The Business Observer Issue 17 - 15th January 2015

INTERVIEW

Issue 17

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January 15, 2015

Distributed with Times of Malta

A permanent link is a crucial step if Gozo’s economy is to grow – but Gozo Business Chamber president Michael Grech stressed that much more is needed in terms of incentives and infrastructure see pages 8 and 9 >

COMMENT Azerbaijan’s Ambassador Vaqif Sadiqov explains his country’s foreign policy approach and why collaboration makes economic sense. see pages 6 and 7 >

€1.6m claims from More creditors Vanessa Macdonald Over €1.6 million is so far being claimed by 17 companies owed money by More Supermarkets, in a case which the Malta Association of Credit Management believes should never have happened.

“This is the fourth case involving a supermarket that the MACM has dealt with. First we had Price Club, then Supermaster and Nicholsons and now More,” director general Josef Busuttil said.

“Suppliers do not seem to be learning any lessons from the past!”

The 17 companies – including ARMS – are claiming the money in a variety of ways, ranging from judicial letters to court cases.

Alf. Mizzi is claiming over €600,000 – the largest amount being claimed – while Farsons Group companies are claiming over €300,000. The amounts are owed by five different entities behind the More Supermarkets chain, which

closed last autumn. The association believes that the actual amount is much higher as there would be many other creditors who have simply given up, and opted not to pursue their legal options. There may also be others who have not yet instituted legal action.

that director Darren Casha had taken over as owner. It was somewhat concerned as the new owner did not have any track record in supermarkets. The suppliers met Mr Casha and Mr Schembri and left quite satisfied. The plans were to keep two of the five outlets open –

Once suppliers start seeing red flags, they are reluctant to pull out and stop supplying the supermarket The court last week approved a garnishee order for €3.5 million in favour of Alexander Farrugia and Edmond Mugliette, who had lent money to the supermarket owner Ryan Schembri, who fled Malta last September.

The MACM called its first meeting on the More Supermarkets case in May, after suppliers were notified

Żebbuġ and Mosta – and the creditors were to be paid over a fiveyear period.

But then everything changed and payments were missed, with the new owners claiming that they were having problems because of staff wages and utility bills. Żebbuġ was then closed and a new company was opened which took over Mosta,

“apparently with all of its stocks, even those which had not been paid for,” Mr Busuttil said.

“Is this right? Did the owners of More have a right to sell stocks they had not paid for to the new owner?

This would never happen elsewhere!”

Mr Busuttil admitted that the situation in Malta was very challenging for suppliers, who were operating in a very competitive and complex market. However, he said, once they started seeing red flags, they were reluctant to pull out and stop supplying the supermarket.

One of the problems is that suppliers grant a long credit period which does not make sense for a cash business like supermarkets, which sell fast-moving consumer goods. By the time the supermarket is in arrears, the arrears will have already accumulated to substantial amounts, meaning that the supplier Continued on page 13

COVER STORY We all know that the price of crude oil has fallen dramatically but that the price of petrol has not. Economist Philip von Brockdorff explains the various reasons for this. see page 11 >

CASE STUDY Mepa is currently gathering feedback on its proposed solar farm policy. Bajada New Energy believes it would be a step in the right direction. see pages 12 and 13 >

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NEWS

MSE working to facilitate SME financing The Malta Stock Exchange (MSE) is working on a product which will encourage small- and mediumsized enterprises to access capital markets which, subject to all the relevant regulatory approvals, should be implemented during this year.

Although SMEs can currently access capital markets through the Main Market and the Alternative Companies List, the Exchange believes that there is scope for the introduction of a more flexible and cost-effective market that will be a good fit for the issuing company while still ensuring transparency and good corporate governance for the benefit of the investor.

“For initial public offerings over €5 million, equity and bond issues on the main market remain a feasible solution, and come with a prospectus for shareholder information and protection,” MSE’s business development manager Cliff Pace said.

“However, there are many reasons why the main market for the issue of equity and bonds may not be the right solution for SMEs that want to raise amounts lower than that.”

The first reason is the cost involved, since compliance and marketing costs could add up significantly. The MSE is therefore proposing to set up a new market targeted at SMEs which might want to raise between €1 million and €5 million.

There is also the issue of control as the current IPO regime requires that at least a quarter of the equity is made available – something that SMEs, many of which are familyowned, might baulk at.

“The new market would not set a minimum threshold of equities in public hands, so SMEs would be able to raise equity capital without relinquishing a significant percentage of their shareholding,” Mr Pace said. The new product will also cater for the issue of corporate bonds and other types of instruments.

A significant challenge for SMEs to get investors interested in their products and raise finance is often the lack of an instantly-recognisable brand name. The new market

also brands the relevant company through its robust infrastructure for admission to ensure investor protection – and hence builds up investor confidence in the products available.

The new product will certainly help with the under-capitalisation rife among SMEs, a prevailing situation that has been highlighted by everyone from bank chairmen to Central Bank governors. But it will also help in other ways, Mr Pace explained.

“This new market would be a very important tool in succession planning, particularly for family businesses. Companies in the second or third generation stage often have family members who want to sell part or all of their shareholding, but at the moment they have limited avenues.

“We are looking at a sector that would very often not be able to get a loan from the banks” “The problem becomes particularly acute by the time you get to the third generation as the shareholding by then has become much more diluted. Prospects would create the opportunity to sell that shareholding on the market, as they can be freely traded on the Exchange, particularly if the shares are put on to the market by the second generation, creating a market ready for the next one,” he said.

He was also quick to point out that this new initiative was not necessarily a rival for bank lending.

“We are looking at a sector that would often not be able to get a loan from the banks. We welcome the participation of the banking sector in this process because the product has been designed in a way which would allow a bank or an auditor to be recognised as the SMEs’ corporate adviser.

“And in contrast to the role of the sponsor during an IPO on the main market, the corporate adviser would not be dispensed with after the IPO but will need to stay on afterwards. This would not only bring the SMEs’ corporate governance up to scratch and ensure robust due diligence, but will also ensure that these are retained and maintained to ensure transparency and investor protection,” he said.

He believes that there is another reason why SMEs should consider Prospects: there is plenty of evidence to show that listed companies outperform non-listed ones, in terms of turnover, employment and profitability.

“There is no doubt that the transparency and corporate governance imposed on a company by going public brings about more scrutiny of decisions and more awareness, both of which reflect positively on a

company’s performance,” he said.

“The return on equity of listed companies averages over 11 per cent, and their market capitalisation value has mostly increased significantly over the years.

“This initiative will be a new opportunity for SMEs to access the capital markets in order to grow, and will allow investors the opportunity to participate and benefit from their growth to the extent that they are comfortable with.”

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NEWS/APPOINTMENTS

Area 4 back on the market for oil companies The government will soon publish a notice in the Official Journal of the European Union notifying that Area 4 is once again open for companies interested in oil exploration.

Phoenicia Energy Company Ltd and Melita Exploration Company Ltd completed the contractual obligations of the first exploration phase.

They were then granted a further six months in order to evaluate the results of the tests carried out on the Hagar Qim well last summer but decided to terminate the contract on Sunday January 18, rather than to initiate a second exploration phase.

Sources familiar with the government’s intentions said that promotional efforts will continue in the sector.

“It is only through further exploration that one can truly evaluate the potential of Malta’s offshore acreage.

“Clearly, the fact that Phoenicia Energy Company Ltd and Melita Exploration Company Ltd will not pursue further exploration in this area will not be very encouraging when it comes to attracting other companies.

“We have to bear in mind that exploration is very costly and when the price of oil goes down – crude is at the lowest price since 2009 – then this is the first area that oil companies will cut back on. So we have to be pragmatic about whether the government will find any takers for the area.

“The issue is not just about finding oil but about finding oil that is economically feasible to drill at the current cost of crude.

“Having said that, the government will continue to collect new data whenever it can and to correlate it with the data already available.”

At present, the only other activity in Malta is in Area 3, a 6,000 sq.km area where Cairn Energy its JV partner Melita Exploration Company (a wholly-owned subsidiary of Rockhopper Exploration PLC) is at the moment processing a 2D broadband (seismic) survey on just over a fourth of the area, expected to be complete within the coming months.

The results will determine whether the partners commit to a 3D survey under the 2012 exploration study agreement.

New partners at Fenech & Fenech Advocates

(FROM LEFT TO RIGHT) DAVID PACE, DOREEN FENECH, JONATHAN DINGLI, JOHN ELLUL SULLIVAN AND PAUL PACE ROSS.

KPMG appoints partners and directors KPMG has appointed David Pace and Doreen Fenech as partners and Jonathan Dingli, John Ellul Sullivan and Paul Pace Ross as directors. This reflects the continued growth that the firm has achieved in 2014 and which is expected to be sustained in the coming years.

Mr Pace joined KPMG in 2002 and has worked on numerous advisory assignments, both locally and overseas. Ms Fenech joined KPMG’s audit function in 1995 and has been instrumental in the growth of the tax practice over the years.

Mr Dingli re-joined the firm as an associate director in 2012 specifically to spearhead the Accounting Advisory Services (AAS)

Unit at KPMG in Malta, while Dr Ellul Sullivan joined KPMG in 2007, and advises a variety of multinationals and high net worth individuals on their international corporate structures, as well as retirement scheme administrators on their operations in Malta.

Mr Pace Ross joined KPMG in 2002 and eventually moved to tax services and now leads a multi-disciplinary team of professionals advising clients on the tax implications of corporate restructuring, mergers, continuations, exit strategies and other reorganisation projects.

He is also a senior member of the corporate services team.

Fenech & Fenech Advocates has appointed Monica Galea John and Alison Vassallo as partners.

Dr Galea John joined Fenech & Fenech Advocates in 2000 and currently heads the compliance team within the financial services department. Her areas of practice include corporate law, corporate finance, mergers and acquisitions, financial services and banking law, trusts and estate planning, prevention of money laundering and financial terrorism legislation, general commercial law and family mediation.

Dr Vassallo joined Fenech and Fenech Advocates in 2005 as an associate within the marine litigation department. Her areas of practice within the firm embrace all aspects of maritime law including EU shipping law, recognition and enforcement of foreign judgments and arbitral awards and the coordination of tender procedures involving a maritime element. She is heavily involved in the day to day running of the Yachting Department.

MONICA GALEA JOHN

ALISON VASSALLO

Dhalia strengthens HR department Dhalia Real Estate services has appointed David Dingli as its new HR executive.

Mr Dingli, a management consultant by profession, specialises on strategic development, human resources management and operations management and has delivered lectures and corporate

training to over 5,000 managers in 30 different countries.

Mr Dingli has been responsible for Dhalia’s internal training since 2013 and will now be responsible for the human resources department including recruitment, orientation, induction and appraisal of all personnel.

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COMMENT

THE AZERBAIJAN AMBASSADOR TO MALTA, VAQIF SADIQOV

Memorandum of misunderstanding?

On December 15, Malta and Azerbaijan signed a memorandum of understanding on strategic cooperation in the oil and gas sector. The Azerbaijan Ambassador to Malta, VAQIF SADIQOV, is disappointed by what he sees as negative perceptions of his country.

There has been a lot of interest to the Maltese-Azerbaijani relations in Maltese media in general, and to a number of aspects related to Azerbaijan, in particular. This is good as it, on the one hand, reflects the growing attention of the Maltese public to development of relations with the emerging partners going beyond the traditional geographic domain of this country’s foreign policy interests.

On the other hand, it points at a considerable lack of information about today’s Azerbaijan, the region in which it is located, and the potential for cooperation between our two countries.

Azerbaijan carries out an independent, active and robust foreign policy, the pillars of which are our national interests and achievements in political, economic and social spheres.

Bilateral and multilateral relations are part of our foreign policy aimed at establishing external conditions conducive for further internal reforms. Our foreign policy is guided by the norms and principles of international law, and compliance with international commitments.

Azerbaijan is building strategic cooperation with the outside world based on good neighbourly relations, non-interference in internal affairs, equality and mutual respect and fruitful collaboration.

In accordance with geography, history, traditions and geopolitics, the foreign policy of Azerbaijan is not confined to only one region.

Bearing in mind its numerous pillars, such as South Caucasian, Caspian, South-East European, Central Asian, Islamic world, postsoviet and Euro-Atlantic dimen-

sions, a multi-faceted foreign policy has been pursued by Azerbaijan through the Caspian, Black Sea, and Mediterranean basins.

It has been as the result of such policy that Azerbaijan is perceived around the world as a reliable partner, and the number of states wishing closer cooperation with Azerbaijan is growing. Our membership in the UN Security Council in 2012-2013 is a good example of this.

In 2014, international relations continued to be challenged by crises and confrontations, growing division along political-military clusters, the emergence of new hotspots of conflicts and transnational threats in the proximity of Azerbaijan.

One such threat is the ongoing armed conflict with neighbouring Armenia has not yet found its just solution based on the norms and principles of international law.

The silence of the international community about this gross violation of sovereignty has led since the

strengthening its relations with Malta. Today’s level of relations establishes a good foundation for further cooperation in many spheres: political, economic, commercial, energy, culture, education, tourism, etc.

This is also part of our policy towards the European Union, with which we enjoy a wide network of relations in different spheres,

“We believe this purely commercial project could have, in principle, an impact on the electricity cost reduction for the public” 1990s to similar situations in Georgia, Moldova, and today in Ukraine.

Thus, safeguarding the independence and sovereignty of Azerbaijan, eradicating the consequences of Armenian aggression, promoting economic interests, energy and transport strategy, disseminating true information on Azerbaijan around the world, and relations with the multi-million Azerbaijani diaspora are foreign policy priorities.

It is based on this vision that Azerbaijan is interested in

underpinned by a number of legal documents. In general, we would like to raise our relations with the EU to the level of strategic cooperation based on mutually beneficial and equal partnerships.

The recent visit of Prime Minister Joseph Muscat to Azerbaijan was an important event as it was the first ever of its kind. It took place at a time when our relations with the EU and Malta in particular are gaining momentum despite serious challenges and far-reaching processes taking place in the EU, in

the South Caucasus, and in adjacent areas in the Mediterranean, Middle East, North Africa, etc.

Dr Muscat’s meetings with the President and Prime Minister of Azerbaijan provided a good opportunity for a wide-ranging discussion about present bilateral relations and prospects for their development, as well as on major international issues important for the both countries.

The MOU on strategic cooperation in oil and gas sectors signed by the two energy ministries paves the way for further cooperation in the energy field on the basis of mutual interests.

Azerbaijan is becoming an important political, security and economic partner for the EU, and our relations in the energy security and projects carried out by the initiative and with direct participation of Azerbaijan could be beneficial for Europe, including Malta.

There could be a number of projects to be discussed with Malta for a mutual benefit, and my country is ready to engage in these discussions.

The Trans-Anatolian and TransAdriatic pipelines bringing gas from Azerbaijan to Europe will be implemented by 2019, and will significantly change the European energy landscape, bringing new volumes

of gas to the growing market of Europe. Malta, as a country for which energy security is an important factor, could also benefit from the new developments in this sphere.

The possible gas pipeline connection between Malta and Italy could also be possible in a midterm perspective once the two countries agree on this.

Malta has also a special role in the oil transportation (fuelling, bunkering, etc.) in the Mediterranean.

There has been a lot of media interest in the LNG project established by Electrogas consortium in Malta, in which Azerbaijan’s State Oil Company (Socar) is one of the participants.

We believe this purely commercial project could have, in principle, an impact on the electricity cost reduction for the public, and we believe in a successful execution of this project for the benefit of the local population.

Azeri Ambassador Vaqif Sadiqov will be giving a talk on bilateral opportunities at the Malta Chamber of Commerce, Enterprise and Industry in Valletta on Thursday January 22 at 9.30am.

For further information contact the Chamber by telephone on 2123 3873.

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What the MOU means The government has not published any details of the memorandum of understanding (MOU) signed with Azerbaijan after an unpublicised visit last month. Ambassador Vaqif Sadiqov, who was present at the signing in Baku, did his best to fill in the blanks.

The MOU refers to oil and gas infrastructure. What does Azerbaijan’s state owned oil company, Socar, have in mind? How could Malta help?

Socar is active in a number of sectors in oil and gas industry. With its main sales outlets and terminals located in the ports of Georgia and Turkey, it considers the Mediterranean as a potential market.

Malta’s infrastructure can serve as an important element of Socar’s development strategy offering opportunities in blending, bunkering and pure storage.

No specific projects exist yet, but the MOU signed in Baku paves the way for business development teams of both countries to work on analysing options that Malta could offer Socar.

There are many ideas floating around, but any specific project would need to be addressed directly to Socar. That said, the Electrogas Malta project where Socar’s trading subsidiary holds 20 per cent, is already an important strategic project for both sides.

Azerbaijan already has a gas pipeline planned to southern Italy. Are you considering extending this to Malta?

As I have mentioned earlier, the gas pipeline connection between Malta and Italy could also be possible in a mid-term perspective once the two countries reach an agreement on this.

Is there a role for Malta to play in transhipment of oil from the Turkey pipeline?

I am not aware of any specific plans in this field at present. I think Socar is in a better position to address these issues.

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INTERVIEW

Tunnel vision for Gozo e president of the Gozo Business Chamber, MICHAEL GRECH, is a firm believer in a permanent link – a tunnel, not a bridge – but he told VANESSA MACDONALD that the link alone would not be enough to help Gozo’s economy grow.

“AT THE MOMENT, THE UPPER PART OF VICTORIA AND THE MAIN SQUARE ARE CLOSED.”

Gozitans always lament that the economy is not doing well but the NSO reported that in 2013, Gozitan gross value added went up by 4.8 per cent while that of Malta went up by 4.5 per cent...

We are not saying it is not doing well but it could do better. We could get a fairer share of the cake if there were more opportunities, then we could perform better and in turn help the economy of the islands.

Gozo accounts for only 5.1 per cent of the islands’ GDP. What should that figure be, all else being equal?

Statistically we have nearly eight per cent of the population, so there is room for growth. However, that is based on NSO’s population figures.

We believe the population is smaller than their reports say.

Gozo needs incentives to be competitive. The disadvantage of double insularity is there, but will hopefully not be an issue forever.

We are pushing for a tunnel. At least we can aim for single insularity!

You repeatedly mention the need for a permanent link. The bridge would cost €1 billion. How much would a tunnel cost?

We believe we could build four tunnels for the cost of one bridge, although that is admittedly a calculation done on the back of an envelope, not based on any real data or geological surveys...

We brought over a Norwegian tunnelling expert a few years ago to give us an estimate. Obviously, you would need in-depth studies to see whether there are any undersea faults, as this would drive up the cost. The indications are that it could be done in five years or less.

However, we believe that a private enterprise could build it without any need for government funds.

There would be a huge upfront cost. How would they recoup the money?

The land could be given as a concession for a long period – say 65 years – and then the revenue would come from the usage toll.

How would the toll compare with the cost of the ferry?

It would be fair and equal for everyone – whether Maltese or Gozitans – and probably cheaper than what people are paying now for the ferries.

Would the tunnel increase the number of people going to Gozo?

Wouldn’t Gozo lose its ‘magic’ appeal for visitors as an island?

The numbers will go up. But do not forget that there are many

shoulder months: you get a concentration of people crossing between mid-May and mid-October but then the figures drop. The permanent link would spread people out more evenly over the whole year.

It will also be a real incentive for visitors if they saved the time it takes to queue up for the ferry and to embark and disembark.

The ferry could be retained during the day for those who are not in a hurry, or who like the experience of the boat crossing. But for the business community, students, people flying overseas, patients etc., the time saved by the tunnel is significant. Time lost in commuting is costing the economy millions.

Imagine if the two hours currently lost because of the crossing could be used more productively.

Would the tunnel solve the problem – and the cost – of transporting hazardous material?

Hazardous material would still be transported on the ferry: Gozo Channel does a special trip with no passengers on board for hazardous material like fuel bowsers, gas cylinders and so on, to minimise risk.

You are not quite convinced about the population of Gozo. The NSO says it is 31,446, fairly unchanged over the past five years. How many Maltese hold Gozitan ID cards because of their holiday homes, and how many Gozitans are working and studying in Malta but still count as living in Gozo?

We met the NSO to discuss this.

They say that through the last census they were able to eliminate from their figures the Maltese who have a Gozitan ID card. But we still think the figure is not correct.

So many Gozitans have work in Malta and have settled in Malta over the past few years. If a student is living in Malta Monday to Friday but returns to Gozo on the weekend, that person is still registered as a Gozitan, which does not make sense. It does not reflect that they

DID YOU KNOW? ■ ere are 1,075 Gozitan students at the University of Malta, and 219 at Mcast.

■ e number of unemployed in Malta went up by 8.2 per cent, and in Gozo by 5.8 per cent.

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are spending most of their money in Malta, whether on clothes and groceries, or petrol and leisure.

Even the birth figures are misleading as there might be Maltese who go to Gozo to deliver as the hospital is not nearly as busy.

This is worrying as you are talking about the exodus of young people. Are we going to end up with an island of old people?

The process tends to accelerate with time, so it will get worse very quickly. Speak to local parish priests and they tell you it is pointless to organise anything for youths during the week as there is no one around.

One way to reverse this is obviously to have more jobs in Gozo... Are you attracting FDI to Gozo?

FDI has been quite a problem in the past few years. The agreement on the medical school would give a boost to the economy as we would have foreign students who need accommodation, food, clothing, leisure and so on.

We will also need to enlarge the Gozo Hospital as the students will need cases to handle – we might even need to bring cases over from Malta, which would in turn ease the waiting list at Mater Dei. But the school would hardly create a lot of employment for Gozitans, will it? What about new manufacturing opportunities, new back office units? The employment figures improved – but 200 of the jobs were public administration transferred to Gozo.

It is not enough. The Gozo Minister helped to persuade software company RS2 to set up an office in Gozo. That could bring back youths who were lured by the IT sector in Malta, although some might already have a home there and might find it hard to return. But for those graduating now it offers a real opportunity.

There could be other possibilities. For example, we missed out completely on i-gaming. We were led to believe that it could not be done: we have a problem with the

GOZO BUSINESS CHAMBER PRESIDENT MICHAEL GRECH.

fibre-optic cable but the government knows about this and there is a study under way at the moment on a second cable to be in place in the coming year or so.

Other private sector investment could be attracted if there were the necessary incentives. For example, if you look at the big four audit firms, 25 years ago they all had offices in Gozo; now there are none.

These firms are centralising and they have become more specialised. It does not make sense for them to have offices in Gozo...

Why not? You could bring an entire unit to Gozo. All these entities need is a fiscal incentive. It worked perfectly well in the late 1960s and 1970s when foreign investors were given a 10-year tax holiday. Clearly, you have to be careful not break any EU rules on state subsidies and so on.

But there could be ways and means to offer incentives.

The Budget had some incentives through the Employment and Training Corporation for Gozo which we think will work.

You can bring a horse to water but you can’t make him drink.

Even if there were a cable, igaming employees want to live near an entertainment area with restaurants and bars.

What can Gozo offer to compete with that?

Everything is tied to supply and demand. If there were enough people, then I am sure that Gozitan – or Maltese – businessmen would react. Some 30 or 35 years ago, there were dozens of nightclubs in Gozo, and this at a time when there were only a handful of trips every day, the last one at 5.30pm! And yet they were thriving and were filled with Maltese.

Are you just being nostalgic and sentimental? Can you really go

back to the way things were 35 years ago? It is not only Gozo which has changed but the rest of the world!

The way in which people seek entertainment might have changed over the past decades but people still want to enjoy themselves. The concept of what you offer might have to change.

What new investment does Gozo need? Hotels? A casino? The marina? The cruise terminal?

There was one bidder for a marina. With regards to a casino, we think that, if there were the necessary support infrastructure, such as the airstrip – which now seems to be on the cards – it would help as we could then offer it to people coming by private jet.

People who want to come to Gozo just to gamble would be put off by the time it takes to cross over by ferry. We think the airfield will give a boost to the

Gozitan economy as it could also pave the way for visitors not just from Malta but beyond.

It could open up new forms of tourism, especially from countries close to us. You could also have people landing at MIA and then catching a plane to Gozo, saving a lot of time, which is also important.

We do not need he sort of development that has been going on. Most of it was crazy as all we did was build apartments without paying any attention to how they should be done. That has to stop.

We do not want Gozo to be built up any more – except for projects that make sense, which fill a gap. We need a few more branded hotels on Gozo, five-star hotels, like a Hilton or Hyatt.

Perhaps the government can help by investing in more projects to entice people to come to Gozo to live, to work or for leisure.

With a permanent link, we could have many more Maltese settling in Gozo. There is already a small Maltese community who commute every day.

People fret that the permanent link could have an adverse impact on the quiet and peace – but have small villages like Safi and Gudja changed because they are linked by road? Have they been ruined? I don’t think so. They kept their character.

Of course, the link would highlight the need for more infrastructure, like a ring-road around Victoria.

At the moment, the upper part of Victoria and the main square are closed. Unfortunately, business has suffered and commuters have to take a diversion which causes jams.

Are businesses in Victoria being compensated for the loss of business?

I do not believe so. It is an issue and we hope that works will be finished as soon as possible as the businesses there are suffering.

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e Business Observer is Malta’s leading business newspaper distributed with Times of Malta every fortnight.

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

EDITORIAL

Property tax wrong on many counts The tax on the sale of property has been a thorn in the side of finance ministers for nearly a decade. The original tax was met with howls of protest and had to be tweaked. But even then, there were parts of it that irritated parts of the sector.

And therein lies the problem... There did not seem to be any formula which could meet all the needs of all the stakeholders, while at the same time anticipating all the one-off cases that might fall through the cracks and create unfair exceptions – which would generate howls of protest.

What was the context? The property sector was going through a boom after EU accession, with development trebling in just a few years. Also the decision to allow an extra floor (and a receded one) in two-storey zones saw entire towns and villages becoming unrecognisable.

It was only obvious that the government would want its share of revenue on the profits made on property sales, while the Inland Revenue Department wanted to curb tax evasion, particularly since so much previously undeclared money was being poured into property – partly because of the repatriation schemes and partly because of the eventual changeover to the euro, which forced people to find some way to ‘park’ their money legitimately.

Prices were rising as high demand was anticipated, especially from EU citizens, but the reality is that it did not materialise to the extent dreamed of. It took years to admit that there was an oversupply, as to do so would have sent a ripple of panic across the entire sector.

The sector eventually self-regulated as development slowed down.

But just as the hordes of EU citizens coming here to buy property did not materialise as hoped for, new phenomena rose up: foreigners

coming to work here for the i-gaming sector who wanted to rent; foreigners coming here to buy passports; and so on.

The property tax was working well in some ways but not in others.

The option to pay capital gains meant vendors had an incentive to collect receipts to offset against the sale price. But the provisional capital gains system was a nightmare for the Inland Revenue department to administer.

Some stakeholders started whispering in Finance Minister Edward Scicluna’s ear, arguing for yet another change to the system.

The capital gains option was removed in the last Budget, sweetened by the lowering of the final withholding tax (FWT) rates. Veteran real estate Frank Salt criticised the decision almost immediately. And now both the Federation of Estate Agents and the Malta Chamber of Commerce, Enterprise and Industry have come out with howls of protest.

They argue that removing capital gains removed the incentive to get receipts for purchases related to the property, that it means FWT would have to be paid even if the property were sold at a loss, that foreigners would have to pay the tax here and in their country of origin as it is considered to be a transaction tax which does not fall under the umbrella of double taxation agreements.

The bottom line is clear: the changes have created more problems than they solved. The sector cannot afford yet again to take two steps forward and three steps back.

We must get it right first time and the only way to do that is to listen to all the stakeholders. No solution will appease all of them. But finance ministers have to juggle conflicting needs all the time.

Let us get this right before more damage is done.

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BUSINESS OPINION

Why pump prices aren’t falling faster

Philip von Brockdorff With prices of crude oil in almost free fall on international markets, it is natural for car users to ask why pump prices aren’t falling as fast as the price of crude oil.

There are a few reasons. There’s wide agreement that hedging is one of them, but it’s by no means the only reason.

Hedging would explain the lag in the price drop at the pump. The fuel you buy today was made with crude oil bought when prices were higher.

So it takes a while for lower prices to move through the supply chain, though it would certainly help if the supplier (Enemalta) or the regulator (Malta Resources Authority) were in a position to provide information on the timing of this pass-through of crude oil prices.

One also needs to understand that the prices of crude oil and pump prices don’t necessarily move in tandem because different market conditions apply to crude and pump fuel.

Whereas crude prices are affected by supply and demand conditions, together with geo-political motives,

the prices at fuel stations are set by the sole provider of fuel, Enemalta.

Hedging or no hedging, there’s no competition to cut prices, and profit margins – besides other considerations – weigh heavily on the minds of authorities.

The first consideration is the commission earned by fuel stations on sales of fuel based on contractual arrangements. There’s no way fuel stations would accept contractual revisions to their commissions to accommodate lower pump prices.

Secondly, when you fill your tank, you’re paying for more than just the cost of the fuel. We pay VAT and excise duty. So when fuel prices rise, you pay extra for it but when they fall, you still pay the full tax, which is levied per litre rather than per euro. So taxes tend to skew the ratio between the price of petrol or diesel and crude oil. That’s another reason why, despite a 40 per cent drop in crude prices since June, pump prices have fallen by a much smaller percentage.

The strength of the dollar hasn’t helped, either. A stronger dollar against the euro means Enemalta has to pay more for its supplies. One also needs to factor in the cost of refinery, delivery and distribution in the final price at the pump, and the extent of this cost can only be provided by Enemalta or the Malta Resources Authority.

All the foregoing helps to explain the gap between crude and pump prices, but there is no doubt that political pressure for lower prices at the pump is mounting. According to recent European Commission

“When you fill your tank, you’re paying for more than just the cost of the fuel.

We pay VAT and excise duty” figures, the gap appears to be still wide, and price reductions for consumers in many EU economies amount to less than half the fall in wholesale refined fuel prices, even when taxes and exchange rate moves are accounted for.

In the UK, petrol prices at petrol stations fell by just over six per cent between June and December. When the tax component is taken out of the equation, the reduction amounts to around 14 per cent. That’s nowhere near the 40 per cent reduction in the spot wholesale price.

Of course, the situation is very different in UK where supply of fuel is procured by more than one supplier, unlike Malta. Whereas the UK finance minister can be bold enough to state his government would be watching (oil companies) carefully to see whether consumers will be paying lower prices, the same cannot be said in Malta with oil being procured by a public entity.

However, what the government could do is to disclose, within reason, information on how the final price at the pump is arrived at. That

would help to defuse the mounting pressure to reduce prices.

In the UK it is very difficult to establish who in the distribution chain has an interest in not passing on lower prices to consumers. There is no such issue in the case of Malta, with Enemalta being the sole supplier. Our situation is very unique because of this fact, and transparency in how pump prices are determined is vital for consumers and constituted bodies alike.

Philip von Brockdorff is the head of the Department of Economics at the University of Malta.

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e Business OBSERVER

| January 15, 2015

CASE STUDY

Enemalta support ‘make or break’ for solar farms Solar farms will only succeed if Enemalta sees them as complementary to its own generation, rather than as a threat to its revenue, Mark Bajada, the chairman of Bajada New Energy, has warned.

“The energy from a solar farm would obviously reduce a customer’s consumption – and if they are heavy consumers, then the energy saved would be from the highest tariff band of 65c per unit.

“This is the most lucrative band for Enemalta, the one on which its margin is highest, and we understand that it would not want to relinquish it.

“But consumers should have the option of cheaper energy,” he said.

Mepa has issued a public consultation document on its solar farm policy, and is seeking feedback until February 13. The policy outlines the definition of a solar farm and the areas where installations can be located.

These are limited to areas like large-scale roofs, disused landfills and quarries, and parking areas. Open countryside and arable land are being excluded.

The solar farms will be given 30year leases and should be done in such a way that the site can be de-commissioned and returned to its original state.

The solar farm policy is just one of the many ways in which Malta is improving its renewable energy profile, in order to meet its commitment to have 10 per cent of its energy from renewable sources by 2020.

FROM LEFT: CHAIRMAN MARK BAJADA AND CEO FLAVIO CECCHI

Another pillar will be the interconnector, which will provide Malta with energy from a variety of sources.

Flavio Cecchi, who has just been officially appointed as the company’s chief executive officer, is not keen on the interconnector as a solution, saying that it remains to be seen whether the price of energy is competitive.

“The energy we get from the interconnector could come from nuclear plants, and although it is cheap, we are wary of all the long-term costs associated with it, such as de-commissioning of plants and the original capital expenditure.

“Clearly, wind energy is more environmentally-friendly, but it is also costly. ‘Green’ comes at a

premium, just as organic food costs more,” he said.

Mr Cecchi speaks with passion about photovoltaics, describing them as one of the cheapest forms of energy.

“When you look at the cost of energy, it is not enough to look only at the cost of generation.

You also need to look at the cost of distribution, for example,” he said.

“Solar farms are very costeffective in this respect. The ideal solution for Malta would be to push solar-thermals, as a quarter of a household’s electricity bill is accounted for by water heating.

And then PVs and wind energy could provide much of the rest – although we believe that small wind units generating 3-5kW are

“e energy from a solar farm would obviously reduce a customer’s consumption – and if they are heavy consumers, then the energy saved would be from the highest tariff band of 65c per unit”

e Business OBSERVER

| January 15, 2015

much more suitable than the large turbines.”

It is becoming more and more feasible to factor in solar energy because technology has been moving in leaps and bounds since Mr Bajada founded the firm 26 years ago.

Smart grids are being tested in Asia which only send the power to where it is needed, and lithium and salt batteries are becoming more and more efficient, solving the problems associated with energy which is generated for only part of a day.

In the Maldives there are already installations capable of storing 1MW, while in Italy, 8MW are being tested.

One of the perceived disadvantages of solar farms is that they require so much space. Bajada New Energy has already completed two installations which shatter this myth: vertical farms have been installed on the walls of two entities.

Clients were also delighted to find that roof panels act as insulation too, cutting temperatures in summer by a few degrees and keeping the interior warmer in winter. Bajada New Energy is also investing constantly in new research with the University of Malta, and in staff training to keep the 90 employees abreast of the latest technology and best practice – particularly when it comes to installation.

Both Mr Bajada and Mr Cecchi are excited about the potential for solar farms, citing a 2010 study which found that Malta had over 3.6 sq.km. of roofs which were suitable for PVs – which could generate 240MW. But they believe that the policy is merely the starting point.

“There are some comments that we will be submitting. For example, Mepa is excluding agricultural land, but there is so much arable land which is not currently being used.

“Why not use it for solar farms, as that will provide income for the farmer? And panels can be raised a few metres off the ground, allowing enough light for certain crops to be planted underneath,” Mr Cecchi went on.

“On the other hand, the policy should also specify clear visual buffer zones around the heritage sites that are found.”

But the role of other stakeholders – Enemalta and the Malta Resources Authority – is also seen by the company as crucial to the success of the policy.

“They also need to support it and appreciate that consumers should not have to shoulder the burden of the infrastructure that Enemalta has to provide, for example, having to pay for substations. Solar farms will give consumers many more options,” Mr Bajada said.

Solutions for better credit controls Continued from page 1 is tempted to throw good money after bad in an attempt to recoup some of his losses.

The solution is keeping tighter control on credit periods.

“The probability is that by the time they realise what is happening, it is too late,” he said.

“Credit terms should be related to the turnover of the product. If the turnover is less than 30 days, why should you want a 60-day or even a 120-day credit period? We are not talking about machinery which has to be installed and commissioned, with staff training and so on,” he said.

Mr Busuttil also said that suppliers should start asking

questions as soon as a payment was missed.

“Their sales force is out there and they know the market.

They talk to their peers from other suppliers. They see empty shelves. Whose products are they? Why were the supplies not restocked? But do we gather that knowledge, let alone heed it?”

Apart from information on legal procedures, the MACM gathers default reports from its clients – who he said are also very ready to talk to each other.

“They all understand that if you are a victim, then it is likely that they will be too. This is why reciprocity of information is so important.”

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e Business OBSERVER

| January 15, 2015

BUSINESS UPDATES

Capitalising on solar farm installations Ryan Xuereb The government’s decision to provide a policy for the installation of solar farms is wise and welcome. Solar energy is abundant in our country and it can be a stabilising factor in the energy supply for our demand. Diversifying our energy source will give the country a more stable price for energy. However, this needs to be controlled.

The policy will offer the tracks on which eventual applicants need to move. This will help prioritise areas of most yield with the least impact. The 2020 target of 10 per cent renewable energy needs to be met, however, in a country where land is precious we need to be careful that in the process we do not impact other

sectors of importance, such as countryside and agricultural land. Going through the policy, these aspects are well catered for and hence should provide maximum benefit from solar farm installations.

A solar farm is a medium to large installation of solar panels with the aim to cultivate or harvest energy from the sun. Installations may range from a couple of 100sqm up to installations covering square kilometres.

Lately, we have seen quite a few PV solar systems installed on houses’ roofs.

These normally range from eight to 12 panels. We have also seen larger installations on commercial buildings and factories ranging from a few hundreds to thousands of panels.

The amount of power generated by these panels is dependent on the number of panels as well as the actual power generated by each panel itself.

Most of these systems have been installed with the aim of offsetting the energy demands by the building on to which they have been installed. It is not uncommon however, that entrepreneurs actually install a solar system to generate energy that they can then sell. This will constitute a return on their investment and hence be a source of income.

The fact that this is an investment necessitates that the installation is done in such a way that the area being developed is planned carefully to maximise yield. This entails various

iterations on purposely designed software. It is one thing designing a system for a house or small commercial installation, yet designing a solar farm is a completely different ballpark. Specific training on solar farm design is paramount in this respect. When following such training it becomes apparent how easy it is to produce a design which does not maximise the yield potential of a given area.

It also becomes apparent that every single component, be it the panel itself or something insignificant such as a connector, needs to be such that no losses are incurred along the distribution line. It is not uncommon in installations in Malta where, even on

medium-size systems, the cables are not properly sized.

It would be a welcome addition to the policy to have design and installation standards for solar farms such that it is ensured that maximisation of potential is enforced on such projects. This could take the form of a special qualification licence for installers of the solar farm, with the designer/installer needing to undergo training at a company which has a track record for the installation of a number of solar farms. This way we can ensure that we are truly capitalising on the areas we are dedicating to solar farm installations.

Ryan Xuereb is managing director of Econetique Ltd. Mobile: 7959 2767

ISD: pioneers in local alternative energy ISD have become pioneers in the local alternative energy market in the last 10 years. The company has achieved such a feat by staying in the forefront of technological changes in the market and offering customers products that have unique advantages and improve the ROI of any investment in the short and long term. The numbers are astounding: over 5MW (20,000 PV panels) of domestic installations and a large number of industrial projects including the largest industrial rooftop installation to date.

Why ISD? ISD are the sole distributors of Solaredge. Solaredge have revolutionised the solar industry by eliminating all losses from traditional PV systems. This is achieved by installing a power optimiser behind every two PV panels. The power optimiser serves a number of functions.

The first function is that of getting the utmost from each and every panel. Traditional systems are connected in series, meaning that any PV panel producing less

power (due to shading, soil, faults) would normally affect all the other panels. This is not the case with Solaredge, since each and every panel works independently. This function alone generates up to 25 per cent more energy than traditional systems.

Secondly, Solaredge enables module to module monitoring.

This means that you can remotely monitor the output of each panel.

This reduces operation and maintenance costs by up to 90 per cent.

Engineers no longer need to go onsite and spend days figuring out issues with a system. This process takes around 10 seconds using Solaredge’s monitoring portal.

Finally, Solaredge offer superior warranties, improving

return on investment in the longer term.

Looking for partners Developing a solar farm can be daunting, both from a technical as well as an administrative point of view. Partners would need to overcome a number of bureaucratic and technical milestones in a short period of time. ISD take a proactive approach in guiding our customer through these processes, making it easy for anyone to reap the benefits of such a great investment.

ISD may be contacted on 2148 2166 or website www.isd.com.mt/