
munications and postal sectors; l to ensure that customers get the ‘best deal’ by way of value-for-money
services and social mechanism; l to create an environment conducive to investment in telecommunica-
tions infrastructure and services as the basis for the allocation and development of the information economy; l to promote and support the development of e-commerce and ensure
the consolidation of the institutional and organizational elements necessary for its proliferation. The means of attaining these strategic objectives have been identified in the articulation of a number of tasks. The nature of these tasks consists in continuing the building of the regulatory infrastructure, strengthening and refining the ongoing regulatory and support processes within the MCA, ensuring that the sectors the MCA regulates contribute to the development of the Maltese socio-economic environment, adopting as appropriate the new EU package of electronic communications directives and ensuring that the MCA has adequate resources to implement its strategy.
Local telecommunications sector The Maltese telecommunications sector is characterized by the presence of the following operators:
Maltacom plc Maltacom plc is the incumbent fixed-line operator with 60 per cent government ownership. It enjoyed a monopoly in fixed-line telephony and international gateway services until 31 December 2002. Maltacom
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owns the existing international gateway which links Malta to Sicily via a sub-marine cable and which is operated by a Maltacom subsidiary Datastream Ltd. Datastream has launched asymmetric digital subscriber line (ADSL) services in Malta. Connectivity also takes place via satellite links. Maltacom operates other subsidiaries, among which are an Internet service provider (ISP) Maltanet Limited and a mobile telephone operator Mobile Communications Limited. The Maltese government has made it clear that it wishes to proceed with total eventual privatization at the earliest feasible date.
Vodafone Malta Limited Vodafone Malta Limited is a mobile telephone operator which has been present in Malta since 1988. Its monopoly was curtailed in December 2000 as part of the national liberalization programme. The Vodafone network covers 100 per cent of the Maltese islands. The company has also announced its intention to operate an international gateway in 2003. Vodafone fully owns an ISP subsidiary Primatele.
Mobile Communications Limited Go Mobile is the second mobile operator. It is a subsidiary of Maltacom plc and commenced operations in December 2000. Like its competition, it provides 100 per cent network coverage and in two years has achieved approximately 35 per cent of market share. Mobile telephony penetration is now approaching 70 per cent and tariffs have declined by approximately 50 per cent since the advent of competition.
Melita Cable plc Melita Cable plc is a cable TV service provider, present locally since 1991, and originally granted a monopoly until 2006, which was curtailed to 2001. Melita has a nationwide cable network which reaches most households. Melita has recently branched into the data services sector using cable modem technology and the company wholly owns the ISP Video on Line Ltd. Melita is a 50 per cent Maltese private partnership with UPC of the Netherlands.
Internet service providers In addition to the above, the sector also includes 12 other ISPs.
Fixed telephony Maltacom plc was formed on 31 December 1997 with the purpose of taking over the business of Telemalta Corporation as national telecom-
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The Scope of the Market
munications service provider. In June 1998, the government sold 40 per cent of the equity of Maltacom in an initial public offering (IPO). Due to Malta’s geographical size, all national calls are classed as local and billed at a standard tariff. As Maltacom has enjoyed a monopoly on international calls, these tariffs have tended to be higher than the European norm. This is now set to change with other international connection options coming on stream. The implications are that the fixed telephony sector needs to improve on quality and offer competitive overseas rates, with resultant beneficial fallout for the rest of the economy. On the accessibility front, fixed telephony compares favourably both in terms of penetration as well as other aspects of universal services such as availability of public phones. Malta’s fixed-voice telephony network consists of 12 AXE, 10 Ericsson and 1 Alcatel digital exchanges. It consists of a digital switching system, a nationwide optic fibre network and a widespread duct system. It has a dedicated data transmission network and an optical fibre-based SOH backbone supporting high-speed digital communications. Maltacom provides various data services including packet switching, frame relay and high-speed leased lines.
Source: First Report on Monitoring of EU Candidate Countries (Telecommunications Services Sector)
Figure 2.2.1 Fixed lines per 100 inhabitants in EU candidate countries as of 31st December 2001
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Practically all households are connected to the telephone network. Despite this apparent saturation, the demand for telephone lines has continued to increase.
Mobile telephony In view of the TRA, as subsequently amended, the number of licences for mobile telephony, which is presently limited to two, is to be subject to a review to be conducted by the MCA, to be concluded by 2004. The advent of a second mobile operator has had a considerable impact on prices and consumption, as well as on quality of service. Two-thirds of the population now has a mobile phone, while the cost of service provision has just about halved. The mobile telephony segment is well developed with a 62 per cent penetration rate. The rate of increase in mobile penetration compares favourably with EU average increases, as there was an increase in Malta in active mobile subscribers of 49 per cent between July 2001 and July 2002.
Source: MCA
Figure 2.2.2 Mobile phone subscribers
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The Scope of the Market
Cable Melita Cable owns an overhead HFC (hybrid fibre/coaxial cable) system that runs almost entirely alongside Enemalta’s power lines. Melita Cable offers over 56 different channels ranging from documentaries to movies and sporting events to general entertainment. There was an increase in cable television subscribers of 5.7 per cent in July 2002 in comparison to the same month in 2001. Approximately 95 per cent of households have access to cable television services. The percentage of households served by the cable television network at the end of 2001 was 71 per cent, compared to the median 60 per cent in Sweden and 70 per cent in Germany.
Source: MCA
Figure 2.2.3 Cable TV subscribers
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Internet The Internet has revolutionized the telecommunications sector, providing a vast number of opportunities and services both to those employed in the sector and to those who use it. In 1998, Maltacom plc secured an agreement with Telecom Italia for access to a high-capacity fibre-optic sub-marine link (SEA-BONE), a facility that affords high-speed Internet connectivity. In 2000, Melita Cable commenced offering broadband access via cable modem. By 2001, local access speeds were further increased through the availability of ADSL. ADSL enables users to access the Internet from the existing fixed-line telephony infrastructure. Locally, Internet service provision is a relatively new service industry with only a sixyear history. In contrast to the fixed and mobile telephony and cable television market, the need for liberalization was never an issue in this market, as no operator has been granted monopoly rights since 1995, the uptake of Internet subscriptions has been encouraging and has grown steadily, with Internet participation now calculated to be approximately 35 per cent of the population. Other data network operators have also established an important presence. Some are specialized such as SITA, which predominantly services the auto industry, and Datatrak, which provides localization and tracking services.
Conclusion In a recently conducted political, economic, sociological, technological (PEST) analysis, Malta scored highly as a destination for new economy type activities. Politically, it has a history of stable and democratic governments with strong links to other Mediterranean countries, Europe and North Africa. Its imminent European membership could only serve to enhance the perception of the country as an attractive business destination. Economically, it boasts a liberalized market economy complemented by a government privatization programme. It enjoys a reputation as a financial centre with one of the highest GDPs per square kilometre in the world – this latter being also the result of a high population density. Malta offers low corporate taxes and fiscal incentives to encourage foreign direct investment. Sociologically, the Maltese have strong family ties and a highly educated entrepreneurial and multilingual workforce. To the foreign investor, it offers a Mediterranean culture and lifestyle in a technology/business investment friendly climate. On the technological front, Malta has a state-of-the-art infrastructure with prospects for further enhancement and expectations for reduced costs in international connectivity. Its connectivity to other academic institutes offers a range of excellent IT/engineering programmes. The country is also rich in its accounting, business and legal human capital.
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The Scope of the Market
2.3
Malta Freeport and Related Commerce Malta Freeport
For thousands of years, the natural harbours of Malta have been a Mediterranean centre of maritime activity. They have provided services of considerable value to the major commercial and political powers of the time and, although their military importance may at times have overshadowed their commercial potential, nevertheless there have been several periods in the economic history of the region when its ports have enabled Malta to establish itself as a major centre for trade in the Mediterranean. By capitalizing on Malta’s geographic location at the centre of the main shipping lanes of the Mediterranean, Malta Freeport has carved its own niche as a hub for transhipment and other maritime services, thus allowing Malta the opportunity to recreate its historical vocation in the new pattern of maritime transportation. Malta Freeport was the first transhipment hub in the central Mediterranean and was instrumental in initializing the vast opportunities that the transhipment business has to offer. Its success has triggered a round of investments that has significantly added to the central Mediterranean transhipment capacity. Malta Freeport is presently a key player in the Mediterranean huband-spoke transhipment trade, handling over 1.24 million TEUs per annum as compared to the 7,788 TEUs handled in 1988 when Malta Freeport took over the facilities. The Freeport is proud of its achievements, presently ranking among the leading Mediterranean transhipment ports, and is recognized as one of the main ports in the European container traffic league. Malta Freeport’s proven track record justifies the company’s strategy of promoting its facilities as a centre of excellence where efficiency, spurred by competition, drives its progress.
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Developments To develop and manage Malta Freeport, the government of Malta set up Malta Freeport Corporation Limited in 1988 entrusting it with the redevelopment of the Port of Marsaxlokk into a commercially viable hub port on an international scale. In 1987, the Marsaxlokk Port project consisted of a one-kilometre breakwater and a terminal with a 500metre quay, 1000 container slots and a yard which due to its irregular slopes could not accommodate container stacking. This precluded the effective utilization of equipment which at the time consisted only of a second-hand quayside crane and two forklifts. Furthermore, the construction of a second container terminal had already commenced. This terminal was exposed to bad weather conditions with the north quay having a downtime of 45 days per annum. In terms of transhipment business, this project necessitated an immediate review and an upgrade of the existing facilities as they were inadequate for the needs of a modern container terminal. In addition, the company that previously managed the Marsaxlokk Port project acted more as a regulator when the project really needed an operator. It was for this reason that in 1989 the Malta Freeports Act was enacted. Following this, Malta Freeport Corporation Limited was set up with the responsibility for the development of Freeports in Malta and their commercial utilization. The Malta Freeports Act converted the company into a public body and simultaneously allowed it to function with the flexibility of a commercial concern. In order to acquire the necessary credibility among potential customers and to benefit from technology transfer, in 1988 the newly formed Malta Freeport Corporation Limited entered into partnership with A&P Appledore (later becoming Maritime Transport Services) for the running of its container terminal. A&P Appledore was also entrusted with the preparation of a master plan. Their study envisaged the complete rehabilitation of Terminal One, the enhanced configuration of Terminal Two and the development of an oil terminal and warehouses in preparation for future business. Parallel to this development, in 1989 Malta Freeport commenced rehabilitation works on Terminal One, which included the filling of the central basin and plans for new equipment procurement for the facility to operate as a modern container terminal. Freeport Terminal (Malta) Limited was set up in 1990 for the operation of the container terminal, owning 65 per cent of the shares, while A&P Appledore owned the remaining 35 per cent of the shares. Malta Freeport took over the first phase of the rehabilitated container terminal on 3 April 1990 and the first shipping contract was signed just three days later with Norasia Line in conjunction with Sea-Land Service Inc. The first Norasia vessel of this major shipping service called at the Freeport on 18 April 1990. Other major shipping lines quickly followed and container traffic volumes experienced a sharp upsurge. This
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The Scope of the Market
necessitated further investment in the Terminal One facilities including the extension of the north quay to one kilometre and the expansion of the yard area. As Malta Freeport gained a stronger foothold in the transhipment business and following the positive outcome of the feasibility studies for further growth, in 1994 Malta Freeport engaged in the development of its second container terminal. The development of Terminal Two is one of the largest projects ever undertaken in Malta, the magnitude of which is not solely measured by the investment involved but also by the wealth it has created for Malta. The design and technical construction of this project pioneered new technology in quay and coastal development in Malta. The Freeport left no stone unturned in order to develop this state-of-the-art project and during its redesign the company ensured that Terminal Two would be capable of handling efficiently any containership afloat and those to be built in the foreseeable future. To ensure efficient and effective operations, the existing Terminal Two structure had to be modified mainly due to the demolition of the west quay, the length of the breakwater as it was not as intended and more quay length was required. Terminal Two is enabling Malta Freeport to sharpen its competitive edge in the highly competitive Mediterranean container market. Terminal Two Phase ‘A’ commenced operations in December 1997, while the Terminal Two civil works were fully completed in 1998 ahead of schedule and according to budget. Terminal Two was officially inaugurated in 1999. The capital needed to finance the US$250 million required for the project was raised on international capital markets. The fact that the issue was oversubscribed reflects the trust and confidence that Malta Freeport enjoys with international investors. It also emphasizes Malta’s potential for attracting foreign investment. Presently, Malta Freeport has available the needed resources to handle effectively a 14-crane peak operation for a number of consecutive shifts. The Freeport now offers a total of 10,100 container ground slots, a total quay length of 2646 metres with a dredged water depth of 15.5 metres, while the total area for container storage stands at 474,646 square metres. Equipment procurement also retained a vital supportive role in the development of the Freeport. The company is currently served by sixteen quayside cranes, comprising eight super post-Panamax quayside cranes with an outreach of 54 metres and capable of handling container vessels stacking eighteen containers across on Terminal Two and seven post-Panamax quayside cranes having an outreach of 42.5 metres and one Panamax quayside crane on Terminal One. To be in a better position to offer maximum efficiency and flexibility in the handling of container vessels stacking eighteen containers across on Terminal One, the company is presently upgrading two of the Terminal One post-Panamax quayside cranes to increase their outreach to 50.5 metres and air draught to 34.5 metres. An array of valuable yard
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equipment is deployed by the company for container stacking on both terminals offering high yard utilization levels and low handling costs. The rubber-tyred gantry crane system is the main method employed for yard stacking, with 29 rubber-tyred gantry cranes being deployed on both terminals. In addition, Terminal One is also equipped with two rail-mounted gantry cranes. Reachstackers are also being used extensively to provide the terminals with viable support for rubber-tyred gantry crane operations. Malta Freeport has also invested in the multi-trailer train system to speed up container movement between both terminals. In an attempt to develop further, the company is increasing its resources to ensure that it is fully capable of handling efficiently the projected increase in traffic volumes. In this respect, the Freeport will be increasing its annual capacity upon further development of land and equipment. Malta Freeport will also be developing a new main gate. This project will provide various features and will be positioned centrally to meet Malta Freeport’s increasing demands more efficiently. Two different areas will be designed close to the new main gate – one for the implementation of a vehicle and cargo inspection system and the other for the installation of a border inspection post for veterinary and phyto-sanitary purposes. These facilities will boost Malta Freeport’s significance as a regional distribution depot. Considering that not all ports in the region offer these facilities, Malta Freeport stands to benefit as companies requiring them to be able to distribute their cargo may redirect their cargo through the Freeport.
Corporate structure Malta Freeport is today standing on its own two feet, having in 1997 amicably terminated the relationship it enjoyed with Maritime Transport Services. As part of Malta Freeport’s strategy to consolidate its position internationally, in 1998 the Freeport undertook a corporate restructuring exercise. The organizational changes completed in 2001 have significantly improved operational efficiency. Malta Freeport Corporation Limited now solely fulfils the role of landlord and authority over the Freeport zone. Other activities have been divested from the corporation and passed to the operating companies. Malta Freeport Terminals Limited was established in 2001 as the single operating company of both container terminals and the warehousing facilities. This company fulfils its role efficiently and harmonizes the port operations, guaranteeing clients minimum bureaucracy in all its activities to enhance their business operations. The new structure provides a clear distinction between the authority and the operator in preparation for further development.
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The Scope of the Market
Competitive advantages Malta Freeport has the necessary resources to operate efficiently as a pure transhipment hub that few ports can match. The Freeport’s unmatched central geographical location enables its clients to service demands in just one single call not only along all the eastern littoral but also to target the various markets found along the western front, North Africa and Southern Europe. This results in a drastic reduction in the duration of delivery of goods, cost savings in the distribution system and enhanced customer satisfaction. Malta Freeport offers a minimal diversion distance of just six nautical miles between Gibraltar and the entrance to the Suez Canal. The entrance to Malta Freeport is easily accessible offering the carriers safe manoeuvrability of their vessels while entering the harbour. The port configuration itself is predisposed for least delays to vessels wanting to berth or sail while another containership is manoeuvring. In addition, the turning circle inside the harbour leads to distinct manoeuvring areas for the two terminals. Furthermore, despite the significant increase registered in container traffic volumes, Malta Freeport has not experienced any congestion problems. This enables clients to maintain their schedules’ integrity. Malta Freeport enjoys year-round advantageous weather conditions with minimal stoppage in operations as the containerships being berthed at Malta Freeport are well protected from the prevailing north-westerly winds. Malta Freeport also enjoys a proven track record, high performance levels, cost-effectiveness and an unmatched quality service complying with the ISO 9001:2000 standard. The Freeport’s capability to satisfy the ever-increasing demands of clients is also possible through the ongoing development projects being undertaken, top-notch investment in the latest computerization systems, as well as through the recruitment and human resources development programmes implemented to ensure that it is capable of handling higher traffic volumes. The Freeport also enjoys good industrial relations with minimal strife being registered. The company also adopts a very flexible and responsive approach to ensure that it adds maximum value to its customers.
Ancillary activities supporting a complete hub operation Malta Freeport provides a base for warehousing facilities and an oil products terminal. The company believes that these ancillary activities enhance the commercial attractiveness of the Freeport for both existing and potential customers.
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Distripark facilities The Freeport provides distripark facilities for trading companies and freight forwarders interested in setting up a logistics depot for the distribution of cargo to the western and eastern Mediterranean markets, Northern Europe, North Africa, the Black Sea and the Middle East. The distripark facilities are complemented by efficient transportation systems, round-the-clock operations offering clients a cost-effective and efficient solution, minimum red tape, an efficient security system, valueadded and quality services, and a pro-business environment. These factors coupled with unrivalled fiscal incentives as per the Business Promotion Act as well as exemptions from customs duties, excise laws and exchange control offer investors a solid business environment. Through the utilization of these facilities clients can engage in an extensive range of handling operations including cargo consolidation, break-bulk, storage, re-packing, re-labelling, sorting and onward shipping. Clients can also set up their own controlled temperature facilities. In addition, Malta Freeport offers assembly and processing possibilities and in some instances goods finished or partly finished in Malta may qualify for a certificate of origin from the Freeport Authority provided that certain criteria are met. Normally this is required in order to benefit from customs tariff preferences as certain goods may leave Malta with a more favourable rate of duty than from a third country. Since Malta Freeport is located just six kilometres away from Malta International Airport, it enables the distripark facilities’ clients to undertake sea and air business operations when trading in timesensitive cargo. Furthermore, Malta Freeport’s 40 per cent shareholding in Brindisi Terminal Italia S.p.A. enables the distripark facilities’ clients to gain a foothold on the European mainland, giving them greater access to Southern Italy and the Adriatic. The Freeport has plans to further develop the warehousing facilities by constructing an additional 18 adjacent multi-purpose warehousing units in a single row.
Oil terminal The oil products terminal is managed by Oiltanking Malta Limited, a joint venture company with Oiltanking GmbH in which Malta Freeport Corporation Limited owns a 30 per cent shareholding. Since the oil terminal is situated within Malta Freeport’s zone, this allows products to be shipped and stored free of duty and tax. Various internationally renowned trading companies and major oil companies have chosen Oiltanking Malta Limited for their operations and the company’s present capacity of 359,000 cubic metres is fully rented out.
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The Scope of the Market
Oiltanking Malta Limited handles various products including gasoline, gasoil, jet fuel, heavy fuels, components (MTBE) and crude oil. The main functions of the oil terminal include traditional speculative storage, direct transhipment, and consolidation of product portfolio for distribution purposes, product treatment, bunkering, as well as administrative services. In the light of the present high demand for storage capacity as well as the rising request for board-to-board operations which cannot be fulfilled due to capacity limitations of the existing jetties, Oiltanking Malta Limited will be investing further in its facilities by developing the fourth phase of this project. This stage will include the construction of a fourth tank field and the development of additional berthing facilities.
Other related activities CMC Co. Limited Malta Freeport Corporation Limited also owns 66.67 per cent of shares in CMC Co. Limited, with Svasek Ingineurs of the Netherlands owning the remainder. This company provides coastal management consultancy services including engineering services.
Brindisi Terminal Italia S.p.A. Malta Freeport’s unrivalled and credible reputation worldwide has enabled it to secure 40 per cent of shares in Brindisi Terminal Italia S.p.A., thus further broadening its business horizons. The other shareholders are Papalini Partecipazione srl owning 59.2 per cent and the Comune di Brindisi owning the remaining 0.8 per cent. Brindisi Terminal is mainly targeting origin and destination cargo besides transhipment traffic. By choosing Brindisi Terminal for their activities, shipping lines will benefit from Malta Freeport’s regular global network connections. Containerized cargo originating from the Far East, North America, Australia, New Zealand and Northern Europe destined for the southern Italian regions can be transhipped to Malta Freeport and relayed to the Brindisi Terminal through regular feeder services which operate between the two ports. This project enables Malta Freeport to compete on an equal footing with ports offering different forms of transportation, thus enabling the company to enhance its competitiveness and concretize its standing in the containerization market.
Malta Freeport and the local economy Malta Freeport is generating various positive direct and indirect economic spin-offs for the benefit of the local economy as a result of the
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high traffic volumes being handled. The Freeport is stimulating investment within the free zone and is encouraging the setting up of foreign and local companies complementing its activities. This has created new opportunities in terms of employment generation, as a foreign currency earner, as well as the introduction of new skills and technologies. The track record it enjoys has also boosted Malta’s image outside its shores, increasing its potential for attracting foreign investment.
Employment generation The employment being generated by Malta Freeport plays an important role. These include employment generation directly with Malta Freeport and indirectly with a number of companies whose activities are related to the services offered by the Freeport. These include companies operating within the distripark facilities, shipping agents, insurance companies, ship chandlers, ship repair, container repair, as well as equipment manufacturers and maintenance. It is also important to consider the employment which was generated as a result of the development of Malta Freeport’s facilities.
Foreign currency earner The Freeport has given a new dimension to Malta’s service sector and has enabled the island to tap new sources of foreign currency earnings as substantially all of Malta Freeport’s revenue is generated in US dollars. This currency is the recognized medium of exchange for shipping lines and port service operators. Indeed, the Freeport is one of the main companies on the island generating a significant amount of foreign currency. Since Malta Freeport is in the service industry, all revenue generated is directly injected into the Maltese economy.
Global network connections As a result of the shipping lines that have chosen Malta Freeport as their Mediterranean transhipment hub – namely CMA-CGM Group, Norasia Container Lines, Maersk Sealand, Bulcon, Line P&O Nedlloyd, Safmarine Container Line NV, Contship Container Lines, Hapag-Lloyd Container Line, Hamburg Sud and Marfret Compagnie Maritime – clients presently have access to over 100 ports worldwide including over 80 network connections throughout Europe, North Africa, the Black Sea and the Middle East. These global network connections heighten the opportunities for Maltese and foreign entrepreneurs seeking to organize their own niche services. In fact, the local industry has never had such efficient connections to so many ports on a regular basis. This is a major advantage for local industrialists which steps up their competitive edge. Moreover, upon Malta’s EU accession, through Malta Freeport’s regular network connections, local entrepreneurs will be able to reach various
92
The Scope of the Market
EU member markets without duty payments and custom clearance and procedures. As Malta Freeport offers a flexible and responsive approach to meeting client demands, foreign logistic providers may opt to redirect their cargo through the Freeport to benefit from minimum red tape and use Malta as a gateway to Europe. EU member companies may also redirect their cargo through the Freeport to benefit from Malta’s expertise and network connections to reach, among others, North African markets more efficiently.
Skills acquisitions Since the container transhipment business was a new concept for Malta, Malta Freeport has had to intensively train its personnel. Malta Freeport set up an in-house training institute, the Freeport Training Centre, which operates in close collaboration with the Port of Rotterdam College for Transport and Shipping. The in-house training institute is a centre of excellence for training personnel on an ongoing basis. It is providing a growing number of development programmes in various fields for all levels of personnel, being fully aware that the employees’ input is a major determinant of service quality. This enables the company to develop the knowledge, skills and right attitude in employees that are necessary for the effective performance of their work and hence for the achievement of the Freeport’s objectives.
Subsidization of local entities Since the inception of Malta Freeport, a number of companies on the island operating within the maritime sector have benefited from the significant increase in container traffic registered by Malta Freeport. This enables these organizations to register additional revenue.
Enhancing Malta’s image on an international level Malta Freeport’s impeccable repute worldwide has strengthened Malta’s image and credibility on the international market and is attracting a greater flow of foreign investment to the country.
Conclusion Undoubtedly, the sea and surrounding environs will continue to be a major source of economic prosperity in Malta, with Malta Freeport playing a major role to further strengthen Malta’s competitiveness in this sector. Based on the Freeport’s successful performance in an increasingly competitive marketplace, the company has the expertise and resources to continue registering significant growth. Indeed, there are optimistic signs for the Freeport’s future, assuring that the company
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will continue offering high-quality and reliable services to meet its clients’ increasing requirements and exploit the emerging challenges in its business for many years to come.
Table 2.3.1 Malta Freeport’s traffic volumes and ship calls, 1988–2002 TEUs 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
7,788 8,080 94,500 157,631 259,232 288,192 383,061 514,767 593,013 662,648 1,071,669 1,044,972 1,033,052 1,165,070 1,244,232
Ship calls 89 71 231 381 709 702 903 1,165 1,559 1,509 1,732 1,931 2,196 2,411 2,295
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The Scope of the Market
2.4
Ship Registration AVMT Advocates
Maritime activities have long been part of Malta’s tradition, not only due to its geographical location and harbours, but also because its people have contributed to making the island an international maritime service centre. With its highly equipped ports, natural harbours and other facilities for shipping, Malta is an international ship register which is now classified as one of the five largest in the world. Besides having a successful Freeport and oil terminal, a hub for cruise liners and international yacht marinas providing both shore and repair support services, Malta hosts the Regional Marine Pollution Emergency Response Centre for the Mediterranean, the IMO International Maritime Law Institute and the International Ocean Institute and is continually developing its infrastructural, legal and financial services. The Malta flag is today one of the eight largest in the world and is classified as being both a flag of confidence and a flag of choice as evidenced by its ever increasing register. Ship registration and other ancillary services are the responsibility of the Merchant Shipping Directorate of the Malta Maritime Authority, which is set up by law for the organization, supervision and administration of maritime services. While providing ship and yacht registration, the Merchant Shipping Directorate is also entrusted with the training and certification of seafarers and with the implementation of international maritime conventions and agreements. The Directorate also offers a 24/7 service in the case of emergencies. It was the legal tradition in the Mediterranean, codified as the Consolato del Mare, which contributed to the Maltese initiative at the 1967 United Nations General Assembly and which culminated in the adoption of the 1982 United Nations Convention on the Law of the Sea. Malta is today a party to most of the major International Maritime Organization (IMO) and International Labour Organization (ILO) Maritime Conventions, and Maltese-registered ships are obliged to adhere to the provisions of these international conventions.
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95
Vessel registration and the operation of Maltese vessels is regulated by the Merchant Shipping Act, a law based mainly on UK legislation and subsequently amended in order to introduce important control measures and safeguards for financiers and to enhance the financial aspects of this law, which further promoted vessel registration and financing in Malta. Malta also works to conclude bilateral treaties with various other jurisdictions to ensure that Maltese-registered vessels benefit from the reputation that Malta enjoys in the international community. Malta has negotiated a number of double taxation treaties with a large number of countries and regularly participates in the deliberations of major intergovernmental and non-governmental maritime organizations such as the IMO and ILO.
Procedure for ship registration Under Maltese law, all types of vessel, from pleasure yachts to oil rigs, may be registered provided they are owned by persons qualified to own a Maltese ship. Persons qualified to own a Maltese ship are: l Maltese citizens; l bodies corporate established and subject to Maltese law; l such other persons as the minister may, by regulation, prescribe.
The minister of transport may, in fact, prescribe the extent of the ownership of a ship or class of ships eligible to be registered and may prescribe other conditions in conjunction with the requisite ownership for ships. For foreign beneficial ownership to register a vessel under the Maltese flag, a shipping company must first be registered with the Registry of Companies. The minimum subscribed share capital required by law is €1250, of which 20 per cent must be paid up. Company registration fees are €250 and an annual return is to be filed each year together with a payment of €125. The registration of a company is quick and inexpensive. It can be registered by means of a power of attorney sent by the prospective shareholders to the person representing them in Malta – usually a law firm. The principal place of business need not be in Malta and there are no restrictions whatsoever on the sale and transfer of shares in such a Maltese shipping company. Provisional registration, in terms of law, has the same effect as permanent registration, but authority to operate the ship is only given once the administration is satisfied that the vessel conforms to all the standards required by the relative international conventions. Provisional
96
The Scope of the Market
registration is valid for six months, but this may be extended for a further six months during which time all documentation for permanent registration has to be forwarded to the maritime authorities. Once a vessel is provisionally registered, registration, transfer and discharge of mortgages may be effected immediately upon presentation of the relative documents to the registrar. The following are required for provisional registration: l an application for registration by the owner or an authorized repre-
sentative accompanied, if required, by an application for a change of name; l a copy of the ship’s international tonnage certificate, where applicable; l proof of qualification to own a Maltese ship; in the case of a body
corporate, the memorandum and articles of association; l a declaration of ownership made before the registrar by the owner
or an authorized representative; l evidence of seaworthiness; in the case of trading vessels, confirmation
of class; l payment of initial and annual registration fees.
The following documents must be submitted during provisional registration: l a builder’s certificate if the vessel has not been registered elsewhere;
otherwise, a bill of sale or any other document by which the vessel was transferred to the applicant for registry; l a cancellation of the registry certificate from the last country of reg-
istry, showing the vessel to be free from encumbrances or otherwise; l a certificate of survey and a copy of the international tonnage
certificate certifying that the vessel has been surveyed in accordance with Maltese regulations; l evidence that the vessel has been marked in accordance with the
law; l at least one crew list accompanied by photocopies of the officers’
certificates of competency.
Taxation Under Maltese law, a ship is exempt from taxation either when it is declared to be so by the minister responsible or when a ship is owned or chartered by a company registered under the Merchant Shipping
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97
Act, provided that such a vessel is not less than 1,000 net tons and is engaged in the carriage of goods or passengers registered under the Act and in respect of which registration fees have been paid. A company wishing to own or operate exempted ships must first furnish the minister of finance with the following details in writing: l the name of the company; l the address of the registered office of the company; l the name and tonnage of the ship which it wishes to own or operate
as an exempted ship. However, the minister also has discretionary powers which enable him to declare any ship to be an exempted ship, irrespective of tonnage, operations or trade. In the case of companies owning or operating exempted ships, a declaration must be submitted to the commissioner of Inland Revenue in lieu of a tax return required in terms of the Income Tax Act. No tax is charged on the income of a shipping company in respect of gains or profits derived from the ownership or operation of an exempted ship, or on any dividend paid to the shareholders of such company. Where the shareholder is another company, any dividend paid to the shareholder of such company is not taxable as long as the dividends are paid out of gains or profits derived from the ownership or operation of an exempted ship, or out of such company’s share in such profits. Moreover, notwithstanding any provisions in the Income Tax Act, no tax will be payable by any person on interest or other income payable to him by any company or organization registered under the Act in respect of any debt or other obligation contracted or undertaken by such company or organization in relation to any ship.
Miscellaneous issues The Merchant Shipping Act also provides for bareboat charter registration of foreign ships under the Maltese flag and for bareboat charter registration of Maltese ships under a foreign flag provided that there exists compatibility between the two registers and that matters concerning title over the ship, mortgages and encumbrances are governed by the underlying registry. The operation of the vessel, on the other hand, falls under the jurisdiction of the bareboat charter registry and vessels so registered enjoy the same rights but have the same obligations as any other ship registered in Malta. A bareboat charter registration will be for the duration of the bareboat charter or until the expiry date of the underlying registration, whichever is the shorter, but in no case for a period exceeding two years. Registration may be extended in certain qualified cases.
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The Scope of the Market
In all cases of vessel registration under the Maltese flag, prior to and during the period of the vessel’s registration merchant vessels must be classed with one of the classification societies authorized to issue statutory certificates on behalf of the Maltese government. As from 1 May 2002, the list of classification societies authorized to issue statutory certificates is: l American Bureau of Shipping; l Bureau Veritas; l China Classification Society; l Class NK; l Det Norske Veritas; l Germanischer Lloyd; l Korean Register of Shipping; l Lloyd’s Register of Shipping; l RINA; l Russian Maritime Register of Shipping.
The classification societies currently enjoying recognition applicable in certain circumstances on the specific authorization of the directorate are: l Croatian Register of Shipping; l Hellenic Register of Shipping; l Polish Register of Shipping.
A company whose principal business is that of owning or operating exempted ships may also engage in operations incidental to such ownership or operation or the investment in other assets of the profits derived from such ownership or operation or the variation of such other assets. There are no trading restrictions as such in ship registration. However, ships of 15 years and over, but under 20 years, must pass an inspection by an authorized flag state inspector before or within one month of provisional registration, and ships of 20 years and over must pass an inspection by an authorized flag state inspector prior to being provisionally registered. As a rule, however, trading ships of 25 years and over are not registered.
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99
Registration fees1 The rates per net tonnage payable on registration and annually in respect of all ships, except pleasure yachts, of 24 metres in length overall and more, are:
Ship of net tonnage (NT) Exceeding Not Fee on registration exceeding (Maltese lira) 0 2,500
2,500 8,000
250 250 plus 10 cents for every NT in excess of 2,500 NT
8,000
10,000
800 plus 3 cents for every NT in excess of 8,000 NT
10,000
15,000
860 plus 3 cents for every NT in excess of 10,000 NT
15,000
20,000
20,000
30,000
30,000
40,000
1,010 plus 3 cents for every NT in excess of 15,000 NT 1,160 plus 3 cents for every NT in excess of 20,000 NT 1,460 plus 3 cents for every NT in excess of 30,000 NT
Exceeding 50,000
2,060 plus 3 cents for every NT in excess of 50,000 NT
Annual tonnage tax (Maltese lira) 375 375 plus 15 cents for every every NT in excess of 2,500 NT 1,200 plus 8 cents for every NT in excess of 8,000 NT 1,360 plus 6 cents for every NT in excess of 10,000 NT 1,660 plus 5 cents for every NT in excess of 15,000 NT 1,910 plus 4 cents for every NT in excess of 20,000 NT 2,310 plus 3 cents for every NT in excess of 30,000 NT 2,910 plus 2 cents for every NT in excess of 50,000 NT
The fees due on registration and the annual tonnage tax in respect of all ships, except pleasure yachts, of 24 metres length overall and more are subject to a reduction or increase as follows:
1
In force on 1 January 2003.
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The Scope of the Market
Age of ship
Reduction on fee on Reduction or increase on registration (%) annual tonnage tax (%)
Equal to or Less than exceeding Years 0 5 10 15 20
5 10 15 20 25
50 25 – – –
25 30 – Equal to or exceeding 30 – Note: Lm 1 is approximately €2.53.
–30 –15 – +5 +10
+25 +50
Subject to minimum increase of 500 Maltese lira
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2.5
Information Technology: its Use and State of the Industry in Malta Pierre Mallia, Director, Enterprise Consultancy Services Limited
The modern nation operates within a technological environment which allows it to manufacture and operate almost all of its own goods, services, communications, transport, trade and overall social well-being. The empowerment provided by technology is expressed not so much in its use as in its absence or limitation on people’s choices due to the technological platform on which they operate. It is no surprise that longterm economic well-being is very much technology induced. So, what is Malta’s position in the current scenario? Given the small physical size of the country and its population, IT provides Malta with a means of potential multiplier effects in terms of output in both services and direct intellectual capital in the form of software. Until 1990, investment in IT was virtually nil and few companies were actively using or developing IT applications. This extremely low level of use was largely due to political reasons and was reflected directly in the public sector, particularly in the glaring absence of proper public administration systems such as taxation and other revenue-generating systems. Following the election of a new government in 1987, a policy change took place. This was promulgated in the statement of intention of the government of the day to re-engineer government. This reengineering was to be powered (as per the prevalent philosophy of the day) through the widespread infusion of computerized systems in all levels of public service. This strategy of widespread computerization
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The Scope of the Market
was embodied in a document known as the Information Systems Strategic Plan (ISSP). This five-year programme envisaged an overall capital expenditure of around US$60 million. Parts of this investment went into: l the creation of a multi-disciplinary agency, including skilled IT
resources; l the procurement of hardware, operating systems and database
management platforms to be used across government; l the establishment of a government-wide high-speed data network
(now known as MAGNET); l the procurement or building of specific core public administration
systems; l the training of public officers in the use of IT.
This particular effort secured the necessary impetus to set the stage for an even wider basis of diffusing IT into the very social fabric of the Maltese islands. It provided the evidence that IT was a necessary ingredient for Malta to progress in its new cycle of socio-economic growth. In 1994, the government commissioned a one-year project known as the National Strategy for Information Technology (NSIT). This was broader in scope than the ISSP 90, in that it covered the deployment of IT on three fronts: l business opportunities and development; l telecommunications infrastructure; l education.
The NSIT and ISSP have been key drivers from their inception until the present day. This chapter seeks to expand on the results of these initiatives and their likely benefit to the potential investor.
Labour force As has been pointed out, Malta does not have a long tradition of IT. The traditional key sources of human resources are the University of Malta and technical institutes (now incorporated into a vocational college known as MCAST). The University of Malta runs a number of degree courses in areas such as: l computer science and artificial intelligence;
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l informatics; l computer systems engineering.
The MCAST college offers courses to post-secondary diploma level. These courses aim to deliver personnel at technician level in hardware, software and networking. In addition to these two sources of formally trained and skilled personnel, other institutions providing IT training have recently been established: there is an academy supported by Cisco and a diploma programme run by a semi-private company known as Swatar Training Centre (STC), which provides a programme licensed by the National Computing Centre (NCC) of the United Kingdom. Other private institutions also contribute to the overall picture by providing part-time degree programmes or vendor-specific qualifications such as Microsoft-certified engineering programmes etc. Overall, the estimated annual output of personnel in a variety of IT disciplines is 350.
Skills Most of the educational establishments active within the IT field produce graduates with modern and relevant skills and knowledge. These skills include hands-on practice using modern technologies (such as modern programming languages and networking technologies) and industry best practice (such as modern system development methodologies and techniques such as object orientation, UML etc). A typical graduate is therefore capable of being rapidly assimilated into industry and, with the solid grounding being provided, is capable of quickly learning new techniques. Traditionally, vocational colleges have produced streams of graduates with a slant towards hardware, networking and related engineering skills. These students are well matched to the needs of the electronics and computer assembly sectors of the economy. The university (and to some degree alternative sources such as the NCC programme and other privately funded initiatives) has traditionally had a slant towards the software and informatics graduates. An additional skill among Maltese personnel is their knowledge of languages. Apart from their native Maltese, fluency in English and Italian is commonplace. Many people also speak French, German and Arabic.
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The Scope of the Market
Labour costs As in other developing economies around the world, Malta currently provides an interesting proposition in so far as the cost of labour in the IT sector is concerned. Typically, a computer science graduate would be looking at a salary of around €16,000 per annum. A senior programmer typically commands anything between €19,000 and €31,000. When compared with Western and Northern European rates these are extremely competitive. Table 2.5.1 Comparative salary costs Resource
UK cost (€)
Malta cost (€)
Team leader Senior programmer Programmer
64,000 48,000 38,400
32,000 25,000 16,400
Source: ECS Ltd
E-government In 1998, the government commissioned the formulation of a new strategy for IT to reflect changed priorities and policy directions. The resulting ISSP covered a three-year span with a projection of a total expenditure averaging between €25 million and €27 million per annum. A significant area addressed in this strategic document was the emergence of ‘Government Online’ as a means to leverage technology spend and improve efficiency and customer service. This was very much in line with what was happening in Europe and the United States. A followon document which specifically addressed what was later to become known as e-government bearing the title ‘A Vision & Strategic Framework for the Attainment of e-government in Malta’ served as the launch pad for an active programme of development. The government subsequently launched several initiatives on a number of fronts: legislative, infrastructure and the inception of the principle of a public/private partnership with best-of-breed suppliers. It was also understood that the socio-economic factors related to such initiatives were more far reaching and should be coupled with a national initiative which culminated in the formation of an independent commission which is now the eMalta Commission. E-government in Malta is to a large degree championed by the Ministry of Justice and Local Government. Through the offices of this ministry, several projects have been launched in an attempt to spearhead as many government services as possible online. It is claimed that over 85 per cent of central government services are to be online within
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2003. These services are in various cases delivered by multiple channels or customer touch points, including the Internet (via the gov.mt and servizz.gov portals), mobile telephone, computer/telephony integration (CTI) and call centres. Although each individual ministry has its own set of services and its own website, there is a single recognizable e-government brand and identity. This has been accompanied by a slick and effective communication campaign through the traditional media as well as alternative means such as billboards in prominent places.
Regulatory framework Malta’s regulatory framework with regard to IT has evolved rapidly to reflect changing social norms and expectations. Holistically, the Electronic Commerce Act, the Data Protection Act and the Computer Misuse Act (which has now been integrated into the Criminal Code), provide a sound legislative framework as a prerequisite for the attainment of an information society and economy. Law and regulation relating to the use of IT have over the last few years been a priority for the Maltese authorities. The culmination has been the passing into law of the Electronic Digital Signature Act, which provides a bedrock for e-commerce in Malta. The other significant piece of legislation pertains to data protection. Although the legislation is in place, the public’s perception and understanding of the purpose and rights afforded by it remain quite low. Certainly from a public administration point of view, the impact will be quite substantial as clearly the tenets of the legislation run counter to key initiatives in government with regard to developing a full integration information infrastructure about Malta’s citizenry.
Data Protection Act The Data Protection Act seeks to protect personal data by making sure that it is processed according to the requirements set out in the Act, in order to protect the right of individuals. The Act is in line with the requirements of the EU directives on the protection of individuals (eg Directive 95/46) with regard to the processing of personal data and on the free movement of such data, known as ‘the Data Protection Directive’. The Act addresses a number of issues related to personal data. Among other things it establishes that personal data shall be processed fairly and lawfully, data shall be accurate and kept up to date, such data shall not be kept for longer than is necessary and it shall be processed in accordance with the rights of the data subjects. The Act draws heavily from legislation of other jurisdictions (primarily Sweden, Italy and Portugal).
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The Scope of the Market
Computer Misuse Act The Computer Misuse Act takes into consideration instances of specific computer misuse, excluding traditional offences which are already covered by the Criminal Code, which may be carried out by means of a computer. Thus, the Act considers those aspects of the criminal act which are strictly related to the computer. In cases of computer fraud or forgery, the prosecutor will bring charges under two counts: unauthorized access under the Computer Misuse Act and fraud or forgery under existing criminal laws. The main sections under the Act cover: unlawful access to, or use of information; misuse of hardware; commission of an offence outside Malta; offences and penalties and search and seizure.
Electronic Commerce Act The Electronic Commerce Act seeks to provide a secure legal foundation for the conduct of electronic transactions and communications on a technology-neutral basis. It is intended to be sufficiently flexible to embrace new technological developments. The Act addresses a number of issues, which include: the importance of a secure and legal basis for electronic communications, contracts, signatures and transactions; the protection of the consumer and the service provider and the need to set minimum rules for providers of ‘information society services’. The Act also sets out a number of defensive measures together with obligations on intermediary service providers. The Act allows a high degree of flexibility by granting the minister responsible for communications the power to prescribe regulations on a number of issues relating to e-commerce. It borrows from a number of sources, including the UNCITRAL Model Law on E-commerce of 1996, EU directives, and legislation from other jurisdictions (primarily Australia and the Republic of Ireland).
Internet Widespread access to the Internet was first launched in 1995, in tandem with an initial wave of liberalization of the local telecommunications sector. This liberalization of data carrier services brought about the launch of around seven Internet service providers (ISPs) within the first few months. Prior to 1995, access to the Internet was not publicly available, with only very limited access available to the university and one or two international companies which had specific dispensation for access via satellite. The landscape of Internet service provision since 1995 has kept very much in line with burgeoning international trends. It has gone through a variety of changes but has remained very much based on terrestrial and sub-marine links in terms of bandwidth and
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connectivity. With further recent liberalization, satellite-borne alternatives are starting to make inroads into the provision of international bandwidth. Two key platforms are available to the consumer and the corporate customer: broadband services through the national telephone network and the cable TV (CATV) infrastructure provided by a private operator. Services are based on three mainstream access technologies: l asymmetric digital subscriber line (ADSL); l cable modem; l dial up.
The access speeds of the available service provision (on a non-guaranteed basis) range up to 1,024Kb/s for both upward and download transmission on the ADSL infrastructure as well as the cable modem platform. It is anticipated that access speeds will continue to increase in the coming months. The cost of broadband services starts from around €30 per month. International bandwidth continues to be a major cost factor for the ISPs, with most connections running through a sub-marine cable into Sicily and Telecom Italia infrastructure. Alternative connections direct to the United Kingdom via satellite are used by some of the operators in the field. Approximately 75 per cent of businesses on the island are connected or have access to the Internet and use services such as email and browsing or have their own websites. However, in terms of direct turnover, e-commerce continues to have few practitioners.
ICT availability Ever since the early 1990s, an ambitious programme of development has been underway to transform Malta into a true information-based society. The impact of this can been seen today with proficiency among much of society attaining levels which only 10 years ago seemed unthinkable. Recent surveys run by the National Statistics Office all point to the widespread proliferation of computers within the home. Approximately 30 per cent of Maltese households own at least one computer. This fact, combined with increasing access to broadband services coupled with the recent launch of e-government and even Internet banking services (launched by Bank of Valletta), bodes well for further surges in increased usage. Other national initiatives, such as the establishment of partnerships with leading ICT organizations such as Microsoft, Oracle and Cisco,
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The Scope of the Market
14.8
Satellite dish connected to TV 3.9
Portable computer
74.5
Mobile phone 1
Handheld computer
13.9
DVD player Desktop computer
38 40.1
Conventional analogue (terrestrial) TV Cable TV
52.2 0
10
20
30
40
50
60
70
80
% population
Source: National Statistics Office
Figure 2.5.1 Percentage of households with availability of household articles has made access to technology even easier. Recent initiatives by the eMalta Commission and Microsoft has made the latter’s technology available to students for as little as €10. Table 2.5.2 District
All households
Households with Internet
% district
Southern Harbour Northern Harbour South Eastern Western Northern Gozo and Comino
28,780 41,520 16,760 16,510 15,490 9,930
6,850 14,400 5,400 5,470 5,710 2,500
23.8 34.7 32.2 33.1 36.9 25.2
All households
128,990
40,330
31.3
IT industry The Maltese IT sector has grown significantly over the last 15 years. From just a small handful of companies, the industry now spans a least 100 firms providing a range of services from networking, multimedia, Internet, consultancy and hardware through to software companies active in the international markets.
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Table 2.5.3 Distribution of persons who have attended basic computer training by highest level of education achieved Educational level
Number of persons
%
% sub-population
Primary Secondary Post-secondary Tertiary Other (including no schooling)
3,520 43,160 29,470 16,630 1,650
3.7 45.7 31.2 17.6 1.8
3.7 32.2 65.9 65.8 16.8
Total
94,430
100.0
30.5
55+ 7% 15-24 33% 35-54 33%
25-34 27%
Figure 2.5.2 Distribution of Internet users by age group Some of the markets where these companies are active include Germany, the United Kingdom, Italy and the Middle East. By virtue of its domestic market dynamics, the software industry has adopted a horizontal market approach, since specialization in what is a tiny market makes initial growth extremely difficult. A sizable proportion of players in this sector has moved in VAR style of business models where the primary focus is on marketing, selling and supporting off-the-shelf packaged software such as financial management and payroll/human resource management software. A number of highly specialized companies also exist which have developed and sell their own niche products such as fax servers and security software.
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The Scope of the Market
A number of companies retain a software development capability which generates a quantity of domestically developed software. Given the relative youth of the industry, most of the products and skills found are relatively new and very much linked with the practical use of newer technologies. As is seen in other software industries, the two key software development technologies utilized are primarily Microsoft- and Java-related tools. The absence of many large-scale industries in Malta has resulted in a relative dearth of enterprise resource planning (ERP) expertise in products of high value-added such as SAP, Baan, Peoplesoft etc. This is probably the key Achilles heel of the industry when compared with competitor countries and their domestic skill base.
Conclusion As can been seen, despite its position on the periphery of Europe, in terms of ICT development Malta has maintained a ‘fast follower’ position with continental Europe. The present state of the industry presents the potential investor in this field with the opportunity to establish a highly cost-effective operation manned by a well-trained and multilingual workforce. Malta is set to continue developing its expertise and, while its market dimensions may not make it an attractive option to large multinational firms, the small-to-medium-sized enterprise will be more than well placed to serve international markets.
Printing Industry
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2.6
Printing Industry Compiled by METCO
Background Following the adoption of the Statistical Classification of Economic Activities in the European Community in 1997, the sub-sector grouping of printing enterprises is today fully compliant with EU requirements. The printing sector as discussed is divided into the following sub-sectors: Activities by NACE Code 21.21 21.23
21.25 22.11 22.12/13
22.21 22.22
22.23 22.24/25/31
Manufacture of corrugated paper, paperboard and containers thereof Manufacture of paper stationery (including manufacture of receipt, cheque & similar books, tombola & other tickets and other related work) Manufacture of other articles of paper and paperboard n.e.c.(3) (including the printing of labels & stickers) Publishing of books (including books, brochures, leaflets, dictionaries, maps and charts and other related work) Publishing of newspapers (including advertising newspapers), journals, magazines, reviews & periodicals and other related work Printing of newspapers Printing n.e.c. (including magazines, reviews & periodicals, books, music, music manuscripts, letterheads/envelopes, receipt books, cards, labels & tapes, exercise books, tombola tickets, currency notes, postage stamps, textiles and other printing works) Bookbinding and finishing Composition & plate making and other activities related to printing
The industry’s structure is typical of printing and publishing industries across Europe, with the majority of local companies (131) employing between one and five people. The five largest local printing companies
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The Scope of the Market
employ just under 50 per cent of the island’s human resources engaged in printing. Key activities in the sector include: l the publishing of newspapers, books, magazines, reviews & periodi-
cals, letterheads/envelopes, receipt books, cards, labels & tapes, exercise books, tombola tickets, currency notes, postage stamps, textiles and other printing works, accounting for 63.4 per cent of the sector’s output in 1999 (down from 65.9 per cent in 1995); l the printing of newspapers, accounting for 9.8 per cent of the sector’s
output in 1999 (down from 17.9 per cent in 1995); l the manufacture of corrugated paper and paperboard (including
containers thereof), accounting for 9.6 per cent of the sector’s output in 1999 (up from 8.3 per cent in 1995). The sector has reported an overall increase in output. The following facts are worth noting: l an average growth rate of 86.7 per cent annually was observed for
the NACE 22.12/13 (publishing of newspapers, journals, magazine reviews & periodicals and other related work) within the sector; l an average growth rate of 66.7 per cent annually was observed for
the publishing of books, magazines, reviews, periodicals, posters and advertising, including other related work (NACE 22.11).
Printing output NACE activity 21.21 21.23 21.25 22.11 22.12/13 22.21 22.22 22.23 22.24/25/31 Total
1995 3,141,000 440,000 505,000 254,000 1,206,000 6,762,000 24,958,000 12,000 572,000 37,850,000
1999
% change
4,505,577 343,779 81,252 931,761 5,392,582 4,619,105 29,655,215 17,233 1,242,033 46,765,138
43.4 –21.9 –83.9 266.8 347.1 –31.7 18.8 43.6 117.1 23.6
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Operating companies and employment Table 2.6.1 Summary of enterprises, 1997 Main activity Cardboard packaging Printing of stationery Printing of labels & stickers Book publishing Journals & periodicals publishing Posters publishing Other publishing Printing of newspapers & journals Printing of books Currency notes printing Postage stamps printing Textiles printing Bookbinding & ancillary work Graphic services Other printing work Total
No. of enterprises 8 28 11 3 3 1 5 23 13 1 1 7 8 5 57 174
As at 1997, 1,813 people were gainfully occupied (1,698 employed) within the sector, working in 174 registered companies. During the same year, each resource accounted for an output averaging Lm 19,200 annually, while generating some Lm 10,978 gross value added, rising to Lm 11,217 in 1998. While this figure is just above the local manufacturing average, in contrast the average employee earned a salary approximately 15 per cent higher than the manufacturing sector’s average. Aggregate employment in the paper products and printing sector increased during the period ending September 2002 and stood at 1987. The increase in employment was entirely due to the printing and allied manufacturing sector. Consequently, the share of the paper products and printing sector in total manufacturing employment stood at 6.7 per cent.
Performance In 1999, printing in Malta generated some Lm 46.76 million of output, resulting in a 23.6 per cent rise from Lm 37.85 million in 1995. The sector accounts for 4.3 per cent of total manufacturing sales (2002: printing and publishing = Lm 42,649/Total: Lm 991,743) or about 3.2 per cent of Malta’s GDP at market prices (in 2002, Malta’s total GDP stood at Lm 1,456.1 million).
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The Scope of the Market
The sector accounted for 4.3 per cent of Maltese manufacturing or about 3.2 per cent of GDP. The share of GDP is higher than the typical EU country, where it varies between 0.9 per cent and 1.5 per cent. This is partly due to local language requirements, a relatively small market and transportation requirements that create a natural barrier to outside competition. Nevertheless, a net import of Lm 13.3 million of printrelated products was reported in 1997, largely consisting of paper and paperboard, articles of paper, paperboard and/or paper pulp. An analysis of the imports of raw materials in 1998 reveals that over 87 per cent of the paper and related materials used by the local print industry in 1998 was imported from EU markets. Of this, 82 per cent was accounted for by sheet paper and paperboard. EU market sources also account for over 26 per cent of the printing ink used in the generation of printed matter locally. Over 70 per cent of the ink used in 1998 was imported from Switzerland. An average run speed of just above 6,000 sheets per hour is a prevalent feature. However, some companies used slower equipment with an average run speed of just over 4,200 sheets per hour. This suggests low utilization of equipment and consequent output per employee. Nevertheless, average weekly earnings per capita in the period ending September 2002 increased by Lm 15.27 and stood at Lm 116.70, which is 13 per cent higher than the average recorded for the total manufacturing industry. Average weekly domestic exports per employee likewise increased by Lm 94.33 and stood at Lm 318.81. During the period ending September 2002, the printing and publishing sector directed 62.5 per cent of its production towards foreign markets. This is a marked increase in export orientation from the 54.9 per cent share recorded during the same period in the previous year. Turnover in the sector increased by 28 per cent and stood at Lm 30.6 million. This was mainly underpinned by an increase of Lm 6 million in domestic exports which stood at Lm 19.1 million. Local sales increased from Lm 10.8 million to Lm 11.5 million during the same survey periods. Capital outlays in the sector registered a significant increase of Lm 2.7 million and stood at Lm 3.2 million. It is pertinent to note that a major operator in the sector shifted certain activities from its foreign plant to its Malta subsidiary. Sources: Economic Survey January–September 2002, Economic Policy Division, Ministry for Economic Services Industry Analysis Report for the Printing Sector, IPSE Ltd (prepared by Marketing Advisory Services, PIRA International, MSD & Co, 2001) National Statistical Office, Trade Statistics 2001, 2002
Agriculture
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2.7
Agriculture Dr Philip von Brockdorff, Permanent Secretary, Ministry for Rural Affairs and the Environment
Background Balanced growth needs to evolve the right sector balance between agriculture, industry and services as economic activity expands and real incomes rise. Agricultural production on the islands is constrained however by the limited natural resources of land and water. Selfsufficiency levels have been sustained in fresh vegetables, fresh milk, pork, poultry and eggs. For economic policy, food is of both strategic (in terms of national food security goals, concerns common to any country) and tactical (in terms of food price effects in the general price level and thus real wages, competitiveness and growth) relevance. The total agricultural area is officially recorded at around 12,000 hectares and is cultivated by an estimated 3,000 full-time farmers and 14,000 part-timers. Agriculture contributes around 2 per cent to GDP. Maltese agriculture still exhibits an integrated structure and encompasses: l Cropping and horticulture: horticulture crops are mostly specialized
crops by today’s standards and include potatoes, tomatoes, aubergines, peppers, melons, onions, cauliflowers, cabbages, carrots and strawberries. Cereals, wheat, barley and sulla are grown on the islands and are of major economic importance to farmers and herdsmen. Fruits are mostly peaches, grapes, plums, pears and some citrus, while vine growing is becoming a thriving cultural and economic activity. l Dairy and livestock: dairy sector products include fresh milk, fer-
mented milk (yoghurt), fresh cream, ricotta, ‘gbejna’ (fresh or dried speciality sheep or goat cheese) and mozzarella. The beef sector accounts for bovine animals and fresh beef, the swine sector for live
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The Scope of the Market
animals, pork and pork offal, as well as processed meat and other products. Other important sub-sectors include eggs and poultry, sheep meat and goat meat and rabbit meat. l Marketing, distribution and processing: agricultural produce needs
its own market outlets. These include agro-industrial activities such as canning. Agricultural development in production therefore warrants continuous change in marketing, distribution and processing. For the dairy and livestock sectors, the ultimate goals must necessarily remain the same as those set for the fresh fruit and vegetable sectors; they must satisfy established demand patterns for fresh milk, fresh meat and other products at reasonable prices to the consumer but also at a fair return to the dairy and meat producer. The main features of change in the pattern of sources of growth of Maltese agriculture may be summed up as follows: l a decline in absolute but an increase in relative contribution made
by land input; l a continuing decline in the relative contribution made by labour input; l an increase that follows the trend in the relative contribution made
by capital input; l an increase in the relative contribution made by growth of total factor
productivity. In fact, growth of total factor productivity and growth of capital input may emerge as the two predominant sources of growth in Maltese agriculture.
Agro-industry Domestic agricultural production also supplies produce for processing and agro-industry. In 1998, the year for which official data are last available, the food and beverages sub-sector accounted for Lm 121.6 million, which represented 13.02 percent of total output from the manufacturing sector. According to the 1998 Industrial Statistics, 423 enterprises employing 4,300 people were engaged in this sector. The food industry continued to register an average value added per employee higher than the average for the whole manufacturing sector. Malta’s agro-industry sector faces limitations normally associated with a micro-state. Such limitations may be of particular significance in a world of global (or interrelated) markets and these can be summed up as follows:
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117
l A small natural and agricultural resource base: the constraints on
agricultural production in a micro-state tend to make its agroindustry dependent on imported inputs which in many cases can be obtained at lower prices on world markets at highly competitive international prices. l A small domestic market: a small domestic market has important
implications from the viewpoint of efficient levels of production. Scale considerations have a direct bearing on product costs where lowvolume production entails high fixed and variable costs. The basis of agricultural production in Malta is quite a small area with soils of limited production potential and water constraints. Innovation of land utilization systems through modern techniques is taking place, but a large part of farm holdings remain characterized by stagnation and traditional techniques. Market imperfections and, at times, outright market failure inhibit the efficient functioning of the economy of market and distribution in Maltese agriculture. The import dependency of inputs for Maltese agricultural production and the transport requirements raise a number of issues which cannot be ignored, as cross-country experiences well demonstrate. The new Rural Development Plan (RDP) for Maltese Islands 20042006 has been set as a long-term national strategy for a restructured and sustainable Maltese agriculture. The government is seeking to deliver its national rural and countryside policy through the combined use of a range of EU measures and national instruments. The government established guiding principles for drawing up and implementing the RDP through compliance with all international, community and national obligations, notably community environmental policy, and full respect for the principle of sustainable development. The following priorities for RDP have been selected by the government: l to offer more differentiated, higher-quality products and services to
domestic consumers and foreign tourists by integrating with and serving the needs of the tourism and agro-processing sectors to maximise the growth of the nation’s GDP; l to provide better protection and development of the environment; l to preserve and develop traditional rural resources, know-how,
heritage and quality of life. In practice, most measures contribute either directly or indirectly to more than one priority. The national priority, therefore, is to facilitate the development of a dynamic, competitive and sustainable rural economy by encouraging an agricultural sector which is competitive, diverse and flexible, responsive to consumer wishes, environmentally
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The Scope of the Market
responsible and linked to the changing nature of the Maltese tourism product. Some farmers will also need to adapt more generally to the declining importance of the primary industries and selective support can encourage new enterprise directly or through indirect assistance, eg the provision of infrastructure. The intended use of measures to achieve operational objectives includes: l Investment in agricultural holdings: to provide targeted assistance
to support the development of more sustainable and competitive farming businesses with improved agricultural incomes, redeployed production and diversified farm activities. l Training: to broaden the skills base of the agricultural workforce to
enable it to meet the challenges of the re-orientation of agriculture and so contribute to the new demands of the rural economy. l Improving processing and marketing of agricultural products: to
encourage innovation and investment to achieve added value for Maltese agricultural primary products and enhance market opportunities. l Producer groups: to remedy the structural deficiencies affecting the
supply and marketing of agricultural products resulting from insufficient producer organization in Malta. l Land re-parcelling: to stem the high level of land fragmentation in
Malta and create farms of an economically viable size. l Agricultural water resources management: to ensure that Malta’s
limited water resources are optimally utilized by farmers to maximize their productivity and competitiveness. l Financial engineering: to ensure that Malta’s farmers (especially
tenant farmers) are able to finance essential investments made under the RDP. As regards the promotion of environmentally friendly production methods in line with rural heritage, the following aim must be considered: l Agri-environment. To conserve and improve the landscape, wildlife
and historic heritage of rural Malta, thereby also contributing directly and indirectly to economic activity and social objectives in rural areas. In order to diversify and develop the multifunctional role of rural enterprises, the following strategy must be adopted:
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119
l Encouragement for tourist and craft activities: to ensure that Malta’s
rural community contributes to and benefits from the holistic approach to tourism development now adopted by the Malta Tourism Authority. The agricultural sector is passing through a phase of both challenge and opportunity. Perhaps never before has so much attention been afforded to this sector, whose importance from a multifunctional point of view is perhaps belied by bare statistical data. The problems facing farmers and herdsmen have to be tackled without delay, taking full advantage of the opportunities for technical and financial assistance arising from Malta’s forthcoming EU membership. At the same time, production methods must be modernized without destroying the traditional characteristics of Malta’s rural heritage.
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The Scope of the Market
2.8
Furniture Industry Stefano Mallia, Director, ECMS Ltd
Overview This chapter provides a general overview of the current domestic furniture demand and supply conditions that have evolved in Malta over the past years. The analysis, which is macro in nature, finds that: l demand currently remains orientated towards solid wood, which may
partly be due to domestic supply conditions; l over the past few years, foreign imported goods only account for a
relatively small proportion of the domestic supply due to the heavy protection that was being applied. This protection has now been removed and thus imports are on the increase; l the industry is highly fragmented, with a large number of vertically
integrated operators with a low propensity to cooperate; l exports to date have been low and erratic in nature.
Domestic demand In terms of the composition of demand, the highest domestic demand remains for kitchen furniture, bedroom suites and dining rooms, which represent 19.1 per cent, 17.8 per cent and 7.9 per cent of the overall monetary value of the market. Together these categories combined with office furniture account for more than half the total market size. In general, local taste favours solid wood furniture products which are made to client specifications. Interviews conducted with a crosssection of producers and retailers suggest that while most medium-sized operators have a basic range of products, the products are either
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121
Kitchen Furniture 19%
Dining/Living Rooms 9% Other 48%
Bedrooms 18% Office Furniture 6%
Source: Central Office of Statistics
Figure 2.8.1 Domestic demand by product produced to stock in a semi-finished state and finalized to customer specifications or else directly produced to customer orders. The primary types of solid woods in demand include oak, coniferous woods and spruce. Others 22%
Particle Board 19%
Spruce 8%
Oak Wood 15% Plywood 9% Coniferous Wood 17%
Source: Central Office of Statistics
Figure 2.8.2 Raw material imports by product
Fibreboard 10%
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The Scope of the Market
Although the general preference for the use of solid wood may have cultural origins, it may also be determined by supply side factors – in particular the general lack of production capabilities in the use of chipboard technology, which to date accounts for some 80 per cent of total output in the European market.
Domestic supply Industry structure The domestic supply of furniture is highly fragmented. Official statistics released for 2001 by the Central Office of Statistics suggest that there are in excess of 800 enterprises active in the production of wooden, metal and plastic furniture, which collectively employ close to 2,600 people. The trend in both employment and number of establishments has been declining, suggesting a consolidation and shake-out within the industry. The industry is dominated by establishments employing less than five people, with only about 4 per cent of all establishments employing over 10 people. Only three major operators employ over 100 people. The largest proportion of establishments produces mainly kitchen furniture (32.3 per cent), single and double bedrooms (12.55 per cent) and furniture re-upholstering (7.4 per cent). The former two categories largely reflect the domestic demand conditions and heavy protection that was afforded to those product groups. Only 2.1 per cent of all establishments produce office furniture and only three operators produce mattresses. Kitchen furniture 32.30%
Others 48.32%
Furniture reupholstery 3.60%
Single and double bedrooms 12.55% Dining rooms 3.23%
Source: Central Office of Statistics
Figure 2.8.3 Proportion of establishments by main products
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123
The relatively low penetration of foreign imports is largely due to the high protective levies which were imposed on furniture products, in addition to customs duties on non-EU originating products. With the removal of protective levies, the amount of imports is already increasing, although it is not yet possible to quantify the increase in importation as official statistics are not yet available. The primary source of imports remains the EU, accounting for over 83 per cent of the total imported furniture. The bulk of these imports are from Italy, which on its own accounted for over 54 per cent, followed by the United Kingdom, which accounted for 13.6 per cent, with the remaining 32 per cent being spread across 47 other countries.
Other Non-EU 12% USA 4%
Italy 55% Other EU 15%
UK 14%
Source: Central Office of Statistics
Figure 2.8.4 Imports by country The number of companies exporting remains limited. To date, export performance has generally been erratic, spurred by occasional one-off sizeable orders, with only a handful of firms consistently building an export market. Roughly half of all exports are destined for the United Kingdom, Ireland and Belgium. Exports to other countries such as Russia, Libya and the Middle East have been more erratic. The more consistent export products are currently wooden seats and metal office furniture (which accounts for over half the total exports, although wooden dining/living furniture has been growing rapidly). These products are exported by a
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The Scope of the Market
handful of companies that have succeeded in building up their export capabilities over a number of years. In general, these product types used to enjoy very limited protection by levies. Metal office furniture, for example, had an average effective protection of 5.6 per cent. Not only does this highlight the detrimental effect of the latter on the competitiveness of Maltese furniture producers, but it also proves that companies are capable of exporting successfully. In addition to being small by international comparison, most of the Maltese enterprises are highly integrated with a low propensity to cooperate. Based on primary research conducted during the study with a cross-section of producers, it transpired that most Maltese enterprises (some 16.56 per cent of the respondents to the questionnaire) indicated that their companies were both manufacturers and retailers, the bulk of which are over-five-employee establishments. This is further confirmed by a retail survey conducted by the Planning Authority in 1997, which suggested that the fragmentation within the distribution chain is also very high with some 457 furniture retail outlets in Malta (equivalent to one retailer for every two manufacturers). This is comparable to a total of 123 retail outlets per 100,000 inhabitants, compared to 39 and 13 in Italy and Germany respectively. Moreover, the very low average turnover per outlet of Lm 56,000 compared to Lm 727,234 and Lm 158,366 of Germany and Italy respectively confirms that the large majority of these outlets are very small. For a better understanding of the soft variables affecting the industry’s competitiveness (eg culture, management style, propensity to partnerships etc), the benchmark exercise carried out during the study focused mostly on qualitative issues with a relatively limited and carefully chosen use of quantitative comparisons. This was a deliberate choice, since experience has shown that unless quantitative benchmarks are put into context, they are insufficient and can be misleading. Moreover, it was almost impossible to approach the benchmark exercise exclusively in a quantitative way given the lack of data availability, reliability of data and comparison problems encountered locally both at institutional and company level. Furthermore, especially when approaching an articulated restructuring project such as this, it is more important to understand what the DNA of the industry being analysed looks like (ie what has brought about the current situation and what is preventing the industry from changing) rather than to measure the differences with other (often noncomparable) systems/industries. Consequently, in order to better depict the influencing factors, the team of consultants involved in the study made extensive use of soft cause-effect relationship loop diagrams, these being effective tools to try and understand which are the determinants that might have contributed to both a given status quo and also prevent this status quo from changing.
Furniture Industry Core competencies What the Maltese furniture industry is good at
Competitive factors Which input factors (labour, capital, energy, etc.) contribute to the competitiveness of the Maltese furniture industry
125
Core incompetencies What the Maltese furniture industry not good at
Internal competitive obstacles Which private sector practices prevent the Maltese furniture industry from being competitive (manageable through entrepreneurial action)
External competitive obstacles Which public sector policies and practices prevent the Maltese furniture industry from being competitive (not manageable at company level but changeable through legislation, regulations, direct/indirect action etc. by the institutional bodies)
Figure 2.8.5 Analytical model used
As illustrated, the results of the benchmark study carried out were rearranged under five sections. This was done to illustrate clearly the key issues that emerged from the study and to better compare the Maltese furniture industry with other systems and/or countries. The field and desk research was thus able to identify: the following three main areas of core competencies: l widespread tradition of woodworking; l good solid woodworking skills; l made-to-measure furniture manufacturing;
the four main areas of core incompetencies: l design and product engineering; l panel working ability; l manufacturing process management; l export-related skills and culture;
one competitive factor: l the low cost of labour
four main internal competitive obstacles: l high vertical integration and lack of role differentiation/specialization;
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The Scope of the Market
l small size; l poor propensity to partnership; l no/rare information systems;
five main external competitive obstacles: l high transport costs; l inadequate education system; l lack of a furniture industry association; l need for better utilization of support provided by public agencies; l limited opportunities to credit access; l geographic limitation on export insurance policies.
From the analysis, it is clear that an extensive restructuring of the furniture industry is required in order to enable the sector to survive and succeed. The new scenario faced by existing operators presents both threats and opportunities which must be addressed. Clearly there will be casualties during the process as weaker operators exit the industry. An increased presence of foreign companies on the domestic market will further require radical change in both production efficiency and product design. In the short term, this will necessitate operators within the industry reviewing their current operating practices, not only internally but also externally in terms of their business relations. This will be difficult given the prevailing business culture – but inevitable. External pressures will be the main driving force. The prospective benefits of eventual EU membership which will enable Maltese operators to obtain financial support from EU programmes, as well as the lower cost of certain raw materials, will only materialize following EU membership in 2004. The key problem faced by Maltese entrepreneurs is to obtain a more definite direction in moving from a static production system which has suffered from reduced innovation and protection, and has hence been domestically oriented, to one which is dynamic and reactive to changing customer tastes and demands, and which by definition has to be export oriented. This will require the removal of competitive obstacles identified in the previous section, accompanied by increased competitiveness on the part of the companies. The domestic market, which to date remains the primary market of domestic producers, has remained stagnant over the past years. The limited size of the market has reduced opportunities to generate economies of scale and has stifled manufacturing process innovation as well as investment in product design. This has resulted in an increased gap between the Maltese producers and their product to those of foreign
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127
②
Domestic market is not growing
Levies removal will reduce Maltese companies market share
⑤
Several Maltese companies will give up manufacturing for distribution only
③
Lower opportunities to generate economies of scale
④
Increasing gap with foreign companies
EXPORT IS THE ONLY WAY OUT!!!
Figure 2.8.6 Low competitiveness cause-effect loop
companies. Consequently, several Maltese companies have abandoned and will continue to abandon their manufacturing operations in favour of importation and distribution of foreign products. The reduction in Maltese manufacturing operators’ share in the local market, which will be further reduced by the removal of levies, creates a vicious circle which again lowers the opportunities to generate economies of scale and so forth. Figure 2.8.6 clearly illustrates that for the Maltese furniture industry to survive, it must do so by increasing its output through exports. However, to achieve success in export, a number of prerequisites must be fulfilled: l the product must fit the respective destination market, in terms of
target market taste, customer and legal requirements; l the product must be adequately priced, which requires the enterprises
to have appropriate cost structures; l there must be adequate human resources with the necessary skills
in export promotion and distribution management; l there must be investment in marketing/promotion at overseas fairs
and exhibitions and the establishment of distribution networks. It should however be stressed that, given the high cost of penetrating foreign markets, not all enterprises will be capable of exporting even after the restructuring of the industry. This is not to be taken as a negative development – and is in fact a necessary development – as
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The Scope of the Market
many of the companies falling within the latter category would be able to act as specialized and highly efficient sub-suppliers to larger exporters, with the residual operators servicing the domestic markets exclusively.
Recommendations to Maltese entrepreneurs From the analysis, it is clear that for the local furniture industry to attain international competitiveness, substantial action must be taken at company level. The options and recommendations presented were for the industry as a whole and are to be adapted to the specific circumstance of the respective enterprise. Based on the analysis carried out, Maltese enterprises have four strategic options to pursue over the coming years: l to cease manufacturing and concentrate on distribution; l to reposition themselves away from the traditional products/markets; l to specialize along the phases of the value chain; l to focus on one of their more promising products and excel in both
design and production efficiency.
Cease manufacturing and concentrate on distribution The option of closing down manufacturing operations and concentrating on distribution appears to be the preferred option of some of the weaker domestic manufacturers within the market. With the removal of levies, the attraction of retailing cheaper imported products will increase and prove to be a relatively painless exit route for a number of operators. The success or otherwise of this particular strategy will however depend on the retailing infrastructure that the respective company already possess and/or can build up over the ensuing years, during which margins are likely to remain relatively good. This requires financial strength in particular given the investment in operating a retailing outlet and purchasing the necessary stocks. For local manufacturers that decide to continue their manufacturing operations, this development has the advantage that it allows them to cease their retailing operation and concentrate resources purely on manufacturing. The distribution of their goods to the final customer would then take place through specialized retailers. The longer-term prospects of this strategy are however less clear, as the attractiveness of this particular strategy may result in a rapid increase in establishments in the short term which will need to vie for market share within a relatively static market. This is in fact already being witnessed in the local market.
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From an industry perspective, this particular strategy is advantageous for manufacturers as it will help in the reduction of potential over-capacity and hence reduce the risk of severe price competition in the manufacturing sector.
Reposition away from traditional products/markets In view of the high concentration of enterprises on highly protected products such as wooden kitchens and bedrooms, which will be adversely affected by the removal of levies, companies heavily dependent on such products should consider entering markets where their core competencies could potentially present a competitive advantage over competitors, both domestic and foreign. As the core competencies of each company differ, each company needs to assess their own position and determine what these markets may be. As highlighted previously, the most common competencies identified during the course of the study include: l the ability to work solid wood; l made-to-measure products; l a strong woodworking tradition.
These core competencies could be exploited following the implementation of internal efficiency-raising measures in three potential areas, namely: l ship interiors (re)furbishment; l international contract work; l production of niche high-value woodwork-related products.
The three areas are ranked in order of their applicability and potential for execution by the Maltese entrepreneurs given the current set-up of the industry.
Specialize along the phases of the value chain The disadvantages of the traditional highly integrated value chain prevalent in Maltese enterprises, in particular given the small size of the enterprises, has been highlighted previously. However, both the Italian and German manufacturing value chain suggest that economies of scale and a high degree of efficiency can be achieved even in small enterprises. The key is to specialize along part of the value chain and excel within that respective niche acting as a sub-supplier of services to other manufacturers. The underlying logic here is that an enterprise can increase its competitiveness by focusing on those stages of the value chain where it is most efficient and subcontract those tasks that can be
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The Scope of the Market
performed more efficiently by a specialist and hence cost less. Companies can thus reap economies of scale despite their relatively small size. Companies can also sell unused capacity to third parties. Additional income is generated to cover the investment in specialized equipment, hence reducing the per unit/hour cost of the use of the equipment, both to external customers and for own production. By specializing and processing higher volumes, the company can move faster down the learning curve, ie the higher volumes processed will enable the company to find new methods of accomplishing the respective task faster, more precisely and more efficiently than if it had lower volumes. The higher volume of work in a specific phase, due to the processing of external work, would eventually reach a critical mass which would make investment in more advanced and specialized equipment more feasible, thus further enhancing the competitiveness of the enterprise.
Concentrate on more promising products and excel in their production and design A further option available to Maltese manufacturing enterprises is to maintain their current manufacturing operations along specific product lines. However, the inevitable market share gain of foreign imports in the relatively static Maltese market would imply that these operators would have to seek growth from the export market. To achieve this, a company would need to undertake the following steps: l identify the market that it wishes to/is capable of competing in given
the market dynamics, key success factors and the company’s inherent capabilities and resources; l focus attention on a limited (possibly even just one) product line that
it feels it has the greatest potential of penetrating the respective market; l increase internal systems, productivity and design.
The options available to Maltese furniture enterprises to a large extent depend upon their current internal state of development, resources and capabilities. In view of this, strategic groupings (clusters of companies which have similar characteristics in terms of structure, strategy, behaviour and approach) were created, which reflect the make-up of the enterprises involved in the sector. These strategic groupings then enable the identification of strategic options for the respective groups. The key segmentation variables which had been found to be the most appropriate for classifying Maltese companies and capturing the essence of the industry’s DNA, as well as highlighting potential strengths and weaknesses thus helping to configure their respective strategic options, are:
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l operational competence: the capability to organize the delivery system
in an effective and efficient way through technology (hard aspects) and management (soft aspects); l specialization: company scope in terms of product range and business
endeavours. In fact, both the operational competence and specialization variable provide an interesting measure of the competitiveness status and potential of Maltese companies since the former refers to the companies’ proficiency in design product engineering, manufacturing process management etc (thus efficiency and efficacy), while the latter refers to the degree of specialization both in terms of product range and position/role within the added value chain (thus economies of scope/ scale).
The Sharks
High
The Whales
Operational Competence Low
The Soles The Plankton
Low
High
Specialization Figure 2.8.7 Strategic groupings
As illustrated in Figure 2.8.7, using these segmentation criteria it is possible to identify four major strategic groupings: l Whales: the whales are those companies that have a wide product
range and/or are highly integrated along the value chain, while at the same time being strong in terms of their operations competence. Companies within this strategic group include the relatively large operators that generally employ over 100 people. Companies within this group all possess a strong retailing presence and their dominant local market position requires them to service the entire spectrum
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The Scope of the Market
of product types ranging from kitchens, bedrooms and ancillary furniture. The companies are generally self-sufficient in their manufacturing and their size permits them the benefits of scale to a certain extent. Most of the companies exported successfully on at least one occasion. l Sharks: the sharks are enterprises that have achieved high opera-
tional competence through specialization on a narrow product range and excel in product engineering and manufacturing process management. These companies are still few in number, but include companies that specialize in a limited product range. Most of the companies within this strategic grouping have successfully exported. l Soles: the soles are companies that have failed to achieve operational
competence and have a variety of product types though not a full range. The relatively small size of these companies combined with the medium variety product range precludes them from successfully reaping economies of scale. Most of these companies have invested in machinery which is under-utilized and are now highly geared. Most of the enterprises within this category employ over 15 people but below 100, some of which have exported but most have failed due to their high cost base. Companies within this group are either just breaking even or are running at a loss and by and large have ceased investing over the past three years.
Exploit current positioning and push for export
Specialize
The Sharks
High
The Whales
Operational Competence Low
Get fit for export by focusing on high potential products and a massive restructuring programme
The Soles The Plankton
Prepare to become a Shark through heavy technological investment Low
High
Specialization Stay local for the locals Evolve into small sub-supplier
Figure 2.8.8 Options for strategic groups
Act as second tier sub-supplier to Whales or Sharks Opt for distribution only
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l Plankton: the plankton are the smaller craftsmen-like companies that
constitute the bulk of the industry operators, which often carry out made-to-measure furniture to client specifications, and as such invariably have to cater for a broad spectrum of product types. Given the high diversity and low volume of operation, the operational competence of these operators is generally low, servicing niche markets. Operators within this group are almost exclusively domestically oriented and generally do not have a retailing presence. The strategic options of each of these groups differ, which in turn requires companies in the respective groups to take different actions in the restructuring process. Given these strategic groupings and the recommendations outlined above, Figure 2.8.8 provides in a very concise manner the different options that can be undertaken by the different players.
Part Three
The Financial Sector
3.1
Regulatory Framework for Financial Services and International Business Michael Xuereb, Malta Financial Services Authority
The financial services sector employs over 5,000 people and accounts for around 12 per cent of GDP. Blue-chip banks, international fund managers and investment houses operate alongside local professional practices, corporate administrators and world-leading accountancy firms. The number of funds registered has gone from zero to a few hundred in the space of a few years, while financial sector assets have recently topped the €16 billion mark.
Historical background The beginnings of Maltese financial services may be traced back to the time of the Order of the Knights of Malta who set up a number of charitable funds (monte) in the 16th and 17th centuries. These funds carried out banking-type functions such as issuing loans secured by pledges over property. However, it was the 19th century that ushered in a fully fledged banking industry, first through initiatives taken by local individuals which were later to flourish into successful institutions, and then through an influx of European banks, such as the AngloEgyptian Bank, Banco di Roma, Barclays and Credit Foncier, at the turn of the 20th century. The 19th century also witnessed the codification of Maltese private law on the lines of the Code Napoleon. Malta is basically a civil law jurisdiction, a system that has its roots in Roman law. Its public law, however, is a legacy of its British colonial past, as are the influences of
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common law on local commercial practice and regulation. As a consequence, Malta has adopted English statutory law as a model for most of its financial services legislation, including banking, investment services, insurance and company law. These developments have given the Maltese legal system sophistication and versatility, and allow its financial services industry to carry on business in Anglo-Saxon as well as continental European markets with equal ease. Having built its post-independence economy on tourism, manufacturing and maritime services, Malta moved to streamline its financial services sector and re-launch it as the fourth pillar of economic activity. A major legislative reform in 1994 set up the Malta Financial Services Centre (MFSC) to consolidate the regulatory framework and spearhead the development of a seamless finance industry servicing domestic and international economic activity. In the process, Malta’s preferential regime for offshore companies was phased out. Banking, insurance and company legislation was aligned to EU and other internationally recognized standards and the legal framework for a funds and securities industry was established. Money laundering, professional secrecy, insider dealing and market abuse laws were placed at the forefront of international regulatory practice. Together with economic reforms undertaken by the Maltese government in the 1990s, these regulatory changes created the necessary conditions for the development of non-bank intermediaries and a capital market. Regulatory structures were further consolidated in 2002 with the reconstitution of the MFSC as the Malta Financial Services Authority (MFSA).
Regulatory authority The MFSA is the licensing and supervisory authority for all financial services activity and takes over responsibility as the listing authority and stock exchange regulator in 2003. The overseeing of the country’s payment systems and the conduct of monetary policy are the responsibility of the Central Bank. Both authorities are independent institutions set up by law and report directly to parliament. The organizational structure of the MFSA ensures that the regulatory and operational functions of the Authority are exercised within strict legal demarcations. The Board of Governors, presided over by the chairman, sets policy and general direction. The Supervisory Council, headed by the director general, is exclusively responsible for licensing and regulation and is composed of four directors responsible for banking, investments, insurance and company compliance. Management matters
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are the responsibility of the Board of Management. Coordination between these three organs is ensured at Coordination Committee level. Appeals from the regulatory decisions of the MFSA can be made to an independent Financial Services Tribunal. A further appeal on points of law may be lodged with the Court of Appeal. The MFSA also has a number of cross-cutting functions. In line with its constitutive Act, its regulatory policies are designed to promote fair competition and consumer choice in financial services. These functions are reflected in its regulatory style. Regulation is robust and follows stringent ‘fit and proper’ rules and a rigorous product quality assurance policy. On the other hand, financial services providers are given space and encouragement to innovate and come up with cutting-edge products. As the guardian of consumer interests in financial services, the MFSA is also responsible for consumer protection and education.
Financial services legislation Regulation by the MFSA is based on a set of sector-specific laws that cover banking, investment and insurance business, while the Malta Financial Services Authority Act provides an umbrella framework that is able to manage the areas of convergence between these sectors through a single regulatory structure. The Investment Services Act provides the statutory basis for the licensing and regulation of investment services undertakings and collective investment schemes. Investment services business may not be undertaken in Malta or from a base in Malta without a licence from the MFSA. The protection of investors’ interests is paramount and powers are available to take action against individuals operating without an appropriate licence or failing to meet the required standards. Consideration is also given to the importance of providing licence holders with the freedom to innovate and to develop new products to meet the changing needs of the market. When considering an application for an investment services licence or a collective investment scheme licence, the MFSA takes into account the reputation and suitability of the applicant and of all other relevant parties closely connected with the scheme. Collective investment schemes may be set up as open-ended and closed-ended investment companies, investment partnerships and other non-corporate investment vehicles. The MFSA will in particular examine the nature and features of the proposed scheme and the type of investors to whom it will be marketed. Professional investor funds designed for professional and high-networth investors are governed by a specific set of rules relating to their establishment, management and marketing in a manner which reflects
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its distinction from normal retail funds. The object is to reduce to an acceptable minimum the information and documentation needed to establish a professional investment fund. In most cases a corporate professional investment fund would take the form of an incorporated open-ended or closed-ended investment company or partnership – in the form of a SICAV or a unit trust. Retirement funds are governed by the Special Funds (Regulation) Act, which regulates funded retirement benefit arrangements between an employer and his employees (‘second pillar’ retirement income), as well as arrangements that involve a contributor and a beneficiary. The legislation is very recent and takes into consideration current international standards as well as the highly competitive international market. Insurance business is regulated by two complementary laws: the Insurance Business Act and the Insurance Brokers and Other Intermediaries Act. These two Acts cover all relevant operators in this sector, including insurers, re-insurers, agents and sub-agents, brokers, insurance managers and captive insurance companies. Solvency margins and technical provision requirements are based on EU parameters. Recent amendments also create opportunities for Malta-based insurance companies to expand their business overseas. These include an improved framework for insurance management and captive insurance companies, and positions that lay the ground for access to the European single market. The Banking Act is a reflection of Malta’s commitment towards increased harmonization in international banking regulation. It lays down a strict regulatory regime coupled with the flexibility warranted in a modern, competitive and dynamic banking environment. The Act adopts the concept of ‘credit institution’ which originates in the EU First Banking Coordination Directive. It lays down authorization procedures relating to the opening of branches and representative offices of foreign banks in Malta and includes provisions relating to formal cooperation on supervisory matters with foreign regulatory authorities. The MFSA must approve individuals intending to acquire a participation of 5 per cent or more in the share capital of a credit institution. The minimum paid-up capital for a credit institution is Lm 2 million (approximately US$5.5 million). The adequacy of own funds is measured on a risk-weighted asset basis. The Banking Act recognizes the importance of measuring and monitoring concentration of risk through the concept of establishing and limiting large exposures in relation to a bank’s own funds. The Banking Act also provides a regulatory framework for electronic money and electronic institutions. Credit institutions are given the opportunity to undertake the business of electronic banking as part of their banking licence. ‘Stand-alone’ electronic money institutions on the
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other hand have to operate within the parameters of a licence based on the framework of EU Directive 2000/46/EC. Financial activity that does not amount to banking or investment, such as financial leasing, money broking, foreign exchange, other money market activities and the regular and habitual acquisition of holdings, require a licence under the Financial Institutions Act.
Corporate and trust law In 1995, the Companies Act replaced the Commercial Partnerships Ordinance of 1962 which had originally introduced modern company law principles into Maltese law. The Act improved company structures introducing more financial transparency and updated corporate law to meet the needs of a more sophisticated and complex financial and commercial environment. In the process, it also introduced the principles and standards established in the Company Law Harmonization Directives of the European Union. The registrar of companies is responsible for ensuring compliance with the provisions of the Act. The Act provides the statutory basis for the establishment and regulation of the following types of commercial partnership: l the limited liability company, based on the English company model; l the partnership ‘en nom collectif ’, where partners have unlimited
liability for partnership debts; l the partnership ‘en commandite’ where at least one partner has
unlimited liability for partnership debts; l the limited partnership.
Commercial partnerships enjoy a distinct legal personality. The Act also provides for the setting up of investment vehicles such as the SICAV, which is a limited liability company with variable share capital, and the INVCO, which is an investment company with fixed share capital. These two structures are used as collective investment vehicles. Company continuance is regulated by a specific set of regulations that allow corporates registered under the laws of an approved jurisdiction to continue in Malta. Companies carrying out licensable activity require the consent of the regulator in the country of origin to continue in Malta. Malta-registered companies may also be allowed to continue outside Malta under similar conditions. Companies may denominate their share capital in a foreign currency and draw up their accounts in the same currency.
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The Trusts Act provides that every trust must be created by written instrument or a will. A trust may be created by a unilateral declaration, which is a declaration in writing made by the trustee, giving the name of the trust and containing all the terms of the trust as well as the names or information enabling the identification of all the beneficiaries. The proper law of a trust is determined in accordance with the Hague Convention on the law applicable to trusts and on their recognition. This provides for the free choice of the applicable or proper law by the settlor and for the most closely connected law to apply if the settlor makes no valid choice. Malta ratified the Hague Convention on 31 December 1995. Trusts may be either Maltese or foreign. Maltese trusts are those that adopt the law of Malta as their proper law and are governed by the rules contained in the Trusts Act. Foreign trusts are those trusts the proper law of which is the law of a jurisdiction other than Malta. The proper law of a Maltese trust may, at any time, be changed to the law of another jurisdiction. Registered trusts may qualify for benefits allowed under the Act. The Recognition of Trusts Act is another law that allows unit trusts governed by a foreign trust law to conduct business and be managed from Malta. The Act also creates the legal mechanism whereby Maltese Courts may recognize the validity of a foreign trust in line with the Hague Convention.
Anti money-laundering and supplementary legislation Malta’s anti-money laundering laws and procedures are based on EU legislation and international best practice. The Financial Action Task Force (FATF) has concluded that Malta’s regulations provide far-reaching identification procedures, while assessments carried out by the EU, the Council of Europe and the IRS all take a positive general view of Malta’s anti-money-laundering regime. Financial services intermediaries including persons involved in banking, insurance or investment business as well as supervisory authorities are all subject to anti-money-laundering legislation. Compliance with anti-money-laundering obligations is monitored by the Financial Intelligence Analysis Unit. The unit is also responsible for analysing suspicious transaction reports under investigation by the police. Individuals who obtain information which indicates that any person has or may have been engaged in money laundering have the duty to disclose such information to the police as soon as reasonably practicable. Disclosure of such information is not considered a breach of professional secrecy.
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Licence holders cannot form a business relationship or carry out any transaction with or for another person except in accordance with the requirements of the above-mentioned law and procedures. Licence holders and nominee companies are bound by law to ensure the probity of their clients in accordance with established ‘know your customer’ principles. Banks, insurance and investment companies must keep a record of the principal (‘ultimate beneficiary’) even if the application for business is made by a licensed nominee. The assets of individuals suspected of involvement in crimes committed under the Act can be frozen following the issue of a court order upon application by the police. The Professional Secrecy Act abides by the basic principle of the protection of professional secrecy in relation to information obtained from customers. Exceptions are made with respect to suspected cases of money laundering and information already in the public domain.
Tax structure and treaties, tax rulings The Maltese government shares concerns about the global effects of harmful tax competition and is committed to transparency and the elimination of measures that attract no substantial domestic activity. Exchange of information with overseas regulatory authorities is however regulated by law and may take place only within the terms of multilateral or bilateral agreements that are in place and subject to the appropriate judicial proceedings. Malta was in fact among the first six countries in the world – and the first in Europe – to reach an advanced accord with the OECD on tax matters and has never featured on the OECD list of non-cooperating countries. All companies are taxed at a rate of 35 per cent. Since Malta follows a full imputation system of taxation, there is no further tax to be paid by shareholders on receipt of a dividend. In certain cases, shareholders may become entitled to a tax refund on declaration of dividend. One such case is that of non-resident shareholders carrying out international activity from Malta. Consideration is given to the substance of the commercial activity carried out in Malta. The International Tax Unit of the Inland Revenue is responsible for issuing advance rulings. These rulings ensure certainty for the commercial operator and guarantee the tax position for a minimum period of five years. They may be renewed for a further five-year period. Double taxation relief is given by virtue of Malta’s comprehensive tax treaty network under the ordinary credit method. Unilateral relief is available where overseas tax is suffered on income received from a country with which Malta does not have a treaty.
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The Financial Sector
Collective investment schemes licensed under the Investment Services Act are exempt from tax (except for a 10–15 per cent withholding tax for certain funds that invest in non-equity, Malta-based assets). Capital gains realized by a scheme listed on the Malta Stock Exchange are exempt from capital gains tax. Licensed investment services companies providing management, administration, safekeeping services and investment advice to collective investment schemes benefit from special deductions in addition to the normal deductions available to companies. These additional deductions are mainly: l 200 per cent deductions on building occupancy costs for the first 10
years; l 200 per cent deductions on salaries paid to Maltese staff for the first
10 years; l tax relief on funds invested in schemes managed by themselves.
Collective investment schemes and investment services companies are exempt from duty on documents and transfers.
Future Development As a new member of the European Union, Malta gains access to the integrated market in financial services on 1 May 2004. Within the new scenario Malta’s key strengths should lie in its institutional framework and economic competitiveness. Malta should therefore be looking towards developing further as a cultural interface for cross-border and international business in financial services and ancillary activities.
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3.2
Maltese Banking within the Financial Services Sector Timothy H Fitzpatrick – COO, HSBC Bank Malta Plc
During recent years, the Maltese banking sector has experienced rapid changes as it has emerged from a tightly controlled, publicly owned scenario into one of liberalization and private ownership. This new orientation has increased the wave of competitiveness, which augurs well for a faster process of corporate and business reengineering, and which should put the local banking sector on a stronger basis to face up to international pressures and opportunities. The growing contribution of the financial sector to GDP as well as that of banking to the financial sector are both significant pluses that need to be acknowledged. Malta’s EU accession process has brought with it the need for banks to assess in a more focused manner the threats and opportunities which the resulting economic restructuring and liberalization process will present. As amended the Banking Act incorporates almost all the features of the corresponding EU directives; particularly regarding the own funds of credit institutions, solvency, capital adequacy, accounting and large exposures. The two most recent Maltese banking directives, which were introduced last year, govern the consolidated supervision of credit institutions as well as provisioning against credit and country risk. The areas of EU legislation recently adopted locally include the establishment of a deposit protection scheme, and the recognition of netting of financial transactions in bankruptcy procedures. Banks operating in Malta enjoy a broad capital base – with the ratio between own funds and risk-weighted assets standing higher than the statutory minimum.
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The Financial Sector
Recent years have seen the reinforcement of domestic banks’ capability to assess and contain risk while no concerns exist regarding the health of the domestic banking system. This is mainly due to the strength of the supervisory framework and measures taken by the banks themselves to address possible risks in areas that could potentially include compliance, money laundering and risk management. With a view to enhancing their capacity for sustainable earnings, banks have been improving their operational efficiency and are diversifying their earnings through fee-earning services. The gradual liberalization of the financial sector together with the easing of exchange controls in the last few years has brought with it a shifted emphasis from regulation to competition and created more opportunities for banks to deploy their resources more profitably. Despite the growth of non-bank financial intermediaries, banks remain the principal financial intermediaries in Malta. In view of the competition increasing across the traditional boundaries that used to define banking, insurance and investment services, the role of the MFSA as sole regulatory body leaves it better placed to regulate financial services organizations and firms. Acquisition brought a new element of competition into the Maltese banking system and introduced new business standards. Banks are today able to offer clients more sophisticated and developed products and services, giving them a competitive edge in the process. Once the process of capital control liberalization is accelerated, so greater reliance will be made on the interest rate mechanism as a stabilizing device to correct possible disruptive cross-border capital movements. The local banking system has continued to gain further strength and has taken decisive steps to gear up for the ever-increasing opportunities and threats posed by the ongoing financial liberalization and globalization. These developments have broadened considerably the scope and potential for further growth and deepening of the financial sector. The structure of the banking sector and the intensification of competitive pressures in recent years have led to a significant consolidation process. Banks have branched out into other spheres of financial services including stockbroking, fund management and other investment services. The advent of a considerable number of investment services providers and new investment products has generally led to a marked shift in investor confidence from fixed income to more sophisticated equitylinked, variable income products. The banks and stockbrokers have also been consulted by the local Central Bank with a view to facilitating the assumption of the marketmaking function by the market. It appears that private market-making facilities are likely to be introduced in the near term both for bonds and equities. Such a development should help stimulate a pick-up in secondary market turnover and a more liquid market.
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In the changing and more competitive environment commercial banks have been under pressure to innovate. They have taken steps to increase their competitiveness by upgrading technology, adding to their automation capabilities and improving their operational efficiency. This also explains why they have started to innovate with new products and services. Foreign banks are allowed to operate in Malta on level terms with domestic institutions with respect to licensing and regulatory matters. Since the laws governing banking were thoroughly overhauled by 1998 the domestic capital market has deepened considerably. As at end June 2001, there were 18 banks licensed in terms of the Banking Act 1994. The size of the banks’ balance sheets shows that their activities are carried out on very conservative lines and are also highly capitalized. Malta has earned itself a firm reputation as a well-regulated centre for financial services and international trade. Its strategic geographical location at the centre of the Mediterranean makes it easily accessible from major destinations. Malta is constitutionally bound by a policy of political neutrality and maintains high regulatory and anti-money laundering standards, making it a stable and respectable jurisdiction. Malta’s continued success is also due to its modern and advanced financial services and tax framework. These factors have enabled the Maltese financial services sector to develop strongly, which in turn has provided a supportive environment for further expansion of the sector. The island’s wide network of double taxation agreements as well as other methods for relieving double taxation on cross-border transactions also provides an excellent basis for establishing tax-efficient structures including international trading and holding companies. The fact that Malta has one of Europe’s most advanced telecommunications infrastructures allows direct access to all countries around the world. An impressive array of international banking and investment companies is already present in Malta in various forms. Businesses are attracted by competitive registration fees, annual duty and capital requirements when compared to those of other jurisdictions. In addition, there is a well-established legal community, while the major international auditing firms all have representation in Malta. Malta has been successful in promoting itself as a particularly suitable base for professional or institutional funds and for funds targeted at certain Mediterranean rim countries. It also acts as a base to develop further business in neighbouring countries, especially in North Africa and Southern Europe. As far as HSBC Bank Malta plc is concerned, its franchise has been further enhanced by the fact that it is 70 per cent owned by HSBC Holdings – one of the largest global banking and financial services groups. Headquartered in London UK, HSBC Holdings plc is one of the largest international banking and financial services organizations in
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the world. HSBC’s international network comprises some 7, 000 offices in 81 countries and territories in the Asia Pacific region, Europe, the Americas, the Middle East and Africa. Through an international network linked by advanced technology, including a rapidly growing e-commerce capability, HSBC provides a comprehensive range of financial services including personal financial services, commercial banking, asset management and private banking. The Bank has a rigorous Group Money Laundering Deterrence programme which apart from focusing on the FATF List of Non CoOperative Countries and Territories also ensures high operational standards by countering reputational and environment risks. The Bank has also aligned its Corporate and Institutional Banking with Investment Banking and Markets as one of its key strategic imperatives, thus establishing an integrated business line for the Group’s wholesale business activities. The creation of Corporate, Investment Banking and Markets (CIBM) has brought together within principal banking business the commercial and investment banking skills required to service these vitally important client segments. The key to CIBM’s success is effective relationship management. Specifically, CIBM focuses on transaction banking, foreign exchange in which HSBC is one of the leading global players, debt financing and advisory services as well as risk management products. The International Banking Centre within HSBC Bank Malta plc is a unit providing a professional and high-quality service to its international clientele. The International Banking Centre has a wealth of experience and expertise in providing the necessary banking service to corporate clients registered overseas as well as the locally registered shipping and international trading/holding companies including trusts. Clients of HSBC Bank Malta also benefit from the HSBC Group’s global resources and expertise through the Group’s network of international centres. Serving as the Maltese operation of a global financial services group, HSBC Bank Malta plc enjoys a full range of support from its parent. Apart from having introduced more prudent classification and provisioning policies on the island, it has well-functioning credit policies while continuing to offer its support and increased focus on the corporate sector as well as on retail and small and medium-sized companies. In the coming years, banks in Malta should embrace new opportunities such as in the private pensions sector, once the interface between state and private pension provision has been legislated upon. While banks will no doubt continue to be active to develop strategic responses to the various new developments that are bound to present themselves in future, the biggest challenge will remain how to deepen the domestic capital market further.
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3.3
Monetary Policy Central Bank of Malta
The Central Bank of Malta is responsible for carrying out monetary policy in Malta. According to the Central Bank of Malta Act, which governs the conduct of the Bank, the primary objective of monetary policy is price stability. Price stability is widely seen as the proper goal of monetary policy, essential to encouraging sustainable economic growth. Without prejudice to its primary objective, the Bank is called upon to promote orderly and balanced economic development and to ensure the stability of the financial system. This goal of price stability is achieved through an exchange rate peg, which is the intermediate target the Central Bank uses in its conduct of monetary policy. An exchange rate peg has been the fulcrum of monetary policy in Malta since the establishment of the Bank in 1968. Initially, the Maltese lira was pegged to sterling, reflecting Malta’s historic links with the United Kingdom. From May 1972 onwards, the Maltese lira was pegged to a basket of currencies of its major trading partners. Today, the Maltese lira basket is made up of the euro, sterling and the US dollar, with weights of 70 per cent, 20 per cent and 10 per cent respectively. Weights are mainly based on Malta’s international trade patterns. Malta’s economic characteristics make the choice of an exchange rate peg as the intermediate target of monetary policy particularly appropriate. Malta is an extremely small open economy, with imports and exports each amounting to around 100 per cent of GDP. It is, therefore, a price-taker on world markets and cannot influence its terms of trade by changing the nominal exchange rate. A pegged exchange rate limits imported inflation, thereby contributing directly to price stability given the important share of imports in Malta’s consumption patterns. Moreover, a pegged exchange rate helps to discipline Maltese price and wage setters. Although a fixed exchange rate regime exposes the economy to external shocks, this consideration is less important in Malta’s case since its economy is already highly integrated with that of the EU. This supports the policy of pegging the lira to a basket dominated by the euro and sterling.
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The governor of the Central Bank is responsible for taking decisions on the monetary policy stance. In taking these decisions, the governor is advised by a Monetary Policy Advisory Council (MPAC), which is made up of the governor himself, the deputy governor, the remaining three members of the Bank’s board of directors and three other senior officials of the Bank. The MPAC meets monthly to examine a wide range of economic and financial indicators before making its recommendation on the level of official interest rates. The benchmark official interest rate is the central intervention rate, which currently stands at 43.75 per cent. A sizeable portfolio of official external reserves backs the exchange rate peg. In terms of the Central Bank of Malta Act, the level of external reserves held by the Bank must not be less than 60 per cent of its currency and deposit liabilities. As at the end of 2002, official reserves stood at 143 per cent of the monetary base and this ratio has rarely fallen below 100 per cent. The Bank stands ready to intervene in the foreign exchange market by buying and selling foreign currency at the official exchange rate in response to market conditions. The Bank buys or sells spot foreign currency against the lira at a fixed spread of 0.25 per cent. In the forward and swap market, the Central Bank only participates when the deals cannot be cleared in the interbank market. In 2002, foreign exchange deals against the Maltese lira totalled approximately €6 billion, representing 145 per cent of GDP. In order to ensure that short-term interest rates in Malta are in line with the Bank’s monetary policy objectives, the Bank conducts open market operations each week, injecting or absorbing funds for 14 days. Open market operations are conducted within a narrow band set by the MPAC, currently at between 3.70 and 3.80 per cent. When the market is forecast to be in surplus the Bank offers a term deposit auction in order to mop up this excess liquidity. On the other hand, when the market is forecast to be in need of liquidity, a reverse repo is offered in order to inject funds against collateral, which takes the form of Malta government securities. When temporary liquidity needs are not satisfied in the interbank market, banks can make use of an overnight lending facility against collateral. The Central Bank charges an overnight lending rate, which is 55 basis points above the central intervention rate. Excess liquidity that is not absorbed by the market can be deposited overnight with the Central Bank. The interest rate on this facility is 295 basis points below the central intervention rate, ie 0.80 per cent. The Central Bank also imposes minimum reserve requirements on credit institutions in order to control the growth of credit and the money supply. The minimum reserve requirement is determined by applying a percentage (currently 4 per cent) on credit institutions’ deposit liabilities. The minimum reserve requirement has to be held on average over a
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month-long maintenance period.1 The balance on the settlement account is remunerated at the fixed rate of 2.7 per cent. No interest is paid on the excess in the reserve requirement, while a penalty, currently fixed at 8 per cent, is charged on the shortfall in the reserve requirement at the end of the maintenance period. The required reserve ratio can be changed in order to complement the Bank’s monetary policy stance. For example, the Bank may lower the required reserve ratio to ease the monetary policy stance. The required reserve ratio was last changed in September 2001, when the Bank lowered it from 5 per cent to 4 per cent. To a limited extent, exchange controls support the exchange rate peg. However, the Maltese government has embarked on a programme of exchange control liberalization, as part of the reforms being undertaken in view of Malta’s membership of the EU. With the complete removal of exchange controls, the Central Bank would lose its ability to determine interest rates autonomously. Given the fact that the exchange rate peg is the nominal anchor of monetary policy, interest rates in Malta would have to move in line with interest rates abroad. Broad money, M3, which consists of currency in circulation and residents’ deposits with the banking system, expanded at a faster pace during 2002. M3 increased by €697.6 million, or 10.4 per cent, between January and December, with time deposits accounting for around threequarters of the increase. Demand for bank deposits on the part of households and private firms was strong. Monetary expansion was driven mainly by growth in the net foreign assets of the banking system, which went up by €522.6 million, or 19.7 per cent, during the year. Privatization receipts and portfolio investment flows boosted the Central Bank’s external reserves and the net foreign assets of the rest of the banking system. In contrast, domestic credit increased at a slower pace, rising by €188.6 million, or 3.3 per cent, during the period. A deceleration in economic activity, more prudent bank lending policies and the development of the capital market as an alternative to bank finance are likely to have contributed to the deceleration in credit growth.
Capital market The 1990s were dominated by liberalization in the financial sector – interest rate ceilings were abolished, the banking system was privatized and the Malta Stock Exchange was set up in 1991. The establishment of the Malta Stock Exchange was a milestone in the development of the Maltese capital market. 1 The maintenance period runs from the 15th of each month and ends on the 14th of the following month.
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Trading on the Malta Stock Exchange commenced in January 1992, providing a wider range of financial products to investors and alternative sources of finance for companies from all sectors of the economy. As at the end of 2002, the number of investor accounts on the Central Securities Depository (CSD) of the Malta Stock Exchange was over 143,000, representing almost 60,000 individual account holders spread over different types of securities excluding collective investment schemes. Market capitalization excluding collective investment schemes as at the end of 2002 reached just under 3.8 billion, representing 95 per cent of GDP.
Government bonds During the 1990s, the government borrowed heavily from the domestic market in order to finance its budget deficit. As at the end of 2002, there were 36 different issues of government stock with residual terms to maturity up to 17 years, almost half of which were held by credit institutions. Market capitalization of government bonds was €2.1 billion, or 52 per cent of GDP, as at the end of 2002, representing an increase of €53.6 million over the previous year. Government bond yields are above corresponding yields in the United States, the United Kingdom and the euro area. For example, at the end of 2002, the yield on a fiveyear bond was 15 per cent, or 172 basis points above the weighted average yields of similar instruments denominated in the peg currencies. The Treasury is expected to consolidate the number of Malta government stock issues through the issue of fungible stock in order to give greater depth and liquidity to the market.
Corporate bonds Over the years, the popularity of corporate bonds has been increasing. As at the end of 2002, there were 23 listings on the Malta Stock Exchange with market capitalization amounting to €381 million, representing 9.5 per cent of GDP. A number of corporate bond issues are expected to be listed on the Malta Stock Exchange early in 2003.
Equities As at the end of 2002, there were 13 listings on the Malta Stock Exchange, of which one was listed on the Alternative Companies List. Total market capitalization as at the end of 2002 was €1.3 billion, representing 32.7 per cent of GDP. Turnover in listed equities picked up strongly in the late 1990s, rising from €43.3 million in 1995 to €322.9 million in 1999. However, investors subsequently switched to alternative assets and turnover in equity for 2002 totalled just €50.6 million. Hence, turnover as a percentage of GDP fell from 9.3 per cent in 1999 to 1.2
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per cent in 2002. The Malta Stock Exchange share index peaked in January 2000 and then, in line with developments in capital markets overseas, declined steadily. The index as at the end of September 2002 stood at 1,870.91, representing a fall of around 51 per cent from its peak.
Collective investment schemes In October 1995, the first collective investment scheme was listed on the Malta Stock Exchange. This scheme was an open-ended investment company operating as an umbrella fund together with two sub-funds. In the late 1990s, the popularity of collective investment schemes increased and by the end of 2002 there were 56 funds listed on the Malta Stock Exchange with total market capitalization reaching €2.5 billion. In addition, 321 funds have obtained a secondary listing on the Malta Stock Exchange.
International credit ratings International credit ratings assess the capacity of a country to meet its foreign currency and local currency commitments and give an indication of the creditworthiness of governments, thereby enabling them to tap into international capital markets more easily. Three credit rating agencies – Standard & Poor’s, Moody’s and FitchRatings – provide ratings on Malta’s sovereign risk. They base their ratings after analysing political, social and economic factors. Table 3.3.1 Malta’s international credit ratings Credit rating agency
Foreign currency Long-term Short-term
Local currency Long-term Short-term
Standard & Poor’s (1) FitchRatings(2) Moody’s(3)
A A A3
AAAAA3
A-1 F1 Prime 2
A-1+ n/a n/a
Notes: The ratings were assigned on the following dates: (1) 20 September 2002 (2) 29 August 2002 (3) 1 August 2002.
All rating agencies give Malta investment grade ratings, denoting low credit risk and a strong capacity for timely payment of local and foreign currency financial commitments. The ratings outlook is expected to improve further as fiscal policy is tightened and the country pursues structural reforms as part of its drive towards EU membership.
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3.4
Insurance Business Dr Anton Felice, Malta Insurance Association
With a Maltese population of less than 400,000, the size of the insurance market in Malta is understandably modest, yet it is a developed market which has responded well to the needs of a small but demanding economy.
Non-life insurance In 2001, the gross insurance premium for non-life business was Lm 39 million and it is estimated that it will have exceeded Lm 41 million in 2002. Non-life premiums are shared among 17 companies.
Motor insurance Motor business showed modest growth in 2001, with gross premiums of Lm 18.8 million compared to Lm 17.9 million in 2000. Premium income for 2002 is estimated at Lm 21 million. Motor remains the most important class of non-life business in terms of premium volume, accounting for 48 per cent of the non-life market. Its proportion has hardly changed since 1998 when it stood at 49 per cent. Motor also continues to remain a loss-making class of business, even though the net claims to premiums ratio has improved slightly. In 2001, this stood at 80 per cent compared to 86 per cent in 1999. The negative underwriting losses are due to a constant escalation in claims costs coupled with the competitive nature of the business. The competition is diminishing with 12 companies vying for this business today, compared to 18 in 1998. Motor underwriting has also hardened and there are indications that the loss ratio for 2002 has further improved. Burgeoning injury awards and an inflationary trend in the cost of vehicle repairs are of concern to insurers. Both concerns are being addressed, with legislation that will regulate injury assessments and market pressures to stabilize repair costs.
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Marine, aviation and transit insurance The demand for marine, aviation and transit insurance showed the greatest decline from Lm 2.7 million in 2000 to Lm 2.2 million in 2001. This decrease has to be understood in the context of the potential for this cover being placed directly overseas, thereby escaping local statistical analysis.
Accident insurance There has been a 12 per cent increase in premium income for accident insurance. Premium income reached Lm 7 million in 2001 compared to Lm 6.3 million in 2000. This class accounts for 18 per cent of the total premium written in 2001 for non-life business. 2001 figures for personal and commercial accident insurance business have shown a healthy increase. The same positive results do not extend to health insurance business however. In this sector, the net claim to premiums ratio is still in the red as it has been in recent years, and stood at 83 per cent in 2001. Some corrective action seems to have been taken in 2002, but it remains a loss-making business.
Property insurance The total property premium income for 2001 amounted to Lm 7.3 million compared to a premium of Lm 6.8 million written during the previous year, showing an increase of 6 per cent. Property insurance includes engineering, electronic equipment, home and industrial all-risks policies. Property insurance premium income amounts to 19 per cent of the total non-life premium income for 2001.
Life insurance Market concentration is more noticeable in life insurance, which is dominated by local indigenous companies the largest of which is Middle Sea Valletta Life Assurance Company Limited. Other companies include HSBC Life Assurance (Malta) Limited, Citadel Insurance plc and British American (Malta) Company Limited. Until 2000, demand for life insurance had shown a healthy growth, climbing from a premium income of Lm 16 million in 1998 to Lm 34 million in 2000. Demand slowed in 2001 when premium income reached Lm 35 million. This development is probably not unconnected to the negative investors’ sentiment that has prevailed since 2001. There is however potential for further growth once changes in legislation permit private retirement schemes to supplement state pensions.
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Pensions The new retirement funds legislation is intended to encourage private retirement schemes. However, this legislation requires meaningful implementation and currently social security legislation continues to discourage privately financed occupational retirement schemes. It is understood, however, that the government is addressing this issue and is considering appropriate fiscal incentives for those individuals who wish to supplement their existing state pension with private schemes.
Insurance legislation Insurance business in Malta is conducted under the supervision of the Malta Financial Services Authority (MFSA) within the terms of the Insurance Business Act of 1998 and the Insurance Brokers and other Intermediaries Act of 1998. The Insurance Business Act of 1998 replaces the former legislation of 1981. Its main purpose is to regulate the carrying out of insurance business in or from Malta, the maintenance of adequate regulatory standards and the protection of policyholders. The Insurance Business Act of 1998 provides for the supervision and regulation of activities carried out by insurance companies, insurance bodies such as Lloyds, insurance agents, brokers and managers.
Local companies Before commencing business, locally registered insurance companies are required to obtain authorization from the MFSA. Authorization is generally dependent on minimum propriety and financial requirements. These include the requirement for a locally registered company to possess unencumbered own funds of not less than Lm 1 million. However, where the company is set up to carry out re-insurance business, or combined business, the value of own funds must reach a minimum of Lm 2 million or Lm 3 million, depending on whether the business relates to risks situated in Malta or otherwise. The law no longer recognizes composite insurance companies. This means that insurance companies can no longer carry both life and nonlife business other than personal accident, health and reinsurance. An insurance company must also maintain a margin of solvency and submit proof that the minimum guarantee fund requirement has been deposited. Most of these financial requirements are tailored on European insurance directives.
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Foreign companies There are also authorization requirements in respect of companies whose head office is outside Malta. These require that the foreign company has a physical presence in Malta through a branch or an insurance agent, and possesses the statutory own funds together with certain prescribed assets in Malta. These requirements will be eliminated for companies whose head office is in the European Union if Malta joins the EU. Foreign companies are also required to maintain adequate technical provisions as well as equalization reserves, including those for catastrophe risks. Such reserves are allowed deductions for tax purposes. Special provisions relate to the operations in Malta of Lloyds. Among these is a provision which requires that the Lloyds representative should have judicial representation for each syndicate.
Policyholders’ Protection Fund The approach to policyholder protection is emphasized through the MFSA’s monitoring and scrutiny of the solvency margins of insurers. Other arrangements strengthen policyholder protection by ensuring that private policyholders are not subjected to the risk of insolvency. Such protection rests firstly on MFSA’s powers of intervention, and secondly on a safety net of funds, financed by compulsory contributions from all insurers, whenever an insurer becomes insolvent. There has not been any massive insolvency that has necessitated levy payments by other insurers. The Policyholders’ Protection Fund or, as it was known before, the Security Fund, continues to oversee the liquidation of Black Sea and Baltic General Insurance Company Limited and Independent Insurance Company Limited. If, as is likely, the funds held in Malta by these two insolvent companies are sufficient to meet their liabilities, it will be unnecessary for the Fund to make any payments to policyholders.
Insurance intermediaries The status of an insurance agent who exercises underwriting authority on behalf of an authorized insurer is identical to that in European directives. Insurance brokers, on the other hand, are independent intermediaries generally acting with complete freedom in the placement of business on behalf of their clients with authorized insurers. The insurance manager is an ancillary provider of management services to an insurer or an insurance broker.
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In order to be authorized to act as an insurance agent or broker, the company must possess unencumbered own funds amounting to not less than Lm 25,000. Supplementary requirements include: l the separate retention of monies held in a fiduciary capacity, and
their privileged status in favour of policyholder’s rights; l rules governing misleading advertising, and the enrolment of insur-
ance sub-agents; l a statutory requirement for these insurance intermediaries to be
covered by a policy of professional indemnity.
Taxation of insurance companies Life insurance companies are taxed on the profits attributable to shareholders plus the surplus in the life funds. In other words, income generated within long-term insurance funds (ie policyholders’ funds) are allowed to accumulate tax free; however, tax at the rate of 15 per cent is payable by the insurance company on the profits made by the insured in the event of a maturity or surrender of a long-term contract of insurance. No such tax is payable however with regard to a lump sum payable upon death. As regards the taxation of general business, the law defines the items of income and deductions for the determination of chargeable income. These include all technical reserves that should be maintained under the Insurance Business Act of 1998. In addition, non-resident insurance companies carrying on insurance business in Malta are taxed on the actual profits from their Malta operations, which include income from investments held outside Malta to back Maltese business. Where this income cannot be readily ascertained, it is determined on the basis of the worldwide investment income in the proportion that investment held outside Malta to back Maltese business bears to worldwide investments. Malta’s tax system contains various features which are attractive to operators who are interested in establishing insurance underwriting companies and insurance management companies in Malta. Certain tax benefits are also extended to expatriates with such companies. Anyone who is interested in establishing such companies should seek professional tax advice in Malta.
Linked long-term insurance products Since these products are basically investment products with marginal life assurance content, policyholders are given a tax treatment which is similar to that of investors in collective investment schemes.
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In this way, capital gains earned upon the maturity or surrender of certain qualifying linked long-term products are chargeable at the rate of 15 per cent and this is withheld at source. Where the benefits of a linked insurance product are determined by reference to certain securities listed on the Malta Stock Exchange, the relative transfer, including maturity or surrender of such a product, is exempt from tax. As in the case of a conventional life insurance product, no tax is chargeable on receipt of a lump sum on death.
Compulsory motor insurance As in all other European countries, every motorist must be covered for liability to third parties in respect of bodily injury and property damage. So far, the compulsory compensation level is fixed at Lm 50,000 for property damage and is unlimited for third-party injury. However, the legislation is being amended to set minimum thresholds to third-party cover and to align the motor compulsory insurance law with all four EU motor insurance directives. Motor insurers are part of the European ‘Green Card’ network, which provides for the reciprocal recognition of motor insurance cover in Malta and across Europe. They also participate in the Motor Insurers’ Bureau, which is a fund for the compensation of uninsured victims of traffic accidents, and participate in an Undesired Risk Pool in respect of thirdparty liability insurance for public transport vehicles.
Future developments 2003 has been a year of major developments for Malta. It has been the culmination of many legislative changes which have brought Malta in line with the EU directives in view of its anticipated accession to the European Union. These changes transcend insurance supervisory law and embrace many aspects of insurance business such as fair contract terms, personal data protection, money-laundering and competition law. These fundamental changes have pushed and will continue to push insurers to a series of adjustments that are inevitable as the market becomes increasingly competitive and consumer oriented. There have already been a series of withdrawals, mergers and acquisitions which has concentrated the market among fewer players. Difficult market conditions worldwide will lead to other adjustments including the further concentration of business among existing and newly established indigenous companies.
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3.5
Investment Funds and Investment Services Angela Carabott, Valletta Fund Management Limited
Following laws enacted by the Maltese parliament in 1994, the financial services sector attracted a number of local and international companies in areas such as banking and investments. New legislation enacted at the time included laws relating to the prevention of money laundering, insider dealing, investment services, professional secrecy, banking, companies, taxation, trusts and insurance. While regulation relating to certain sectors such as banking, commercial partnerships and insurance was in force prior to 1994, regulation in relation to other sectors (particularly the provision of investment services) was rather limited before that date. In the wake of the 1994 enactments, Malta has seen a gradual but steady growth in the investment services sector. ‘Collective investment schemes’ is the common term used to describe the various types of investment vehicle that may be used for investment business. These schemes are regulated by the Investment Services Act of 1994. The sources of the Act and related regulations draw from UK legislation as well as EU directives relating to investment services and to the establishment of UCITS. In order to keep abreast of developments in the international scenario, the Maltese legislator has recently updated the Act and related guidelines. These amendments came into effect in October 2002. The competent authority responsible for the licensing, regulation and supervision of collective investment schemes is the Malta Financial Services Authority (MFSA). In establishing a legal framework in line with that prevailing in Europe and the United Kingdom, the intention of the Maltese legislator was to ensure that the provision of investment services is of a high calibre, thus ensuring the protection of the investor, the protection of the reputation of Malta and the best economic interests of Malta. In essence, therefore, Malta’s accession to the EU in 2004 means that investment services regulation already meets the standard of that prevailing across Europe.
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The introduction of the Act in 1994 provided the necessary legal framework for the establishment of collective investment schemes in or from within Malta. The Act provides scope for a very broad definition of collective investment schemes, embracing corporate schemes such as open- and closed-ended investment companies, investment partnerships and mutual funds and other non-corporate vehicles, namely unit trusts. Incentives were also created to attract the required management and administrative expertise to support Maltese funds. By way of example, investment services companies licensed to provide management, administration, safe keeping or investment advice to collective investment schemes are allowed 200 per cent deductions for tax purposes with respect to building occupancy costs for the first 10 years and on salaries paid to Maltese staff for the first 10 years. Tax relief also became available on excess funds invested by investment services companies in their own collective investment schemes within authorized limits. One of the first entities to take advantage of this new regime was Valletta Fund Management Limited, a joint venture between Bank of Valletta plc, the parent company of one of Malta’s major banking groups, and Rothschild Asset Management Limited,1 which is part of a leading UK independent merchant banking and asset management organization. This company was in fact the first company of its kind to be licensed by the MFSA to conduct investment services business for collective investment schemes. Collective investment schemes have today become one of the main investment vehicles for the investing public. Other local fund management houses that regularly launch investment products in Malta include HSBC Fund Management (Malta) Limited. These companies offer a range of locally based schemes that invest in both Maltese and international markets. In the meantime, Malta has also experienced a considerable number of primary and secondary listings of overseas collective investment schemes on the Official List of the Malta Stock Exchange. In order to seek a listing on the Malta Stock Exchange, a collective investment scheme must first obtain a licence under the Act. Through specific continuance provisions within the Act, it is also possible for funds established in other countries to re-establish themselves in Malta while maintaining the same legal personality. A total of 59 locally-based schemes with over €600,000 million in funds under management are licensed by the MFSA. In addition there are also 296 overseas-based funds that are licensed to operate in Malta. As a result, both the Maltese investment service provider and the Maltese investor have gone through a steep learning curve. The array 1 This company has now changed its name to Insight Investment Management Holdings (Malta) Limited following the acquisition of Rothschild by the Insight Group.
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of funds available in Malta today cater for different investor requirements. In addition, the funds industry has experienced rapid systems development to meet the increasing demands of an expanding administrative infrastructure. This has been driven by increasingly sophisticated local investors as well as an increase in international business such as third-party administration services. Competition among the large players involved in the fund industry in Malta is fierce. International concerns such as Barclays, Lloyds, Bank of Ireland, Fidelity, UBS, Five Arrows and HSBC, among others, together with local names such as Valletta Fund Management and Lombard, all offer their own range of funds tailored to meet the different requirements of investors. However, from a provider’s point of view, the conditions for sustainable success in the Maltese investment sector are nothing short of ideal – a market that belies the size of the population, an extremely efficient tax framework for investment services providers and for consumers of investment products, competitive cost structures and an excellent understanding of surrounding European and other Mediterranean markets. It is for this reason that the Maltese are now looking outwards and seeing the surrounding region as the next big opportunity for growth in business. The pattern for outward expansion has already been set. A number of foreign asset management companies and corporate service providers with an international clientele are already established within the Maltese environment, the authorities have streamlined the regulatory framework for back-office fund administration services and the subcontracting business in fund administration services has taken off. In the authors’ opinion, all the necessary infrastructure – a sound legal framework, an advanced telecommunications system and well-trained personnel – is in place and a great deal of effort has been made to instil in the finance industry the level of confidence and outlook of an international player. The regulatory framework for administration services is based on a set of legal provisions and guidelines that lay down the requirements for obtaining operating clearance. Fund administration services may only be provided in or from Malta by ‘recognized persons’, ie persons that are deemed fit and proper to carry out this type of business either by the Maltese financial authorities or by home country regulators (in the case of recognized jurisdictions). Companies that carry on pure management operations such as routine administration services, book-keeping and accounting services, information and data-processing services, database and computer outsourcing services to local or foreign financial services companies would only require a formal approval. No investment services licence would therefore be required unless, along with simple administration
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services, such companies intend carrying out discretionary or trustbased services such as investment advice, handling client money and other licensable activity as defined by the Act. Companies providing back-office services may be set up as international trading companies within the parameters of Malta’s efficient tax framework and tax treaty network. A recent development related to the provision of investment products is the introduction of legislation intended to regulate schemes and funds aimed at providing retirement or pension funds. The legislation in question is referred to as the Special Funds (Regulation) Act and it lays down the foundations for the development of the retirement/pension fund sector in Malta. Hence, at the time of writing, the pension fund market is still a virgin ground, although the legislation has already attracted interest from both the local and the overseas market. The development of the pension fund industry will definitely benefit the Maltese financial community since the regulatory framework has until now been lacking despite an evident demand for this type of product. In addition, it is a regulatory requirement for such retirement schemes to have a scheme administrator as this not only ensures better regulatory control on the administration of such funds but also gives further scope to firms in the fund administration business. The collective investment schemes currently available in Malta are predominantly of a retail nature and are thus available to the general public. Such retail funds need to appoint a manager and custodian who are independent of the collective investment scheme. The management company is expected to have a place of business in Malta, while the custodian is required to be incorporated and have a place of business in Malta. Overseas custodian arrangements may however also be considered by the regulator as part of the overall set up of the operation. However, the legislative framework also allows for the establishment of professional investor funds. These investment vehicles are intended for professional and high-net-worth investors termed ‘authorized investors’ and require a minimum investment amount per investor of at least US$100,000, having a minimum net worth of US$1 million in assets. These two requirements are the main features distinguishing professional investor funds from retail funds. As professional investor funds are aimed at professional investors, the information and documentation required for the establishment of one is kept to a minimum. In substance, a professional investment fund is not subject to any restrictions on investment and borrowing powers. Recent tax legislation in Malta classified collective investment schemes as either prescribed or non-prescribed funds. Essentially, a prescribed fund is one which has 85 per cent or more of its assets situated in Malta, while a non-prescribed fund is any other fund being an overseas fund which has less than 85 per cent of its total assets situated in Malta.
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Investment income derived by prescribed funds is subject to a 15 per cent final withholding tax in the case of bank interest and 10 per cent in the case of some other types of investment income. No such tax is withheld on investment income received by non-prescribed funds. Collective investment schemes licensed in Malta incur no stamp duty on share issues or transfers, no tax on the net asset value of the scheme, no withholding tax on dividends paid to non-residents of non-prescribed funds, no taxation on capital gains on the sale of units by non-residents out of non-prescribed funds and no taxation on capital gains on the sale of units held in prescribed funds by residents provided such units are listed on the Malta Stock Exchange. It is clear that the market for collective investment schemes and investment services in Malta is progressing well. Malta has the necessary regulatory and economic make-up for the establishment, management and administration of collective investment schemes and provides sound opportunities for both existing and potential operators alike.
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3.6
Case Study: Blevins Franks William Boyle
David Franks is not a man given to exaggeration. His business, Blevins Franks Group, has grown in 28 years to be a much-respected specialist adviser and fund manager by giving clients advice based on sound analysis and sober judgement. So, when Franks speaks about Malta as a business location, people tend to give his views high credence. Blevins Franks has offices in the United Kingdom, France, Spain, Portugal, Cyprus and Malta. The Malta operation was established in 1998 to carry out the back office functions of the business previously carried out in Guernsey and London. Forty-five locally recruited staff run the operation, overseen by Franks, who, having picked Malta as a business location, decided to make the country his family’s home. By the mid-1990s, Blevins Franks was finding it difficult to grow its business in Guernsey, where its Offshore Trust was based. In addition, some administrative functions then based in London could be delivered more economically by being carried out in the same location as the Trust, so the search was on for a jurisdiction that could meet Blevins Franks’ demanding needs: l English in common everyday use as a business language; l ability to visit from London and return on the same day; l tax environment not detrimental to offshore trusts; l good pool of well-educated labour; l ideally with legislation in English.
Franks arrived at a shortlist of three countries: the Isle of Man, Switzerland and Malta. Switzerland, his original front-runner, lost out on labour costs, which Franks says are ‘exorbitant’. ‘London has the reputation of being one of the world’s most expensive cities and it is, but the cost of staff in Switzerland would have been
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simply untenable for our business. Hiring a secretary, for example, would be at least double the cost of London.’
Warm welcome ‘Malta almost picked itself after that,’ says Franks. His analysis of what was happening on the Isle of Man showed that its financial services economy was heating up and he judged that it too would soon suffer similar cost and labour problems to the Channel Islands. The passage of time showed him to be correct. Franks says that the warmth of the Maltese welcome and the practical guidance he got from government and the regulator allayed any lingering anxieties he might have had. ‘The company was putting a great deal of investment into creating a specialist back office operation and the Board was being asked to put a great deal of faith in my judgement and recommendation. Finding the Maltese authorities not only supportive but also mature and realistic about the island’s strengths and weaknesses was very encouraging. No country has a perfect infrastructure, but Malta works very well and I find everyone very good at getting around a particular problem. The institutional support has been very good.’ Blevins Franks’ Malta operation really did start from scratch. Because of the nature of its business, locally recruited staff had to be specially trained. This was achieved through internal sessions run by the company and externally via such courses as the International Capital Qualification. Franks believes that the experience of starting from a clean sheet was hard work but ultimately very rewarding. ‘In Malta our people have been excellent. They are well motivated, hard working and keen to progress.’ What Blevins Franks now has in Malta is an operation that works efficiently and at less cost to the business. Franks estimates that labour costs are up to 60 per cent less than those in the United Kingdom and property costs – both commercial and residential – significantly less than most major European centres, including London and the Channel Islands. The cost of international telecommunications has historically put Malta at a competitive disadvantage, but the arrival of full competition in the local marketplace and the appointment of a telecommunications regulator with statutory powers are driving prices down. ‘Lower telco prices will obviously benefit us and should be an added incentive for more finance businesses using Malta as a back office location,’ says Franks.
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Setting standards Continuing education and training in the financial services sector receives a great deal of deserved attention from the Malta Financial Services Authority (MFSA). ‘Having the highest possible standards in finance sector education and training makes Malta a more attractive location for mobile investors, gives investors and their customers greater confidence and shows the world that Malta deserves its place in the premier league of small finance centres,’ says Professor Joe Bannister, Chairman of the MFSA. Endorsing Bannister’s view, Franks says, ‘We are advising individuals on their investments and then managing the administration of investment vehicles. It’s of fundamental importance to us that Malta is a stable country and has a good international reputation in general, and in financial services in particular. Where we manage our administration from sends signals into the marketplace. We’ve had nothing but positive feedback about Malta.’
Peace of mind For Franks, Malta’s legal and regulatory framework gave him added peace of mind. He describes the regulatory regime in Malta as well established and not overly bureaucratic. Malta also has the benefit of having two official languages – Maltese and English – and financial services legislation very closely modelled along EU directive lines. Business is usually carried out in English and all the legislation relevant to financial services is translated into English. Guidance notes and directives from the MFSA are always in English. Blevins Franks’ structure in Malta gives it economies of scale, builds local expertise across all its activities and there is no tax downside for the firm. Malta is not actually an offshore jurisdiction but the tax position is not in any way detrimental to Blevins Franks’ Trusts and the tax environment is generally favourable to foreign businesses. Franks is a successful man who with his partners has built a substantial business operating in six European countries. At the age of 54 he has the means and the freedom to live anywhere of his choosing. But he has made Malta his home and that has given him a real insight into how the country works and into its customs, culture and habits. ‘The Maltese are a people of great contrasts. Professionally they are as good as any other advanced European country. They are an extremely hardworking people and very able as business people. Most things work well in Malta. It’s really an advanced City-state. It is also a land of traditional values. Families matter in Malta and few things are more important than the many festas in homage to parish saints, but still
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the work gets done. Commercially Malta has worked well for Blevins Franks and as a family we have been welcomed with open arms.’ As an experienced international businessman, Franks has been watching with interest the emergence of some Maltese finance businesses on to the international stage. The two leading forces in the overseas drive have been Bank of Valletta and Middlesea Insurance. ‘It’s never easy breaking into new markets and to other local concerns that want to expand beyond Malta I’d advise looking at a range of options and then deciding what’s right for you. It might be to appoint an agent, open a representative office, start a joint venture with a local player or buy up an established local concern. But stay aware that any overseas expansion needs a great deal of management time.’ Franks’ advice is likely to be carefully listened to in Malta. The local market for financial services is maturing rapidly and many local businesses are looking to the European Union, to the Middle East and to North Africa for business expansion. It is a future that looks like one of Maltese firms venturing beyond national boundaries for growth and internationally mobile financial services projects moving jobs and functions into Malta to enjoy the benefits that Franks has already won for his own business.
Part Four
Getting Established: the Taxation and Legal Environment
4.1
Business Structures AVMT Advocates
Corporate structures and tax-efficient vehicles for non-residents Maltese company and financial services legislation experienced a radical overhaul in 1995. This restructuring established Malta as an international financial services centre equipped with up-to-date legislation largely modelled on UK legislation. The same period also witnessed change in the fiscal treatment of companies owned by non-residents, in order to better reflect Malta’s status as a regulated onshore centre implementing a strong and comprehensive regulatory regime.
Limited liability company Under the Companies Act of 1995, a company may be formed for any lawful purpose and may be either a private or a public company. Under Maltese law, a company is formed by means of capital divided into shares held by its members. The company is vested with a distinct legal personality from the moment it comes into existence, which is the date of its registration. Such separate legal personality continues to exist until such time as the company is struck off the register following dissolution and winding up. In fact, the members’ liability is limited to the amount, if any, of any unpaid issued share capital. The major effect of separate personality under Maltese law is that each company enjoys rights and is subject to liabilities that are distinct from the rights and liabilities of its members. A company can therefore own property, can sue and be sued, and can enter into obligations in its own name. A Maltese company thus has a life that is independent of its
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members. The notion of separate personality is the rule and it is only in very exceptional cases that this separation is set aside.1
Formation and registration of companies In order for a company to be validly constituted, a memorandum and articles of association must be entered into by at least two persons and a certificate of registration must be issued by the Malta Financial Services Authority (MFSA) in respect thereof. The memorandum and articles of association constituting the company are forwarded to the registrar of companies for registration. Evidence, in the form of a deposit slip showing that the paid-up share capital of the company has been deposited with a local bank, must be produced. Upon registration, the registrar will issue a certificate of registration, certifying that the company has been officially incorporated. A record of all company registrations is available for public inspection. A company may be registered by the company’s promoters, prospective shareholders or their authorized agents. In addition, local consultants may be engaged to carry out all necessary formalities, which in standard situations should not take more than a few days. Although the minimum number of shareholders is normally two, single-member companies may also be registered. Every company must have at least one director and a secretary. Company shareholders and directors may be natural or corporate persons. Nominee shareholding is also possible through the services of a local nominee company licensed by the MFSA. The secretary must be an individual but no specific qualifications other than that of general competence is required. Every company registered in Malta must have a registered office in Malta. In every calendar year, each company must hold an AGM of shareholders. Annual returns are to be filed by all companies. Annual returns must be sent to the registrar of companies, accompanied by a payment of between €125 and €635 depending on the company’s authorized share capital.
1 (i) Where the shareholders of the company are reduced to below two for a period that exceeds six months; (ii) As a remedy for fraudulent and wrongful trading; and (iii) Groups of companies may be viewed as a single entity for fiscal or accounting purposes.
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Private and public companies Every company must in its memorandum and articles of association state whether the company is private or public. The Companies Act defines a private company as one which by its memorandum or articles restricts the right to transfer its shares, limits the number of its members to 50 and prohibits any invitation to the public to subscribe for any shares or debentures of the company. The Act does not elaborate on the term ‘public companies’ and limits its definition of such companies to stating that a public company is one that is not a private company. Public companies may be listed on the Malta Stock Exchange.
Fiscal treatment of Maltese companies A company registered in Malta is liable to pay tax in Malta on its worldwide income, while a company that is registered, controlled and managed outside Malta but operates in Malta is only taxable in Malta for income and capital gains arising in Malta. As a rule, all Maltese companies are taxed at a flat rate of 35 per cent. Malta’s wide network of double taxation agreements, as well as other methods for relieving double taxation on cross-border transactions, provides an excellent basis for establishing tax-efficient structures, in particular through the formation of international trading and holding companies. International trading and holding companies are normal onshore Maltese companies having their status recognized only for tax purposes.
International trading company (ITC) Malta’s full imputation system of taxation and the refund of tax provisions, found in the Income Tax Act and the Income Tax Management Act, allows non-resident shareholders to benefit from a very taxefficient vehicle – the international trading company (ITC). An ITC may be defined as a company registered in Malta which is engaged solely in carrying on trading activities from Malta but not in Malta, with individuals who are not resident in Malta, and which has its objectives expressly limited to such trading activities as well as to such acts and activities as are necessary for the conduct of its operations from Malta. An ITC may: l purchase for export goods manufactured, assembled or processed in
Malta provided that such purchases are not made from an individual
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who owns, either directly or indirectly, more than 15 per cent of the ordinary share capital of the said international trading company; l trade with companies registered in Malta under the Malta Financial
Services Centre Act of 1994; l trade with other ITCs registered in Malta; l manage resident companies whose business is restricted to affiliated
insurance conducted exclusively with individuals who are not resident in Malta; and l provide services to collective investment schemes resident in Malta
but marketed exclusively outside Malta and licensed under the Investment Services Act. An ITC’s fiscal status is guaranteed through the issue, by the International Tax Unit, of an Advance Revenue Ruling. Such a ruling establishes whether or not the company qualifies as an ITC and guarantees the company’s tax position for a minimum period of five years. The ruling may be renewed for further five-year periods. Advance Revenue Rulings survive any changes in law for a period of two years after the entry into force of any such new law.
Fiscal treatment of ITCs Through a relatively straightforward structure, described below, the total tax payable by the ITC and its shareholders is limited to 4.17 per cent on all profits earned. The structure works as follows. An ITC is taxed at a rate of 35 per cent on all company profits. Such a company cannot operate a foreign income account since all of its income is foreign. Therefore, an ITC can benefit from all forms of relief from double taxation which exist under Maltese law other than flat rate foreign tax credit relief, which form of relief is dependent on a company having a foreign income account. Therefore, an ITC is, on the first level, taxed in the same manner as an ordinary Maltese company; however, its status provides certain benefits. Where non-resident shareholders or Maltese-registered companies that are wholly owned by non-residents receive a dividend from an ITC, such shareholders are taxed at a flat rate of 27.5 per cent on the gross amount of the dividend. As has been seen, the company out of which the dividend is paid would have been taxed at a flat rate of 35 per cent. The non-resident shareholder is entitled to have the tax paid by the company at the rate of 35 per cent credited against the tax paid on the dividend. Therefore, the shareholder does not pay any tax on the dividend and is also entitled to a refund of 35 per cent less 27.5 per
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cent, ie 7.5 per cent. However, in order to obtain such a refund the shareholder must file an income tax return and be assessed in Malta. The non-resident shareholder is also entitled to a further refund of two-thirds of the tax paid by the ITC on its profits, ie a further refund of 23.33 per cent. This refund is granted on application without the need for a formal tax assessment. The refund is payable by the commissioner for Inland Revenue within 14 days from the end of the month within which the refund becomes due. The effective tax paid by an ITC is 35 per cent less 7.5 per cent less a further 23.33 per cent. Therefore, the final rate payable is 4.17 per cent. In addition, ITCs are exempt from the provisions of the Duty on Documents and Transfers Act on acquisitions or disposals of marketable securities.
International holding company The Maltese tax system does not have a specific international holding company regime. A Maltese holding company may qualify to hold a ‘participating holding’ in an overseas company. A ‘participating holding’ means a holding of at least 10 per cent of the equity shares of a company not resident in Malta. If the shareholding percentage is less than 10 per cent, its shareholding still qualifies as a participating holding, provided that: l the Maltese corporate shareholder is entitled at its option to purchase
or has the right of refusal on a disposal of the balance of the equity shares of the overseas company; l the Maltese corporate shareholder is entitled to be represented on
the Board of the overseas company; l the shareholding value exceeds €1.25 million (or the equivalent sum
in any other foreign currency); l the shares are held in the overseas company for the furtherance of
the business of the Maltese company. Where the international holding company’s income is derived from a participating holding, the non-resident shareholder is entitled to a full refund of the Malta tax paid by the international holding company. Therefore, an international holding company that qualifies as a participating holding company pays an effective tax rate of 0 per cent.
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4.2
Property Legislation AVMT Advocates
Property construction and development is of major economic importance to Malta. In recent years, several up-market developments have been constructed and the quality of residential and commercial premises is increasingly achieving higher standards of excellence. The target market for such developments consists of both Maltese residents/citizens and foreigners wishing to purchase or rent property in Malta. Maltese property legislation is primarily regulated by the Civil Code, Chapter 16 of the Laws of Malta. The Code provides for various methods of acquiring title to property; however, the most common method remains the standard sale and purchase agreement concluded by public deed enrolled in the acts of a notary public, and the lease agreement, which may be executed by private writing between the parties with no formal requirement of publication.
Sale and purchase With regard to sale and purchase agreements, it is standard practice for interested parties to enter into a binding promise of sale and purchase agreement – a convenium. By means of the convenium (which may be written in either English or Maltese), the parties agree the essential terms and conditions of the final deed of sale, a deposit in the region of 10 per cent of the purchase price is paid by the buyer, and a time limit is fixed (generally of three months) within which the parties agree to appear on the final deed of sale. A convenium is generally made subject to good title of the seller being confirmed by the notary public as well as on the condition that the buyer obtains the necessary acquisition permit (if non-resident in Malta), building permits and bank loans if required. Deposits paid on convenium are refundable if the buyer has good legal reason to withdraw from the final deed of sale; if no valid reason exists and the buyer fails to appear on the final deed, the deposit will be forfeited in favour of the seller, or specific performance demanded.
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Once a convenium is signed it is very rare that the final deed is not concluded. Upon signing the final deed of sale, the buyer pays the seller the outstanding balance on the purchase price and all taxes and duties are collected by the notary public on behalf of the commissioner of Inland Revenue. In order to ensure that the whole process follows the above procedure, it is recommended that purchasers, particularly foreigners, appoint legal experts in Malta to assist them.
Acquisition by non-residents Individuals who are not ordinarily resident in Malta are obliged, under the terms of the Acquisition of Immoveable Property by Non-Residents Act of 1974, to obtain an acquisition permit prior to and as a condition of entering into the final deed. Such a permit is granted if the following conditions exist: l The property to be acquired has a market value of Lm 50,000 in the
case of a villa or house, and a value of Lm 30,000 in the case of an apartment. When properties are acquired as simply a shell or in unconverted form, the values are inclusive of the cost of finishing or conversion. l The property to be acquired is not considered one of historical interest
(exceptions are houses of character and farmhouses). l The property acquired is for the purchaser’s (and his immediate
family members’) residential purposes. l In the case of commercial premises, the property is acquired for an
approved industrial, tourism or other project beneficial to the development of the Maltese economy or as otherwise approved. l The funds used for the purchase originate from a foreign source and
proof of this is supplied to the Central Bank of Malta. l Only one property may be held in ownership at any one time (unless
the property is in a Special Designated Area in which case more than one property may be acquired). It must further be pointed out that when the purchaser eventually comes to re-sell the property acquired such re-sale may only be made to a Maltese resident. This condition may be waived if proof is brought to the satisfaction of the relevant authority that all efforts to sell the property to a Maltese resident proved unsuccessful. All proceeds, including any profit, derived from the sale of such property by nonresidents may be repatriated abroad.
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Letting The letting of property in Malta is not subject to any specific regulation with regard to non-residents. Consequently, the standard provisions contained in the Civil Code apply. Leases may be short or long term and are constituted by private writing between the parties subject to the terms and conditions as may be agreed. Non-residents owning property in Malta are allowed to lease their property in the event that: the property in question has a value in excess of Lm 100,000; it is a villa with a pool; it is registered with the Hotel and Catering Establishment Board as holiday accommodation; the lease is on a short-term basis; and a tax of 15 per cent is paid on all rental income.
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4.3
Investor Incentives Stephen Zerafa, Communications & Public Relations, Malta Development Corporation
When considering the advantages of a particular investment location, it is important to take a comprehensive approach. Economic stability, healthy industrial relations, a flexible labour force, strategic location and, of course, the investment incentives offered all influence a country’s competitiveness in a positive manner. Manufacturing accounts for around 23 per cent of the country’s GDP and is of crucial importance to the economy. Over 200 foreign and some 400 locally owned manufacturing companies are operating profitably and many of these companies have experienced growth beyond initial predictions. In terms of productivity, profitability, quality and response time, locally based foreign-owned plants consistently achieve excellent results. The advantages that Malta has to offer are not simply in terms of strategic location, but as a whole package comprising the availability of labour skills, industrial support infrastructure and business ethic, in addition to a welcoming social environment. Malta’s advantages for the investor are manifold. The workforce is multilingual, highly skilled, educated and, perhaps most important of all, flexible. Labour costs are significantly lower than those of mainland Europe and there are more university graduates on a per capita basis than in many competitor countries. This greatly enhances opportunities for research and development to be carried out in the country. To ensure that academic qualifications and skills go hand in hand with the everchanging requirements of modern industry, there is close cooperation between industry, the 400-year-old University of Malta and the country’s technical training colleges. Malta’s small size and modern infrastructure make it an ideal location for the manufacture of electronics, precision engineering, health care, plastics and upmarket clothing products. Malta is also eminently suitable for ‘newer’ fields such as software development. Moreover,
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Malta is home to companies providing data transmission services through satellite and fibre-optic networks. Malta offers easy access to all markets due to its infrastructure and air/shipping connections. One of the cornerstones of Malta’s marketing strategy revolves around this strategic location advantage. Malta is an ideal base to penetrate both the Southern European and North African markets and beyond. Air and sea passenger and freight connections are excellent. London is just three hours by air, Rome a mere 90 minutes. The Central European time zone also facilitates business dealings with European and North American clients. While large international companies producing millions of products are successful in Malta, it also works well for companies producing short runs of complex high-value-added items that need to change certain specifications from client to client in a very short time. Products manufactured in Malta range from industrial radio remote controls to dosing-pump sensors, from electronic point-of-sale terminals and GPS modules for mobile phones to car seat heating elements. Companies based in Malta include international names such as Dowty Auto, ST Microelectronics, Playmobil, De La Rue Security Printing, Baxter, Cardinal Health, Toly Products and Methode Malta Ltd. Malta is expected to become an EU member in 2004, following a referendum. This has created new interest on the part of foreign investors, particularly those who are located outside the EU who want to exploit unrestricted access for all products to EU markets. EU membership also means that companies based in Malta will benefit from trade agreements entered into with other states around the world. Moreover, membership of the EU means legislation that European investors are familiar with and also means taking full benefit of vocational training programmes that help provide better-skilled employees for foreign investors. These are all factors that encourage foreign investment. Maltese incentives are also very attractive. For example, potential investors can be operating in a leased ready-built factory within a few months of the date of application. The investment incentives within the new Business Promotion Act include fiscal incentives, soft loans, investment allowances, training assistance and R&D allowances. The Business Promotion Act is proactive in the sense that it is flexible. The Business Promotion Act encourages more high-value-added activities in ‘new’ areas such as software development and biotechnology while also promoting investment in what are now considered as ‘traditional’ areas such as electronic, electrical and mechanical engineering.
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Main fiscal incentives l Reduced rates of income tax. l Investment tax credits. l Incentives for job creation.
Tax rates applicable: l 5 per cent for the first seven years of assessment, applicable to target
sector companies set up after 1 November 2000. l 10 per cent for the next six years of assessment, applicable to existing
target and non-target sector companies that have renounced their right to the TH, IIS or EIS. l 15 per cent for the following five years of assessment.
Other main incentives Soft loans Soft loans are available to qualifying companies in terms of Section 3(1)(a) and (b) of the Business Promotion Act and R&D and biotechnology. Malta Development Corporation may approve soft loans to finance up to 75 per cent of an investment on qualifying expenditure such as tangible fixed assets – land, buildings, plant and machinery, and development of technology or know-how. l Repayment over a maximum of 10 years with a two-year moratorium. l Interest at least equal to the minimum discount rate less 2.5 per
cent.
Loan interest subsidies Loan interest subsidies are available to all qualifying companies in terms of Section 3(1)(a) and (b) of the Business Promotion Act and R&D and biotechnology. l Applicable where no soft loan has been granted. l Investment has to be made on qualifying expenditure. l Malta Development Corporation finances the difference between the
bank interest rate and a soft loan interest rate.
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Loan guarantees Loan guarantees are available to all qualifying companies in terms of Section 3(1)(a) and (b) of the Business Promotion Act and R&D and biotechnology. l Applicable in respect of loans obtained from banks. l Guarantees up to 75 per cent of the qualifying expenditure on which
the loan is granted.
Training assistance Training assistance is available to all qualifying companies in terms of Sections 3(1) (a) and (b) of the Business Promotion Act and R&D and biotechnology. l Applicable in respect of full-time employees undergoing training as
approved by ETC. In the case of small and medium-sized enterprises: l up to 45 per cent of costs where the training is not general training l up to 80 per cent of costs where the training is general training
In the case of all other companies: l up to 35 per cent of costs where the training is not general training l up to 60 per cent of costs where the training is general training.
Relief from import duty Malta Development Corporation is the government body that administers the incentives package as well as the 10 industrial estates throughout Malta and its sister island Gozo. Malta Development Corporation serves as a one-stop shop for industrialists interested in setting up in Malta. However, since it places great emphasis on ‘investment aftercare’, the relationship between Malta Development Corporation and its clients usually goes far beyond the initial setting-up period. Naturally there are additional incentives such as lifestyle, culture, schools and hospitals etc. Distances are short and all amenities are within easy reach. All these factors and more contribute to a healthy business and living environment, which are among the island’s strongest selling points for foreign investors and which is why Malta is considered a profitable investment location.
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4.4
Taxation System and Business Environment Deloitte & Touche
Business environment During the last few years, Malta’s political environment has been dominated by the country’s ongoing negotiations with the European Commission for accession to the European Union. These negotiations have now been concluded and during the EU Summit held in Copenhagen in December 2002 Malta was accepted as one of the 10 accession countries that will formally join the EU in its next enlargement, scheduled for 1 May 2004. Needless to say, the business environment is not immune to these developments. The last few years have witnessed an energetic drive by the business community to restructure and reorganize in order to prepare itself for the new challenges that EU membership will invariably bring about. The government on its part has made great strides towards modernizing the local economy, the most conspicuous reforms being the privatization of a number of state-owned companies, the almost complete liberalization of exchange control and the enactment and amendment of several laws aimed at bringing Malta’s system into conformity with EU requirements and standards.
Taxation system Malta’s tax system is historically based on the UK Model Ordinance of 1922, but income tax was only introduced in Malta in 1948 through the enactment of the Income Tax Act. Tax legislation has developed significantly since that time and amendments in recent years were mainly aimed at shifting the tax collection process towards a system of withholding taxes at source, thus
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ensuring more timely collection and simultaneously decreasing the compliance requirements, particularly on individual taxpayers. In addition to the Income Tax Act and the Income Tax Management Act (collectively known as the Income Tax Acts), which impose a tax on income and capital gains, other important taxes in Malta are: l VAT under the Value Added Tax Act of 1998; l duty on documents, payable under the Duty on Documents and
Transfers Act of 1993; l social security contributions payable under the Social Security Act
of 1987.
Income tax Administration The Office of Inland Revenue is the sole organization entrusted with the administration of the Income Tax Acts and the imposition and collection of tax arising from them. No regional, federal or local taxes exist in Malta. The Income Tax Acts regulate tax on the income of both individuals and companies. No separate capital gains tax exists in Malta and capital gains are added to a person’s other income and tax is levied on the whole amount.
Residence, ordinary residence and domicile The scope of tax in Malta largely depends on the individual’s residence and domicile. ‘Residence’ in this context relates to individuals who may be physically absent from Malta in a particular year but are deemed to be ordinarily resident in Malta due to the fact that they retain sufficient links with Malta to signify that their absence from the island during a particular period of time is occasional. A company that is incorporated in Malta is automatically considered resident. This status is extended to also incorporate any foreign body of persons the control and management of whose business is exercised in Malta. The term ‘domicile’ is not defined in the Income Tax Acts but the Office of Inland Revenue considers an individual’s domicile to be the territorial unit that regulates such things as his marriage, succession and legal capacity in general. A company is domiciled in the country of its incorporation, although amendments are under discussion to allow the re-domiciliation of companies to and from Malta. Individuals who are both ordinarily resident and domiciled in Malta are taxable on their worldwide income, irrespective of whether such income is received in (ie remitted to) Malta or not.
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An individual who is either ordinarily resident but not domiciled or domiciled but not ordinarily resident in Malta is taxable only on income that is received in Malta. Individuals who are neither ordinarily resident nor domiciled in Malta are taxable only on income arising in Malta. A foreign company whose control and management is exercised outside Malta is taxable only on its income and capital gains arising in Malta.
Chargeable income Income, including capital gains, subject to tax in Malta may be categorized under four headings, even if tax is charged under the Income Tax Acts on the aggregate amount. The categories are: Trade and business The profits from a trade or business, after taking into account taxdeductible expenses, are subject to income tax. Business income includes the profits from one-off transactions undertaken with a profit-seeking motive. A reduced tax rate of 15 per cent applies for part-time business income, subject to certain restrictions and conditions. Employment Any income from employment, including the receipt of benefits in kind, is taxable and the tax is withheld at source by the employer under the final settlement system. This system ensures that by the end of a calendar year deductions of tax would have been made from the employee’s income to account exactly for his tax liability in that year. Part-time employment income is also taxed at the reduced rate of 15 per cent, subject to certain restrictions and conditions. Other income Other income subject to tax includes interest, rents, dividends, pensions, annuities, annual payments and any other income not falling under these categories. Capital gains The gains from the transfer of capital assets consisting of immovable property and securities are taxable, since 1993, as part of a taxpayer’s total income. Various exemptions apply with regard to the transfer of capital assets between group companies, upon the incorporation of a business into a limited liability company and on the exchange of shares upon company reorganizations.
Allowable deductions The tax deductibility of expenses depends on the category of income and the type of expenditure. As a general rule, any expenses incurred
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in the production of business income is allowed as a deduction for tax purposes, but some restrictions apply with respect to certain types of expenditure. Deduction for tax depreciation on business assets is allowed under the straight-line method and the law lays down the maximum number of years over which different categories of assets may be depreciated for tax purposes. Pre-trading expenses are only allowed in so far as they are incurred not earlier than 18 months prior to the commencement of the business activity and only if they consist of training, advertising and salaries or wages. A trading/business loss may be offset against the taxpayer’s other income from whatever source and in the case of companies it may also be surrendered to group companies who may utilize the loss as a deduction against their income or capital gains. With regard to employment income, the deductibility of expenses is restricted to those expenses that are necessarily incurred in the production of the income. Allowable deductions against other income is normally restricted to interest payable on loans taken out to acquire the asset that generates the income. In the case of capital gains, the cost of acquisition of an asset is increased by an index that is based on the country’s inflation rate. Income from the rental of immovable property allows the recipient to deduct a fixed 20 per cent of the gross income as maintenance allowance.
Basis of assessment Companies and individuals are taxed in each year of assessment on their income of the basis year, which is the 12-month period preceding the year of assessment. While for individuals this is invariably the calendar year, companies may be allowed to adopt an accounting date that is not 31 December.
Tax returns Individuals are required to submit an annual tax return by 30 June to report their income of the previous year. Individuals whose income has been entirely taxed at source, such as employees and persons earning prescribed investment income, need only submit a declaration to this effect by 30 April each year. A company’s tax return is required to be submitted within nine months from the end of its financial year or 31 March of the following year, whichever is the later, and has to be accompanied by financial statements that have been audited in accordance with international accounting standards. The Office of Inland Revenue has also introduced a system that enables the lodgement of company returns over the
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Internet, in which case the data in the financial statements has to be indexed in accordance with a tax index of financial data.
Tax rates A company incorporated in Malta is taxed on its worldwide income at the rate of 35 per cent of its taxable profits. Individuals are taxed at progressive rates of tax. The tax rates for 2003 are:
Married From 0 4,301 6,001 7,251 8,501 10,001+
To
Rate (%)
Single From
4,300 6,000 7,250 8,500 10,000
0 15 20 25 30 35
0 3,101 4,101 5,001 6,001 6,751+
To
Rate (%)
3,000 4,100 5,000 6,000 6,750
0 15 20 25 30 35
Note: all figures in Maltese lira, equivalent to €2.40.
A married couple where both the husband and the wife are deriving income subject to tax may opt to each be taxed at the single rates of tax, which normally results in a substantial tax saving.
Payment of tax Provisional tax is payable in three instalments during the basis year in which the income is being earned. Such provisional tax is paid on account of the individual’s final tax liability for the year. Once the year’s actual tax liability resulting from the individual’s tax return is definitively determined, the difference between such tax and the provisional tax payments already effected during the basis year has to be settled by the date on which the individual is required to submit his annual tax return. Employers deduct tax from emoluments paid to their employees under the final settlement system, which is a system which broadly ensures that an employee’s tax liability is fully settled through deduction from the payroll by the end of the calendar year. Tax on investment income is also withheld at source by the paying agent at the rate of 15 per cent of the gross income. An individual who is in receipt of investment income on which tax has been deducted need not declare such income in his annual tax return and the tax so withheld is considered as final tax.
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Companies’ tax accounting The distributable profits of a company have to be allocated to three tax accounts as follows: l Foreign income account: to include all income and capital gains from
assets situated outside Malta and profits derived from a permanent establishment abroad. l Maltese taxed account: to include the balance of the taxed income
that has not been allocated to the foreign income account. l Untaxed account: representing the difference between the distribut-
able profits of a company and the sum of the profits allocated to the foreign income account and the Maltese taxed account. Malta operates the full imputation system of taxation. Companies pay tax at the rate of 35 per cent on their worldwide income, but on a distribution of profits the tax paid by the company on the profits out of which the dividends are distributed is imputed on the shareholders, who may set if off against the tax on their other income. A final withholding tax of 15 per cent applies to distributions from the untaxed account to Maltese resident individuals. Non-resident shareholders who receive dividends from a Maltese company out of its foreign income account may claim a refund of the tax paid by the company. This refund may amount to two-thirds of the tax so paid, but where the company is distributing profits derived by it from a participating holding in a foreign company non-residents may claim back all the tax paid by the Maltese company on the distributed profits. International trading companies are Maltese companies that are broadly engaged in international trading activities with non-residents. Dividends paid by these companies to their non-resident shareholders enable the latter to reclaim most of the tax paid in Malta by the company.
Incentive legislation Companies engaged in high-value-added activities such as certain manufacturing operations, software development, web design etc. may benefit from very generous incentives under the Business Promotion Act, including reduced rates of tax for a number of years and an investment tax credit. Under the latter incentive, a percentage of the investment in qualifying assets is allowed as a credit against the tax otherwise payable by a company. Fund management companies also benefit from substantial fiscal incentives in the form of additional deductions for their expenditure on building occupancy costs, salaries paid to Maltese personnel and investments in funds managed by themselves.
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Individuals retiring in Malta may apply for a permanent residence permit, which entitles them to flat rate of 15 per cent tax on any income that they remit to Malta, subject to a minimum yearly payment of Lm1,800.
VAT The Value Added Tax Act of 1998 is largely based on the EU’s Sixth Directive and was introduced on 1 January 1999 after having already been in force for a brief period between 1 January 1995 and 30 June 1997. VAT is imposed at the rate of 15 per cent on most taxable supplies of goods and services, while a reduced rate of 5 per cent applies to hotel accommodation and electricity. Various categories of supplies such as food, medicines and exports of goods are exempt from VAT, while still allowing operators in these sectors to reclaim input tax suffered on supplies made to them. The supply of education, health and banking services is also exempt from VAT, but no input VAT may be reclaimed by those supplying these services. Specific rules laid down in the law prescribe the place of supply of certain services such as accounting, legal and consulting services which are all deemed to be supplied in the country where the customer is established.
Duty on documents A duty of 5 per cent on the value of immovable property is imposed on public deeds that transfer such property, both in the case of inter vivos transfers as well as causa mortis transmissions. An exemption is provided by law on transfers between group companies. Transfers of company shares are subject to duty at the rate of 2 per cent of the value of the shares. However, where more than 75 per cent of the company’s assets consist of immovable property, duty is payable at the rate of 5 per cent of the value of the shares being transferred. Transfers and exchanges of shares between group companies in the course of a restructuring exercise are exempt from duty.
Social security Social security is payable under the Social Security Act. Employees pay social security at the rate of 10 per cent of their gross basic salary or wage up to a maximum yearly contribution of Lm 671. An equivalent amount is paid by the employer. Self-employed people pay social security at the rate of 15 per cent of their income subject to a maximum yearly contribution of Lm 1,013.
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ONLINE UPDATES - 8 September 2005 Taxation system and business environment (Chap. 4.4) Corporate tax A number of incentives and reduced rates of tax have been available to companies resident in Malta and engaged in financial services, manufacturing, shipping and free port activities. Following EU entry, some of these incentives are being phased out.
Individual tax Individual income tax is still levied at progressive rates up to 25 per cent. Although the definition of residence is based on where the individual effectively lives and has a home, there is still no strict definition. However, staying in Malta for a year would imply residence. There is a favourable expatriate tax regime for employees of investment services and insurance companies.
Capital gains Gains on the sale of securities listed on the Malta Stock Exchange are exempt from capital gains tax. Generally, capital gains realized by companies and individuals continue to be taxed as income.
Tax administration and compliance Companies Corporate profits are assessed on the basis of the accounting year immediately preceding the year of assessment. Companies make three advance payments of tax at four-monthly intervals during the accounting period. They must file a tax return by the later of nine months after the end of the accounting period or 31 March in the year of assessment. A final tax payment is due on submission of the tax return. Individuals Individuals are taxed on a preceding-year basis. Employment income is taxed by withholding at source, and individuals must make advance
S5
payments of tax on other income with final tax payable by 30 June in the year of assessment.
Value added tax Following harmonization with the EC directives, VAT rules have been modified. VAT continues to apply to most transactions and registration remains compulsory for suppliers of goods with annual turnover above MTL12,000 and suppliers of services with turnover above MLT8,000. The standard rate has been increased from 15 per cent to 18 per cent, and a lower rate of 5 per cent applies to the supply of hotel accommodation, electricity, printed matter and confectionery. Zerorating applies to exports, international transport, domestic passenger transport, food, pharmaceuticals and the supply and repair of ships and aircraft. Exemptions from VAT include the sale and leasing of immovable property, banking and insurance services, health services, education and broadcasting.
Additional tax information • • • •
There are no withholding taxes on dividends, interest and Royalties. Malta has now concluded over 40 double taxation treaties. Loss transfer is possible between resident group companies. There are taxes on insurance premiums, petroleum profits, transfers of securities and transfers of immovable property, in addition to import duties.
Source: Deloitte Touche Tohmatsu, 31 May 2005
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4.5
Accounting and Auditing Deloitte & Touche
The accountancy profession in Malta has been established for some 50 years. During this period, the Maltese economy has changed dramatically from one that was largely dependent on the country’s use as a military base to an economy that now counts tourism, industry and financial services among its main contributors. During this time, there has been enormous development of business in general, as a result of which many large enterprises and limited liability companies have been created. The growth of the profession was fuelled in the late 1970s when legislation was passed which obliged all companies, whether public or private, to have their annual financial statements audited. An exception to this rule was only recently made for very small private companies which: l have a turnover of less than Lm 40,000; and l have a balance sheet value of less than Lm 20,000; and l have an average employment factor of 2.
Auditors must either hold the necessary warrant to practise as an auditor under the Accountancy Profession Act of 1979 or be a partner in a partnership of auditors registered under the Act. The profession is regulated by the Accountancy Profession Act. Almost all warrant holders are also members of the Malta Institute of Accountants, which is a member of the International Federation of Accountants (IFAC). Members of the Malta Institute of Accountants are required to comply with IFAC’s audit requirements promulgated in the international standards on auditing. The Companies Act of 1995 also requires all accountants to follow international standards on auditing when auditing financial statements.
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Financial statement requirements Reporting requirements The Companies Act and international accounting standards govern the format and content of a limited liability company’s annual financial statements. Financial statements must be submitted to the shareholders in a general meeting within 10 months following the end of the company’s financial year, referred to as the accounting reference date, and filed with the registrar of companies within 42 days. Companies with significant interests overseas may be allowed an additional three months on application. A company’s year end is assumed to be 31 December but any other date may be adopted upon application to the relevant authorities. The Act permits two alternative balance sheet formats, vertical and horizontal, both of which must provide the same information. Four formats are allowed for profit and loss accounts: two of the formats show expenses by function (vertical) and two show type of expenditure (horizontal). It is common practice for most balance sheets and profit and loss accounts to be prepared in vertical formats. Much of the required detail can be shown in the notes accompanying the financial statements, but certain items must be shown on the face of the balance sheet or profit and loss account. Major classifications of a company’s business, such as activities in different industry sectors or geographical areas, must be detailed to show their contributions to turnover and profitability. Specified transactions with related parties must be disclosed. A directors’ report commenting on the company’s activities, its results and likely future developments, as well as giving additional details required by the Companies Act, such as information concerning directors’ interests, must accompany financial statements. The accounting policies adopted by a company must be detailed in the notes to the financial statements; these policies must comply with international accounting standards. Significant departures from applicable standards must be disclosed and explained and their effects quantified. The effects of any change in the basis of accounting must also be disclosed in the financial statements and notes. Certain types of regulated businesses such as insurance companies, banks and other financial institutions must prepare financial statements according to particular requirements. Small companies, as defined, are permitted to exclude some detail in the financial statements that they are required to file with the registrar of companies. A company that has subsidiaries must generally prepare group financial statements in the form of consolidated accounts unless:
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l the company is a wholly owned subsidiary of a parent company
registered in Malta; or l its parent holds more than 90 per cent of the company’s shares and
the minority shareholders have not requested the preparation of group financial statements. A subsidiary undertaking may be excluded from consolidation if its inclusion is not material for the purpose of giving a true and fair view. In addition, a subsidiary undertaking may be excluded from consolidation where: l severe long-term restrictions substantially hinder the exercise of the
rights of the parent company over the assets or management of that undertaking; or l the interest of the parent company is held exclusively with a view to
subsequent resale and the undertaking has not previously been included in consolidated accounts prepared by the parent company. Certain other exemptions from the requirement to prepare consolidation accounts exist on the basis of size. The accounting practices of public listed companies and private companies differ in the extent to which disclosure is required. Entities other than limited liability companies and partnerships en commandite, the capital of which is divided into shares, need not prepare financial statements or comply with the Companies Act or international accounting standards.
Accounting principles and standards A fundamental requirement of the Companies Act is that every company’s financial statements must give a ‘true and fair view’ of its financial position and must comply with the provisions of the Act. As there is no definition in the Act as to what constitutes a ‘true and fair view’, commercial and professional judgement has to be applied within the bounds of the Act and international accounting standards. Financial statements must be prepared on a consistent basis and with prudence on the assumption that the company’s business can continue as a going concern. Assets and liabilities cannot be offset against each other and the accrual basis of accounting must be used. The Companies Act allows financial statements to be prepared following either the historical cost convention or the current cost convention. Most companies adopt the historical cost convention, modified by upward revaluations of appropriate fixed assets, particularly real estate.
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The financial statements sent to the tax authorities are the same as those prepared for the shareholders or other proprietors. Since financial statements must show a true and fair view, the law does not permit the reduction of assets to misleadingly low values and the consequent creation of secret reserves.
Accounting practices Upward revaluation of assets There is no requirement to revalue particular assets, other than may be required under international accounting standards and except in the cases in which the current cost convention is adopted. Under the historical cost convention, however, tangible fixed assets may be carried at current cost or at fair value at the date of the last valuation (either as a class of assets or on a selective basis). Investment property that is property held to earn rentals or for capital appreciation or both should either be measured at fair values and changes in fair values recognized in the income statement or else measured at cost less depreciation. Financial assets which are held for trading and available for sale investments are carried at fair value if this can be measured reliably. Investments held to maturity and originated loans are carried at cost. Depreciation Depreciation rates are based on the estimated economic lives of the assets, taking into account any residual values. In practice, round-figure percentages are usually adopted. Depreciation is calculated on the basis of cost or, if the asset has been revalued, on the revalued amount. Straight-line, declining-balance or other systematic methods may be used as appropriate, with the straight-line method being the most popular. Tax allowances for wear and tear are disregarded for this purpose. Government grants Government grants should be included in revenue in such a way that they are matched with the expenditure to which they relate. If the income recognition of all or part of a grant is deferred, it should be carried forward as deferred income. Merger accounting The Companies Act permits companies to use the pooling of interest method to account for mergers if: l at least 90 per cent of the nominal value of the relevant shares in
the acquired company is held directly or indirectly by the acquiring company as a result of the merger;
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l this percentage was attained under an arrangement providing for
the issue of equity shares by the acquiring company or its subsidiaries. Goodwill Goodwill purchased or arising on consolidation should be capitalized and amortized over its estimated useful life. The Companies Act does not stipulate a maximum life; however, the presumption taken by IAS 22 is that the useful life of goodwill will not exceed 20 years from initial recognition. Assets introduced on the acquisition of another company must be adjusted to fair values so that goodwill represents only the balance of the acquisition price. The capitalization of internally generated goodwill is not permitted. Treatment of dividends Dividends proposed or declared after the balance sheet date should not be recognized as a liability at the balance sheet date. In such instances, IAS 1 requires an enterprise to disclose the amount of dividend either on the face of the balance sheet as a separate component of equity or in the notes to the financial statements. Leased assets In a lessee’s books, assets held under a finance lease (in which the risks and benefits of ownership largely pass to the lessee) must be capitalized. Rents payable under an operating lease are normally expensed using the straight-line method over the life of the lease unless another basis is more appropriate. The tax treatment of rentals does not affect the accounting treatment. R&D expenditure Research expenditure must be written off as incurred, except that fixed assets for research activities are capitalized. Development, exploration and similar expenditure is also generally written off as incurred, although it may be capitalized if it meets the following criteria: l The project and its costs are separately identifiable. l The project is technically feasible and commercially viable. l The project’s completion is assured. In this case, the expenditure
capitalized is then usually amortized over the period during which the product is expected to be used or sold. Capitalization of interest Interest paid on funds used to acquire fixed assets, or even current assets such as work in progress, may be capitalized until production is complete.
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Inventory valuation Inventories are normally valued in financial statements at the lower of cost or net realizable value; this comparison is made for each stock line individually. Cost may be actual, average or first-in, first-out. Finished manufactured goods and work in progress should include an appropriate proportion of manufacturing overhead but not selling or administrative costs. Profits accruing on a long-term contract in progress are not usually taken until the outcome of the contract can be assessed with reasonable certainty. In practice, this may not be until the contract is at least 60– 70 per cent complete. Anticipated contract losses should be provided for as soon as they become apparent. Deferred tax accounting Deferred taxation is provided for, using the balance sheet liability method, providing for temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized only to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Currency translation Assets, liabilities, revenues and costs arising from transactions denominated in foreign currency are usually translated into Maltese lira at exchange rates in force on the date of the transactions. At the balance sheet date, monetary assets and liabilities denominated in a foreign currency should be restated using the closing rate of exchange. In general, exchange gains and losses, both realized and unrealized, should be included in the profit and loss account; however, the unrealized gains and losses should then be transferred to an undistributable reserve. In group financial statements, the results of foreign subsidiaries are usually translated by using the closing-rate method. The profit and loss account of a foreign subsidiary accounted for under the closing-rate method may be translated at either the closing rate or the average rate for the accounting period. Equity capital A company’s equity share capital is its issued share capital, excluding any part that cannot participate beyond a specified amount in a distribution of profit or capital.
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Pension costs Accounting practice requires that the cost of providing pensions be recognized systematically over the period during which the employer benefits from employees’ services. Substantial disclosure is required regarding the nature of the pension plan, results of periodic actuarial valuations, and the pension cost for the period. Financial instruments Under IAS 39, all financial assets and financial liabilities are recognized on the balance sheet, including derivatives. They are initially measured at cost, which is the fair value of whatever was paid or received to acquire the financial asset or liability. Subsequent to initial recognition, all financial assets are re-measured to fair value, except for loans and receivables originated by the enterprise and not held for trading, other fixed maturity investments that the enterprise intends to hold to maturity and financial assets whose fair value cannot be reliably measured. Unusual items In profit and loss account formats of the Companies Act, unusual profit and loss account items are characterized as exceptional or extraordinary items. Exceptional items arise within the company’s normal business activities and are included in ‘profit/loss on ordinary activities’, with a descriptive comment if appropriate. Extraordinary items are disclosed net of tax below the ordinary activities result line. Prior-year adjustments are not aggregated with either exceptional or extraordinary items. The adjustment is reflected in the opening reserve position, the prioryear comparative figure being adjusted accordingly. Prior-year adjustments arise from changes of accounting policy and the correction of fundamental accounting errors. Consolidation practices All subsidiaries must be fully consolidated into group financial statements. The Companies Act defines a subsidiary as an entity that is controlled by another undertaking. Holdings in associated undertakings (usually those that are 20–50 per cent owned) are normally accounted for in financial statements using the equity method.
Audit requirements and standards Entities subject to audit Public and private limited liability companies and partnerships en commandite, the capital of which is divided into shares, must have their annual financial statements audited, with the only exception being shipping companies. Other business entities do not have to appoint
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auditors unless the rules under which they are constituted require them to do so. The auditors/audit firm are required to report whether the financial statements provide a true and fair view of the company’s financial position, results and cash flows and whether they have been prepared in accordance with the 1995 Act. Audit The law does not permit an auditor to hold any office in a company besides that of auditor, nor may the auditor be a partner or employee of a company that it audits. Appointment of auditors The shareholders at general meetings appoint auditors of companies. In practice, the directors will invite an auditor to accept an appointment and the shareholders will then ratify the appointment. If a company fails to appoint an auditor within the specified time, the registrar of companies has the power to apply to the courts. Professional ethics require that an auditor, before accepting a new appointment, contacts the previous auditor to establish whether there are any reasons for refusing the appointment. If the directors of the company in question do not authorize such a contact or prohibit the existing auditor from discussing the company’s affairs with the proposed auditor, the proposed auditor must decline the appointment. Removal of auditors Auditors may be removed either by not being reappointed at an AGM or during the year by a specific resolution passed at an extraordinary meeting. Outgoing auditors have the right to make written representations on the matter to the shareholders, to attend the meeting during which they are to be removed, or both. Auditors may also choose to resign. When there are circumstances connected with the resignation that need to be brought to the attention of shareholders or creditors, their resignation must be accompanied by a statement to that effect. A copy of this statement must be filed with the registrar of companies. Unlike several continental European countries, Malta has no requirement for the appointment of a statutory auditor or for a government tax audit. The Maltese tax authorities normally rely on the professional integrity of the company’s auditors.
Part Five
Business Development: Operating an Enterprise
5.1
Arbitration AVMT Advocates
International commercial contracts require certainty and efficiency. In order to safeguard these requirements, it has become standard practice to subject such contracts to a predetermined legal regime and to arbitral proceedings in a centre of international repute backed by an up-to-date legal framework. Parties to such contracts attempt, as far as possible, to remove the agreement from the possibility of scrutiny before a court of law in a jurisdiction otherwise divorced from the subject matter of the dispute. This is done to ensure a more amicable resolution of disputes, thereby preserving the possibility of future commercial relations, and allowing for disputes to be resolved within a less formalistic and possibly a more efficient environment.
The Maltese environment During the last 14 years, Malta has established itself as a reputable centre for the conduct of financial, international and maritime business. Several international and multinational corporations are adopting Malta as the base from which they conduct their international business. As a result, legal affairs in Malta have become increasingly international in nature, resulting in the corresponding enactment and development of a comprehensive and integrated legal framework to cater for international business. One such development has been the enactment of legislation establishing Malta as an international centre for commercial arbitration.
Arbitration Act In 1996, the Maltese parliament enacted the Arbitration Act. This substituted the archaic arbitration provisions in the Civil Code which had only addressed domestic arbitration. The Arbitration Act has
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established a comprehensive and up-to-date arbitral framework incorporating internationally accepted standards. The Arbitration Act has established the Malta Arbitration Centre1 as a ‘body corporate having a distinct legal personality and, subject to the provisions of the act’ entrusted with, among others, the obligation of: l promoting Malta as a centre for international arbitration; l providing for the conduct of international arbitration in Malta; l encouraging domestic arbitration as a means of settling disputes; l making available the necessary facilities for the conduct of arbitra-
tion; and l performing any other functions supplementary or ancillary to the
above. The Malta Arbitration Centre is managed by a board of governors which is responsible for establishing the policy and general administration of the affairs and business of the Centre. The Board consists of not less than five and not more than nine members, appointed by the president of Malta on the advice of the minister responsible for justice, one of whom will be designated by the minister as chairman. The members are required to have had experience of and shown capacity in matters relating to international and/or domestic arbitration, conciliation and the settlement of disputes in international trade, commerce, industry, investment and maritime affairs; the attorney general must be an exofficio member of the Board. In the exercise of their functions under the Act, all Board members must act in their individual judgement and must not be subject to the direction or control of any other person or authority. The Malta Arbitration Centre may from time to time draw up panels of qualified people nominated as arbitrators for both domestic arbitration and international commercial arbitration. Domestic arbitration panels may be appointed on matters related to commerce, insurance, traffic collisions, building construction, the maritime sector and such other fields as the Centre may deem expedient from time to time. The panels are composed of those people who, in the Centre’s opinion, are qualified to carry out the duties and functions of arbitrators in a particular field of expertise. The Centre must establish an internal arbitral advisory committee to be presided over by the chairman of the Centre and this committee 1 The Malta Arbitration Centre (Centru Malti Ta’ L-Arbitragg) is located at Palazzo Laparelli, 33 South Street, Valletta. The centre is strategically located within the walls of Malta’s capital city Valletta.
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must advise the Centre on any matter relating to international commercial arbitration and must recommend to the Centre people who, in its opinion, are qualified to carry out the duties and functions of arbitrators in international commercial arbitrations regarding matters such as international trade, commerce, insurance, investments and the maritime sector. For the purpose of encouraging settlement of a dispute, the Centre may, with the agreement of the parties and in accordance with rules made by the Centre under the Arbitration Act, employ mediation, conciliation or other procedures at any time before or during the arbitration proceedings. In addition, the Arbitration Act sets out the parameters within which domestic and international commercial arbitration may be conducted.
Types of arbitration Two types of arbitration are provided for under the Arbitration Act: domestic and international commercial arbitration.
Domestic arbitration Domestic arbitration takes place when the parties involved have their place of business in Malta. Disputes may include any controversy or claim arising out of or relating to an agreement, or the breach, termination, invalidity thereof or failure to comply therewith. The Arbitration Act, however, excludes disputes concerning questions of personal civil status, including those relating to personal separation and annulment of marriage. The party who wishes to submit a dispute to arbitration (the claimant) has to file a Notice of Arbitration (with the corresponding statement of claim) with the registrar for registration by the Centre and for onward transmission to the other party (the respondent). The notice has to include certain requisites such as the demand, the name and addresses of the parties and a reference to the arbitration clause. The arbitration proceedings commence when the respondent receives the Notice. At that time, the respondent has to communicate his statement of defence in writing to the claimant. It may be stated that the main purpose of this Act is to grant the parties autonomy in the determination of the manner in which to conduct the proceeding. The parties may be represented and the parties may appoint three arbitrators (each party shall appoint one arbitrator and these two arbitrators will choose the third). However, if the parties do not agree on the number of arbitrators, or if the disputed claim has a monetary value of less than Lm 5000, there will be only one arbitrator. No appeal on the merits can be made from an arbitral award.
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Every arbitrator must be independent and impartial. This is ensured by the fact that at the outset the parties are able to challenge the nominated arbitrator(s). The language used in the proceedings is Maltese, unless the parties agree otherwise.
International commercial arbitration The Arbitration Act incorporates the UNCITRAL Model Law on International Commercial Arbitration of 1985. The UNCITRAL Model Law defines arbitration as being international if: l the parties to an arbitration agreement have, at the time of the
conclusion of that agreement, their place of business in different states; or l one of the following places is situated outside the state in which the
parties have their place of business: – the place of arbitration, if determined in, or pursuant to, the arbitra-
tion agreement; – any place where a substantial part of the obligations of the commer-
cial relationship is to be performed or the place with which the subject matter of the dispute is most closely connected; l the parties have expressly agreed that the subject matter of the
arbitration agreement relates to more than one country. The use of the term ‘commercial’ consequently excludes all disputes concerning Family Law matters. The proceedings follow those described in the case of domestic arbitration. However, the Model Law provides for an appeal to the Court of Appeal provided that: l the applicant proves to the satisfaction of the Court of Appeal that: – a party to the arbitration agreement was under some incapacity
to enter the arbitration agreement; or that the said agreement was not valid under the law to which the parties have subjected it; or – the party against whom the award is invoked was not given proper
notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise impeded from presenting his case; or – the award deals with a dispute not contemplated by or not falling
within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: provided that if decisions on matters submitted to arbitration
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can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside. – the Court of Appeal finds that: – the subject matter of the dispute is not capable of settlement by
arbitration under the Laws of Malta; or – the award is in conflict with the public policy of Malta.
Despite the incorporation of the UNCITRAL Model Law, the parties to an international commercial arbitration are granted significant flexibility in that they can choose to adopt either the procedure established in the Model Law itself, the procedure adopted for domestic arbitration, or an ad hoc tailor-made procedure agreed to by the parties. The parties are also free to agree on the language or languages to be used in the arbitral proceedings. However, if there is no agreement on the language to be used, the language will be determined by the Arbitral Tribunal. In order to further assist the parties, the Malta Arbitration Centre is able to arrange translation assistance.
Enforcement of the arbitral awards Malta is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Consequently, arbitral awards obtained in Malta under the auspices of the Centre can be easily enforced in over 120 countries signatory to the Convention. The New York Convention establishes a minimum standard for the treatment of such foreign awards. The Act provides in Part VII such treatment and the minister by notice publishes up-to-date lists of the treaties to which Malta is party. Disputes determined by arbitration, foreign or domestic, shall, once registered at the Malta Arbitration Centre, be recognized and enforced by the courts of Malta in the same manner as any settlement of international investment disputes under the Washington Convention of 1965, as if such awards were final judgments obtained through the courts in Malta. Ever since its establishment, the Malta Arbitration Centre has successfully strived to position itself as a dispute resolution centre of international repute, competing in terms of both quality and economic viability with centres such as Geneva, London and Paris.
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5.2
Intellectual Property: Patents and Trademarks AVMT Advocates
Registration and regulation of patents The registration and regulation of patents in Malta are governed by the Patents Act.1 The law states that an invention is patentable if it is novel, involves an inventive step and is industrially applicable. The meaning given by the law to the term ‘novel’ is that the invention does not form part of the prior art, ie everything which, before the filing date or, where priority is claimed before the priority date of the application claiming the invention, was available to the public in a written or other graphic form, by an oral description, by use or in any other way anywhere in the world. The term ‘invention’ excludes the following: l discoveries, scientific theories and mathematical methods; l aesthetic creations; l schemes, rules and methods for performing mental acts, playing
games or doing business and programs for computers; l presentations of information.
Patents are also not granted in respect of the human body, the human embryo, the modification of the genetic identity of animals, cloning or other inventions which are considered to be against public morality in general. An invention is deemed to be inventive if it is not obvious to a person skilled in that art. However, a disclosure of the invention is not taken into consideration if it occurs no earlier than six months preceding the filing of the patent application or in consequence of an abuse towards 1
Chapter 417 of the Laws of Malta.
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the applicant or if the applicant has displayed the invention at an officially recognized international exhibition.
Application for registration of a patent Any natural or legal person may apply for a patent, alone or jointly with third parties. The right will belong to the inventor or his legal successor, while joint inventors have equal rights (unless the contrary is agreed to). Where two or more persons have applied independently in respect of the same invention, the right to the patent will belong to the applicant who applied first and, where priority is claimed, the earliest priority date, as long as that application has been published. Unless a written declaration addressed to the comptroller of industrial property is not made, the inventor is mentioned in the patent. An application for a patent must be filed at the Office of the Comptroller of Industrial Property and must contain the following: l a request for the grant of a patent; l a description of the invention; l one or more claims; l any drawings referred to in the description or the claims; l an abstract of the invention.
The application must designate the inventor or inventors or the legal grounds for the applicant’s entitlement to file the application. It is also subject to the payment of a filing fee as may be prescribed from time to time. The filing date of the application is the date of receipt by the Office of the Comptroller. It is very important for the disclosure of the invention to be sufficiently clear and complete for it to be carried out by a person skilled in the art. If, however, it refers to biologically reproducible material which cannot be disclosed in such a way as to enable the invention to be carried out by a person skilled in the art, and such material is not available to the public, the applicant must supplement it by depositing such material with a depositary institution as may be prescribed. The applicant may then amend or correct his application as long as he has paid the fees and all requisites are present, but the amendment or correction may never be beyond that which has been disclosed in the application. The applicant also has a right to withdraw his application while it is still pending grant. The application may also contain the right of priority pursuant to the Paris Convention for the Protection of Industrial Property2 or one or more earlier national, regional or international applications filed by 2
20 March 1883, as revised or amended from time to time.
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the applicant or his predecessor in title, in or for any state party to the Convention or the World Trade Organization or for any state with which Malta has made an international arrangement for the mutual protection of inventions. The comptroller may require the applicant to furnish a copy of this earlier application. The next stage is the examination of the application whereby the application is forwarded to an ‘examiner’ who determines whether the application complies with all necessary legal requirements. The examiner then prepares a report to be handed over to the comptroller. If it is the opinion of the examiner that not all the legal requirements have been complied with, the applicant is given an opportunity to make his observations and to amend the application within a given period of time. Once the patent is granted, a notification is published 18 months after the filing date or, if priority is claimed, from the date of priority, unless before the said period expires the applicant presents a written request to the comptroller that his application be published promptly. A patent application or patent may be licensed in whole or in part for the whole or part of Malta and a licence may be exclusive or nonexclusive. In the absence of any provision to the contrary, the rights of the licensee extend to the performance in respect of the invention of all acts without limitation as to time, in the entire territory of Malta, and through any application of the invention.
Effects of patent registration The term of registration of a patent is 20 years from the filing of the application and a maintenance fee is due in respect of the third year and each subsequent year thereafter and the proprietor of the patent shall have the right to prevent third parties from performing, without obtaining his prior authorization, certain acts as prescribed by law.3 Examples of such acts are the making of a product incorporating the subject matter of the patent or the use of a process which is the subject matter of the patent. However, the extent of protection conferred by the patent is determined by the claims, which are interpreted in the light of the description and drawings so as to combine fair protection for the proprietor with a reasonable degree of certainty for third parties by taking into account elements which at the time of any alleged infringement are equivalent to elements expressed in the claims. A patent or patent application may be assigned by means of a written contract. The change in ownership is recorded in the patent register but the transfer of such rights does not affect any rights acquired by third parties. The patent register is prima facie evidence of all matters directed or authorized by or under Maltese law to be entered therein and this may be open to public inspection. 3
Article 27 of the Patents Act, Chapter 417 of the Laws of Malta.
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The proprietor of a patent may also surrender the patent by written declaration submitted to the Office of the Comptroller. In all other cases, a patent shall lapse at the end of the 20-year term or if the maintenance fees or surcharges have not been duly paid. A patent may also be invalidated by a writ of summons filed by a third party in First Hall of the Civil Court to invalidate the patent in whole or in part, on specific grounds.4 Invalidation proceedings may also be taken after the patent has lapsed. The applicant or proprietor of a patent who, notwithstanding having taken all due care required by the circumstances was unable to observe a time limit set by the comptroller, may, upon his request, have his rights re-established if such non-observance has the direct consequence of causing the refusal of the patent application, or the refusal of a request, or the lapse of the patent, or the loss of any other right or means of redress. The request must be filed in writing within two months from the removal of the cause of non-compliance or within the year immediately following the expiry of the unobserved time limit, whichever is the earlier. The request must state the grounds on which it is based and must contain the detailed facts on which it relies.
Infringement: civil and criminal actions A person who, in contravention of the law, exploits an invention which is the subject matter of a patent or a patent application is liable to damages towards the proprietor or the licensee and may be sued for damages. The Court may also, on the plaintiff ’s demand, order that any machinery or other industrial means, any articles and apparatus, used by the person in contravention, be forfeited and delivered to the proprietor of the patent. Acts of infringement cannot be instituted in the Civil Court after five years from the date at which the party or parties injured came to the knowledge of such infringement and the identity of the alleged infringer. Anyone who circulates or sells any article which he falsely represents as being legally patented will be liable to a fine of not less than the Maltese lira equivalent of €250 and the Maltese lira equivalent of €12,500. The Court may also order that any goods or things forfeited be destroyed or disposed of and it may also direct that, out of any net proceeds realized by such disposal, any persons in good faith who were injured by the forfeiture be awarded compensation for any loss caused to them. Criminal actions are barred by the lapse of three years from the day on which the act constituting the offence was committed, if the person to whose prejudice the act was committed had no previous knowledge 4
Article 44 of the Patents Act, Chapter 417 of the Laws of Malta.
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thereof. In all other cases, the period of limitation is one year from the day on which such person became aware of that act.
Regulations Under the Patents Act, the relevant minister may, from time to time, issue regulations giving effect to provisions of international or regional patent registration instruments or any agreements to which Malta is or becomes a party.
Registration and regulation of trademarks The registration and regulation of trademarks is governed by the Trademarks Act.5 A registered trademark is a property right obtained by the registration of the trademark under this Act whereby the proprietor of that mark has the right and remedies provided for in the Act. The law defines a ‘trademark’ as being any sign capable of being represented graphically and is capable of distinguishing goods or services of one undertaking from those of other undertakings. It may also consist of words (including personal names), figurative elements, letters, numerals or the shape of goods or their packaging, provided that any sign capable of being represented graphically includes any sign capable of being put down in words. A collective mark or certification mark is also defined as being a trademark capable of registration. A collective mark is a mark distinguishing the goods or services of members of an association which is the proprietor of the mark from those of other undertakings. A certification mark indicates that the goods or services in connection with which it is used are certified by the proprietor of the mark in respect of origin, material, mode of manufacture of goods or performance of services, quality, accuracy or other characteristics. Marks which do not have a distinctive character, consist exclusively of signs or indications which may serve to designate the kind, quality, intended purpose, value, geographical origin, time of production of goods or of rendering of services, or which consist of signs or indications which have become customary in the current language or in the practices of the trade cannot be registered as trademarks. In addition, a trademark cannot be registered if it is identical to an earlier one and the goods or services for which it is applied are identical to those for which the earlier mark is protected and there exists a likelihood of confusion on the part of the public and the likelihood that
5
Chapter 416 of the Laws of Malta.
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the public in general would associate that mark with the earlier trademark. Moreover, a trademark which is identical to or similar to an earlier trademark but which is to be registered for goods or services which are not similar to those for which the earlier trademark is protected may still not be registered if the earlier trademark has a reputation in Malta and the later mark may cause detriment to or would take unfair advantage of the distinctive character and reputation of the earlier mark unless the proprietor of the earlier right consents to its registration. An earlier mark is a registered trademark which has an earlier date of application than that of the trademark in question or which, at the date of application for registration or of the priority claimed in respect of the application, is entitled to protection under the Paris Convention as a well-known trademark.
Application for registration of a trademark An application for the registration of a trademark is made on a prescribed form to the comptroller of industrial property and upon payment of the relevant fee. A person who duly files an application for the protection of a trademark in a country which is a member of the World Trade Organization or party to the Paris Convention6 has a right to priority for the purposes of registering the same trademark in Malta, for any or all of the same goods or services for which the application has been filed and for a period of six months from the date of filing of the first application. If the application is made within this six-month period, the relevant date for the purposes of establishing which rights take precedence is the date of filing of the first Convention application and the registrability of the trademark is not affected by any use of the mark in Malta in the period between that date and the date of the application as stated above. It is the comptroller who is authorized to examine whether an application for registration of a trademark satisfies the legal requirements and he may carry out a search of earlier trademarks if he considers it necessary. If it appears to him that the requirements for registration are met, he will accept the application. If he does not, he will refuse the application or request the application to be amended within a certain period of time. The trademark is deemed to be registered as of the date of filing of the application and the comptroller then publishes the registration in the Government Gazette and issues in favour of the applicant a certificate of registration.
6 The Paris Convention for the Protection of Industrial Property of 20 March 1883, as revised or amended from time to time.
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The period of registration of a trademark is 10 years from the date of registration and this may be renewed for further 10-year periods. This has to be done at least six months before each date of expiry. The proprietor is usually informed of the date of expiry before this takes effect. Renewal then takes effect from the expiry of the previous registration. If registration is not renewed, the comptroller will remove the trademark from the register. The register is open to public inspection. A registered trademark may be surrendered by the proprietor in respect of any or all of the goods or services for which it is registered and may also be revoked on certain specific grounds.7
Effects of a registered trademark The proprietor of a registered trademark has exclusive rights in the mark which are infringed by persons who use, in the course of their trade, a sign which is identical or similar to that trademark and in relation to identical or similar goods or services for which that trademark has been registered and there exists the likelihood of confusion by the public, including the possibility of the public associating that mark with the registered trademark. However, in the case that the identical or similar mark is not used in relation to goods or services which are not similar to those for which the trademark is registered but the trademark has a reputation in Malta and the use of the sign takes unfair advantage of or is detrimental to the distinctive character or the reputation of trademarks, there would also be a case of infringement. There are, however, limits on the effect of a registered trademark and there is no infringement where a person uses his own name or address, uses indications concerning the kind, quality, quantity, intended purpose, value, geographical origin, time of production of goods or of rendering of services, or other characteristics of goods or services, or where the trademark is used where it is necessary to indicate the intended purpose of a product or service, in particular as accessories or spare parts, provided that the use in such cases lies in accordance with honest practices in industrial or commercial matters. A registered trademark is considered the personal property of its owner and is transmissible by assignment, testamentary disposition or operation of law in the same way as other personal or moveable property. The assignment or transmission may either be partial or limited to some but not all of the goods or services for which the trademark is registered or limited in relation to the use of the trademarks in a particular manner or a particular locality.
7
Section 42 of the Trademarks Act.
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The assignment of a registered trademark is only effective if it is in writing.
Infringement: civil and criminal actions An infringement of a registered trademark is actionable by the proprietor of the trademark by writ of summons to be filed in the First Hall of the Civil Court. If the Court finds that a person has in fact infringed a registered trademark, the Court may order him to cause the offending sign to be erased, removed or obliterated from any infringing goods, material or articles in his possession, custody or control, or, if this is not reasonably practicable, to secure the destruction of the infringing goods, material or articles in question. Where, however, a person threatens another with proceedings for the infringement of a registered trademark other than the use of the mark on goods or packaging, the importation of goods to which, or to the packaging of which, the mark has been applied or the supply of services under the mark, by means of a writ of summons before the First Hall of the Civil Court, the relief applied for must be any of the following: l a declaration that the threats are unjustified; l an injunction against the continuance of the threats; l damages in respect of any loss that the person may have sustained
by the threats. However, the mere notification that a trademark is registered or that an application for registration has been filed does not constitute a threat of proceedings. In all legal proceedings related to the registration of a trademark, the registration of a person as the proprietor of that trademark is prima facie evidence of the validity of the original registration and of any subsequent assignment or transmission of it. The law on trademarks also regulates the unauthorized use of trademarks by a person who intends to cause loss to another or with a view to obtain a gain for himself or another.8 The use of a trademark without the consent of the proprietor may result in the commission of a criminal offence and the person guilty of such an offence is liable to imprisonment for a term not exceeding three years or to a fine of not more than the Maltese lira equivalent of €25,000 or to both such fine and imprisonment.
8
Section 71 of the Trademarks Act.
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In addition, a person who falsely represents a trademark as being registered may be liable on conviction to a fine of not more than the Maltese equivalent of €12,500. Furthermore, in criminal proceedings, the Court may order that the infringing goods or material be delivered to the holder of the trademark or forfeited to the Court and then destroyed or disposed of and that any persons injured by the forfeiture be awarded compensation for any losses caused to them.
Licensing of a registered trademark A licence to use a registered trademark may be general or limited. A limited licence may apply in relation to some of the goods or services for which the trademark is registered or in relation of its use in a particular manner or locality. A licence is binding on a successor in title to the grantor’s interest unless the licence provides otherwise and, where it so provides, may be sub-licensed by the licensee. A licensee is entitled, unless his licence provides otherwise, to call on the proprietor of the trademark to take infringement proceedings in respect of any matter which affects his interests, and if the proprietor refuses or fails to do so within two months after being called upon the licensee may bring proceedings in his own name as if he were the proprietor and the proprietor is joined in the suit.
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5.3
Residence and Employment Permits for Foreigners AVMT Advocates
Permanent residence scheme Malta has far more to offer foreigners than simply a pleasant climate and rich cultural and historical heritage. Malta’s permanent residence scheme offers a number of additional incentives. The legal instrument which regulates the residence of foreigners in Malta is the Immigration Act (Chapter 217 of the Laws of Malta), which provides for the issue of residence permits for indefinite stays in Malta (Section 7). The issue of residence permits has always been linked, as far back as the 1960s, to economic objectives in order to attract foreign exchange to the islands and enhance the economy. The first and perhaps most attractive incentive for foreigners interested in acquiring a Maltese permanent residence permit is the low tax rate applied. A flat rate of 15 per cent is charged on all income (less tax rebates applicable) received in or remitted to Malta from foreign sources. This is currently subject to a minimum payment of €4,500 annually. Another positive incentive is exemption from customs duty and VAT. In most cases, the applicant would be wise to import his own household and personal belongings, such as furniture and other personal domestic articles. The applicant would be authorized to import these items free of import duty if he does so within six months of taking up residence in Malta. No import licences are required in these cases. The prospective resident may also wish to bring to bring his own car to Malta. This may also be imported free of VAT with respect to Item 12 of the Fifth Schedule to the VAT Act of 1998 and is also free of customs duty in respect of the Import Duties Act (Chapter 337, Second Schedule). However, a rate of 15 per cent VAT is applicable on the amount of registration tax payable upon registration of the said vehicle.
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There is also the possibility of repatriating any capital and income falling under any of the following three categories: 1. any unspent remainder of the capital brought into Malta; 2. any income accumulated during the resident’s stay in Malta; 3. any proceeds from the sale of property and/or other investments in Malta. Although under Maltese law no death duties are payable in Malta, under the Duty on Documents and Transfers Act of 1993 stamp duty is charged on the purchase of immovable property in Malta and any shares in a locally registered company, unless the company is one which is listed on the Malta Stock Exchange, in which case no transfer tax is due. There are no nationality restrictions as to who may apply for a residence permit. Any foreigner, of whatever nationality, may submit an application for permanent residence. However, that person must satisfy certain specific conditions at the time of application as well as once the permit is granted. The permit is issued on an indefinite basis. Since 1988, the following conditions have been necessary for a foreigner to qualify to apply for a residence permit under this scheme: l The prospective applicant must have, at least, an annual income
equivalent to €24,000 or, in the absence of this income, a capital equivalent to €360,000.
l The applicant must also be able to remit annually to Malta an income
equivalent to €14,400 in his respect. If the applicant is married or has dependants, he must remit a further €2,400 in respect of his dependants. ‘Dependants’ include a spouse, children under 21, and a parent or grandparent who is wholly dependent on the applicant.
These are basically the two conditions that any prospective applicant must satisfy. However, once the permit has been issued the resident is required to adhere to the following conditions: l The resident is required to take up residence by no later that one
year from the date of issue of the permit. Failure to take up residence within this time frame would possibly mean loss of the permit. l The resident must either purchase immovable property valued at no
less than €120,000 in the case of a house, or €72,000 in the case of an apartment. He may, however, choose to lease/rent property instead of purchasing it. The lease/rent must not be less than €4,320 per year. Twelve months after taking up residence in Malta, he is required to produce evidence that he has, in fact, complied with this condition by submitting a copy of the purchase contract or the lease agreement to the relevant government department. While any resident may
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invest capital in Malta, investments in real estate outside areas known as special designated areas (SDAs) are limited to one owneroccupied house or apartment. Therefore, the resident may purchase more than one property in these SDAs. Special designated areas are usually recently constructed residential areas consisting of properties finished to modern high standards. l The resident is not permitted to exercise any occupation or profession,
hold any appointment, seek employment or engage in any form of business for the local market. He may, however, conduct his business activities outside Malta from Malta. l The resident cannot participate in any political activities.
Applications for permanent residence can only be made on appropriate forms available from the Department of Citizenship and Expatriate Affairs and the applications must be accompanied by the following documentation: l A banker’s certificate showing that the applicant has either an annual
income equivalent to at least €24,000 or capital equivalent to €360,000. This banker’s certificate must also clearly certify that the applicant would be able to remit into Malta a minimum annual income of €14,400 plus a further €2,400 for each of his dependants.
l A conduct certificate from the police authorities nearest to his original
place of residence. In certain jurisdictions, it is not possible to obtain such a certificate and this may be replaced by character references from any three of the following: a) an accountant; b) a solicitor; c) a medical practitioner; d) a current or previous employer; e) a banker; f) any person of a similar standing. l In the case of married couples seeking permanent residence, a
married woman applying on her own behalf, a divorced woman or a widow, a copy of the marriage certificate. In all other cases, birth certificates should be submitted. l Three passport-sized photographs of each person whose name appears
on the application form. l A copy of either the deed of purchase or the lease/rent agreement if
the applicant owns or rents/leases property in Malta.
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The processing of applications for permanent residence permits usually takes three months or so. The fee payable upon issue of the permit is €120. At the end of the first year of residence and at the end of each subsequent calendar year, the resident is required to complete an annual declaration form, confirming that he has fulfilled all the conditions attached to his permit. Failure to submit this form could mean revocation of the permit. It is interesting to note that, for those who may be interested, an updated list of all foreigners holding permanent residence permits is published in the Malta Government Gazette. The permanent residence scheme is administered by the Department for Citizenship and Expatriate Affairs, which is responsible for ensuring that all conditions necessary by law are adhered to by all holders of permanent residence licences.
Employment licences The Immigration Act (Chapter 217 of the Laws of Malta) also provides for the issue of employment licences to foreigners enabling them to work in Malta (Section 11). The policy applied by the present government is that employment licences are only granted to foreigners in exceptional circumstances, for specific purposes only and solely for a determined period of time – and this only after the employer in question has been unable to engage a suitable Maltese citizen for the same post. Applications for employment licences are to be made by the employer or by a director or person holding a managerial position who seeks to engage a foreigner for the post in question. Applications must always be forwarded to the relevant department, which is, once again, the Department for Citizenship and Expatriate Affairs, at least three months before the employment commences. An exception to this rule is applied in the case of groups, entertainers or any other activities falling under this umbrella where the application must reach the department at least 10 days prior to the date of performance in Malta. The application in this case must be accompanied by the artist’s or performer’s CV, which should include the date of commencement of the person’s career, the places where he has performed and details of the place of his last performance. No expatriate may be engaged in employment unless and until that person is in possession of a valid employment licence. The Immigration Act applies heavy penalties for the infringement of the provisions regulating this to both the employer and the expatriate. The foreigner on whose behalf the prospective employer is seeking employment may either be abroad or already in Malta, in which case the date of expiry of the foreigner’s entry visa or permit to Malta is to
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be indicated on the application. The application is to be accompanied by a copy of the foreigner’s passport, photos and, of course, personal details. Employment licences are usually granted only for a period of one year, after which a request for renewal for an extension may be submitted. This must be done at least six months before the employment licence is due to expire. The approximate fees in euros applicable for the above applications, which are regulated by the Immigration (Residence and Employment Licences) (Fees) Regulations, 1993 – Legal Notice No. 15 of 1993, are currently: l Application for an employment licence: €26 l Issue/renewals of an employment licence valid for:
One year
€38
Two years
€76
Three years
€114
An indefinite period
€190
With its ever-increasing population, the Maltese government has tended to adopt protective measures to control any immigration influx to the island and foreigners are most often granted permission to settle in Malta on a permanent or temporary basis, or to work on the island only in exceptional circumstances and only if it is felt that such permission would contribute to the island’s economy and well-being. In fact, on examining the situation over recent years, it is clear that the number of licences granted, particularly with respect to employment licences, has fluctuated considerably and this fluctuation is mostly related to the island’s degree of economic development with the passage of time.
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5.4
Trusts AVMT Advocates
Largely modelled on the Jersey law on trusts, the Trusts Act of 19881 regulates the registration of trusts in Malta and defines the qualifications, rights and duties of trustees, beneficiaries and settlors. Under the Trusts Act, a trust exists where a person (trustee) holds or has vested in him property placed in his trust by a person (settlor) under an obligation to deal with that property for the benefit of third persons (beneficiaries), whether or not yet ascertained or in existence, or for a purpose which is not for the benefit of the trustee. A trust is regulated by the Trusts Act if the settlor is not resident in Malta at the time of its creation, the trust property does not include any immovable property (including shares, stock or debentures in a company whose assets include immovable property in Malta or in a company other than an offshore company, registered in Malta) situated in Malta, and none of the beneficiaries are resident in Malta at the time of creation or entitlement. The Trusts Act provides for the creation of various types of trust, the most common of which are: l fixed trusts; l discretionary trusts; l accumulation and maintenance trusts; l protective trusts.
Validity of a trust For a trust to be valid and enforceable, certain factors must be present: there must be certainty of intention to create a trust (as opposed to some other legal relationship or some moral obligation); certainty of subject matter (the property to be subject to trust); certainty of objects 1
Enacted by Act XXXV of 1988, as amended by Acts XIV of 1989 and XX of 1994.
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(the trust must be for the benefit of persons); and the trust must be administratively workable. In addition, trusts will be null if constituted for an illegal purpose or a purpose contrary to public policy.
Intention An intention to create a trust must be clearly manifested. This manifestation must take the form of a written instrument and may be contained either in a valid act inter vivos, in a testamentary disposition or by a unilateral declaration on the part of the trustee. Although under the Trusts Act no particular form of wording is necessary, the wording must be such that a clear intention to create a trust is manifest. The concept of trust implies further that the settled assets must pass entirely into the control and legal ownership of the trustee. If they do not, the relationship would not be one of trust. Therefore, the trustee must appear as the legal owner of the trust property, enjoying all the powers of a natural person having absolute title to such property exercising his power in accordance with his duties stipulated under the trust itself.
Trust property A trust must give rise to a relationship with respect to described, ascertained or ascertainable property. The law does not specify the amount or value of the property to be placed in trust so long as there is an effective transfer of some property into the possession of the trustee. In practice, it is common to have a nominal amount settled into trust, with the deed specifying that other amounts may be transferred. The trustee may be given the power to sell and deal with trust assets. Therefore, the trust fund need not consist of the particular assets originally made subject to the trust. However, nothing stops the settlor from requiring that the original assets be retained throughout the duration of the trust. The property being transferred must be ascertainable and well described. The Trusts Act provides a broad definition of the term property,2 and therefore any kind of property may be made the subject of a trust. The only limitation is that immovable property situated in Malta may not be placed in a Maltese-registered trust. Maltese immovable property is defined as including shares, stock or debentures in a company whose assets include immovable property in Malta or in a 2 In Section 2, Trusts Act of 1988,‘property’ means property of any kind or description, whether movable or immovable, personal or real, and wherever situated, and in relation to rights and interests whether vested, contingent, voidable or future.
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company other than an offshore company, registered in Malta. The above limitation also applies to foreign trusts registered with the Malta Financial Services Authority (MFSA). The distinction between the property held in trust and the property held by the trustees personally is in fact another essential characteristic. The trust property is to be held by the trustee as a separate fund, distinct and separate from that of the trustee, and must be dedicated only to benefiting the beneficiaries or the purpose of the trust and must be free from the claims of the trustee’s own creditors, spouse and heirs.
Beneficiary A ‘beneficiary’ is a person entitled to benefit under a trust. Although the beneficiaries must be identified with certainty, it is sufficient that the beneficiaries will be ascertainable at the stipulated date. Therefore, the deed need not actually identify the beneficiary but must create a mechanism that allows the beneficiary to be identified. If it is determined that the beneficiary will never be identified, the trust would be null. The terms of the trust may provide for the addition of a person as a beneficiary, the exclusion of a beneficiary from benefit, or the imposition on a beneficiary of an obligation as a condition for benefit. The beneficiary may, subject to the terms of the trust, by instrument in writing, sell, charge, transfer or otherwise deal with his interest in the trust or transfer his entitlement and may furthermore disclaim his interest. In addition, if the beneficiaries of a trust are all alive and consenting, they may come together and agree to have the trust terminated. The settlor may himself be named as the beneficiary. In fact, the only limitation on the identity of the beneficiary that exits under the Trusts Act is the fact that beneficiaries cannot be residents of Malta. Where there is more than one beneficiary, the trustees must be impartial and must not execute the trust for the advantage of one, except to the extent that they are so authorized or required by the terms of the trust. Nevertheless, the trustee is given wide discretionary powers in determining the distributions to the beneficiaries and the manner in which the terms of the trust are to be implemented.
Trustees Trustees are appointed in the manner specified in the trust instrument. However, in every Maltese trust at least one of the trustees must be a nominee company licensed by the MFSA to act as such. A trustee may be a physical or juridical person, and there is no limit to the number of
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persons that may be appointed. Furthermore, not all of the trustees need be appointed upon the creation of the trust, and it is possible to have further trustees nominated at a later date.
Powers and duties of trustees In the execution of their duties and exercise of their powers and discretions, trustees are to act with the prudence, diligence and attention of a bonus paterfamilias and observe utmost good faith. Furthermore, trustees must carry out and administer the trust according to its terms and so far as is reasonable must preserve and enhance the value of the trust property. Trustees are to keep accurate accounts and records of their trusteeship and must provide copies of such accounts to beneficiaries within a reasonable time.
Protector The terms of a trust may provide for the office of protector who will have the power to appoint new or additional trustees and to remove trustees. In the exercise of his office, the protector is not deemed to be a trustee. The protector has no duties in the administration of the trust, but is given the power of veto. Depending on the intentions of the settlor, the protector may be given very wide powers. The settlor may not himself be the protector, but there is nothing which precludes the beneficiary from being appointed protector. The latter arrangement is rare in practice owing to the real possibility of a conflict of interests and that the other beneficiaries might challenge his actions.
Registration of trusts A Maltese trust must be registered with the MFSA. Registration is effected by filing with the MFSA a certified copy of the trust instrument and a declaration that the trust satisfies the requirements of the law. The trust instrument is only valid if created by a will or other written instrument, in English, specifying the name of the trust. However, a unilateral declaration of trust has the same effect as a written instrument. A unilateral declaration of trust is a written declaration made by a nominee company stating that it is the trustee of a trust. The declaration must give the name and terms of the trust and the names or means for identifying the beneficiaries. A unilateral declaration need not contain the name of the settlor but must state that the settlor is qualified to act as such at the date of the declaration.
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Similarly, a foreign trust in which the settlor and the beneficiaries are not resident in Malta and the trust property of which does not include immovable property in Malta may also be registered with the MFSA. The MFSA will register the trust, whether foreign or local, and issue a certificate of registration on being satisfied that registration requirements have been met and the registration fee paid. The trustee is also bound to register any changes in a trust instrument and changes are without effect until they have been registered. Furthermore, irrespective of the cause or reason of termination the trustee is also to give notice to the MFSA of the termination of the trust. Similarly, a trustee of a foreign trust may by notice in writing request MFSA to cancel the registration of the foreign trust. The MFSA keeps a register of all trusts registered with it and records any changes notified to them and such other matters as it deems appropriate to register. The registration of a trust is deemed to constitute a contract between the government of Malta and the trust guaranteeing the rights and fiscal exemptions and privileges provided by law, which benefits are explained below. This guarantee is subject only to the due observance of the Act. This guarantee, which is valid for a period of 10 years from the registration of the trust, applies also against retrospective actions, whether by legislation or otherwise, which nullify any rights or fiscal exemptions and privileges guaranteed. A trust may continue until the 100th anniversary of the date on which it came into existence and, unless terminated earlier, will then terminate. However, this does not apply to trusts set up for a charitable purpose, the duration of which may exceed 100 years.
Fiscal benefits The tax chargeable under the Income Tax Act on the income of a trust and on any income of a Beneficiary arising from such trust is €500 for each year of assessment, and is payable by the trust to MFSA on behalf of the commissioner for Inland Revenue not later than the end of January of each year following the registration of the trust. No stamp duty is chargeable in respect of any asset held under a trust by any person in respect of his interest as the beneficiary, or in respect of any document concerning a trust property. Any property held under a trust is exempt from customs duty when imported into Malta. However, that duty is payable if and when such property is sold, assigned or otherwise transferred to any person resident in Malta.
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The Exchange Control Act does not apply to any transaction or operation concerning or relating to trusts or any property held thereunder. However, this exemption does not apply to transactions or operations carried out with persons resident in Malta. Where the declaration in lieu of a tax return, as set out in the Trusts Act, has been submitted to the commissioner for Inland Revenue by the trustee, the trust, the trustee and any person having an interest in the trust is not required to furnish any return, information or other details that could be due or required under the Income Tax Act in relation to that trust. A trust ceases to be entitled to the exemptions, benefits or other privileges of a trust if the tax due each year under the Trusts Act is not paid within three months of the due date.
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5.5
SME Sector Enterprises Institute for the Promotion of Small Enterprise Limited
Malta’s relative success over the past four decades in building an industrial base has primarily been due to a well-defined competitive factor – the availability of an abundant labour force at relatively cheap wages. This competitive edge is disappearing however as local labour costs continue to rise while emerging economies to the east and south of Malta open up to the global economy with ample pools of cheap labour. The basic minimum wage in Malta is far higher than most of the other EU candidate countries. While the minimum monthly wage in Malta amounts to around €550, it is only around €200 in Hungary and the Czech Republic. In this context, Malta has to consolidate and rationalize its existing economic and industrial structures while preparing itself for the knowledge society. The country’s success depends on its ability to upgrade its management resources, both in the public and private sectors. In particular, local management has to develop a competence in strategy thinking and planning. Business leaders have to strive to encourage all those around them to become more enterprising, take initiatives, self-manage and generally become oriented towards life-long improvement. A significant portion of the current industrial base is currently in the process of restructuring in the light of the ongoing changes taking place in the external environment. Indigenous manufacturing operators cannot, and should not, isolate themselves in a vacuum. The majority of these sectors cannot survive, let alone thrive, on the basis of protectionism or reliance upon Malta’s restricted internal market. While the trend towards globalization and ongoing liberalization may be seen as threats in the short term, such factors should be considered as the catalysts that may stimulate the development of a healthy and thriving indigenous industrial sector in Malta.
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Only those enterprises with the right culture, capable of adopting to change as a way of managing their day-to-day business and leveraging core competences and key resources to generate greater value, are likely to meet the challenge of industrial restructuring. Diffusion of economic activities across boundaries is now irreversible. The issue of globalization has even led to some academics signalling the end of the nation state as multinational corporations spread their operations across the four corners of the globe. Protective trade barriers are being abolished and averaged a mere 5 per cent in 1995. The globalization or internationalization process does not merely involve the geographical extension of economic activity across national boundaries, but more radically the functional and organic integration of such dispersed activities. Advances in technology and cheaper and faster transportation methods ensure that distance across markets no longer serves as a buffer for natural protectionism. To support higher wages and profits, a nation must increase its productivity and produce higher value added products. Given the nature of the Maltese market, the classification of enterprises according to number of employees is: l micro: up to 5 employees; l small: 6–50 employees; l medium: 51–150 employees; l large: in excess of 150 employees.
The overwhelming majority of enterprises in Malta are micro in nature. Surveys conducted by the National Office of Statistics have revealed that smaller domestically oriented firms are a very important contributor to the employment market. Micro-enterprises in certain manufacturing sectors such as woodwork, have traditionally produced items to cater for the specific requirements of their clientele. This fragmented approach has tended to raise unit costs and also to diminish their ability to acquire the minimum amount of financial and human resources necessary to thrive in today’s increasingly competitive environment. Restricted to relatively small production lines, the trend has been for them to invest less in machinery and product development and therefore there has been less opportunity to delve into marketing and management skills. The restructuring process of SMEs calls for a three-fold approach which is essential to ensure a striving and healthy SME sector in Malta.
Changing the business culture Facilitating a change in culture is perhaps the most fundamental aspect of the strategy. Entrepreneurs have to realize that they operate in a
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constantly changing global market. Internal and external forces are all the time impinging on the scenario and entrepreneurs are requested to revise their operations accordingly to meet these challenges.
Strategic re-orientation Emerging business scenarios point to ‘value creation’. This adjustment entails acknowledging that business is changing from essentially a supplier’s to a buyer’s market. This marketing orientation demands a strategy that identifies key market segments which are best served by the core competences of the enterprise. Most local SMEs have yet to grasp the concept of such analysis which determines the opportunities and threats given the enterprise’s strengths and weaknesses. The business plan translates this thinking process into a tangible strategy that can be implemented by entrepreneurs.
Building the right technical capabilities It is not enough for enterprises to strive for survival. Their evolution has to be along the same lines as the demands imposed by technology and innovation. Enterprises need to shape their operations and find the necessary resources so as to be in a position to tap opportunities and overcome challenges at a profit. The government recognizes the need for continuing facilitation of the business environment and the development of an entrepreneurial and innovative culture. The promotion of entrepreneurship in the context of a national industrial policy must ensure that entrepreneurs have access to the right training and educational tools as well as access to the financial and technical assistance that is specifically designed to address their needs. At enterprise level, the Institute for the Promotion of Small Enterprise offers assistance to start-up operations through counselling and financial assistance, including a loan guarantee scheme that facilitates the enterprise’s access to capital. This is often the first stumbling block to prospective entrepreneurs in their bid to raise the necessary finance to start their venture. At individual level, SMEs must be encouraged to form networks. Such collaboration will allow enterprises to cater for a niche market which was previously out of their reach. Case studies in other countries have repeatedly shown that the international competitiveness of a sector is less dependent on the innovative efforts of one enterprise and more on the critical mass generated in clusters of such enterprises.
Appendices
Appendix 1
Useful Business-related Websites Government of Malta http://www.gov.mt University of Malta http://www.um.edu.mt Central Bank of Malta http://www.centralbankmalta.com Malta Financial Services Centre http://www.mfsc.com.mt The Malta Chamber of Commerce http://www.chamber.org.mt Malta Federation of Industry http://www.foi.org.mt Malta Tourism Authority (formerly NTOM) http://www.visitmalta.com Malta International Airport http://www.maltairport.com Malta Freeport http://www.freeport.com.mt Sea Malta http://www.seamalta.com
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Malta Maritime Authority http://www.mma.gov.mt Ministry of Foreign Affairs (including details of all Maltese embassies and consulates abroad) http://www.foreign.gov.mt/ORG/ministry/default.htm Malta Business Weekly http://www.business-line.com Malta Business Times http://www.businesstimes.com.mt Trade Partners UK http://www.tradepartners.gov.uk The Malta External Trade Corporation (METCO) http://www.metco.com.mt/main.htm US Embassy Commercial Section Malta http://usembassy.state.gov/malta/wwwhcomm.html British High Commission in Malta Commercial http://www.britain.com.mt/Commercial.html Malta Development Corporation http://www.investinmalta.com
Appendix 1: Useful Business-related Websites
Appendix 2
Contributors’ Contact Details AVMT ADVOCATES Level 15 The Business Tower St Julians Malta Tel: +356 21 38211/ 21 382999 Fax: +356 21 388698 Contact: Dr Anton Micallef Email:
[email protected] Central Bank of Malta Castille Place Valletta, CMR 01 Malta Tel: +356 2550 0000 Fax: +356 2550 2500 Web: www.centralbankmalta.com Email:
[email protected] Deloitte & Touche 1 Col. Savona Street Sliema SLM07 Malta Tel: +356 21345000 Fax: +356 21344443 Email:
[email protected]
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EMCS Limited Enterprise Consultancy Services PO Box 7 Naxxar Malta Tel: +356 7942 3474, +356 21 385131 Fax: +356 21 385131 Email:
[email protected] Web: enterpriseconsult.com HSBC Malta Corporate Strategy & Research Department HSBC Bank Malta plc 233, Republic Street Valletta VLT05 Tel: +356 230406 Fax: +356 25972366 Web: www.hsbcmalta.com Contact: Timothy H Fitzpatrick, COO (Chief Operating Officer) Institute for the Promotion of Small Enterprises Limited (IPSE) Small Enterprise Centre Marsa Industrial Estate Marsa, LQA 06 Tel: +356 21 233838 Fax: +356 21 234045 Contact: Pierre Cassar, Communications Manager Web: www.ipse.org.mt Malta Communications Authority Suite 43/44 Il-Piazzetta Tower Road SLIEMA SLM 16 Malta Tel: +356 21 336 840 Fax: +356 21 336 846 Email:
[email protected] Web: www.mca.org.mt
Appendix 2: Contact Details
Malta Development Corporation Triq l-Industrija Qormi PO Box 141 GPO 01 Marsa Malta Tel: +356 21441888 Fax: +356 21441887 Contact: Stephen Zerafa, Communications & Public Relations Email:
[email protected] Web: www.investinmalta.com Malta-EU Information Centre 36 Archbishop Street Valletta VLT08 Malta Tel: +356 21247109; 21226331 Fax: +356 21247170 Email:
[email protected] Contact: Simon Busuttil Malta External Trade Corporation (METCO) Trade Centre, Industrial Estate San Gwann SGN 09 Malta Tel: +356 2144 6186 Fax: +356 2149 6687 Email:
[email protected] Web: www.metco.net Malta Financial Services Authority Notabile Road Attard BKR 14 Malta Tel: +356 21 441155 Fax: +356 21 441189 Email:
[email protected] Web: www.mfsa.com.mt
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Malta Freeport Malta Freeport Terminals Limited Freeport Centre Port of Marsaxlokk Kalafrana BBG05 Malta Tel: +356) 21 650200 Fax: +356 21 654814 Email:
[email protected] Web: www.maltafreeport.com.mt Contact: Anton J. Said, Manager, Business Information & Technology Division Malta Insurance Association 43A/2 St Paul’s buildings West Street Valletta VLT 12 Malta Tel: +356 21 232640 Fax. +356 21 248388 Email:
[email protected] Malta Tourism Authority Auberge D’Italie Merchants Street Valletta CMR 02 Malta Tel: +356 22915800 Fax: +356 22915893 Email:
[email protected] Web: www.visitmalta.com Valletta Fund Management Ltd Level 6, The Mall Offices Floriana VCT I6 Tel: +356 21 227311 Fax: +356 21234699 Web: www.vfm.com.mt
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Index accident insurance 155 accommodation, tourist 72 accounting 190–97 financial statements 191–92 standards 192–97 taxation 188 Acquisition of Immoveable Property by Non-Residents Act 1974 177 ADSL technology 83, 107 Advance Revenue Rulings 174 agriculture 36–37, 115–19 EU concessions 63 foreign trade 55 agro-industry 116–19 Air Malta 72 allowable deductions, for tax purposes 185–86 A&P Appledore 85 anti-money laundering laws 142–43, 148 Arab rule 5 arbitration 201–05 types 203–05 Arbitration Act 201–03 asset revaluation 193 Association Agreement 13, 60 audit 196–97 auditors 197 banking 145–48 Banking Act 140, 145 bareboat charter registration benchmark study, furniture industry 124–26, 125 beneficiaries of trusts 222
97
beverages industry 116 foreign trade 56–57 Blevins Franks case study 165–68 bonds, corporate 152 bonds, government 152 Brindisi Terminal Italia S.p.A 90–91 British sovereign protection 6–7 broadband access 83, 107 Bronze Age 4 Business Promotion Act 180, 181 business structures 171–75 company formation and registration 172 ITCs 173–75 Cabinet 11, 17–18 cable communications 82, 82, 107 capital markets 151–53 cars, import by residence permit holders 215 Carthaginian rule 4 CE mark 77 Central Bank 138, 149–50 chargeable income for tax purposes 185 chemicals industry, foreign trade 55 classification societies, vessel registration 98 climate 3 clothing industry, foreign trade 56 CMC Co Limited 90 collective investment schemes 153, 161, 163–64
238
Index
collective responsibility concept 17–18 communication equipment, foreign trade 56 companies 171–75 Companies Act 1995 141, 171, 173, 190, 191, 192 competencies/incompetencies, furniture industry 125, 125–26 competitive factors/obstacles, furniture industry 125, 126 Comptroller of Industrial Property 207, 211 compulsory motor insurance 159 Computer Misuse Act 106 consolidation practices, accounting treatment 196 Constitution 15–18 history 7–8, 24 Constitutional Court 25 construction industry 36 convenium agreements 176–77 Copenhagen Summit 63 corporate bonds 152 corporate law 141–42 corporate structures 171–75 court system 11, 24–25 credit institutions 140–41 credit ratings 153, 153 cropping and horticulture 115 cruise liner industry 38, 69 currency translation, accounting treatment 195 dairy sector 115–16 Data Protection Act 105 deductions from income for tax purposes 185–86 deferred tax accounting 195 deliberative function of parliament 19 depreciation 193 distribution recommendations, furniture industry 128
distripark facilities, Malta Freeport 89 dividends, accounting treatment of 194 domestic arbitration 203–04 domestic banks 146–47 domestic exports 45, 46 ‘domicile’ status 184 double taxation treaties 95, 143, 147, 173 duty on documents 189 Duty on Documents and Transfers Act 1993 175, 184, 216 EcoMod report 65 economic situation 28–43, 28, 30, 43 government finances 31–35, 33, 34, 35 implications of EU membership 64–65 productive activities 35–37 prospects 43 service activities 37–39, 38 social welfare 29–31, 30, 31 see also labour market; foreign trade education 12 e-government 104–05 electoral system 21 electrical machinery, foreign trade 56 Electronic Commerce Act 26–27, 106 employment Malta Freeport 91 printing industry 113 tourist industry 69–70 employment licences 218–19 equities 152–53 equity capital, accounting treatment 195 EU (European Union) accession 11, 59–66, 180, 183 chronology 10, 13–14, 59–61
Index
main negotiating issues 62–63 political and economic implications 64–65 referendum 62 Exchange Control Act 225 exchange controls 151 exchange rate peg 149, 151 exports see foreign trade fees, ship registration 99–100 finances, government 31–35, 33 public debt 33–35, 34, 35 financial function of parliament 19–20 financial instruments, accounting treatment 196 Financial Intelligence Analysis Unit 38 financial package negotiations, EU accession 63 financial services 38, 137–44 anti money-laundering legislation 142–43 corporate and trust law 141–42 foreign trade 58 historical background 137–38 legislative framework 25–26, 139–41 regulatory authority 138–39 tax structure 143–44 financial statements 191–92 fisheries industry 36–37 foreign trade 55 fixed telephony 79–81, 80 food industry 116–19 foreign trade 56–57 foreign banks 147 foreign currency earner, Freeport as 91 foreign trade 40–41, 41, 42, 44–58, 45, 57 current origins and destinations 51–53, 53, 54 exports 45–48, 46, 47, 48, 49, 49–51, 50, 51, 52
239
furniture industry 121, 123–24, 123 imports 49, 50 selected sectors 55–58, 57 tourism 57, 70 Franks, David 165–68 free movement of workers, EU concession 63 Freeport see Malta Freeport Freeport Training Centre 92 furniture industry 120–33 domestic demand 120–22, 121 domestic supply 122–28, 122, 123, 125, 127 foreign trade 57 recommendations to entrepreneurs 128–33, 131, 132 GDP growth 28, 28 geography 3 Ggantija phase 4 global network connections, Malta Freeport 91–92 globalization issues 226–27 goodwill 194 Gozo 3, 73 government bonds 152 government grants, accounting treatment 193 government of Malta 10–11, 15–23 current job holders 22–23 finances 31–35, 33, 34, 35 history 7–10 grants, accounting treatment 193 Great Siege of Malta 6 Group Money Laundering Deterrence programme 148 history of Malta 3–10 horticulture 115 hotels 72 House of Representatives 18, 21 HSBC Bank Malta 148
10–11,
240
Index
HSBC Fund Management (Malta) Limited 161 HSBC Holdings plc 147–48 IFAC (International Federation of Accountants) 190 Immigration Act 215, 218 import duty relief 182 imports see foreign trade incentives for investors 179–82 taxation 181, 188–89 income tax 184–88 Income Tax Act 97, 173, 184 Income Tax Management Act 173, 184 inflation 43, 43 Information Systems Strategic Plan (ISSP) 102, 104 information technology (IT) 101–10, 109 availability 107–08, 108 e-government 104–05 foreign trade 58 Internet 106–07 labour force 102–04, 104 regulatory framework 105–06 Institute for the Promotion of Small Enterprises (IPSE) 36, 228 Institute of Tourism Studies (ITS) 70 insurance 140, 154–59 local and foreign companies 156–57 policyholder protection 157 taxation 158 types 154–56, 158–59 Insurance Brokers and Other Intermediaries Act 140, 156 Insurance Business Act 1998 140, 156, 158 insurance intermediaries 157–58 intellectual property 206–14 patents 206–10 trademarks 210–14
interest, subsidies on loan 181 interest capitalization, accounting treatment 194 international commercial arbitration 204–05 international credit ratings 153, 153 International Federation of Accountants (IFAC) 190 international holding companies 175 international trading companies (ITCs) 173–75 Internet 83, 106–07 Internet service providers 79 inventions 206–10 inventory valuation, accounting treatment 195 investment funds and services 160–64 case study 165–68 Investment Services Act 139, 144, 160–61 investment services licences 139 investor incentives 179–82 IPSE see Institute for the Promotion of Small Enterprises ISSP see Information Systems Strategic Plan IT see information technology ITCs see international trading companies ITS (Institute of Tourism Studies) 70 judicial function of parliament judiciary 20–21 Knights of St John
6
labour market 29, 30, 179 IT industry 102–04, 104 language 12 leased assets, accounting
20
Index
treatment 194 legal codes 25 legal system 11, 24–27 legislative function of parliament 19 legislature 18–20 letting of property 178 licensing investment services 139 registered trademarks 214 life insurance 155 limited liability companies 171–72 linked long-term insurance products 158–59 livestock sector 115–16 living standards 12 loan guarantees 182 loans 181–82 local councils 21 Malta Arbitration Centre 202, 205 Malta Communications Authority (MCA) 76–77, 78 Malta Development Corporation 36, 182 Malta Enterprise 36 Malta External Trade Corporation (METCO) 36 Malta Financial Services Authority (MFSA) 25–26, 38, 138–39 company registration 172 insurance regulation 156, 157 registration of trusts 223–24 training advice 167 Malta Financial Services Authority Act 139 Malta Financial Services Centre (MFSC) 138 Malta Freeport 58, 84–93, 93 ancillary activities 88–90 corporate structure 87 developments 85–87 effect on local economy 90–92
241
Malta Freeport Corporation Limited 85 Malta Freeport Terminals Limited 87–88 Malta Freeports Act 85 Malta International Airport plc 39, 69 Malta Maritime Authority 94 Malta Stock Exchange 151–52, 161 Maltacom plc 39, 78–79, 79–80, 83 Maltapost plc 39 manufacturing sector 35–36 foreign trade 55–56 marine, aviation and transit insurance 155 Maritime Transport Services 85, 87 Marsaxlokk Port project 85 MCA see Malta Communications Authority MCAST college 103 medical and precision equipment, foreign trade 56 Melita Cable plc 79, 82, 83 Merchant Shipping Act 95, 97 Merchant Shipping Directorate 94 merger accounting 193–94 METCO (Malta External Trade Corporation) 36 MFSA see Malta Financial Services Authority MFSC see Malta Financial Services Centre micro-enterprises 227 minimum wage levels 226 ministerial responsibility 18 ministers, current post holders 22 ministry contact details 22–23 Mobile Communications Limited 79 mobile telephony 81, 81
242
Index
monetary policy 149–53 capital market 151–53 international credit ratings 153, 153 Monetary Policy Advisory Committee (MPAC) 150 money laundering 142–43, 148 motor insurance 154, 159 MPAC see Monetary Policy Advisory Committee national heritage sites 73 National Strategy for Information Technology (NSIT) 102 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 205 non-life insurance 154–55 non-residents, property purchase 177 NSIT (National Strategy for Information Technology) 102 Office of the Comptroller of Industrial Property 207, 211 official external reserves 150 oil terminal 90 Oiltanking Malta Limited 90 Order of St John 6 ‘ordinary residence’ status 184 overnight lending facilities 150
permanent residence scheme 215–18 ‘plankton’ grouping, furniture industry 131, 132, 133 plastics industry, foreign trade 55–56 Policyholders’ Protection Fund 157 political situation 15–23 implications of EU membership 64 population 11–12 president, role of 15–17 prime minister, role of 17 printing industry 111–14 operating companies 113–14 private companies 173 privatization 39–40 Product Safety Act 77 professional investor funds 163 Professional Secrecy Act 143 property, trust 221–22 property insurance 155 property legislation 176–78 property purchase, EU derogation 63 protectors of trusts 223 public companies 173 public debt 33–35, 34, 35 public transport system tourism industry 73 quarrying industry
package holiday business 71–72 paper products industry 111–14, 113 parliament, functions of 18–20 patents 206–10 infringement 209–10 registering procedure 207–08 Patents Act 206 pegged exchange rate 149, 151 pensions 156, 163 accounting treatment of costs 196
36
Radio & Telecommunications Terminal Equipment Regulations 77 R&D expenditure, accounting treatment 194 RDP (Rural Development Plan) 117–19 Recognition of Trusts Act 142 referendum, EU accession 62 registration companies 172
Index
ships 94–100 trusts 223–24 regulatory framework financial services 137–44, 167 investment services 162, 163, 167 IT industry 105–06 telecommunications 76 religion 12 research and development expenditure, accounting treatment 194 residence permits 215–18 ‘residence’ status 184 retirement funds 140 Roman rule 4–5 rubber and plastics industry, foreign trade 55–56 Rural Development Plan (RDP) 117–19 salary levels, IT sector 104, 104 sale and purchase agreements 176–77 service sector 37–39, 38 services industry, foreign trade 57–58 ‘shark’ grouping, furniture industry 131, 132, 132 ship registration 94–100 procedure 95–96 registration fees 99–100 taxation 96–97 ship repair industry, EU concession 63 Sicilian rule 5–6 Single Programming Document 64–65 small and medium-sized enterprises see SME sector enterprises SME sector enterprises 226–28 restructuring process 227–28 social indicators 12, 31 social security 189
243
Social Security Act 1987 184 social welfare system 29–31, 30, 31 soft loans 181 ‘sole’ grouping, furniture industry 131, 132, 132 Special Funds (Regulation) Act 140, 163 Special Market Policy programme for Maltese Agriculture 37 specialization recommendation, furniture industry 129–30 stamp duty 216 strategic groupings, furniture industry 131–33, 131, 132 tax returns 186–87 taxation 143–44, 173, 181, 183–89 deferred tax accounting 195 income tax 184–88 insurance companies 158 international trading companies 173–75 investment funds 163–64 payment 187 permanent residence permit holders 216 rates 187 revenue from 32 ships 96–97 trust income 224–25 see also VAT telecommunications 75–83 cable 82, 82 fixed telephony 79–81, 80 global context 75 Internet 83 local context 77–78 local sector 78–79 mobile telephony 81, 81 regulatory framework 76–77 Telecommunications (Regulation) Act 1997 (TRA) 76 tour operator business 71–72
244
Index
tourism industry 37–38, 38, 69–74 foreign trade 57, 70–71 TRA (Telecommunications (Regulation) Act 1997) 76 trade see foreign trade trademarks 210–14 infringement 213–14 registration 210–12 Trademarks Act 210 training arrangements 182 investment sector 167 IT 102–03 tourism 70 transhipment activities 39, 58 see also Malta Freeport trust law 141–42 trustees 222–23 trusts 220–25 Trusts Act 1988 142, 220 UNCITRAL Model Law 204 University of Malta 12 IT degrees 102–03
tourism degree 70 University of the Third Age 12 unusual items, accounting treatment 196 Valletta 6 Valletta Fund Management Limited 161 Value Added Tax Act 1998 184, 189 value creation 228 VAT (value added tax) 42, 189 cars of residence permit holders 215 Vodafone Malta Limited 79 wage levels, IT sector 104, 104 welfare system 29–31, 30, 31 ‘whales’ grouping, furniture industry 131, 131–32, 132 wood furniture industry see furniture industry World Heritage sites 73
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