The Business Observer - 29th January - Issue 18

INTERVIEW

Issue 18

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January 29, 2015

Distributed with Times of Malta

IHI’s acquisition of Island Hotels Group took many by surprise but the latter’s CEO, Winston Zahra, sees it as a way to achieve growth locally and internationally – much faster see pages 5 and 6 >

INTERVIEW Michael Surguladze intends to set up a payment services bank in Malta to support a card that will challenge American Express. Notoriously media-shy, he agreed to explain where he had come from... and his plans and vision for Malta see pages 8 and 9 >

Sector upbeat on oil squeeze Vanessa Macdonald Some of the main operators in the oil sector in Malta are upbeat about their prospects. They are convinced that the normal cycles will eventually bring the price back up – and that there are opportunities to be had during the current period of belt-tightening.

Oil companies are cutting their forecasts and expenditures and oilfield services companies are cutting their workforce. The biggest spending cuts are expected to be in exploration. The squeeze is also having an impact on oil rigs, with a Bloomberg analyst saying that around 140 would need to be scrapped to make way for the 200 that will delivered by 2020, ordered at a time when the future looked bright.

But local players see opportunities as well as challenges – and

cautioned that patience was the key as the price would undoubtedly rise again.

Medserv explained that as a result of price fluctuations, new projects are being delayed waiting for the price to stabilise.

“That means new investment is held back with a knock-on effect on contractors that service the industry. Pressure on price and redundancies are experienced by those firms that service or plan to service exploration projects that have as yet not commenced. The industry is looking for ways to reduce the cost of production as the new price realities hit home,” chairman Anthony Duncan said.

However, this does not mean doom and gloom. Medserv ‘s ‘order book’ is at record levels. It is servicing medium- to long-term operations into which investments to-

“ere are opportunities to be had during the current period of belt-tightening” talling hundreds of millions of dollars have already been ploughed. Both its bases in Malta and Cyprus are working at capacity and it expanded the Ħal Far facility by 10,000 square metres to cope with demand this month.

“Our relatively new engineering and maintenance arm did notice a delay in the start of projects lined up for immediate commencement as companies stall on maintenance

investment and more equipment is mothballed.

“But this delay has not affected Medserv’s financial performance as the delayed maintenance projects have been replaced by other new business,” he said.

Ablecare chairman Paul Abela also sees this drop in oil price as a “cyclical downturn”.

“This phenomenon is not new to the industry and, if anything, forecasts are that this downturn will be reversed in a shorter period than previous cycles,” he said.

Mr Abela predicts more consolidation of drilling assets, as well as renegotiation of rates and operating costs. Although some operations will be delayed, other opportunities will be created due to lower operating costs, he pointed out.

Continued on page 7

NEWS Only 10 per cent of applications to Mepa from SMEs were being approved until recently. A number of changes mean they have a much better chance of getting the green light see page 3 >

CASE STUDY Malta’s reputation as a captive insurance jurisdiction is getting international recognition. PKF Malta recently attended a conference where current challenges were aired see pages 12 and 13 >

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NEWS

SME application refusals down to 10% The percentage of development applications from SMEs refused by Mepa has gone down from almost 50 per cent to just 10 per cent, following a number of changes to improve the system.

Robert Vella, head of the recently set up Business Development Unit, admitted that over the years the Malta Environment and Planning Authority (Mepa) had become too rigid. Recent reforms had since highlighted the bottlenecks and the need to negotiate solutions which were still acceptable in terms of planning policies.

“Unfortunately even though we are making a real effort to guide the investors towards other alternatives, not all of them accept. But at least now we know that nine out of 10 applications will be approved, which is an acceptable level,” he said.

“And it also means that there will be more applications as they will not be discouraged before they even try!”

This has also been helped by offering meetings with SMEs even before the application is submitted.

“The advice we give them can really help them to avoid pointless expense and time, as we can immediately advise them if a project has no hope of getting off the ground. Why waste two years when they could be investing their money in something else?”

Mepa has been making numerous changes to make processes more business-friendly, with a section on the website – Business Sense – giving details of all the initiatives.

The changes have been welcomed by SMEs, which account for around 1,200 applications out of the total of 4,000 in 2014.

One of the changes was that applications from SMEs for commercial areas up to 1,000 sq.m. used to go to area teams but this did not always make sense as there were investors interested in multiple locations, for example.

The recently set up Business Development Unit, which has a team of just eight people, now handles them all.

Mepa’s planning and environments arms are currently being,

which involves some 50 pieces of legislation. The process is being taken at a much slower pace than the merger that brought them together in an effort to ensure all the details are taken care of.

“But there was no reason to wait until the process was completed and the Business Development Unit was set up,” Mr Vella said.

Mr Vella has seen a considerable number of changes in the 27 years he has worked with Mepa, where he started in the enforcement section.

He was one of the first two employees to get a degree in planning, which led to the sector being given far more prominence and attention.

The setting up of the unit itself is the latest in a number of other changes which started in 2013.

The application tariffs were substantially reduced, in an effort to reduce the amount of SMEs who gave up before even starting the process.

Tariffs for restoration and rehabilitation of historic buildings were

“At least now we know that nine out of 10 applications will be approved” also removed in 2013, which also had a significant impact on efforts to save village cores, for example.

“There was one house in Żebbuġ which was being changed into a boutique hotel, where the bill would have been €9,000!” he said.

Mepa also extended the permits for those SMEs which had not yet started their projects and whose five-year deadlines were looming.

However, he is still not entirely happy with the situation as there remain too many subjective factors when it comes to applications.

“Objective aspects are easy as you just have to follow the rules. But subjective judgements could lead to anomalies and inconsistencies. Having area teams did not help as they

might have had slightly different approaches. Having one unit that works together – and therefore more coherently – will help this,” he said.

The unit also signed a memorandum of understanding with the commission representing the disabled, KNPD, which has also removed numerous sticking points.

“Sometimes you just need to take a step back and use logic. For example, if you have a restaurant which can only be accessed by a pavement with stairs, then does the restaurant itself need to have a ramp? We are all absolutely committed to accessibility – and not only because it is a legal requirement – but sometimes the applicant got tied up in endless consultation and ended up

at square one. Now it is much easier to get through an accessibility audit,” he said.

Mepa itself also looked at its own policies. Mr Vella gave the example of an application to change a garage into an outlet which would previously have been refused merely because parking would have been lost, irrespective of the traffic that the outlet would generate.

It also made it easier to change operational categories, for example from a retail outlet to an office, which now only requires a notification, the first change since 1994.

And low impact users who want to set up a home operation, the socalled casa bottegas such as nail technicians or artists, have also been spared the ordeal of applying.

“It is all about supporting startups. We should not discourage those who have an idea and want to give it a try... Our approach is to say that ‘we are in favour of...’, rather than taking a regulator stance and only telling them what cannot be done.”

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INTERVIEW ??

e planned acquisition of the Island Hotels Group by IHI is the largest private transaction on the islands – and the first by publiclylisted companies. e surprise announcement generated a number of questions about the motivation behind the deal, and its long-term impact. e CEO of Island Hotels Group, WINSTON ZAHRA, explained to VANESSA MACDONALD why he has described it as an “evolution”.

Forces of evolution or revolution?

It is clear why IHI would have wanted the footprint of the Radisson in St Julian’s, given their plans to construct a six-star resort there. But why didn’t you just sell that hotel? Why did you sell the whole of the group?

When you look at this transaction, you have to do so with a long-term vision. We have grown the group over the past 27 years from 100 rooms and a team of 25 to what it is today and taken various strategic decisions along the way. We started with the Buġibba Holiday Complex, which had reached a level of maturity where we felt we could not take it any further and sold it.

Earlier last year we divested the Coastline Hotel as we did not feel it fit our strategy any more. These decisions strengthened the group and created new opportunities.

Our strategy going forward was to continue building quality products within the local tourism industry. We know that

WINSTON ZAHRA JR

IHI’s vision for Malta is very much the same.

When we designed the project in St Julian’s it was very much with a view to taking the five-star level of accommodation up to a new level of quality. However, when we heard that IHI was developing next door with a similar view, we felt the most obvious

thing to do was to sit down with our next-door neighbour and to establish at least a conversation where the end product – even if it were a separately developed one – was at least complementary and not conflicting.

Those discussions soon led to an internal one where we did not feel that we wanted to fragment our

“e best way for the family to continue to contribute towards the tourism industry and to help push this quality leap is to join forces with IHI”

group by simply considering the sale of the Radisson in St Julian’s.

It made much more sense to sell all the business units within the Island Hotels Group. There is a lot of scope for consolidation and the best way to grow our group is as part of IHI – with our full involvement going forward. My father is going to remain involved to an extent and I am going to remain fully involved in the new set up.

This is why we see it as an evolution which will allow the Island Hotels Group to grow... but now within IHI. In a nutshell, we feel that the best way for the family to continue to contribute towards the tourism industry and to help push this quality leap is to join forces with IHI, in the local context with the added benefit of the international opportunities.

If you wanted to grow you could have done the acquiring yourContinued on page 6

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INTERVIEW ??

Acquisition will speed up IHG’s growth Continued from page 5 selves. Why take a lower position rather than that of the aggressor?

I don’t see this in terms of aggressor or lower position. Ultimately we are talking about two families who have known each other since tourism started in Malta: Mr Pisani and my father were there at the initial stages, both pioneers of the tourism industry in Malta. The next generations have known each other all our lives, and competed with each other but never had any clashes. It has always been friendly competition and friendly conversation. And we worked together on various initiatives. This was the most natural progression.

The negotiations were very straightforward – tough on both sides as you would expect – but very amicably done.

We are bringing a number of excellent properties, in excellent locations, to the table including the Radissons in St Julian’s and Golden Sands as well as the Oasis project.

We have a very strong catering brand on the events side and a very strong timeshare brand – a business that IHI are not involved in so far.

And we are also bringing the Costa Coffee brand to the table. So we are bringing elements to the transaction which are very strong and have the potential for growth.

The knee-jerk reaction of some people was that the sale was forced because the Island Hotels Group was not doing well financially... In fact, the group posted losses in 2011 and 2012. Did you have your backs to the wall?

If we had had our backs to the wall, we would not be selling for an enterprise value of €106.5 million.

You do not conclude what I believe is the largest company deal ever made in Malta by two local companies if you are not doing well.

IHI was not born into the hotel business yesterday. They would not

acquire the assets of a company if it were not doing well.

The reality is that in the years you mention as a group we still had a healthy Ebitda (earnings before interest depreciation tax and amortisation) result. In 2013 we grew Ebitda and made a modest net profit. Last year was a record year for us – the results will be published soon – and they are excellent, in every business unit.

The sale is also not a question of not being able to do anything else.

It is a question of where we want to see the company in 10 years time, and what kind of opportunities we want to create for ourselves as a family – which includes the 1,000+ employees within the group.

Yesterday, the opportunities were within Malta and maybe Costa in Spain. Tomorrow, the opportunity for all the team is Malta, London, Spain, Prague, Budapest and so on, through the much wider context of the IHI family.

With this transaction we have accelerated our growth path. No more. No less.

“One of the main factors driving this transaction is a belief in both companies that Malta can rise to a new level of quality in the years ahead” What will happen to the Radisson brand?

We have operated under a franchise agreement with Radisson for 18 years, while Corinthia is a homegrown and home-owned company.

Would it make sense to remove the Radisson brand and replace it with Corinthia? That is something that we are looking into.

Radisson is happy to stay. It wants its brand on as many buildings and in as many countries as possible.

We have spoken about it, they understand the logic and now we need to decide what makes most commercial sense.

And Costa?

The Costa franchise is an important part of our group and going forward we have every intention to build on the good work that has already been done over the past years in Malta and more recently in Spain.

Will Corinthia proceed with the Ħal Ferħ project?

The Ħal Ferħ project is a tremendous opportunity to replicate IHI and our vision for quality tourism in the north of the island. One of the main factors driving this transaction is a belief in both companies that Malta can rise to a new level of quality in the years ahead.

This project falls firmly within this vision.

IHI’s point of view An IHI spokesman explained why the company was interested in the acquisition and how it fits into its current and future scenario.

IHI has a strong vision for Malta. We want to draw upon our successful track record as investors, developers and operators of luxury hotels across Europe and bring that expertise to the benefit of Malta.

Acquiring the Island Hotels Group gets us one step further down that road. We are now able to focus our efforts in developing a luxury hotel product in St Julian’s in a more consolidated manner. In fact, as we speak, plans are being updated to take this acquisition into account and move towards a commencement of works in the nearest possible time frames.

The land at Ħal Ferħ, which now forms part of the IHI Group, is a further opportunity to replicate this vision in the north of Malta.

Besides, there are obvious synergies in merging Island Hotel Group’s hotel and catering operations into our own, as well as a body of knowledge within the group – including areas where we were not recently involved such as timeshare – which is now a part of the IHI Group.

Our track record and financial position allows us to tap both internal and external sources of funding and while we have acknowledged a decline in demand for our hotel in Tripoli in recent months, and faced a weakened rouble/euro conversion at our St Petersburg hotel, we have just come out of record profits in each of our hotels in Budapest, Prague, Lisbon and Malta which provide us with a strong platform of geographically balanced positive revenue streams.

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NEWS

Industry will not hibernate Continued from page 1 “The industry will not go into hibernation but will exploit this market reality to improve and reorganise its operations and investment opportunities. One can also foresee some buyouts and mergers, but all this is healthy in a dynamic industry like oil and gas,” Mr Abela said.

“Looking ahead, cold-stacked drilling rigs will need lots of maintenance and re-certification before they are redeployed while older units are being taken off the market, decommissioned and replaced.”

Jonathan Borg, the director of Bluhull, pointed out that the new rig build programme was the result of relatively high oil prices.

“This has increased current and future rig availability, which created a ‘buyers’ market’, and oil companies can pressure rig owners to lease rigs at lower day rates,” he said.

“No doubt services relating to rig stacking or scrapping will enjoy a boom over the next year or two, should the oil price remain low.

Those relating to new drilling contracts will possibly undergo a certain level of strain. Rest assured, today’s winners are tomorrow’s losers, and vice versa.

“e new rig build programme is the result of relatively higher oil prices” “We must bear in mind that the price of oil has been very unpredictable over the past decade, and all those who tried to predict such price fluctuations have got their fingers burnt. It is not dependent on supply and demand alone. Oil price is heavily influenced by government policy, in particular of the largest producers, as well as speculation.

“Who knows? Twleve months down the line the oil price might be double today’s. Between 2008 and 2009, prices slumped from around $130 to $40 in the space of a couple of months, only to recover to $80 within 24 months.”

He too pointed out that each action generates a reaction which may be indirect.

“The renewable energy market is currently going through a slump because of the decrease in oil price.

What’s bad for the renewable market is often good for the oil market. And finally, cheap oil drives demand for consumer goods, decreasing costs for consumers with lower pump prices and increasing spending power. Factory inventories are rapidly depleted, in turn driving up production and demand for oil.”

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INTERVIEW ??

e cards up his sleeve Vanessa Macdonald It was clear from the outset that the launch of a Valletta FC branded card in November 2013 was not your normal press event. For a start, it was a gala dinner at one of the most prestigious locations, and the guests included top businessmen and decision-makers. When one of the investors behind the card, Michael Surguladze, and his considerable entourage stepped out of their limousines, any doubt was banished.

This may have been the launch of a card aimed at a few hundred football fans, but the long-term investment was clearly something much larger. Within months, more cards were launched by Insignia Cards, under the Yes brand, aimed at the Maltese market, but even then it was obvious that there was yet more to come.

Mr Surguladze, described by interested parties as “a man of means”, is now happy to reveal the larger picture: a bank to process card payments, tied to a card

which will target 10 million users and challenge American Express, and one that could employ as many as 400 people.

Normally, when confronted with such a claim, you would Google the investor to see whether he is up to the challenge, but spare yourself the time: you will not find anything about him online, something that the European Central Bank and Malta Financial Services Authority also clearly realised when they embarked on the strict due diligence

required before granting a banking licence.

“They asked me why I don’t give interviews and so here I am,” he said with a shrug.

Considering that it has been some 15 years since he granted an interview, Mr Surguladze was remarkably affable and open. But old habits die hard. He absolutely refused to be photographed.

A Georgian by birth, he moved to Russia and when perestroika paved the way for private business in 1987, he and some others

went into publishing, first printing everything from classics to Solzhenitsyn, and then importing foreign magazines.

Football was already a passion and his group was the first to privatise a football club. Decades later, he would become heavily involved with the Red Knights, a group of investors who put together a failed £1.5 billion bid to buy Manchester United from the Glazer family.

“I still want to buy Manchester United!” he laughed.

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“When we started showing interest in Manchester United, Everton came along, and wanted us to buy them! I am still very close to people who own sports teams; Chelsea owner Roman Abramovich is a very close friend of mine.”

Apart from the Insignia Valletta FC card, he also signed a three-year sponsorship deal with the club which enabled them to get a Dutch coach and manager, as well as a few top players, all of which helped them to win the double.

But it was the company’s links with American Express which set him on the path which brought him to Malta. They introduced the card to the Russian market in 1995 and held the sole agency for seven years. In 2001, they decided to go it alone, wanting to offer a more bespoke product, launching first the Royal card in 2002, aimed at high net worth individuals, and the Glamour card in 2005 for women.

“Glamour allowed women to break all spending records! Until 2008, when the crisis really affected women’s spending as their cards were removed,” he said, grinning.

The cards were originally issued by mostly European banks through an affiliated programme, but the company handled the processing, benefits limits, risk and compliance. The thirst to go it alone was still not quenched and in 2007, they decided to try to do without the bank, keeping everything in house, similar to the AmEx model that they knew so well.

They started to look around for somewhere to base the payment systems bank – but the project was put on hold during the global financial crisis.

When the project was taken off the back burner, Austria emerged as the favourite location but Mr Surguladze then met Joe Zammit Tabona, at the time Malta’s High Commissioner to London, at a Malta Business Network event.

“He persuaded me to come here and I met seven ministers

during that trip,” he said. “The authorities wanted to know what I would offer Malta. Malta is clearly too small to be a market for our cards but they all need to be tested and that is what we have been doing so far. We offer a luxury lifestyle card for a fraction of the cost, with all the benefits that AmEx gives its customers, such as a personal assistant service and higher limits and so on.”

And the Valletta FC card also turned out to be a test before they embarked on a much grander scheme for European club cards.

“The next teams will be a big European one and a British one, one of the greatest British teams – but not Manchester United,” he said with another grin.

The plans are grand and will clearly represent considerable investment, much of which will be in developing the new skills this activity will require. He plans to take on young lawyers and accountants and send them overseas for training.

In the meantime Insignia opened a sister company to take over lifestyle management, with Frederic Azzopardi moving over as CEO, and Tim Zrinzo being appointed CEO of the cards business.

Mr Surguladze thinks that the time is ripe for Malta to learn what the uber-rich want, especially as more and more are drawn to the island by the Individual Investor Programme, pointing out that he is a UK citizen as did not need to apply himself.

“They say some countries are cheaper but here you can get it without any problems. In Portugal it is half the price of Malta but you have to know Portuguese! If you pass the due diligence process you are welcome here.

“My friends are very excited about this programme. It was an amazing decision and it is the future of Malta. By the end of this year, you will see how it will affect you,” he said.

“This is already my second home. What is important is the Maltese people. We feel so com-

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MICHAEL SURGULADZE DECLINED TO BE PHOTOGRAPHED.

“Ultra-rich people have excellent connections.

Soon you will see the headquarters of the biggest companies here”

fortable here. And I am welcome everywhere. It is the only English-speaking country in the eurozone and Schengen.

“Ultra-rich people have excellent connections. Soon you will see the headquarters of the biggest companies here. Private jets will be coming here but there is no five-star luxury hotel on the island. The Hilton is fine but this is for tourists. You have no experience here when it comes to dealing with these individuals.

“Malta will need a lot of investment. For example, Valletta will be the European Capital of Culture in 2018. It should not look so shabby. You have the chance to become the centre of financial services in Europe.

“There are problems but they are known. There is a big problem with bureaucracy, a big brake for private sector.”

He has worked with both governments and said he was impressed by the transition.

“I like youngsters. When you get old, you like young people!

They might have less experience but they are hungry to transform the country. They have one big benefit. They keep stability.”

While they await the final licences, they are setting up a charity for Maltese children who have a health problem, hospital care to overseas surgery.

“We will put our own money into the Wish Granters Foundation. The Valletta FC sponsorship might have been for public relations but this is not for the media; this is for God. God will see what we are doing...” he said.

He is leaving the charity in the hands of Mr Zammit Tabone, clearly uncomfortable with the limelight.

But he is well aware that with his lack of public track record could generate doubt – and suspicion.

“Unfortunately, too many people associate the lack of a public profile with being a criminal or a money launderer or so on... I understand that when people come from nowhere with billions the assumption is that it is money

laundering. But there are a lot of anti-money laundering regulations and compliance processes.

“I put myself as the sole shareholder because I knew that I would be scrutinised by the MFSA, the local intelligence service and the European intelligence service. They will do full due diligence on me. I am sure about my background,” he shrugged.

“The same happened with Roman Abramovich. He was very closed but once he bought Chelsea he knew he had to raise his profile. Buying Chelsea is like buying Buckingham Palace!

Everyone wanted to know who he was. And there are plenty of top European businessmen who are the same. But people now need to know who am I, so here I am...”

The plans are to eventually bring big American financial institutions on board, and a few individual investors from different countries which will allow them to tap far- flung markets.

“So the number of shareholders will increase – we also plan to go public. It gives transparency and accountability.”

The Universe card, to be launched in spring, will cost around €100 and will target the ‘mass affluent’ – but would still give them the benefits associated luxury cards which cost €5,000.

There will be a welcome pack, assistance with travel and lifestyle support, insurance, rewards programme, and even a birthday present.

How can they afford this? He believes the set-up is the key to success.

“There are only a very few banks which are concentrated only on cards. Capital One is huge but is only focussed on a few markets, the US and the UK. We are focused on emerging markets. Of course we will also bring to the US and the UK but this is not our target.

“Our second competitor is Barclaycard, which is mainly focused on the UK. The third is AmEx itself: they are our competitors and we will challenge them.”

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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

Riding Corinthia’s kite The planned acquisition of Island Hotels Group by Corinthia’s IHI is a first for Malta in many ways. It is almost certainly the largest such transaction between private companies in Malta and it is also the first between publicly listed companies.

But it is also remarkable as it involves two family businesses. Both Corinthia and Island Hotels were started a few decades ago by men of vision. Corinthia’s stellar expansion within Malta and overseas is in a league of its own, not just compared with Island Hotels Group, but also compared with other hotel companies. But Island Hotels also built up a respectable and respected portfolio of activities.

Both groups owe much of their success to their ability to make changes without sentimentality: Corinthia closed Jerma Palace and Mistra; Island Hotels sold Buġibba Holiday Complex and the Coastline Hotel.

Both have handled succession smoothly – and again, without sentimentality. Corinthia appointed a non-family member as CEO; Island Hotels found a formula to keep the siblings of the second generation involved and cut ties with one of the founding shareholders.

The groups’ corporate governance is sound and their public listing brought credibility and accountability. They both think big, whether Corinthia with its superlative hotel in London or Island Hotels with its plans for the Costa Coffee brand and concession for Ħal Ferħ.

And yet, the decision to sell Island Hotels to IHI was still a surprise for many in the business community.

The interview with Winston Zahra Jr in this edition of the Business Observer answers some of the questions – but not all. IHI clearly got a fairly good deal, with much of Island Hotels’ value yet to materialise, for a fairly good price.

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It also got an area in St George’s Bay which will allow its six-star dreams for the site to take shape. But why did Island Hotels not just sell the Radisson St Julians? Why did it sell its catering arm when Corinthia is a partner in its biggest competitor – Catermax?

Why did it sell the Radisson Golden Sands, which has such a successful business model based on prepaid timeshare? Why did it sell its share in the Costa Coffee roll-out and the potential eye-opener that Ħal Ferħ could one day be, with or without an adjacent golf course?

But that is not the question that is uppermost in people’s minds.

The question is why would Winston Zahra Jr, a man in his 40s, prefer not to continue building his own empire? It does not matter that the Island Hotels Group will now get a ride on the Corinthia kite. It does not matter that the acquisition will enable the Island Hotels Group to grow two, three or four times as fast.

The question is: why his ego did not trump his business acumen?

Even if the deal made sense commercially, family businesses in Malta are rarely able to take such pragmatic decisions. Joe Gasan was a trailblazer when he merged with competitors in both insurance and car dealerships – but few have followed.

The Sunday Times of Malta (January 25) carried an article about PwC’s survey of family businesses. The global survey includes a quote from one of the interviewees which says: “Family businesses generally fail for family reasons”.

The challenges facing family businesses in Malta are no different to those anywhere else. Being able to take bold – and painful – decisions without sentimentality is a skill others would be wise to consider.

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BUSINESS OPINION

e economics of terrorism

Malcolm Bray The tragic events which took place in Paris are a stark reminder that terrorism is a pervasive phenomenon.

The use of violence and intimidation in order to bring about change is gaining momentum. Like any behaviour, terrorism is influenced by economic realities and constraints.

It can be analysed in terms of demand for terrorism activities, which depends on the extent to which people share the view that in order to bring about change any means is licit. On the other hand, the supply of terrorists is composed of those people who are willing to perform villain acts, the compensation of which may be either monetary or non-monetary. Viewed along these lines, the observed spike in terrorism activity is the result of a concurrent increase in demand and supply. In order to contain terrorism, both demand and supply factors must be addressed.

Scholars suggest that terrorism is rooted in relative economic deprivation: poverty, inequality and lack of economic opportunities. Violent reactions are by no means a new

phenomenon. The French Revolution and World War II, just to name two important historical episodes, are two clear examples of how economic hardship gave rise to demand-driven violence. Indeed, violence may be triggered when there is a discrepancy between what individuals think they deserve and what they actually receive. Such situations create demand for terrorist activities as some people may consider that such extreme actions are the only way to bring about change.

At the same time, economic inequality creates fertile territory for the build-up of a pool of people who may be willing to embrace terrorist causes. People who are marginalised may build up a sense of anger that translates itself into radical violence. This sentiment may be present even among those who are living in rich countries but who still feel economically marginalised. In an environment of economic deprivation, terrorist organisations find it easier to recruit followers. The distinction between what is morally justified or unjustified may become blurred when someone is destitute. Just as the notorious Mafia in Italy is seen by some of its affiliates as the only source of prosperity, terrorist

FRENCH SOLDIERS PATROL IN FRONT OF THE NOTRE DAME CATHEDRAL IN PARIS AS PART OF THE HIGHEST LEVEL OF ‘VIGIPIRATE’ SECURITY PLAN AFTER ISLAMIST ATTACKS. PHOTO: CHARLES PLATIAU/REUTERS

organisations create a sense of dependency on their followers, as in some cases, these may be seen (erroneously) as the only means of improved well-being.

Most societies have managed to achieve a peaceful equilibrium through economic development, supported by a system of progressive taxation (where the rich pay a higher tax rate than the poor) and through generous welfare systems.

In the long term the economic well-being of the rich can only be

sustained if the poorer segment of society is compensated, through redistributive income and expenditure policies. The same approach needs to be adopted at an international level. The gap between the rich and the underdeveloped needs to be narrowed. This is a precondition for peace.

Unfortunately, the economic challenges faced by the developed world in the aftermath of the global financial crisis as well as the costs associated with population ageing,

“Violence may be triggered when there is a discrepancy between what individuals think they deserve and what they actually receive”

among other factors, has meant that rich countries have become increasingly inward oriented, placing at the forefront the economic problems hitting their own countries at the expense of global development goals. Moreover, increased economic integration among some countries, as is the case of the European Union, has tended to divert attention to home policies rather than international affairs.

Such neglect, however, is starting to backfire. There is need for a rethink of international diplomacy and a reassessment of aid efforts. A more proactive strategy based on higher aid, and closer worldwide economic integration, through the further dismantling of trade barriers, will in the long run prove more cost effective than mere reactive antiterrorism policies based on higher spending on defence.

Improved standards of living worldwide and higher levels of education will also tend to reduce religious fanaticisms. Wealth allows people to feel more secure in the sense that they are confident of having their basic needs met and expect to lead a long healthy life. In such environments, there is less of a market for religion extremes, as affluence generally tends to make societies more secular.

Following along the lines of the 1992 economics Nobel Prize winner, Gary Becker, who studied the determinants of crime, even terrorism – which may be considered as the ultimate crime – needs to be understood, and henceforth combated, through an economic approach.

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e Business OBSERVER

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PKF promotes captive industry in Malta With the commencement of the new insurance environment and the implementation date of Solvency II around the corner, PKF Malta participated in the Captive Live 2015 conference in London, which was spread over two days.

Senior audit partner George Mangion and audit partner Donna Greaves were among the impressive line-up of speakers.

What are the primary benefits of establishing a captive in an EU domicile?

The selection of a captive’s domicile is one of the most important decisions involved in a captive feasibility study. And the first critical question that needs to

be resolved is onshore or offshore. One notes that tax differences are less significant and after recent new international regulations, most domiciles can no longer be considered offshore tax havens. Also, the cost of operating in Malta (onshore jurisdiction) is very competitive with offshore.

Having a captive in an EU domicile gave insurers the opportunity to write insurance business for which they have been authorised throughout the EU under the European passport rights. Without question the onshore domiciles have been gaining market share at the expense of the offshore locations.

“In 2014, Malta continued in its efforts to attract more captives and build on its excellent regulatory reputation, efficient tax structure and competitive operating costs” How did Malta’s captive industry fare in 2014? Have there been any new developments?

In 2014, Malta continued in its efforts to attract more captives and build on its excellent regulatory reputation, efficient tax structure and competitive oper-

ating costs. Naturally 2014 was a sluggish year for insurance as global factors continued to influence growth in most European countries. However, in spite of the turbulence, Malta as a domicile continued targeting the ILS legislation, including catastrophe

bonds and, to a lesser extent, the reinsurance sector.

What attracts captive owners’ to the island?

Till today, there are around 60 insurance companies and 26 cells which are based in Malta, and a raft of companies from across the world and in numerous sectors are being well looked after by the country’s insurance managers.

The global names can also be found assisting owners of indigenous insurance management companies.

The advantages of relocating to Malta are numerous and include international banks, professional fund managers, insurance man-

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agers, call centres, stockbrokers and wealth managers. In addition, it is good to mention that there is a big cluster of overseas-owned concerns in pharmaceuticals, high technology manufacturing, commercial aircraft service and repair and marine electronics.

Preparation for Solvency II has been front and centre of all regulatory activity for 2014 (and will be for 2015). Implementation date is January 1, 2016. On December 22, 2014, the MFSA commenced a consultation process on proposed amendments to the Insurance Business Act and the Insurance Intermediaries Act. As Guernsey is not part of the EU, it is not obliged to adopt the requirements of EU directives, and in fact opted not to adopt Solvency II or the equivalence of Solvency II. Nevertheless, Guernsey recently welcomed the publication of Guernsey’s new Solvency Rules. The Central Bank of Ireland (CBI) is the single regulatory authority for financial services in Ireland, which has undergone a major overhaul since the financial crisis. The CBI is broadly in alignment with EIOPA on matters of policy and meeting Solvency II requirements on schedule is a priority for CBI. Malta is the only full EU member state with Protected Cell Company (PCC) legislation.

What are the advantages of PCC in this onshore jurisdiction?

The core benefit of the PCC model is that an individual may carry out insurance business through a certain cell without having to go by the own funds requirements, through using the cell company’s core capital.

In addition, cellular assets that are contained in one cell are only available to meet the liabilities of that specific cell. This thus results in the concept of cellular creditors, meaning that cellular creditors contracting with the PCC in respect of a particular cell only have a right of recourse against the assets of that cell.

Typically though, creditors of a cell may also have the right to secondary recourse to the core assets of the PCC, with the condition that the cellular assets of that particular cell to which the liability is associated with have been used up fully.

“Malta is geared to provide insurance to the risks of cyberattacks and terrorism for US captive owners”

GEORGE MANGION AND DONNA GREAVES.

As explained, a cell of a PCC does not have separate legal personality, and as a result, under the quantitative capital requirements of Pillar II, a cell will typically need to put up its own funds equivalent to the calculation of the cell’s notional solvency capital requirement. In addition a PCC has the possibility to produce a single own risk solvency assessment (Orsa) for the entire PCC. The same applies to Pillar III reporting and disclosure requirements.

How far along is Malta towards accommodating insurancelinked securities (ILS)?

The island is fully prepared to cater for this new phenomenon of the captive world. In extension to the PCC, in 2013 Malta established a framework for the authorisation and regulation of Reinsurance Special Purpose Vehicle (RSPV), (LN 452 of 2013) which offers (re)insures the opportunity to obtain access to capital resources. In addition, last year, Malta earmarked another success, through the implementation of the Securitisation Cell Company (SCC), (SL 386.16), which allows securitisation vehicles to set up cell structures.

Malta is now the only state in the EU with cell legislation for is-

suers of insurance linked securities (ILS). It is targeting the ILS, catastrophe bond and reinsurance convergence sector.

Emerging risks such as cyberattacks and terrorism are becoming salient for US captive owners. Are these gaining prominence in Malta as well?

Malta is geared to provide insurance to the risks of cyberattacks and terrorism for US captive owners.

It is important to define the modus operandi of cyberterrorism – it holds various advantages over traditional terrorism. Primarily, the physical presence of the terrorist is not required and a terrorist may perform the act in the comfort of his own territory.

Cyberterrorism is considered a wide-ranging risk as the internet provides an inexpensive tool for illegal acts to be committed from anywhere in the world. In essence, due to the proliferation of low-cost technology, crime can be perpetrated using just a good computer and sufficient hacking skills to penetrate the opponent’s firewalls.

There are always vulnerabilities in any propriety software system that can be exploited by cyberterrorists. Cyberterrorism also offers greater anonymity, as

security agencies can sometimes struggle to identify the terrorists’ real identity. Furthermore, the number of targets is unlimited, and may include governments and public utilities, such as transport systems, without the need to overcome physical security barriers and personnel.

What are the looming regulatory concerns for the island’s captive managers and owners – such as Solvency II? Malta’s captive managers are remarkably positive about Solvency II, perhaps because the end is in sight, and they and their clients have, in effect, done all the hard work.

A recent survey shows that they are well prepared to embrace Solvency II with all its increased governance requirements in part because operators have been subjected to quality regulation for 10 years. They have done the necessary tests and are poised for the changeover.

Captive owners are confident that they have surpassed the learning curve and are now in the implementation period – so they will reap the benefits of their thorough preparation.

The common perception is that there is now well-developed expertise in the cost-effective application of Solvency II to suit particular clients’ needs. Furthermore, the concept of riskbased supervision is spreading beyond the EU, so one hopes that other offshore domiciles like

Guernsey will be playing catchup with onshore EU domiciles.

The risk management implications of the rising exposure to emerging markets is allegedly driving European companies to increase their use of multinationals. Is this trend being seen in Malta?

It is not apparent whether this trend is growing. However, using a comprehensive multinational programme is usually a better solution. Owners of captives in Malta are waking up to the realities of incremental management implications relating to exposure to risks.

For this and other reasons there is general consensus that companies strive to achieve consistent and compliant insurance cover.

Certainly in this kind of environment it is becoming more difficult to use traditional approaches such as relying on a single global policy or a patchwork of uncoordinated local arrangements.

How does PKF work with Malta’s government to maintain the jurisdiction’s competitive edge?

Our partners meet with the MFSA on a fairly regular basis and our relationship is good.

Linking our business relationship with a network of PKF offices in 125 countries enables us to provide international solutions and this structure helps us to give clients present and future a better service.

In the meantime we continue to seek the best training opportunities for managers and as a firm remain in touch with latest compliance and regulatory developments.

PKF Malta recently received the letter of intent from the Malta Financial Services Authority paving the way to obtaining a licence to provide statutory external audit services to the captive insurance sector. PKF Malta is drawing on the expertise of another member of PKF International – PKF Littlejohn – which has been in the insurance market for over 100 years in London. A half-day seminar on the topic is being organised for insurance managers in summer. www.pkfmalta.com

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e Business OBSERVER

| January 29, 2015

BUSINESS ??UPDATES

HSBC Mobile Banking App exceeds 15,000 customer downloads

Leading provider of fund and corporate services

By Chris Casapinta, Alter Domus Country Executive – Malta Alter Domus is a leading European provider of fund and corporate services, dedicated to international private equity and infrastructure houses, real estate firms, multinationals, private clients and private debt managers. Our vertically integrated approach offers tailor-made administration solutions across the entire value chain of investment structures, from fund level down to local special purpose vehicles.

Founded in Luxembourg in 2003, Alter Domus has continually expanded its global service offer and today counts 28 offices and desks across four continents.

This international network enables clients to benefit globally from the expertise of more than 750 experienced professionals active in fund administration,

corporate secretarial, accounting, consolidation, tax and legal compliance, and debt administration services.

Each of our three service lines, corporate & management, fund administration and financial reporting, is staffed by multi-disciplinary, industry-focused teams that specialise in handling our clients’ local administrative and compliance issues so that they can focus on meeting their own objectives. Our expertise in the unique tax and corporate structures in each of the jurisdictions in which we operate, and our commitment to establishing and maintaining a proactive relationship with our clients, have made us the professional services firm of choice for many of the world’s largest multinationals, premier private equity firms and real estate funds.

Clint Zammit reCeived a token of appreCiation of €100 from rBWm’s ray Briffa (seCond left) for Being the 15,000th Customer to doWnload and use the hsBC moBile Banking app.

Over 15,000 customers downloaded the HSBC Mobile Banking App in less than four months after HSBC Malta launched its mobile banking solution. The free app brings the power of HSBC’s suite of banking services to smartphones and tablets, enabling customers to carry out their banking needs anytime, anywhere.

The free HSBC Mobile Banking app packs many of the same features of HSBC’s internet

banking platform and has recently been upgraded to offer the simplicity of accessing ‘Global View’, which gives HSBC customers access to HSBC accounts that they hold in other countries.

Users can also transfer funds to any other third-party HSBC account holders, including those who do not use mobile banking.

This feature is unique to HSBC mobile banking.

Clint Zammit from Birkirkara was the first customer who ac-

cessed the Mobile Banking app on the day that the 15,000th download was recorded, and received a €100 voucher from HSBC. The HSBC Malta Mobile Banking app is available to download for iPhone, iPad and Android smartphones. To use the app, customers must be an HSBC Personal Internet Banking user. Customers can register for HSBC’s free Personal Internet Banking at www.hsbc.com.mt.

MFSA and Directors Chambers announce fund directors course Professional development course for directors of investment companies and investment funds to be held on February 16 and 17

By John Christmas, director and co-founder of Directors Chambers e Malta Financial Services Authority (MFSA) and Directors Chambers have announced a continuing professional development course for directors of investment companies and investment funds. e course will be held at the Hilton Hotel in Malta on February 16 and 17.

The MFSA will be represented by chairman Joe Bannister and director general Marianne Scicluna.

Prof. Bannister said: “The MFSA carries out a rigorous fit-and-proper assessment on all directors of licensed entities to maintain high governance standards in Malta. The goal of the February course is to keep Malta competitive with the top funds domiciles in the world.”

The MFSA organises a rotating series of these courses for directors from the funds, banking and insurance industries.

The 2015 course is being organised in cooperation with Directors Chambers of Malta, a company promoting proper fund governance and professional standards for fund and management company directors.

Roger Buckley, a co-founder of Directors Chambers, said: “We are proud to partner with the MFSA on this event. Such events demonstrate the close link between the MFSA and local industry, and the joint goal of both parties to ensure the jurisdiction retains its position at the forefront of best practice in governance.”

Petri Tuokko, another co-founder of Directors Chambers, acdded: “Directors must keep informed regarding the latest governance and regulatory issues to ensure that Maltese directors continue to add value to boards. Having a large selection of high-calibre non-executive directors will ultimately make the jurisdiction more attractive as a fund domicile.”

The course will feature international and MFSA speakers discussing the most important topics faced by funds industry directors in 2015. International speakers are expected to include: ■ Dermot Butler, president of Custom House Global Fund Services, ‘Overview of the governance process’; ■ John Donohoe, chief executive officer of Carne, ‘AIFMD – Administration’; ■ Peter Astleford, partner of Dechert,

‘AIFMD – Custody/Depositary and Prime Brokerage’; ■ Elisa Perna, head of Global Risk Management of Cordium and Mirabella, ‘Risk management (Part 1)’; ■ Bob Swarup, author of Money Mania: Booms, Panics, and Busts from Ancient Rome to the Great Meltdown, ‘Risk management (Part 2)’; ■ Steven Huttler, partner of Sadis Goldberg, ‘Why Malta is a relevant domicile for US sponsors’;

“Directors must keep informed regarding the latest governance and regulatory issues to ensure that Maltese directors continue to add value to boards”

■ David Larsen, managing director of Duff & Phelps, ‘Accounting and Audit (focus: valuation)’; ■ Marie Barber, of Kinetic Partners (acquired by Duff & Phelps), ‘FATCA’; ■ Simon Osborn, chief executive officer of IFI Global, ‘Duties of directors’.

The Hilton venue will allow for approximately 250 attendees, most of whom will be directors who received invitations from the MFSA. There are extra spaces, and interested people can send emails to registration@mfsa.com.mt to make reservations.

The event is free and the Hilton is providing lunch at a fixed price for attendees.

Simon Osborn summed up the importance of the course. He said: “I have confidence in Malta as a top fund domicile competing with longer-established domiciles such as Ireland and Luxembourg.

“The MFSA and Directors Chambers are doing a great job not only keeping directors up to date on governance and regulatory issues, but also building international awareness that Malta is a strong contender in the international funds industry.”