The Business Observer 19th June Issue 2014

INDUSTRY FOCUS

Issue 3

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June 19, 2014

Distributed with Times of Malta

With rising demand for rental properties and a slowdown in the number of construction projects, what lies ahead for this sector and what needs to be done? see page 9, 10 and 11 >

NEWS Oil companies are interested in exploring but not until territorial disputes are solved. MOG founder Tony Trevisan does not beat around the bush ... see page 3 >

Electricity tariff reduction will save businesses €50m Vanessa Macdonald Reducing business electricity tariffs by 25 per cent would save them €50 million, according to Energy Minister Konrad Mizzi – but they are going to have wait until 2015.

The government promised to reduce business tariffs in spring 2015 – a year after the tariffs were reduced for residential customers. But the Malta Chamber of Commerce, Industry and Enterprise appealed to the government to consider reducing them now, as a way to incentivise investment and job creation. In Germany, electricity tariffs were actually reduced for business first and then for residents.

However, reducing the tariffs for Maltese businesses now would mean €50 million more added to Enemalta’s losses, Dr Mizzi explained.

which is being made over a oneyear period.

“But we cannot reduce the tariffs for businesses until we reduce the costs of generating electrictiy.

“e most important factor is that we will be reducing generating costs ... with the new gas-fired power station” “We were able to reduce the tariffs for residential customers – which cost us around €27 million – through the €30 million advance payment from Shanghai Electric,

By next year, a number of factors will come into play which will enable us to do so: we have reduced theft and are addressing inefficiencies. But the most important

NEWS

factor is that we will be reducing generating costs,” he went on.

The government is doing this through the construction of a new gas-fired power station – which is to be ready by 2015 – and an interconnector cable, which should be in place by December 2014 to deliver electricity from the European mainland by the first quarter of 2015.

“The savings we make will be enough to compensate for the reduced income from business.

Electricity from Electrogas will have an average price of 9c6 per unit. For the interconnector we are going through a competitive Continued on page 3 >

e NSO has calculated that €40 million is spent every year online by the Maltese – the first estimate of revenue lost by local retailers. see page 8 >

INTERVIEW With permit delays at Tigné costing €10,000 a day, MIDI chief executive Luke Coppini focused on reducing lending costs. see pages 14, 15 >

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AN OIL RIG ARRIVES IN MALTA FOR A REFIT BEFORE PROCEEDING TO DRILL.

Oil investors biding time till disputes solved Territorial disputes hanging over parts of Maltese oil licensing areas may be deterring actual investment, but there is still no shortage of interest from oil companies.

Sources close to the government said that a substantial number of reputable oil companies have shown interest in Malta’s offshore acreage over the past 12-15 months and have even made visits to view data from previous explorations.

“The government is very prudent about who gets access to these data, as they give significant information about the potential of Malta’s offshore acreage and have great commercial value.

“It is worth a fortune to countries which claim the territory ...” the sources said.

Neighbouring states have registered claims over part of Malta’s 76,000 sq. km acreage: Italy to the northwest and northeast, Tunisia to the west and Libya to the south.

Therefore, apart from Area Three and Area Four (see map), there are other areas that are affected by overlapping interests.

Court action has been suspended since a 1985 ruling by the

< Continued from page 1 process as we speak, but it will be a bit higher than that – of course, without considering the cost of the infrastructure,” he said.

Dr Mizzi said that the 25 per cent reduction will be applied to each tier as there are different ones for business depending on their consumption. However, the intention is to reduce them for all companies across Malta – whatever their size and sector – at the same time.

The lower tariffs will have a significant impact, especially

International Court of Justice. Now, according to Infrastructure Minister Joe Mizzi, the government is opting for a pragmatic “joint activity” approach without prejudice to sovereign rights, and in this scenario each state would suspend its continental shelf claims for an agreed number of years to enable joint exploration to proceed.

This would not come a moment too soon: Malta has a number of blocks which are currently open for licensing. Tony Trevisan, founder and significant shareholder of Mediterranean Oil and Gas, currently drilling the Ħaġar Qim exploratory well, made it clear that territorial disputes deter investors.

“Exploration and drilling is a very expensive business and it makes no sense to make discoveries or fund research on behalf of other nations, particularly bigger and more influential ones.

“And let’s face it. All of the nations surrounding Malta’s waters are much bigger and more influential countries,” Mr Trevisan told the Business Observer.

The government does not spend a cent on the seismic studies or ex-

ploratory drilling – on the contrary, it receives hundreds of thousands of euros from the licensees. Investors can make significant gains if oil is found in viable amounts – but if not, they lose everything .

“It clearly makes no economic sense for any government to spend tens of millions of euros in acquiring seismic and other technical studies, given the very real and significant sovereign risks attaching to most of Malta’s licensed areas,” Mr Trevisan said, noting that Heritage Oil – a substantial exploration and production company – has sat on important and promising acreage

to the south of Malta for seven or more years without any drilling.

“The government had extended the original agreement and is still receiving revenue from the company, but the sacrosanct contractual requirement to drill one or two wells has been neatly sidestepped without forfeiture of the licences, and frankly, for good reason as Heritage – not unlike any other commercial enterprise – will not spend the vast sums of money required to drill offshore without security of tenure over their licences. And currently they don’t have that.

when one considers that electricity costs can account for 5-6 per cent of a manufacturing company’s costs, and that for a hotel, it would mean €250,000 off a €1 million bill.

But Dr Mizzi reluctantly admitted that businesses will just have to hang on.

“It is already June. At least they know that in nine months’ time they will have a 25 per cent reduction and that the prices will not increase for five years.

This is very important. During that time, the gap between our electricity costs and the EU aver-

age will narrow,” he said, adding that reports he found when Labour got into government said tariffs would have to go up by 30 per cent for Enemalta to become sustainable.

The government is under pressure from international agencies and the European Commission to make Enemalta sustainable.

Enemalta will actually be cutting its costs by more than the reduction it is giving businesses, meaning that its losses will get lower and lower each year. Last year, it reported a loss before tax of €31.6 million, forecast

to go down to €19.6 million this year, thanks to the €30 million advance being paid by Shanghai Electric.

“We have no choice. It has to become profitable within a 3-4 year period. We need a decent return in accordance with shareholder objectives.”

Shanghai’s €320 million overall injection will pay off barely half of Enemalta’s €850 million debt. The rest will have to be repaid in different programmes. At the moment, the government is in discussion with banks on which loans

“Parts of the acreage licensed to Heritage have been reported as having technically compelling evidence of a geology which is synonymous with other certain discoveries in northern Africa. Heritage is an aggressive multi-billion-pound explorer and the only impediment to drilling is Libya’s (and more recently Italy’s) territorial claims and uncertainty over the sea shelf.

“Overall I think Malta’s resources department has managed the situation very well by negotiating licences over the relatively smaller, Continued on page 5 >

can be repaid, depending on the covenants.

“We will soon reach an agreement so that by the end of year, all the transactions can be executed. All Enemalta’s debt to government will also have been paid by then. Apart from lowering the debt, we will also have less investment to make in the future as the conversion to gas will be funded by SE – we pay only a fraction – leaving us to channel our funds towards distribution, especially in the north and where there are most power cuts.”

e Business OBSERVER

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Oil? When will we know?

< Continued from page 3 non-contentious areas – certainly the most pragmatic and realistic way in the circumstances,” he said.

Mr Trevisan also warned that success in any area could exacerbate the territorial disputes.

“Anyone who believes Tunisia, Libya and Italy are likely to step back from their growing territorial claims over previously recognised Maltese waters is living on a different planet ... Exploration success in non-contentious areas would likely further inflame those claims.”

He said multi-billion companies like the operator of Area Four, Genel, employ an “army of geologists and geophysicists” with considerable experience in exploratory drilling, production and development. Companies would not drill if the prospects of success were much less than one in five.

“Exploration and more particularly offshore drilling is a calculated risk by the companies who undertake it. It may be compared to a lottery with some inside information.

In this case Genel are punting some $30 million dollars based on a technical hypothesis which may or may not be correct, and running the chance of either writing off that cost and walking away with nothing, or potentially making billions of dol-

“Overall I think Malta’s resources department has managed the situation very well” – Tony Trevisan lars. We can all scale those numbers back and can relate to the trade-off between risk and reward.”

The sources also believe that there must be sufficient reason to support the interest.

“There is enough evidence to justify the investment made so far

by Heritage, Cairn (Capricorn) and Genel/MOG (Phoenician). Judging by the interest shown, there are many investors out there biding their time until the results of Ħaġar Qim are known in the coming weeks (see box),” the sources said.

“If they are positive, we should expect to see interest stirring for the rest of the area available. And people often overlook that even if Ħaġar Qim itself is not a discovery, additional exploratory wells might still be drilled by Genel/MOG”, if the data gained from this drilling supported the geological model the operator was following, the sources said.

In fact, the second well is very often considered to be more viable than the original one.

MOG’s directors are currently recommending approval of a £29.3 million take-over bid by Rockhopper, which actually includes a contingent payment to shareholders based on a 100-million-barrel discovery at Ħaġar Qim – but not from any subsequent wells. Rockhopper has asked for the consent of the take-over from the Maltese government – but it will also require approval by the takeovers panel of the London Stock Exchange, MOG shareholders at a general meeting to be called and the British Court in the coming months.

Exploratory drilling started in May and will last between 45-55 days, so by the end of August we could be talking about the next phase, a Genel spokesman said.

There are around 120 people on the Paul Romano rig, including some 50 Maltese. The rig is drilling in waters that are 450m deep, considered to be deep but not excessively so.

“The deeper it gets, the harder it is for a rig to anchor,” the spokesman explained.

The objective of the well is around 2,500m below seabed.

Tony Hayward, the CEO of Genel, the majority shareholder in the consortium holding the licence to explore Area 4, is predicting a one-in-five chance of finding oil, but the odds could be twice that.

While it may be wildly premature to predict whether oil or gas would be found in commercial quantities, a few reality checks based on industry case studies may help to understand the timeline.

If a discovery were made, an appraisal programme would take place over three years to determine whether the discovery can be considered as a Commercial Petroleum Field. If this is the case, then it would take several other years until the field starts to be developed in accordance with a development plan.

There are examples where this was done faster – like the Jubilee field in Ghana which was in production after just four years. But some projects – such as some in Angola – took 10 years. The average tends to be around seven years.

Of course, this all depends on whether the finds make commercial sense – but the relatively low costs of drilling in the Mediterranean compared to places like the North Sea mean that if the price of oil were to fall from the $100 level to even below $80, it could still be profitable, sources familiar with the industry said. Having said that, drilling in Malta would cost substantially more than in the Adri-

atic, for example, due to the water depth.

And what if oil were found?

Due to the distance of the field from Malta, the sources said that the most likely solution would be a floating production, storage and offloading (FPSO) unit. This is a floating vessel which takes the hydrocarbons, processes them, and stores the oil until it can be offloaded onto a tanker or, less frequently, transported through a pipeline.

The next question on people’s minds would be what Malta stands to gain from any eventual production. The details of Malta’s Production Sharing Agreement (PSA) were never revealed, but sources indicated that they are more or less in line with industry standards. Mr Hayward had described the terms as “very competitive” during a recent interview.

“The PSA covers a number of things such as who pays for the exploration and what the tax on petroleum found would be. And then it is up to the government to determine what level of impact they want the production to have on the country. For example, Trinidad and Tobago, which derives some 40 per cent of its GDP from oil and gas, managed to retain a strong tourism interest. It is possible to leave things offshore and have a minimal impact on tourism, fishing, the environment and so on,” the sources said.

Malta could still provide logistical support – such as warehousing and storage for drilling equipment, materials and fluids – and supply boats would be used to transport this to the production rig (the Paul Romano is only for exploration). Crew changes could also be done through Malta via helicopter.

The sources had an optimistic note on which to end. Even if the Ħaġar Qim well is not successful, there could still be oil or gas just a short distance away.

“So more exploratory wells might be drilled! We should never give up!” the sources said.

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e Business OBSERVER

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NEWS

Government should consider private stocks placement with wealth funds – Bonnici The government should consider diversifying its placement of Malta Government Stocks (MGS) and aim for private placements with international wealth funds, according to the governor of the Central Bank Josef Bonnici.

This was not possible before because there is actually a decadesold ordinance which specifies that MGS could not be sold outside Malta – although they can be bought by foreigners. However, following a suggestion by Prof.

Bonnici, changes to this legislation are being considered.

Traditionally, the relative majority of MGS in Malta were held by banks, but over time there has been a slow but steady trend away from this model. In 2013 they held just over 40 per cent of MGS, but individuals held around 32 per cent, compared with 42 per cent and 30 per cent respectively a year before (see chart).

The European Banking Union does not want such close ties between banks and sovereign debt because the failure of a government could then bring down otherwisehealthy banks.

The shift away from banks is partly due to the banks’ own strategies to diversify their treasury operations, but also because of the way that the Treasury favours retail investors, meaning that banks cannot even buy as many MGS as they want. Prof. Bonnici gave no indication that his proposal was based on a fear that the percentage taken up by the banks might decline even

GOVERNOR OF THE CENTRAL BANK JOSEF BONNICI

further – for whatever reason – to the extent that the MGS might not be fully subscribed. He only said that it was never wise to put all one’s eggs in one basket.

“The local banks hold significant amounts of MGS as this provides good income for them, given that the rates are very attractive compared to what else is available. But I think in the medium to long term,

we need to extend the market a little bit. I have recommended that the government should consider private placements, as do other countries like Slovakia, which also sells its bonds to international wealth funds.

“We have not had to do so thus far, but I think in the future it is good to diversify a little bit. We should not just limit ourselves to

Traditionally, the relative majority of MGS in Malta were held by banks, but there has been a steady trend away

the retail market, good as it is, and appreciated as it is by the whole sector,” he said.

Prof. Bonnici said this should not be a dramatic move, but that the wealth funds could be offered a “small fraction” of the total.

The Treasury had always kept at the back of its mind that joining the eurozone meant MGS could be of interest to overseas investors. In fact, issues were consolidated in order to bring the totals up to amounts that might interest investors who would otherwise ignore them completely. Rates here have been very competitive compared to those in the euro area (see chart).

But Prof. Bonnici said that to attract investors, the MGS should be specifically offered to wealth

funds, such as those in Kuwait and Japan.

“Otherwise, can you imagine a wealth fund which might want to invest €100 million but which would have to compete with the retail sector to buy the stocks? It does not make sense,” he said.

“In terms of risk, one needs to diversify a little bit and not rely on a very concentrated market. As the economy grows it needs more loans, and obviously there are limits. We should not have such constraints posed on our economic growth potential because at the end of the day, it could also be a factor that limits the potential growth of the country,” he said.

Sources familiar with the sector said there were pros and cons to the proposal, adding that the current auction system was fair and provided a level playing field to all participants.

“There may be benefits in having private placements especially when tackling certain niche areas, when approaching potential (new) investors and when some one-off opportunity arises.

“Of course, the downside is that while one may negotiate the conditions for a private placement, one might actually be better off taking the best bids through the current auction system!”

Consolidating Malta Government Stocks The government has a total net outstanding long-term debt amounting to £257 million. In 2011 it launched a three-year programme to lengthen and smoothen the interest payments and redemptions of existing MGS. Around a third of the MGS maturing in 2014 were converted into an €83.7 million MGS issue maturing in 2019 and a further €64 million issue maturing in 2020.

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Maltese spend at least €40m online – NSO The Maltese are spending at least €40 million online every year – just under one per cent of the total spent by households – according to the National Statistics Office.

However, the NSO says the figure is an estimate and the reality could be even higher.

The loss of business to online retailers has been highlighted repeatedly by locals but, so far, no figures have emerged to indicate the scale of the issue.

However, many commentators – from constituted bodies to politicians – have speculated on the figures, perhaps not aware that the NSO has been compiling statistics from various sources.

“Internal calculations indicate that consumers spend €40 million online. We are cross-checking this against other sources of information and if it is too conservative

then we will obviously revise it upwards,” NSO director general Michael Pace Ross said.

The NSO has considerably more information than people assume.

For example, major online retailers are actually obliged to report aggregate sales to the relevant EU member states for statistical purposes relating to trade.

Maltapost also send “literally boxes of documentation” every month – it handled €14m worth of orders in 2013 of which €12.6m were from within the EU – and some other dispatch agencies also send information, Mr Pace Ross said, all of which is inputted. And online purchases by businesses are also captured through their VAT declarations, he reassured.

“Of course, we are constantly on the lookout to make our data more accurate,” he said. There are a num-

Maltapost handled €14 Million worth of online orders in 2013.

ber of planned initiatives which will help. The next Household Budgetary Survey will be carried out between January and December 2015.

The NSO plans to update the basket of goods and services that it monitors – and will include a section on online purchases.

The results would give the NSO a good indication of whether the current estimates are close to the actual ones.

It is also using an EU grant to carry out a survey on ICT usage which will also look at online purchases, and will also help by pro-

viding a European benchmark against which to compare local trends.

The survey would encompass some 1,500 households and would ask just a few questions on what they bought as well as how much they spent over the previous few weeks or months.

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INDUSTRY FOCUS: PROPERTY

Demand for rental properties outstripping supply by far There are simply not enough properties available for rent to meet current demand, and a number of changes should be made to encourage landlords to come forward, according to the president of the Federation of Real Estate Agents Ian Casolani.

“This is already a big problem, especially in the sought-after areas – primarily Valletta to Baħar iċĊagħaq and adjacent villages.

“My own company, Belair, has 12 negotiators on letting and their biggest challenge is to find properties to let. It is the same with all the agents,” he said.

The federation believes that stakeholders need to do more to encourage people to invest in property for rental purposes. One of the sectors that came under fire was the banking one.

“The banks need to play a better part in this. Their ‘buy-to-let’ package is ridiculous. They want too much security and interest rates are too high,” Mr Casolani said.

Another way to increase supply would be to allow non-EU nationals to rent out their properties. At the moment this is easy to do in the 12 specially-designated areas dotted around Malta, but is subject to too much red tape if the property is located anywhere else.

Landlords also require a licence from the Malta Tourism Authority (MTA).

“The MTA licenses property which is rented for periods of less than a year. But the landlord still needs an MTA licence, even if the property is to be rented for longer, just to cover that first year.

“In theory, the authority is meant to come and inspect the premises and the landlord has to pay one month’s rent as the fee. We have been arguing against this for years.

It is not even done most of the times. And if you call the MTA and ask five different people about it, you would get five different answers. We need to do away with all that. It is a ridiculous system,” he said.

“Holiday rentals, where you get someone coming in from overseas are different, as you need to ensure that what is advertised is what is actually available and so on. But a long let is an arrangement between

“More people need to invest in property for rental purposes”

a landlord and a lessee based on an informed decision. If the tenant is willing to pay less and accept torn curtains, so be it.”

So much for supply. But what about demand?

The main impetus is coming from foreigners, mostly EU na-

tionals, in Malta because their business or company has brought them here, with thousands in the financial services and i-gaming sectors. Mr Casolani described these as “the dream expat investor” and they move here with their families, put their children into school and integrate into the Maltese lifestyle – many of them putting down anchors that outlive their initial reason for coming to Malta.

But there is now more demand building up from both the Individual Investor Programme – which has attracted more than 140 applicants so far – and, to a lesser extent, the resurrected Global Residence Programme.

“Enquiries are slowly trickling in for the Global Residence Programme, but the IIP has overshadowed it in terms of the effort being made on marketing Malta. The latter also attracts a different audience as clearly these are people looking for a passport and not just residence.

AFTER THE SALE OF ALL 150 APARTMENTS IN PHASE 1 OF PENDERGARDENS, CONSTRUCTION OF BLOCK 16 STARTED IN EARLY 2013 WITH THE HAND-OVER OF ITS 46 APARTMENTS SCHEDULED FOR Q3 OF 2014.

“We have been very encouraged by the fact that so many of the IIP applicants start out looking at rentals but seem to be quite open to the idea of buying once they see what is actually available. But we are clearly not going to be able to offer hundreds of properties in this very highend category,” he warned.

“There are simply not that many available for sale or for rental – although we would hope that developments in the pipeline will keep these potential investors in mind.”

The sales and marketing manager of Pender Ville, Michael de Maria, corroborated Mr Casolani’s viewpoint.

Pendergardens has residents from over 20 different countries – more when you take into consideration those who are renting there.

“With the clever mix of apartments of different sizes, the secondto-none location, the attractive piazza and the competitive prices, we have managed to attract purContinued on page 10 >

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e Business OBSERVER

Utility bills and evictions

MDA’s suggestions

The Federation of Real Estate Agents has come up with a number of ways to stimulate the rental market, but the Malta Developers’ Association has its own.

It identified two other factors which deter landlords from renting out their properties, hoping to get more on the market which has “exploded” in the past few years.

MDA president Sandro Chetcuti said that landlords were still waiting for the legal notice which would explain how the 15 per cent flat tax rate would work in practice, as they will need to declare their 2014 earnings in next year’s declaration. At the moment, the indication is that the tax rate will apply to the gross rental income – to prevent the temptation to abuse when it comes to deductible expenses.

But in the meantime, he said there were two deterrents: utility bills and evictions.

“It is simply too bureaucratic when it comes to changing water and electricity bills from the name of the landlord to that of the tenant.

So they are often left in the name of the landlord. This means that if the bills are not paid, the landlord ends up in trouble,” Mr Chetcuti said.

“The other deterrent is that the only way to evict a tenant who defaults on his rent is to go to court.

The system should protect the landlord and put the onus on the tenant to challenge the eviction.”

Mr Chetcuti believes that the rental market could soon become more important than that for sales.

“The demand from foreigners for properties in central Malta and in the north is phenomenal. We are seeing contracts of one to three years, mostly for upmarket properties like villas or large flats with seaviews or panoramic views.

“There are other places like Vittoriosa and village cores like Balzan and Lija which could also attract foreigners as they are being turned into much more upmarket locations. The problem is that the properties themselves are not enough; we need to upgrade the environment, landscape it intelligently,

and safeguard the character,” he said.

“You can’t expect a multimillionaire to buy a luxurious property and then find a broken pavement outside his door, or an electricity pole with old wires!”

The rental market is tapping into existing vacant properties, but will the demand eventually result in more properties being built? Applications to Mepa have dropped to nearly one fourth of previous levels, but Mr Chetcuti thinks this reflects a shift from the oversupply of units aimed at first-time buyers.

“This is not the end of the construction sector. Developers are now looking at large projects, particularly infrastructural ones like petrol stations, homes for the elderly and boutique hotels – and they are actually getting together to tackle them as joint ventures.”

“And the banks, which were reluctant to lend for construction of housing units, are much more open to the idea of lending for these sorts of projects.”

| June 19, 2014

THE PRESIDENT OF THE FEDERATION OF REAL ESTATE AGENTS IAN CASOLANI.

< Continued from page 9 chasers who reside here permanently, holiday home owners and those who bought as a rental investment,” he said.

“The ‘old’ Permanent Residence Scheme was popular with purchasers at Pendergardens, but after its suspension, the replacement High Net Worth Individual Scheme and the Global Residence Programme never quite took off.

We still have to see the effect of the IIP, but I think the majority in the programme are opting to rent rather than buy,” he added.

Demand may actually be easier to forecast than actual supply is to calculate – something the federation is keenly aware of.

“We are working on compiling data but it is very difficult and will take time. We are talking to some big audit firms on a model to take this forward which would be transparent and confidential enough for the

operators to accept. We have spoken to government about funding as it would cost a lot of money to do well – beyond anything the operators could fund.”

The biggest problem is estimating the size of the undeclared rental market – which the federation hopes will decline with time once the 15 per cent flat tax and the scheme being planned by the government (see above) are introduced.

One of the main concerns is whether high demand is starting to have an impact on prices.

“Yes, prices are going up, especially in Sliema and St Julian’s – but only nominally so far. On the whole, what we are seeing is that whereas a few years ago landlords might have been willing to negotiate a lower price in order to get a tenant, now they tend to hold out until they get what they are asking.

“At the end of the day, let the market forces of supply and demand work.”

e Business OBSERVER

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ARCHITECT CHARLES BUHAGIAR.

BICC: Pulling on one rope?

For Charles Buhagiar, being at the Building Industrial Consultative Council is a déjà vu. The council was his brainchild in 1997, when he was a Labour minister.

Over the years it grew, flourishing under architect Robert Musumeci, but it has since lost momentum. It was set up in 1997 with a budget of €490,000 but by 2013, this had been shaved to €80,000.

Last year he was appointed executive chairman, and he is determined to put it back onto the map – getting the budget back up to €210,000.

“Property and construction seems to get nothing but bad press, and we sometimes forget what an important part of our economy it is. Construction, quarrying and real estate account for 11.1 per cent of our gross valueadded and employs some 12,000 people,” he pointed out.

“And yet it is very fragmented. It does not even fall under a particular minister, although the BICC, as a consultative body, currently lies in Helena Dalli’s portfolio.”

The council represents a staggering range of stakeholders – 24 in all – from operators and regulatory bodies, to constituted bodies and educational institutions. To keep this structure workable, it has been split into an advisory board and an executive board.

The former looks after five working groups, looking after property, regulations and directives including health and safety,

education and training, research and innovation, and property regeneration.

The executive board, which looks after day-to-day management, comprises the chairman and CEO, a representative from the advisory board and the five working group coordinators.

Mr Buhagiar has proposed a number of concrete ways to improve the sector and he seems optimistic that they will not fall on deaf ears.

He would also like to see a safety card, which is common overseas and which is often mandatory for access to a worksite.

Mr Buhagiar also believes that there is inadequate regulation and legislation.

“Believe it or not, there are only two legal notices covering construction – on worksite management and on damage to third parties. There should be many more, although of course, we have to ensure that the impact on the

“Construction, quarrying and real estate account for 11.1 per cent of our gross value-added and employ some 12,000 people” One of the most innovative but potentially complex is for a skills card to be introduced.

“We have identified 89 skills involved in construction – and only a few of these are warranted. If we could establish what skills are required and certify that the holder of the card is qualified or experienced enough to carry out that job, it would cut out the cowboys that give the industry a bad name,” he said.

“The register would also enable us to identify those areas where skills are lacking on the island.”

industry is appropriate. We have already worked with the Malta Competition and Consumer Affairs Authority to introduce some Eurocodes earlier this year,” he said.

Another issue that the BICC would like to sort out is the property price index. There are currently various ones in use by the Central Bank, the National Statistics Office (NSO) and the government – which needs a credible index to abolish the government architect valuations of the past.

“It doesn’t make sense to have different ones using different methodologies. We invited all the stakeholders to come up with a better one that reflects the real price paid and felt that the best place to get this information would be from the mortgage applications. So we asked the banks to add a few extra lines onto their forms,” he said.

Mr Buhagiar is a great believer in data – and another statistic that defies definition has been that of vacant properties. He wants to try to come up with a realistic figure which takes into account all the categories such as properties tied up in inheritance disputes and uninhabitable premises. The BICC is working with the NSO to try to break down the figures, but it is also going to the main inner harbour towns and some of the small villages to actually check up on properties identified as vacant.

The BICC is also trying to encourage contractors to form

joint ventures to bid for projects overseas, with the help of Malta Enterprise, with its eye on the Palestinian Territories and – once the situation is stable – Libya.

“Even if companies join up, most would not be able to tackle large projects, and with small projects, they would be competing with local companies. So the ideal would be to go for medium-sized projects.

We are working with Malta Enterprise to identify suitable ones and are planning a trade mission there at the end of this summer.”

All these initiatives are being tackled by a staff of 12 – soon to be boosted to 19. The council will also be moving from Belt is-Sebħ to premises in Old Mint Street in Valletta.

“We are tackling a number of long-standing issues. What we want is for the industry to see that we have a role to play in improving things and helping them,” he said.

Govt planning rental amnesty on past dues Kurt Sansone A 15 per cent flat tax on property rental income will come with a partial amnesty on past dues, The Business Observer has learnt.

Details of the scheme will be released shortly by the govern-

ment as it moves ahead on a Budget pledge to tap into what has been a perennial fiscal black hole with very few including rental income in their tax returns.

Although the flat tax rate was seen as a positive move to encourage people to declare rental income, questions have been

raised as to whether those who evaded tax in the past would actually come forward, fearing investigation by the tax authorities.

When asked about the possibility of an amnesty, Finance Minister Edward Scicluna said such a scheme would have to be accom-

panied by “a reasonable cap” on past tax due.

Shying away from using the word amnesty, he said that owners would be given the chance to “register” their rental property much in the same way as the asset registration scheme launched last week.

“Abuse has been rampant in this sector and the government was getting nothing from it. Just as we had done when the 15 per cent bank withholding tax was introduced, this scheme for rental income will generate revenue while ensuring that owners pay a reasonable flat tax,” Prof. Scicluna said.

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e Business OBSERVER

| June 19, 2014

INTERNATIONAL NEWS

DEMONSTRATORS SET FIRE TO A US FLAG DURING A PROTEST NEAR THE UNITED STATES EMBASSY IN BUENOS AIRES, FOLLOWING AN ADVERSE US COURT RULING, ON TUESDAY. Photo: Agustin Marcarian/Reuters

Argentine debt investors may let law slide to reach deal Daniel Bases Argentina’s prospects for finally closing out its 12-year-old default on $100 billion of debt will depend on more political and legal maneuvering, a motivated US judge and the fatigue of investors, now that it has lost an epic battle with holdout creditors in the US courts.

Negotiating a new deal with the holdouts, who have fought to exercise their investor rights through the courts, potentially violates a provision specifically written to stop anyone getting a better deal than bondholders who participated in two prior restructurings in 2005 and 2010.

The US Supreme Court declined to hear Argentina’s appeal seeking to overturn an order to pay sovereign creditors $1.33 billion, setting off a scramble in Buenos Aires on what it can do now given its legal options are exhausted.

President Cristina Fernandez vowed on Monday night that Argentina would not again default on its bonds (see box below).

Exchange bondholders received between 25 and 29 cents on the dollar for their defaulted bonds. By itself, these deals are generally considered among the worst restructurings for investors in the history of sovereign defaults.

Axel Kicillof, Argentina’s Economy Minister, said the government

Court Judge Thomas Griesa to explain his position.

“It almost looks like they are trying to broaden the debate to diffuse the stigma of default,” said Siobhan Morden, head of Latin America strategy at Jefferies in New York.

Kicillof has taken a conciliatory approach towards resolving some

“It almost looks like they are trying to broaden the debate to diffuse the stigma of default” is starting to take steps to restructure the debt held by the exchange bondholders and place it under Argentine law in order to service it, which would violate the US court rulings. In a televised address to the nation on Tuesday, Kicillof also said he would instruct Argentina’s lawyers to speak with the US District

of Argentina’s long-standing disputes, including a deal to pay back the Paris Club of creditor nations almost $10 billion in debt and compensate Spanish oil major Repsol for the seizure of energy subsidiary YPF. On Tuesday, Standard & Poor’s downgraded Argentina to CCC-

‘We will not default again’ Addressing the nation on Monday night, Argentina’s President Cristina Fernandez de Kirchner said her country would honour its payments to holders of its restructured debt.

In a nationwide televised broadcast, the President said Argentina wants to avoid a default despite suffering a setback in its long-running legal battle against “holdout” investors.

Hours after the US Supreme Court refused to hear an Argentine appeal aimed at staving off a default, a defiant Fernandez slammed US courts for repeatedly ruling against her government.

She said Argentina was the victim of “extortion” by holdouts who refused to join debt restructuring deals since the catastrophic 2001-02 default on $100 billion of sovereign debt.

But Fernandez said she was still open to negotiations and insisted she would continue to pay the more than 90 per cent of creditors who accepted a renegotiation of the defaulted debt.

She insisted Argentina cannot give holdouts preferential treatment over exchange bondholders after many of them bought the debt at a massive discount and are claiming payback in full.

ARGENTINA’S PRESIDENT CRISTINA FERNANDEZ DE KIRCHNER ADDRESSING THE NATION FROM GOVERNMENT HOUSE IN BUENOS AIRES ON MONDAY. Photo: Reuters

minus, citing the heightened risk of default.

Holdout investors, led by NML Capital Ltd, a unit of billionaire Paul Singer’s Elliott Management Corp, and Aurelius Capital Management have said they are willing to sit down to negotiate with Argentina, but have never been taken up on their offer by the government.

These firms, who specialise in distressed debt investing, have used their deep pockets to press their rights in the courts. Argentina has countered that it is being extorted by the holdouts and if forced to pay would not have enough money without putting its entire economy in jeopardy.

A provision called Rights upon Future Offers precludes Argentina from voluntarily agreeing on better terms with holdouts.

“There is always room for interpretation but I’m not sure this can happen,” said Pierre YvesBareau, head of emerging market debt at JPMorgan Asset management in London, which holds some of the exchange bonds.

“It will be difficult for them to accept repaying a big chunk of their reserves to the holdouts.

Also paying part to them won’t be fair to people like us.”

US District Court Judge Thomas Griesa, who handed down the judgment in the holdout’s favour, and has been dealing with the deluge of cases brought in the New York courts, has asked on several occasions why the two sides don’t sit down and finally negotiate a settlement.

“Whatever hostility he harbours toward Argentina – and there’s plenty of that – he has repeatedly said, ‘Why aren’t you negotiating?’

He has no interest in being the guy who causes Argentina to default on $25 billion, $30 billion in foreign debt,” said Marco Schnabl of Skadden, Arps, Slate, Meagher & Flom who has argued before Griesa on behalf of Argentine clients.

“Injunctions are amendable. I doubt he would do it on a unilateral request by Argentina” but if both sides asked, “he would give them that in a heartbeat.”(Reuters)

e Business OBSERVER

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June 19, 2014

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e Business Observer is a new business newspaper distributed with Times of Malta every fortnight.

EDITORIAL

Who would buy Banif Bank?

The sale of 72 per cent of Banif Bank as part of the conditions for the Portuguese bailout of its parent company could not have come at a worse time for the Maltese economy. The country needs a strong and more competitive banking sector, and the last thing it needs would be to lose a retail bank, especially one which was meant to revitalise the loan sector as a low-cost bank.

Banif set up in 2008 with ambitious targets: Within four to five years, it wanted to capture 10-20 per cent of the local market and have 22 agencies.

In fact, Banif only has 12 outlets after six years, nonetheless an impressive expansion. But the self-inflicted target of 10-20 per cent market share proved to be a harder nut to crack than it expected. People are reluctant to change banks, unless there is a clear added value for them. So it aimed for new business, with some success.

It would be easy to assume that a buyer would be found for it. But the reality is that this is a much harder bank to sell than Volksbank was. The net asset value of Banif is only around €25-28 million, compared with almost twice that for Volksbank. Even then, Volksbank sold for roughly half its value to Med Bank, which was interested in its strong corporate loan book, and the immediate foothold it gave it into the retail market.

What has Banif got to offer and who would be interested?

It has around €12 million invested in properties and intangible assets, as many of its branches and headquarters are leased. The bank made a profit of €124,000 from operating income of €12 million. It had €343 million in loans and advances to customers. Deposits stood at €554 million, as the bank backpedalled from its aggressive campaigns for term deposits with higher interest rates and went for retail deposits.

It was meant to seek a capital injection of €17.5 million last year in order to meet regulatory requirements – now planned for the second half of 2014 –but in the interim had to transfer some of its assets into less risky sectors, affecting its returns and, of course, profitability. Its Capital

Adequacy Ratio was 8.26 per cent in December 2013 while its liquidity was 39.33 per cent.

Who would be interested? With Volksbank, there was a clear hook for its buyer – Med Bank. Bank of Valletta only sniffed it out because they felt it might not be in its interest to let Med Bank get their hands on it. Clearly in the end BOV did not feel the threat merited €24 million. Med Bank is currently eyeing higher net worth individuals and would not be interested in customers attracted by Banif’s low-cost approach.

BOV and HSBC have no interest in Banif’s assets because it is likely that many of Banif’s customers are already their own. APS has a very different and conservative business model. Lombard already has its Maltapost interests (if only it could leverage the extensive high street presence without raising regulatory eyebrows) – and may have the same pressures as Banif at shareholder level.

Which means a buyer would have to come from overseas. But given the current economic scenario and the regulatory challenges coming soon, who would be bothered with a small bank in a small market?

The Banif experience is a cautionary one for any bank assuming that the impressive profits registered by the main banks are easy money. The lowlying fruit has all been picked.

The danger is that Banif will be targeted by less than savoury operators, still roaming the financial world trying to find a place for the dubious funds left homeless after the collapse of the Cypriot banks just over a year ago.

Just as local banks were wise enough to reject the money, the Malta Financial Services Authority as our gatekeeper is there to ensure only suitable suitors come forward.

And the local investors who hold the remaining 28 per cent of the shares – all experienced businessmen – should also be careful whom to get in bed with.

Let us keep our fingers crossed.

Editorial Vanessa Macdonald, Head of Content (Business), Times of Malta.

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BUSINESS OPINION

Social investment: old wine in new bottles?

Gordon Cordina and Amanda Borg The European social model played a key role in shaping European societies and preventing poverty in the post-war years.

In some countries, though, it may have exacerbated the economic crisis caused by labour market rigidities, while in others, its effectiveness is being curtailed by limitations on government expenditure.

The obvious solution is to obtain more bang for every buck spent on preventing poverty, while at the same time promoting rather than curtailing economic growth.

The concept of social investment may be the way forward.

This approach reconciles the pressures between dwindling economic growth and falling birth rates. It presents policies aiming to strengthen people’s skills and abilities, so that they can move from dependence on benefits to self-reliance by working and participating in social life.

The payment of benefits to a person without any quid pro quid to society may actually make poverty worse. It may lead people to become dependent on benefits, and discourage them from seeking to provide for themselves.

Society deserves a return on its expenditure. The least it can expect is that persons benefiting would improve their skills and outlook towards work and become more active contributors to society.

The emphasis on a rate of return to expenditure on social services leads to the direct conclusion that such expenditure should primarily serve as an investment in the human capital of the economy.

This approach has rapidly entered mainstream policy formation at the EU level. The European Commission has called on member states to prioritise social investment by adopting a ‘social investment package’ throughout life.

The package provides guidance to help reach the Europe 2020 targets for smart, sustainable and inclusive growth. It also provides guidance on how countries can address country specific recommendations drawn up by the Commission, related to the labour market, education, pensions, health care, education and poverty eradication as well as the efficient use of relevant EU funds, notably the European Social Fund.

What do these initiatives mean in practice? An important example is the enormous social cost of people failing early in life through early school leaving, teenage pregnancies, delinquency among youths and youth unemployment.

In 2013, two out of 10 young persons aged between 18 and 24 years in Malta were classified as early school leavers while 5 per cent of births in 2012 were to teenage mothers. The problem is that often corrective measures attempted

“e payment of benefits to a person without any quid pro quid to society may actually make poverty worse” later in life such as adult education are not only costlier but also less effective.

Social investment interventions continue along the entire lifecourse, including affordable childcare on the one end to ensuring a longer working life with the possibility for flexibility in the later years close to retirement.

Child-centred investment provides an important benefit to society as it prevents early exit from education for youths, most notably for those coming from poor and low educated families to perform in a knowledge economy.

Lifelong learning also provides an important benefit to society as adults can improve their skills to access gainful employment.

We have examples of policies inspired by social investment in Malta. Tax incentives for more women to enter the labour market and the provision of affordable childcare are clear examples.

Other examples include the facility for older workers to remain in employment after retirement without losing their pension benefits.

The recently published National Employment Policy focuses on the provision of free childcare to working parents, after-school hours care as well as the tapering of social benefits.

This is an important initiative, entailing that persons would not lose all benefits upon finding a job, but that this would happen gradu-

ally, thereby making work pay better for them.

Yet more efforts are warranted, starting from the provision of more effective lifelong learning to ensuring that health care and long-term care systems are accessible, sustainable and of high-quality.

A clear focus on social investment may also represent an effective manner to use EU funds, especially as the mechanisms subject to State Aid rules become more binding.

Above all, a holistic approach to policies relating to education, health, poverty prevention and labour market development is needed to ensure that Malta reaps the best benefits from social investment initiatives.

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e Business OBSERVER

| June 19, 2014

INTERVIEW

Tigne Point delays cost €10,000 a day

LUKE COPPINI joined Midi in September 2008 as chief financial officer, after 18 years with the Mizzi Organisation. In September 2012 he was appointed CEO and set about restructuring Midi. He spoke to VANESSA MACDONALD about the impact of delays on the project and its profitability.

Shareholders expect a return of their investment and, over the last few years, the Midi ones may have been disappointed...

Midi has always been perceived as a long-term project. It cannot be judged purely on its performance on Tigne Point to date, which is only 80 per cent completed. Let us not forget it also includes Manoel Island in which Midi invested considerably – not only on restoration but also on designs and planning.

The last few years have been tough for us for various reasons, not the least being the financial crisis which forced us to retrench. But a major factor was the delay in the issue of the permits for Tigne Point – three years before we got the green light for Tigne North. During this time, we were paying €10,000 a day in interest on our loans.

One of the problems was your gearing – which was 76 per cent. It went down to 45 per cent in 2013.

Are you now in a much more comfortable place?

The annual interest bill on the €40 million bond alone reaches €2.8 million. With the interest on bank borrowing, you get a total of around €4 million every year.

That is why the last two years were tough. We had very little to sell but were still paying all the

interest. This is why I pushed to make it a leaner and more flexible operation which can adapt to changes very fast. We are now back on track.

Up to three years ago, Midi employed 50 people but we are now down to 24. I will never go back to such a large workforce. For example, even though we have three phases under way, which cost about €55 million, we have outsourced our project management on a pay-by-use basis.

The biggest achievement over the last year was the restructuring of its financial debt...

In April 2013, Midi took the decision after consulting its shareholders to sell off the Point Shopping Mall which automatically put Midi in a much healthier position. We knocked €48 million off borrowings.

But you lost recurrent revenue...

It gave us the impetus to move forward on the other phases. We must keep one thing in perspective: Midi is a project development company. We could have held on to the mall for a few years but the ultimate objective was to offload it. Ideally we develop, get full occupancy, allow it to mature and offload.

“e last few years have been tough for us for various reasons, not least being the financial crisis which forced us to retrench”

LUKE COPPINI

Q1 is ready this month for delivery next year, and Q2 will start in the second half of 2014 for launch in mid-2015. You are also selecting the contractor for the Business Centre...

These three phases could have, at least technically, started two years ago. There were various reasons for the delay in issuing the permit. Mepa and government wanted to ensure that the development was exactly in line with what was allowed in the deed.

But time costs money – and not only in financing costs but also in administration. We had €35 million of funding in place – but banks started to become cautious about property because of the financial crisis, and we had to renegotiate funding for each phase separately.

On the strength of our performance on Q1, we opted to go faster on Q2. We are doing our homework and looking at what the market wants. Things have changed – for example, the IIP scheme, bachelor pads, more expats on the island...

So the configuration has to be adjusted depending on what the market wants.

The Q1 apartments sold for €6,200 per square metre. A record for Malta. Could the next phases get even higher prices?

On Tigne, the Q2 phase will be similar. But on Manoel Island it depends very much on the configuration. I believe that Malta in general is moving that way. Not for Maltese buyers but also with foreigners.

e Business OBSERVER

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June 19, 2014

Obviously to command those sort of prices you need to provide a good product.

In your recent results, you said you would have a boutique hotel at Tigne Fort, whereas the original plans envisaged a larger hotel...

The space earmarked for a hotel was used for the shopping mall. A 300-room hotel would have posed more problems than benefits in terms of accessibility etc. But there is interest in a low-profile but high end boutique hotel, very quiet and luxurious, with a commercial rationale. There are many foreign residents who cannot accommodate all their friends and relatives in their flats. And the Business Centre could also generate demand for accommodation.

At the beginning of the project, people were speculating with the apartments. Is that still the case?

The mix has shifted towards buyto-live. In Q1, we are looking at 60 per cent foreign owners, most of

or four years. The problem is that tenants would want a lease of at least 7-10 years, which I cannot give, as investment that needs to be carried out for the final use of the fort.

You have the permit for Lazzaretto. What now? You are planning a casino and 54 residential apartments.

This is another complicated site to develop but a fantastic one.

There is a very strong obligation to restore it. It is the only phase on Manoel Island on which we already have a full development permit.

There is commercial space in the vaults – offices, retail, catering and so on – and a casino in the Palazzo Vecchio.

We have not commenced for the simple reason that we want to make sure that it dovetails nicely with the rest of the Manoel Island development. As you can imagine, Manoel Island is very attractive not only to investors and property developers but also to designers and international architects and firms, who ask

“We have 12 years experience at Tigne Point behind us and know all the pitfalls of a project development of that size” whom – especially those who own the more expensive properties – use them as their homes. Some are second and third time buyers at Midi.

The Maltese, especially those who own smaller apartments, usually buy them to rent – and the rental income is very good, especially from foreign executives.

Our experience with the 281 units sold to date is that there only a very few who are selling what they bought 5-7 years ago.

What will the Business Centre offer that other upmarket developments do not?

We have a lot of interest already.

It will be the top one on the area.

We are not looking at the lower end rentals. It is a very unique location and will have 12,500 sq.m. of rentable office space with a catering proposition on the ground floor overlooking the piazza. We have very strong interest from local companies, banks, gaming companies and others.

We are about the adjudicate the contract following an extensive months-long evaluation process, as it is a very complex building – partly because of the Garden Battery which runs right through it!

Obviously the minute we sign the development contract, we can start to sign off leases as I will know what my opening date will be. We are looking at late 2016/early 2017.

It breaks my heart that you spent all that money on the restoration of Fort Manoel but it is hardly being used.

We spend a lot on remedial works and maintenance – €20,000 a year just to weed it. We do use it for one-off events like concerts, weddings and corporate events. We could have leased it out for a reasonable return over the past three

us to let them come up with designs.

We want to firm up the master plan and the probability is that we will seek a strong strategic investor – in the interest of all 750 shareholders. We need to make sure that Manoel Island will generate the value-added that it merits. To do that, we need a strong financial back up.

15

The Fort at Manoel Island has been tastefully restored.

And we need to start the project with one permit – and not one for each of the seven phases – so that we can start and keep going until we finish. I cannot risk a repeat of what happened in Tigne Point where we finished T10 but could not start the next phase. It will need to start and finish within a sevenyear period. The deed binds us to finish the whole project by 2023.

I understand that you have six or seven serious investors interested although not all will pursue it further. Do you need government’s permission to take them on board?

Midi can transfer up to 40 per cent of a phase under the same deed to third parties. Anything above that, we would need government’s consent.

A strategic partner might have a very different outlook to local investors when it comes to the

expected return on investment.

They might have higher expectations...

The 2000 deed was based on the 1993 development brief.

The master plan has to be done in consultation with the government, investors and shareholders etc. It could actually be less dense than the maximum 95,000 sq.m. in the deed.

The density of Manoel Island can never be equivalent to Tigne Point.

There is a fundamental limitation: we cannot develop higher than Lazzaretto. Secondly, we are developing a brownfield site and more or less redeveloping – as stipulated in the deed – areas which have already been developed in some way.

And the developed footprint will be around 28 per cent of the available land.

We have been in discussion with some very serious people and they believe we should even more selective in our development.

We reckon the full development application should take 9-12 months for Mepa to process according to its targets.

We plan to submit it not later than January next year. Which means that by the end of next year, we will have everything sorted out, including funding, ready to really get going in January 2016.

I have heard people ask why we are still at the master plan stage but this is one of the most crucial stages. We have 12 years experience at Tigne Point behind us and know all the pitfalls of a project development of that size.

To be fair, Manoel Island is a much safer development as there is much less excavation, no underground road network, no tunnels, no Garden Batteries.

It should be much safer to develop within the timeframes as long as you have the right project management and the right organisation.

e Business OBSERVER

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June 19, 2014

17

CASE STUDY

No broker is an Island Lawrence Pavia and Carmel Cascun used to fret that their clients might not turn up alone. They only had three chairs in the office at South Street, Valletta, and if two people arrived, one of them would have to stand up.

That was 25 years ago and the two had already worked together for nearly a decade at Mediterranean Insurance Brokers. The decision to branch out on their own after all those years working for a large company was not easy.

“That first Christmas we found ourselves all alone in our small office. We had been used to large parties! So we grabbed our wives and went out together,” Mr Pavia said.

The story of Island Insurance Brokers is fascinating because it mirrors the way in which this crucial sector has evolved over the years.

MIB was set up in 1976 – before there was even insurance legislation. Its shareholders were the governing Labour Party, the General Workers’ Union and offshore partner Hogg Robinson. Malta was emerging from independence and the government and private companies were setting up in manufacturing, shipping and aviation – and the need for a local insurance broking company was being felt. Its first client was Sea Malta, but it rapidly took over most of the state sector, handling policies for entities like Malta Shipbuilding.

“Those were nothing like standard motor insurance policies. The policies were worth millions of liri and each one was unique and very complex,” Mr Pavia said.

Once the Nationalist government came to power in 1987, the virtual monopoly of MIB no longer seemed so secure. Six of

the main agencies already operating in Malta – including Gasan and Mamo (which have since merged) – saw an opportunity and teamed up to form Island Insurance Brokers in 1989, luring Mr Pavia and Mr Cascun from MIB to run it for them.

“The six were agents for big British companies but they realised that they needed a brokerage presence to ensure that they kept their market share, competing against other brokers and Middlesea, which had been set up in 1981. The government was Middlesea’s shareholder and every company had to give a percentage of their risk to it.

“They did not want to turn their own companies into brokers, so they decided to team up and set up Island Insurance Brokers – in many cases using their personal equity. And they asked us to run it as shareholders and directors. The two of us started off with a 9 per cent shareholding each and have since increased it to almost 66 per cent. We each had our own specialisation – mine was marine and aviation, while Lawrence handled the other sectors. We complemented each other well,” Mr Cascun said.

Having six competitors joining forces to create a brokerage may seem like an odd solution, but it worked. They were treated like shareholders and were expected to quote for any business, rather than expect to win it automatically.

The Marsa Sports Club was their first client and perhaps because of the backing and their expertise, it did not take them long to break into the government market. In January 1990 they won three major accounts – including

Insurance in Malta at a glance

CARMEL CASCUN (STANDING) AND LAWRENCE PAVIA

“We hold our clients’ hands. We feel we are an extension of their companies, part of their family. We are successful because we keep that foremost in our minds.” the Enemalta power station, with annual premiums of Lm44,400.

“We were very competitive and were able to offer it for a price well below the rival bids,” he said.

Other companies started channelling business to the new company and it grew quickly, now listing clients as diverse as Malta International Airport, Sterling Jewellers, Farsons and ST Microelectronics on its portfolio.

In the meantime MIB had been taken over by Mid-Med Bank and eventually by Aon, which had taken over Bain Hogg.

The insurance landscape was changing dramatically, even overseas. British insurance companies were merging, and each change meant that one of the two local agents would have to take over the merged business.

Principals were no longer interested in agents: if the business did not merit having their own

branch in a country, they would simply close. The number of agents dwindled from a few dozen to just a handful.

Recent developments – such as the evolution of Allcare from an insurance agency – have sent more ripples of change through the insurance sector. Regulatory pressures are putting a question mark over the sustainability of the sector, with industry experts saying there may not be enough room for all to survive.

But Island Insurance Brokers believes that at the end of the day, offering a bespoke service is the key to the future.

For example, although the company focuses on corporate insurance, they offer the full range of products.

“For example, a chief executive would want us to insure his personal car as well as his company fleet. But we see this as something that complements our core offer-

ing. We do not want to compete for the retail market,” he explained.

The company moved to Psaila Street, Birkirkara, in 2004, in order to accommodate its 28 staff. Its business model has changed considerably over the years and they are now planning to nudge it into new directions. They have restructured the organisation to try to win new business, with Mr Cascun saying they were strong in financial services and Mr Pavia adding that they were not strong enough in hospitality and gaming.

The relationship between the two partners undoubtedly reflects on the way they run the company – they finish each other’s sentences without noticing, like an old married couple.

“We hold our clients’ hands. We feel we are an extension of their companies, part of their family. I guess we are successful because we keep that foremost in our minds,” Mr Cascun said.

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e Business OBSERVER

| June 19, 2014

NEWS

a neW €10 banknotes Will be introdUced on septeMber 23 as part of ongoing efforts to keep eUro banknotes secUre against coUnterfeiting.

e new €10 banknote Ton Roos, director banknotes at the European Central Bank, explains preparations for the introduction of the new €10 note

How are preparations going for the introduction of the new €10 banknotes in September?

We’ll be introducing the new €10 banknotes on September 23 this year as part of our ongoing efforts to keep euro banknotes secure against counterfeiting and to ensure that the 334 million people across the euro area continue to have confidence in their money.

We are pleased with the efforts made by all so far and are confident that the launch will go smoothly. It’s a complex exercise, but, since the development stage, we have been in close contact with the main stakeholders, including banknote equipment manufacturers and suppliers, the vending machine industry,

cash-in-transit companies and all others whose business depends on handling banknotes.

We know that they are working hard to prepare for the launch and that they will do everything necessary to adapt their equipment in time to accept the new notes.

Last year, there were some issues with the new €5 banknotes. What have the ECB and the national central banks done to ensure that this doesn’t happen again?

Yes, we are well aware that there were issues in some countries with banknote machines that weren’t adapted in time for the new €5 notes last year. I think everyone learned from that

experience. For the new €10, we have worked from an earlier stage and even more intensively with the banknote equipment manufacturers and operators to help them understand what needs to be done and provide them with the necessary support.

For example, we initiated the on-site test programme for the €10 banknotes much earlier in order to give everyone more time to adapt their machines, and we also made it much easier to borrow the banknotes from the national central banks, with more flexible collateral and security arrangements.

Is there anything more that banknote equipment manufacturers and operators could

LSC opens campus The London School of Commerce Malta has opened a campus in Malta, at the Europa Centre in Floriana.

“Our global mission is to provide high-quality, flexible educational programmes at competitive prices, allowing students to achieve professional qualifications efficiently. However, the vision we have for Malta goes further. We aim to complement and reinforce the educational hub of the Maltese islands and strengthen the education of adult students through a diverse student experience which goes beyond simply core academic achievement,” Lord

or should be doing ahead of the launch?

We are confident that most manufacturers and operators are already taking the right steps. We will offer all the support we can at our level, both at the ECB and the national central banks, but anyone who is responsible for banknote equipment knows that in the end it is their responsibility to avoid disappointing their clients by checking that all their machines and devices are ready to handle the new €10 notes as soon as possible. It’s easy to borrow the new notes before their issuance, and anyone who needs to do so can either contact us at the ECB or directly approach their national central bank.

Obituary:

Freeport CEO

John Tomlinson of Walsall, chair of the LSC advisory committee of London School of Commerce, said.

LSCM will offer a portfolio of graduate and postgraduate courses in business, management, and information technology leading to internationally recognised qualifications accredited by the National Commission for Further and Higher Education.

As one of the largest MBA providers in Europe, LSC currently caters to 10,000 students, with facilities in Malaysia, India and Sri Lanka, as well as its base in London. file photo of UWe Malezki With University rector JUanito caMilleri (l)

Uwe Malezki, CEO of Malta Freeport Terminals, passed away last week.

“Mr Malezki’s contributions to Malta Freeport Terminals during his 10 years of dedicated and selfless service were many and varied and his inspiration and drive extended our worldwide reputation. He truly gave his heart and soul to the successful development of the Company,” the company said in a statement.

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APPOINTMENTS

Toly appoints chief financial officer Toly Products, which manufactures luxury packaging for the beauty industry, has appointed Nick Xuereb as chief financial officer. In addition, Mr Xuereb will take up a seat on the executive management team.

Mr Xuereb started his career with Price Waterhouse in 1988, eventually moving into industry where he spearheaded the finance function at Dowty (Trelleborg). During this time he was also appointed non-executive chairman of the Lotteries & Gaming Authority, doubling the size of this industry within five years.

More recently, he undertook a

major restructuring exercise within the airline industry as CFO of Air Malta.

6PM targets Scottish market Kim Rose has been appointed to head 6PM’s business development unit for the Scottish market.

6PM chief executive office Ivan Bartolo said there were already good contacts made which were expected to start bearing fruit in the third quarter of the fiscal year.

The intention is to set up 6PM Scotland in due course, with 6PM retaining 70 per cent of the equity and 30 per cent allocated to local partners who would manage the business on a day-to-day basis.

New partner at Fenech & Fenech Josianne Brimmer has been made a partner at Fenech & Fenech Advocates. Dr Brimmer started her career with Fenech & Fenech Advocates in 2001, working principally in the international practice and financial services department of the firm, involved in privatisation and restructuring deals, advising overseas financial services institutions on the local regulatory framework, as well as being on the legal advisory team of the firm for Air Malta. In 2007, she moved to Tell Investments, a hedge fund manager with offices in Malta, London and Switzerland. When Tell wound up its operations in 2012, Dr Brimmer joined Z Investment Partners Malta, where she stayed until May 2014, before rejoining Fenech & Fenech Advocates.

Representative of Russian chamber

Anastasia Budykho, the executive director of U-Group (Malta) Ltd, has been appointed as Malta’s representative for the Russian Chamber of Commerce and Industry. “The presence of the CCI in Malta augurs well for

CEO for Global Capital Reuben Zammit has taken over as CEO at Global Capital, replacing Bashar Khatib.

Mr Zammit was formerly the chief financial officer at Global Capital. He will also be responsible for the operating subsidiaries, Global Capital Life Insurance, Global Capital Health Insurance and Global Capital Financial Management.

the enhancement of business between Russia and Malta,” Ms Budykho said.

The Chamber of Commerce and Industry of the Russian Federation promotes the growth of the Russian economy and its integration into the world economic system and provides favourable conditions for the advancement of all business sectors.

One of its objectives is to foster good business practices and encourage business growth and represents the interests of small, medium and big business and encompasses all business sectors – manufacturing, domestic and foreign trade, agriculture, the finance system and services.

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INSURANCE

Young drivers: e insurer perspective There are almost 5,000 newlylicensed drivers aged between 18 and 24 in Malta, according to the National Statistics Office – yet until recently few insurers were interested in their business. A few products have now been launched on the market but there is still considerable scope for improving the chances of having an accident.

You might expect that ,since young drivers are healthier, have better eyesight and faster reaction times, they should be better drivers. However, the reality is the risk of a young driver being involved in an accident is statistically two to four times greater than a person who has had at least an eight-year driving experience. It takes a new driver between five and seven years to reach the mean accident rate of a driver aged over 30.

Young drivers account for just 12 per cent of licence holders, but they are involved in 25 per cent of all road deaths and serious accidents.

Research indicates that it is not the lack of experience alone which results in one in every five drivers having a crash in their first six months on the road.

Adolescence is a period of transition and at that age may seek to assert themselves, compete with their peers and seek excitement. It does not help that this age group has generally greater access to use of alcohol /drugs and do a lot more night driving.

As a result, comprehensive cover for a driver aged between 18 and 20 could range from €1,000 for an 11 year-old car, to nearly €3,000 for a new one, dropping to below €1,000

THE RISK OF A YOUNG DRIVER BEING INVOLVED IN AN ACCIDENT IS STATISTICALLY TWO TO FOUR TIMES GREATER THAN A PERSON WHO HAS HAD AT LEAST AN EIGHT-YEAR DRIVING EXPERIENCE.

and €2,450 respectively for a 21-year-old.

Until now the solution was for young drivers in Malta to licence their car and insure it in the name of a parent but they would then lose the no-claims discount which can grow to as much as 70 per cent over five years. However, some parents might not have an

insurance policy in their name (say because they drive a company car), or they might not drive at all.

In the UK insurers would not allow a policy to be issued in the parent’s name if the main user is the young driver. They would consider this as “fronting” and would then refuse to pay claims, a

position supported by the UK Financial Services Ombudsman.

The new products launched in Malta by Gasan Mamo and Middlesea both come with a device which monitors things like speed, but the Association of British Insurers had come up with some other policy recommendations (see box) which should fuel local debate.

Association of British Insurers: Proposed measures (2012) • A minimum 12 month learning period before the driving test can be taken, enabling drivers to undertake supervised practice without an incentive to rush to take the practical test.

As the international evidence and experience shows, a minimum supervised learning period is a key component of graduated driver licensing schemes. For some countries this period lasts six months although the most common minimum learning period is 12 months.

• Lowering of the age at which young people can start learning to drive to 16 and a half years.

Allowing young people to obtain a provisional licence at 16

and a half mitigates the impact on their mobility that would result from having a 12 month mandatory minimum learning period starting at age 17.

In practice, this will mean that few young people will be adversely affected as they will undertake their practical test at a similar age to the current system.

• A ban on intensive driving courses.

These courses – usually just two weeks long – place little emphasis on accumulating road experience during the learning period and as a result young drivers are not likely to have gained sufficient driving experience to be safe road users after completing these courses.

• Introducing graduated driver licensing for drivers under the age of 25.

After passing a test, the driver would proceed to the intermediate stage, which should last two years. There would be restrictions on the number of passengers a young person could carry and the time of day they could drive with possible exemptions for work or medical appointments.

These restrictions would last six months after passing the driving test. In addition, there would be a further restriction – the lowering of the blood alcohol concentration for young drivers – lasting for the full restricted period of two years. A second driving test at the end of the two-year period would

then be undertaken to ensure that drivers have the required competencies to drive in accordance with the Highway Code.

The presence of young passengers in a car can both distract young drivers and encourage them to drive in a more risky way.

The collision rate for young drivers increases with each additional passenger carried: fatality risks to 16- or 17-year-old drivers: increases by 44 per cent when carrying one passenger; doubles when carrying two passengers; and quadruples when carrying three or more passengers.

• The restricted period: A night time driving restriction between 11pm and 4am during the first six months of driving.

Late night driving increases crash risk among young drivers for a variety of reasons such as driver fatigue, lack of driving experience and recreational driving at night.

• A lowering of the blood alcohol limit to 20mg/100ml during the intermediate phase.

A lowering of the alcohol limit to 20mg of alcohol per 100ml of blood (from the current 80mg) would, in effect, act as a zero limit as, if consumed, an alcoholic drink would push this limit beyond 20mg/100 ml of blood. The 20mg also allows for consumption of alcohol linked with products such as mouthwash and confectionary which contain small amounts of alcohol.

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BUSINESS UPDATES

HSBC Malta enhances Maxicredit offer for small businesses International expert in customer experience management is the keynote speaker at iMovo event HSBC MALTA’S MAXICREDIT ENHANCED PROPOSITION NOW OFFERING MORE FLEXIBLE OPPORTUNITIES FOR BUSINESS FUNDING.

HSBC Malta’s Maxicredit proposition has been enhanced to offer greater funding opportunities for small business owners needing a business loan of up to €100,000.

Maxicredit loans now enable borrowers to spread repayment over

the asset’s normal 10-year lifetime, though in certain cases this can be extended to 25 years.

Maxicredit provides customers with the opportunity to unlock their home’s value, which in most cases would also be their biggest

investment. Maxicredit allows property owners to tap this equity and use it as security for a medium or long term loan.

The current Maxicredit variable rate is 4.75 per cent. Customers also have the option of fixing the

interest rate on their Maxicredit loan for two, three or five years.

For more details visit HSBC Malta’s website www.hsbc.com.mt, call customer service on 2380 2380, or visit any one of HSBC Malta’s branches.

Look for companies or specialists with experience and who are able to guarantee regular servicing and testing.

What should I look for in an intruder alarm system?

Secure your property According to the 2013 Malta crime report, statistics show that crime in Malta, including break-ins, has risen by over 27 per cent since 2009.

It is never too early to think about securing your property. It is important to consult security specialists who

are able to guide choices so that properties are fitted with the most appropriate and up-to-date systems.

It is recommended that two intruder detection functions are installed. Adding an alarm communicator ensures that alerts are automatically detected by a monitored station.

Wireless communication brings greater advantages as hardwired telephone lines can easily be disabled by intruders.

External security systems will help deter intruders. However, if you must keep cash and valuables within your property, install a Euro Grade 3 safe (or better) to secure your belongings. Anchored to the floor in a secure location within the property, this will provide very strong resistance against attackers attempting to open it.

Jim Hamill, an internationally recognised expert in the field of customer experience management (CEM), will be delivering a keynote session at an executive event that iMovo, the leading CEM company, is organising on June 25 at Le Meridien Hotel, St Julian’s.

The event is aimed at addressing the importance of customer experience management for companies to be successful in today’s hyper-competitive world by enhancing their interactions with customers.

Dr Hamill has over 30 years of international management experience and has carried out a range of assignments with several leading organisations including the World Bank, Scottish Enterprise and the Economist Intelligence Unit.

A number of other experts will also share their strategies which have led to strong business growth in various sectors.

These include John C. Grech (chairman EMCS Group and chairman Fimbank plc), Joseph M. Camilleri (chief officer – strategy & process management at BOV), Matthew Bezzina (founder and director of eCabs Limited), Nick Tonna (chief commercial officer at BMIT), Claire Galea (Digital Markets, portals and brand manager at Go plc) and Joseph Casha (senior manager – customer experience at Go Plc).

The event is targeted at senior executives, directors, CEO-level professionals and managers from different industry sectors.

It is free of charge, however, due to limited seating, attendance is subject to confirmation and successful registration will be confirmed by e-mail.

For more details and to register please visit http://imovo.com.mt/events/.

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BUSINESS UPDATES

Sparkasse Bank Malta plc offers Depositary Lite* solutions to fund managers Sparkasse Bank Malta plc has announced the launch of its ‘Depositary Lite’ solutions targeting alternative investment fund managers (AIFM) seeking to promote their non-EU funds within the EU. The offering is being made available as a standalone service within the bank’s AIFMD suite of services as the bank seeks to expand its offering internationally to EU and non-EU fund managers managing and seeking to market their nonEU funds on a private placement basis within the EU. * The Depositary Lite regime comes out of Article 36 of the AIFM Directive (conditions for the marketing in member states without a passport of non-EU AIFs managed by an EU AIFM),

SPARKASSE HAS SOLUTIONS FOR FUND MANAGERS WHO WANT TO PROMOTE NON-EU FUNDS.

DataTech Consulting’s firms in Malta and Libya DataTech Consulting specialises in the design, implementation and support of SAP enterprise resource planning (ERP) systems.

Already boasting a successful portfolio of SAP implementations and related projects in Malta and Libya, DataTech Consulting is an official SAP partner in the European Union and Middle East and North Africa territories (SAP service partner and SAP value added reseller).

DataTech Consulting uses bestof-breed service delivery methodologies (including its proprietary methodology aptly called DOIT) to provide the client with the best possible service, both in terms of

which states that the AIFM must ensure that an entity is appointed to perform depositary duties to the fund. These duties must be performed by a credit institution and include the provision of bank accounts, cash flow monitoring, safekeeping of assets and oversight duties.

Mr Paul Mifsud (the bank’s CEO) explained that he sees this as a “stepping stone” opportunity to attract further business as it positions both the bank, as well as Malta, well amongst managers who may eventually seek full integration of their funds into the EU. “The bank is encouraged by the overwhelming response it has received in this regard and is very optimistic,” he added.

Etihad Airways Alitalia partnership

quality and efficiency, which of course translates into a significant reduction of project-related expenses and a quicker return on IT investment.

Furthermore, different training products have been developed by DataTech Consulting covering from basic training up to SAP KEY user training on specific SAP modules. All training material is available in different languages (including Arabic) for maximum training efficiency.

Both DataTech Consulting (Malta) and DataTech Consulting (Libya) are members of DataTech Consulting International (www.datatech-int.com).

ALITALIA HAS GAINED “AN IDEAL STRATEGIC PARTNER” WITH ETIHAD AIRWAYS.

DATATECH CONSULTING HAS SUCCESSFULLY CONCLUDED PROJECTS IN LIBYA.

Etihad Airways has confirmed that it will forward a letter detailing the conditions precedent and the criteria for a proposed equity investment by Etihad Airways that have been negotiated with Alitalia and its stakeholders over the past months. The Italian government appreciates the strategic importance of this transaction and looks favourably at the Etihad Airways – Alitalia partnership.

Upon confirmation by the board of Alitalia and its stakeholders of their acceptance of these terms, the airlines will proceed to final documentation in

order to complete the proposed transaction, in line with EU and other regulatory requirements.

President and chief executive officer of Etihad Airways, James Hogan, said: “We are delighted to be able to move forward with this process and look forward to the successful conclusion of the proposed transaction with Alitalia.

“An equity investment in Alitalia will be beneficial not only for both airlines, but, more importantly, it will give more choice and broader travel opportunities to business and leisure travellers in and out of Italy.”

Gabriele Del Torchio, chief executive officer of Alitalia, said: “This is an excellent outcome for Alitalia. This investment will provide financial stability and confirms Alitalia’s key strategic role as an infrastructure player in the travel and tourism industry in Italy for long-term growth.”

Roberto Colaninno, president of Alitalia, said: “We are delighted to move forward with Etihad Airways providing Alitalia with an ideal strategic partner enhancing the company’s long term growth perspectives.”

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BUSINESS UPDATES

SICILY IS ONLY 90 MINUTES AWAY FROM HOME.

Wholesaling in Sicily – go for it Just 90 minutes from home and you have the full benefits of the single market, where the economy of scale means a notable increase in your purchasing power and retail profits.

It doesn’t take an economist to work this one out, although

economists did work it out, in theory, years back. Now it is the turn of the proverbial man in the street, who goes for value for money and dictates the market.

The world is a village, and globalisation is the name of the game. Of course, a country

with a population of just over 400,000 is hardly a candidate to take this process forward.

However, local companies are seeing the advantages of commercial joint ventures with Sicilian counterparts. Thinking globally is overstating the case but thinking

Dance your way to a better body Get to know your body with Plethora Dance, with an individualized movement program tailored to meet your health and fitness needs. Our line of work covers back care and pain relief, balance and stability, and sportspecific training. Private and personal sessions are recommended for athletes and fitness enthusiasts. In pain? Back, knee, shoulder, neck – Plethora Dance is recommended by doctors and physical therapists and is ideal for anyone needing the luxury of individual attention.

Enjoy the liberty of booking a time that works within your schedule rather than sticking to pre-set class times. A private session with Plethora Dance is the best dose for back pain and other injuries, while

we strengthen weaker aspects of the body.

Our trained eyes are crucial for proper form and ultimate results.

We ensure you stay motivated by always introducing something new in variations.

Whether you’re a teacher, work in an office, or your work is physically demanding, we have the class for you! Choose or combine classes for relaxation, pain management, toning, weight loss, or just a fun dance class.

Relax and be open to the progress your body will undoubtedly make.

For more info visit our website www.danceclassesmalta.com, call or text 99490896 or email plethoradance@gmail.com and like PlethoraDance on Facebook.

single market, with a population of 505 million, is forward thinking.

Importers and wholesalers in Sicily are crying out for joint ventures and selling outside their own immediate market.

Cut your costs, do your commercial purchasing and warehousing

in Sicily, and retail in Malta. Give the so called the Maltese consumer the good retail prices he wants; he is, after all, a price conscious European consumer who can shop around in the single market. www.virtuferries.com admin@virtuferries.com

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INSIGHT

Should business model play role in financial reporting?

Mark Abela Whether or not the business model should play a role in financial reporting has been a controversial topic for some time, with many commentators arguing that referring to the business model would enhance relevance, while others oppose the idea claiming that it introduces bias that would be detrimental to transparency and comparability of financial reporting.

The European Financial Reporting Advisory Group (EFRAG), the French Autorité des Normes Comptables (ANC) and the UK Financial Reporting Council (FRC) have been proactively researching this topic and recently published a research paper on the subject.

For the time being the term ‘business model’ is an undefined term in International Financial Reporting Standards (IFRS) literature. However, the researchers have adopted an assumed meaning of the term for financial reporting purposes that focuses on the entity’s value-creation process: that is, how the entity generates cash flows. In the case of nonfinancial institutions, it represents the entity’s end-to-end valuecreation processes within the business and geographical markets in which it operates.

To assess whether the business model could, or even should, play a role in financial reporting, the researchers looked at whether this role enhances the response to the fundamental qualitative characteristics of useful financial information – relevance and faithful representation – as well as the enhancing qualitative characteristics – comparability and understandability – in the International Accounting Standards Board Conceptual Framework.

According to the Conceptual Framework, financial information is relevant if it is capable of making a difference to those who use the financial information in making decisions. Having the business model play a role in financial reporting would presume that investors have an understanding of the business model before assessing an entity’s financial position and performance.

Academic research shows that this is indeed the case in practice, in particular for long-term investors.

The need to understand an entity’s business model is further increased by development of integrated reporting, where one of the elements is disclosure about the business model. Some argue that ignoring the business model in financial reporting would reflect changes in value that are irrelevant to the financial position and performance of the entity. Some others note that a change in the

“Some argue that it is difficult to imagine how a dialogue between investors and management on the financial statements could be fruitful, if it did not have a primary focus on the results of the business world” entity’s business model is a significant event, because it implies a change in how assets and liabilities are used in the cash flow generation process. Therefore, it is necessary to inform users of this change and the impact on future cash flows.

Faithful representation dictates that financial information must faithfully represent the phenomena that it purports to represent.

Those who oppose the view that the information presented in financial statements needs to reflect and respond to the business model consider that this brings bias in financial reporting and is therefore undermining neutrality in financial statements.

In other words, it creates a conflict with faithful representation.

Those who promote the relevance of the business model notion believe that reflecting financial information on a basis

that is not aligned with the entity’s business model is failing to be faithfully representative because they strongly believe that financial information should be prepared from the perspective of the entity.

Comparability enables users to identify and understand similarities in, and differences between, items. Those who oppose the business model and the use of entity-specific information believe that this introduces bias in the way the financial position and performance of an entity are reported, and therefore make comparisons between entities difficult. Supporters of the business model hold the view that such an approach to comparability is more akin to calling for uniformity, rather than comparability. Ignoring the effects of the business model is, in their view, misleading to users as it makes investors

expect that future economic benefits will arise or be sacrificed as they are reflected in the primary financial statements, although there is observable evidence that the pattern of economic benefits will behave quite differently.

Understandability deals with the clear and concise classification, characterisation and presentation of information on economic phenomena. Some argue that it is difficult to imagine how a dialogue between investors and management on the financial statements could be fruitful, if it did not have a primary focus on the results of the business model. While agreeing with the need for users to know the business model, others argue that this does not automatically mean that this notion should play a role in the financial statements themselves.

To conclude, in the researchers’ view, the business

model should play a role in financial reporting, including the financial statements. Not doing so results in less relevant information, does not lead to a faithful representation of economic reality, harms comparability, and makes the financial statements less understandable. For this reason they believe that the business model notion should be incorporated in the IASB literature.

The researchers support the development of a proper rationale as part of the Conceptual Framework, with appropriate guidance for standard-setting purposes rather than the business model being referred to in financial reporting requirements only on an ad hoc basis.

Mark Abela is the technical director at the Malta Institute of Accountants.

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NEWS

ECB action not likely to revive lending Rahul Karunakar The European Central Bank’s latest offers for long-term cash won’t revive lending in the region despite expectations for strong demand, a Reuters poll showed.

ECB president Mario Draghi announced several new policies this month, including cutting interest rates to record lows and offering a new series of longterm loans known as targeted long-term refinancing operations (TLTROs).

But even with the new measures, economists saw a one-infive chance of the eurozone slipping into deflation in the coming year, up from the 15 per cent likelihood they predicted in a poll three months ago.

“On themselves, we don’t expect the ECB measures to work miracles. They only tackle any potential liquidity shortages, but they don’t provide capital relief for banks,” said Elwin de Groot, economist at Rabobank.

All but six of the 36 economists who answered an extra question said they expected banks to borrow at least half the roughly €400 billion the ECB is offering, in the hope of encouraging more lending.

“On several dimensions the eurozone economy is doing worse than Japan did in the 1990s” But a slim majority, 21 of 38 economists, do not expect that to boost lending in a meaningful way, suggesting the ECB needs to look beyond these measures to push up inflation.

On Monday, a further slowdown in eurozone inflation was confirmed – just 0.5 per cent in May on the year – keeping them in the ‘danger zone’ of below one per cent, half the ECB’s mandate.

And inflation is not expected to rise above that danger zone at least until next year, according to the poll.

The ECB’s own staff project consumer prices to rise just 0.7 per cent in 2014 and 1.1 per cent in 2015. It is projected to rise just 1.4 per cent in 2016 - still below its target of below but close to two per cent.

Although three eurozone countries – Greece, Portugal and Cyprus – are already seeing prices fall, ECB officials repeatedly have said there is no risk of this spreading to the entire region.

The poll respondents were unconvinced, however.

“On several dimensions, the eurozone economy is doing worse than Japan did in the 1990s,” wrote Martin van Vliet, senior economist at ING Financial Markets, in a note.

He added that “this means that, despite recent ECB action, the risk of mild Japan-style

deflation has not disappeared yet.”

Another concern for the ECB is feeble economic growth, which dipped to a quarterly rate of 0.2 per cent in the first three months of the year, half the expected pace.

Quarter-on-quarter economic growth is expected to run between 0.3 to 0.4 per cent for the rest of the year. (Reuters)

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INSIGHT

World Cup gets thumbs up Malta may not get the $3 billion boost to its economy that Brazil is expecting but the World Cup is getting the thumbs up from local businesses which are seeing benefits ranging from sales of drinks to increased betting. No one said anything about bleary eyed employees staggering in to work after the late night games, or complained about tourists who decided to delay their holidays to watch the games at home. Right now, it is all about escaping from reality and enjoying the Beautiful Game.

John Katakis Chief executive officer, Maltco The World Cup left quite a positive impact so far in our operation. The success obtained so far is due to several actions that the company took in view of this much awaited event. Players are more attracted to visit our shops to consult real time-odds. U*BET sales increased significantly due to a record number of bettypes that we are offering for this World Cup. Further to this, our shops extended their opening hours and numerous World Cup followers are opting to watch the games

Abigail Mamo

together with their friends at our Points of Sale in a relaxed environment. We are also offering the unique opportunity for players to be able to bet on the final outcome result, even during half-time.

We are providing continuous information through the Horizon Multimedia system in all our shops, and through website ubet.com.mt, which is being constantly updated with real time odds and the newly launched free mobile application.

Who is going to win?

Brazil with odds at 3.40 is still favourite to lift the cup. Argentina and Germany are also among the favourites with odds at 4.25 and 5.25 respectively.

Having said that, U*BET players are betting on various teams whose performance during the initial stages was impressive, such as Holland with odds at 12.50 and Italy with odds at 17.00.

Director general, GRTU Maltese businesses see the World Cup as an opportunity to maximise sales. The trend of hosting and entertaining at home will continue which is good for super/mini markets.

The biggest winner, however, is the leisure industry.

This industry has gone out of its way to cater for the needs of its clients with big screens and special promotions.

There is also an element of reinvention with even cinemas showing the games, for instance. Thanks to the extension given on opening hours, the leisure industry can work comfortably.

Business should continue to thrive as the games progress especially if England and Italy stay on or even win. So we hope for a such an

Joe Farrugia Director general Malta Employers Association Definitely a thumbs up! People gather and socialise more when there is the World Cup. A sports activity on such a global scale also generates optimism and hope for humanity, which is welcome when one considers that there is so much conflict in the world today.

The timing of the games might have an effect on punctuality in some companies, but the games do provide opportunity for lighthearted conversation and humour at the workplace which in most cases is positive. The World Cup is an event which many – even non-football enthusiasts – look forward to as a break from the routine.

outcome in the interest of Maltese business!

Who will win?

I hope England will win because it would make my father happy – but I don’t think it is likely.

Who do you think will win?

Unlike Nico the Parrot, I do not have the gift of clairvoyance, but my heart beats with Italy.

Paul Bugeja President, Malta Hotels and Restaurants Association Thumbs up, as anything which entertains and brings people together is positive for us in the catering and hospitality business. The late transmissions are a big test for the real supporters of course, and the extension of time for our operators is a move in the right direction.

For tourists visiting our country during this period it is also an experience to watch us supporting the teams in our unique manner given that we have the luxury to choose who to support given that Malta is not participating in the event.

The ideal final for us in business would be another England v Italy however this cannot happen at least for this World Cup..

Susan Weenink Head of Marketing and Communications, Simonds Farsons Cisk plc

Who will win?

The host stands a very good chance though strongly challenged by Netherlands, Spain, Germany and Italy! But all odds indicate that it will go to Brazil!

We at Farsons prepare ourselves well in advance for the World Cup, keeping in mind that we manage brands which are official sponsors of the competition.

Of course with so many fans, families and even visitors to Malta choosing to follow the games in the many bars, social clubs, ‘Fan Villages’ or in the comfort of their own homes, there is a much welcomed positive effect on business in general, including our beer sales.

Having said that, we are very conscious of the need to promote responsible drinking and we take this very seriously in any of our initiatives, campaigns or promotions running at this time.

We have a joke running through our corridors: we refer not only to the boost in beer sales, but also the boost in our sales of bitter lemon!

Who is going to win this year?

The Netherlands and Germany had an impressive first game, Brazil as host country has the huge advantage of playing home……Italy and

England will always be mentioned as the favourites by the adoring Maltese fans of either team.

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INSIGHT

High taxes for family businesses Mario Duca and Tony Pace The tax burden for Maltese family businesses is in the top three when compared to 23 countries tracked in the European Family Business Tax Monitor for 2014.

Tax treatment varies significantly across Europe with the different levels of complexity and obligations.

The result of the EFB-KPMG Tax Monitor shows that in many European countries, governments still impose a tax on intergenerational family business transfers. But many European countries apply reliefs as the tax burden on such transfers within the family business could hinder future growth and investment.

If one is not prepared, the tax obligations can be severe. The Tax Monitor studies a small family business valued at €10 million with a potential tax burden on succession through inheritance or succession on retirement.

Out of the 23 surveyed countries, seven impose no taxes

impose tax on capital gain upon the donation of shares in a Maltese family-run business company where the recipient of the shares is the spouse, descendants or ascendants in the direct line and their relative spouses or, in the absence of descendants, brothers or sisters and their descendants.

However, duty on documents and transfers, both in the case of a transfer inter vivos such as in the case of a donation of shares referred to above, and on succession through inheritance, is payable by the recipient at 2 per cent or 5 per cent. The 5 per cent rate applies if it is a transfer of immovable property or a transfer of shares held in a company 75 per cent or more of the assets (as defined in the Duty on Documents and Transfers Act) of which are immovable property or rights over immovable property situated in Malta. No further exemptions or reliefs apply to these rates of tax, and there is an identical tax burden on succession through inheritance and on

“Many European countries apply reliefs as the tax burden on transfers within the family business could hinder future growth and investment” whatsoever on inheritance. Assuming that no reliefs are applied, the potential tax burden varies from €0 to €4 million. The figures highlight the importance of early preparation because the tax landscape changes dramatically when tax exemptions are taken into account.

With exemptions, the number of countries which impose no tax goes from seven to 13. But even with exemptions certain countries impose comparatively high levels of tax, with the maximum being €1.5 million. In this case Malta is the third hardest hit country after Denmark and France, as can be seen in the graph.

Out of the 23 surveyed countries, six impose no taxes whatsoever on retirement. Once again, assuming no reliefs, the potential tax burden can be significant, with the top four countries levying between €2.8 million and €4.2 million upon a transfer of the business. When we look at the tax landscape with reliefs, major changes occur: 13 countries apply no tax, but the top six still levy a comparatively high amount of between €0.3 million and €1.5 million. In this case Malta is the second hardest hit country after Denmark.

Malta does not impose inheritance and gift taxes, and does not

retirement, either with or without exemptions and reliefs.

What is clear from the study is that family businesses can face an uphill struggle if they want to keep running the business within the family. In the case of Malta the funds to meet the stamp duty levied must be found from other sources as no cash has been generated by the individuals or the business as a result of the business transfer. This reality can severely hinder the future growth and investment capacity of a business.

Finally, the differing tax treatment of inheritance and retirement in other countries is interesting, and such policy differences can often result in changes to the families’ behaviours.

For example, the leaders of family businesses may hold on to control of the business for tax reasons, which can be frustrating for the next generation and act as a constraint on business growth.

Mario Duca is the president of the Malta Association of Family Businesses and Tony Pace is the KPMG Tax Partner for Family Business http://www.kpmg.com/MT/e n/IssuesAndInsights/ArticlesPublications/Pages/Family-Business-Transfers.aspx

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e Business OBSERVER

| June 19, 2014

STOCK MARKET REVIEW

Secured v unsecured

MARINER FINANCE WAS THE FIRST COMPANY TO INCLUDE THE WORD ‘UNSECURED’ IN ITS BOND OFFER.

Edward Rizzo Earlier this month, two new bond issues were announced and it may have come as a surprise to many that, for the first time, the wording ‘unsecured’ was included in the title of the new bond on offer.

On previous occasions, the terms ‘secured’, ‘subordinated’ or ‘guaranteed’ were sometimes used since these were distinct features of the bond on offer. However, the wording ‘unsecured’ which represents all bond issues that do not have some form of ‘security’ in place has never been included in the title.

Following the press release issued by Mariner Finance plc on June 4, a number of comments were posted online on Times of Malta, some of which clearly indicated the confusion among readers on what the ‘unsecured’ term implies. This prompted me to provide some clarification in this respect. I had already tackled this topic in 2008 and 2009. However, given the recent spate of new bond issues, which is expected to carry on throughout the second half of 2014, it is worth raising the topic again to assist investors in their decision-making.

What does the security aspect entail? The security normally takes the form of a hypothec in favour of bondholders on property held by the issuer or one of its subsidiaries.

Few bond issues are secured. Normally, it is property development companies that are dependent on the sale of properties to finance the repayment of the bond that provide secured bonds to investors. Last month’s two bond issues by Pendergardens Developments plc were structured in this manner. Other companies that offer security in the form of a hypothec over a building or a piece of land they own, normally include those firms with a short track record or an erratic profitability record. Companies of this nature require such a feature to be included in the offering as an added assurance to prospective investors.

Apart from the two Pendergardens bonds, there are another three secured bond issues currently listed on the Malta Stock Exchange: Izola Bank plc, Medserv plc and Pavi Shopping Complex plc. In the past there were other issuers with secured bonds, but these have since all been redeemed. All other bonds currently listed and traded on the

MSE are unsecured. Therefore, the majority of bonds are unsecured – similar to the trend seen in overseas bond markets.

As such, the unsecured feature of some recent bond offers should not come as a surprise to potential investors, many of whom would have been invariably investing in unsecured bonds for several years.

While the ‘security’ hypothecated in favour of bondholders gives a certain degree of added comfort to investors, in my view, it is certainly not right to conclude that all unsecured bonds are riskier than secured ones. Although a hypothec is beneficial since it provides some additional reassurance to investors,

As such, the security aspect should not be the most important attribute one must look into when analysing the attractiveness of a bond. The financial robustness of the company issuing the bonds and its ability to meet regular interest payments and final capital redemption is more important. The most common ratios for prospective bond investors to look into are the interest cover (showing the number of times a company’s earnings before interest, tax, depreciation and amortisation exceeds its financial obligations) and the gearing ratio (the leverage of the company, i.e. the extent of borrowings compared to shareholders’ funds).

Another term which often creates confusion among the community is the guarantee offered by some issuers. Since many bond issuers do not have any major assets within the company issuing the bonds, as their only purpose is to act as the financing arm of a group of companies (as is the case with Tumas Investments, Corinthia Finance, AX Investments and others), a guarantee is provided by the parent company to assume the issuer’s obligations in case of default. As an example, in the recent bond issue by AX Investments plc which was guaranteed by AX Holdings Ltd, it is incorrect to assume that these bonds are safer than those of issuers which do not

“Irrespective of whether a bond on offer is secured or unsecured, investors should stay away from issuers whose business model and financial situation indicate a weak company” the security will only come into play in case of the issuer defaulting on its obligations to bondholders. Irrespective of whether a bond on offer is secured or unsecured, investors should stay away from issuers whose business model and financial situation indicate a weak company as this may imply that it has a greater chance of defaulting.

The security feature will become relevant should the company find itself in a position where it is unable to honour its financial commitments including the interest and capital repayment to bondholders.

If a company defaults, it will inevitably lead to a series of regulatory and legal procedures causing a lot of anxiety to investors. In such circumstances, the release and subsequent sale of the security (normally property) in favour of bondholders will be marred by lengthy legal issues and other procedures which invariably take a long time to conclude.

Also, the historic track record of the issuer over an extended period of time is another very important consideration since it depicts the ability of the company to withstand changes in business sentiment and different economic cycles, amongst others. The recent prospectus of Mariner Finance plc provided the 10-year historical financial performance of their container terminal in Riga. The information provided in the financial analysis summary gives ample evidence that the company has a very strong track record in the management of the port facility and container terminal generating substantial profits and cash flows during the past 10 years even in the midst of the international financial crisis. In fact, the company achieved a net profit margin of over 40 per cent per annum in most of its 10-year track record and it is projected to register an interest cover of 4.2 times in 2015 – a very comfortable ratio by any standards.

provide a guarantee. The AX Group could have also issued its bonds directly by the parent company AX Holdings, rather than using the finance vehicle. In such a case, the end result for bondholders would have been the same.

Apart from the differentiating characteristics of each bond, the pricing of a bond issue (i.e. the interest rate offered by the company issuing the bonds), naturally ranks highly among the important factors that impact an investor’s decision on whether to participate in a bond issue. Pricing is a very subjective topic and could be debated at length. Investors should question whether the company/issuer is offering an adequate return to compensate them for the risks being undertaken. There are risks in all investments, even in those bonds issued by any government – whether the Malta government or other sovereign issuers which many Maltese investors may have gained exposure

to in the past. As such, investors should review the issuer’s financial situation or a country’s economic fundamentals to gauge whether the rate offered is sufficient.

Some investors also seem to have been confused with the historical financial information available in the recent prospectus issued by Mariner Finance plc. The key figures were published as stipulated by Listing Rule 3.18 and Section 10 of the Registration Document published by Mariner Finance plc indicates that the full set of financial statements is available upon request. However, these do not provide any meaningful information due to the recent change in the business operations of Mariner Finance. Some readers may have also failed to understand the reason for the publication of the ‘pro forma consolidated financial statements’.

This is explained by Deloitte Services as financial advisors to Mariner Finance plc. The report by Deloitte is available on the issuer’s website www.mfplc.com.mt.

Basically, pro-forma financial statements are drawn up to provide an indication on how a company or a group would have performed for the whole year following significant changes in its form or structure. In the case of Mariner Finance plc, the 2013 pro-forma financials were provided since the Mariner Group was restructured in the first few months of 2014. Mariner Finance plc’s role was changed from a special purpose vehicle entrusted solely with the raising of funds, to a holding company of two operating entities whilst still retaining the financing role. As such, this rendered the historical financial performance of Mariner Finance plc irrelevant as they do not reflect its current structure.

Furthermore, the Financial Analysis Summary appended to the Prospectus provides the 10-year historical performance of BCT. This is the main operating asset of the new Mariner Finance Group since it generates the large part of revenue. These are the figures that need to be analysed by prospective

e Business OBSERVER

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June 19, 2014

investors and the sponsor to this bond issue should be commended for the fact that although the Listing Rules do not require that financials for such a long period of time are published, a full 10 years of financials were provided. This very useful information indicates the strong profit and cash flow generation achieved by the terminal even in the midst of the international financial crisis.

Furthermore, although historical financial statements should play a large part in analysing an investment opportunity, prospective investors should also look into the projections of the future performance of a company since this will determine the ability of a company to honour its commitments.

The Financial Analysis Summary includes the estimates of Mariner Finance for 2014 and the projections for 2015. Moreover, the company’s management informed financial intermediaries that by 2024, there should be excess cash of €28 million after the repayment of the bond issue. Admittedly, achieving ones financial projections over a 10-year period is no mean task, however, the projected cash buffer of €28 million is almost equivalent to the amount of bonds to be issued and as such provides ample cushion in the event of any potential business setbacks.

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PROPERTY DEVELOPMENT COMPANY PENDERGARDENS, WHICH IS DEPENDENT ON THE SALE OF PROPERTIES TO FINANCE REPAYMENT, RECENTLY PROVIDED SECURED BONDS TO INVESTORS.

Financial journalism is still very much in its infancy. It’s an area that needs particular attention given the sensitive nature of the topic and the increased participation by retail investors in the local financial market.

A growing and active bond market is a positive development for Malta’s economy especially in the light of the Investment Registration Scheme launched last week and the indication by the Minister of

Finance also last Sunday that two private pension schemes will be launched imminently.

Edward Rizzo is a director at Rizzo, Farrugia & Co (Stockbrokers) Limited.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and is licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon.

RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen.

Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report. © 2014 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved

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e Business OBSERVER

| June 19, 2014

LAST WORD

‘You are not going to the office looking like that...’

Jon Rosser Inspired by a piece I read recently in an English broadsheet, I decided to take a look at the subject of office wear and appearance – and the conventions thereof. I began by analysing my own admittedly limited experience.

My very first brush with my superiors at work was not, strangely enough, because of my sartorial tastes. It concerned my hair... or to be more specific, its length.

After completing my studies in the late 1960s I began a job with a Canadian company in a small town 60 miles west of Toronto.

On my first day I turned up for work in a suit and tie and felt almost squeakily conventional.

But, at the end of day one, the office supervisor sidled up to me and whispered: “Er, before you come in tomorrow... would you get your hair cut please.” It was not a request, it was an order.

However, as my hair at the time was comparatively short – and since I did not wish to look like a

not for me and if my refusal to subject my thatch to this extreme cut meant the sack, then so be it.

And it was with this resolute attitude to the fore that I faced the big boss that afternoon – after working hours, naturally. I remember he looked balefully at me, sighed deeply and said: “I am asking you to conform to company policy and get your hair cut in the manner of the rest of my male employees.”

Incidentally, this was the first time the work ‘asking’ was used; prior to this I had been instructed or told to comply.

Anyway, once again I decided to ignore the request, even when it could have meant dismissal.

And as luck would have it, no more was said about the haircut... apart from a few snide remarks from one or two of my more moronic work colleagues.

The hair crisis was over and done with in less than a week.

At the other extreme, I once worked for a northern English advertising agency where there was

reckon business attire has changed very little since the 1940s.

To back up this point, even today some conventions linger when it comes to work apparel.

A male lawyer, for instance, has a proscribed uniform of dark two-piece business suit and quiet tie, plus an aura of understated pomposity (unless he happens to be a certain renegade ex-MP, where his pomposity is anything but understated) that says: “I have done six years studying law and now I am a fully qualified lawyer.

“Consequently I am superior to you and everybody else... so there!”

I suppose we are at least two generations away from seeing isur avukat entering the law courts in velvet jacket, pastel coloured shirt and bold cravat.

But I hope I’m still around when it does happen.

So does what you wear to work matter? Yes, for certain professions of course, it does.

“I suppose we are at least two generations away from seeing is-sur avukat entering the law courts in velvet jacket, pastel coloured shirt and bold cravat” convict or a sufferer from some nasty disease of the scalp, I checked myself out in the mirror and decided not to comply. Bad move: Next day there appeared in my pigeonhole a note in red ink from the big boss... the supreme leader. It was short and to the point and read: “Get a haircut after work today.” Then his spidery signature underneath.

Again, after checking that my crowning glory had not sprouted a metre or so in a night, I decided that it was both neat enough and short enough, so I ignored this as well. The next stage was a direct: “See me” summons, school headmaster style, from the big boss and a face to face confrontation across his desk.

I should explain that in the meantime I had checked out the hairstyles of the rest of the office’s male employees.

To a man, these comprised a look that nowadays seems to be adopted by prematurely balding men in their 20s and 30s: namely shaved back and sides with about one centimetre of hair left on top of the head. I decided this was

positively no dress or hair code.

The only thing the boss insisted on was that staff should be clean.

They could wear what they liked and they sure did. One female designer – with exceptional legs – used to turn up in the shortest shorts I have ever seen.

Not only could you see her hip bone... you could almost see her armpits. Yet, she was exceptionally good at her job and also a real sweetie, so her dress sense was completely irrelevant.

My father was an accountant and wore suits everywhere.

His idea of casual wear was to loosen his tie. Professional men in general have always been a bit tight cheeked about their schmutter.

Doctors, businessmen, computer geeks... all tend to dress conservatively – and, with the exception of the last mentioned, have always done so. And I don’t see a change any time soon.

Similarly female professionals have also tended to be rather sartorially austere... but usually with a lot more style. I can’t vouch for it with chapter and verse, but I

A construction worker shouldn’t dream of entering a building site without a hard hat and industrial boots.

Just as someone who prepares food should never do so with filthy hands and wearing an overall splattered with grease and gravy stains.

But the office is slightly different; any firm that has direct contact with the public should make sure its employees are at least neatly and cleanly turned out.

Speaking personally, the one freedom I treasure above all others, now that I work full-time from home, is that I no longer have to dress the part.

I can be at the computer dressed in anything from shorts and a T-shirt to a rather tatty dressing gown and slippers... and nobody gives a damn... least of all me.

Of course there will always be those who claim that in order to succeed in one’s chosen career, it is essential to turn up in a conventional dark suit and tie.

Oh really? Just go and tell that to Richard Branson.

ANY FIRM THAT HAS DIRECT CONTACT WITH THE PUBLIC SHOULD MAKE SURE ITS EMPLOYEES ARE AT LEAST NEATLY AND CLEANLY TURNED OUT.