The Business Observer Newspaper - 26th February

INTERVIEW

Issue 20

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February 26, 2015

Distributed with Times of Malta FEWER THAN ONE IN FOUR OF THOSE WHO ARRIVED BY BOAT FROM LIBYA ARE WORKING. PHOTO: DARRIN ZAMMIT LUPI

Corinthia is ready for Rome and New York should not be far behind. Alfred Pisani talks about the empire his family has built up. see pages 8 and 9 >

NEWS Eco-tax has to be removed by September but the GRTU is concerned that not enough has been done to replace it with schemes under the WEEE directive. see pages 5 and 6 >

OPINION

1,300 irregular migrants working Vanessa Macdonald A total of 1,296 irregular migrants were officially employed in Malta, as at the end of September 2014, either in full or part-time jobs.

The figures provided by the Employment and Training Corporation show that only 177 of these were refugees, with the others having various categories of status (see table).

The UN High Commission for Refugees estimates that less than 30 per cent of the around

19,000 who arrived by boat from Libya since 2002 remain in Malta. That means that fewer than one in four are working – at least officially.

Beneficiaries of protection have a right to a travel document and many opt to leave Malta on their own initiative. Over 2,800 beneficiaries of protection have been resettled or relocated to the US and other EU member states.

However, it is difficult to gauge the economic contribution being made by the working mi-

Irregular migrants employed

Total

Asylum seeker

534

Refugee

177

Subsidiary protection

305

Temp. Humanitarian Protection

280

Total

1,296

grants, as the Inland Revenue Department tags them along with the rest of expatriates working in Malta and therefore does not have any data on their contributions.

The number of those who work is only one aspect of the issue, however. It is just as important to consider the jobs that these migrants are taking up and the director of the Emigrants’ Commission, Fr Alfred Vella, believes that many of them are underemployed, taking up jobs that bear little or no relation to their experience and qualifications.

This is partly an issue of what employers want – most need Continued on page 3

Economist Philip von Brockdorff sets out the implications of quantitative easing and its role in stimulating economic growth. see page 11 >

CASE STUDY The drop in oil prices is forcing many rigs to be taken out of operation but Bluhull’s managing director Jonathan Borg sees eventual opportunities. see page 12 and 13 >

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NEWS

Best being lost to resettlement Continued from page 1 workers to do menial jobs in construction and cleaning – and partly the fact that migrants can rarely substantiate their claims to technical or even professional skills.

“Certificates are a problem.

And even when these are available, it is not always possible to ascertain their equivalence in Malta. The BICC is creating a Skills Card which would allow them to be assessed to ascertain their proficiency – but this is not yet available,” Fr Vella said.

There are a number of initiatives in place to help migrants find work: all those with a subsidiary protection status can apply for a work licence. Charities are donating €30 out of the €58 fee that they have to pay to get a work permit.

The commission has a volunteer at the Marsa Open Centre to help them find jobs, and Alex Tortell, the operations director at the Agency for the Welfare of Asylum Seekers, said that although there was no formal project for work placements in open centres, all welfare staff (social workers etc.) focused on employment as a priority area.

Another problem is the wage they are paid. Even though they should be paid at least minimum wage, there is still some abuse, although considerably less than there was a few years ago. A case highlighted by Times of Malta in 2013 concerned eight migrants who worked as garbage sorters

with a contractor engaged by Wasteserv, a government waste management agency. They were paid just over €8,400 annually when Maltese employees earned €11,300 a year.

There are occasional stories that offer hope: six migrants from the open centre are studying as mature students, one at the University and five at Mcast. And of course, there are numerous children attending school and are working their way through the educational systems.

Fr Vella is all in favour of these efforts to improve their chances of survival – but is also

“Another problem is the wage they are paid”

concerned that Malta is losing an economic opportunity.

“The ones who do best are the ultimately also the ones who have the best chance to benefit from resettlement programmes. I think, we are losing some of the best, being left with those who have humanitarian protection status or who are failed asylum seekers.”

MIP improves financial position Malta Industrial Parks has made marked improvements to its financial position, doubling its profits and cutting its costs.

MIP managed to improve its turnover from €11.8 million in 2012 to €13.5 million in 2013, in the meantime cutting its direct costs from €5.34 million to €3.98 million. Administrative expenses also decreased from €2.81 million to €2.63 million.

As a result it made a profit before tax of €3.5 million, compared to €1.28 million.

The board appointed in May 2013 set out to improve the company’s financials when it took over, by restructuring its debt, collecting its arrears, and introducing more governance with regards to tenants.

MIP had been saddled with tens of millions in ‘debts’ by having to take on assets, including €35 million for the former Air Malta headquarters. It holds €103 million worth of investment property (up from €95 million in 2012), which was supported through bank loans. MIP is allowed to grant

“ere is also a loan of €2m to cover 40.5 per cent of the refurbishment of the head office” property if the applicant gets approval from Malta Enterprise, and also has the right to retain the income generated from the rentals.

In 2013, MIP collected €13.2 million worth of lease payments (2012: €11.3 million).

MIP still has €83.9 million worth of loans due to be paid within more than a year (2012: €90 million), and €11 million due within a year (2012: €5.7 million). These include nine loans taken on by

MIP to construct factories for big name companies, which these repay over a set number of years.

The amount also includes loans for the upgrade of industrial estates and relocation of factory tenants. There is also a loan of €2 million to cover 40.5 per cent of the refurbishment of the head office located within the former St Luke’s Hospital grounds.

Cash flows have also improved, and in 2013 MIP had positive cash flows amounting to €26,000 compared to negative outflows of €6.2 million in 2012.

However, the company is still saddled with interest of over €4 million a year and has unabsorbed trading losses of €32.2 million.

MIP also increased its provision for doubtful accounts from €278,635 to €477,729, bringing the accumulated provisions up to €949,656.

The company employed 10 managers and 56 staff in 2013.

The company paid net dividends of €400,000 compared with €1.03 million the previous year.

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NEWS

e DemoEV project: encouraging electric mobility The DemoEV project conducts research related to the use of electric cars in Malta. It is cofunded by the European Union’s LIFE+, a financial instrument supporting environmental and nature conservation projects throughout the EU. The project involves the participation of the government, Transport Malta, Enemalta and the Gozo Ministry and has a fleet of 24 battery-operated vehicles – three different types – namely the Renault Fluence, the Mitsubishi i-MiEV and the Renault Kangoo.

The Renault Fluence was revealed in September 2009, at the Frankfurt Motor Show in the form of a concept car, before being presented at the Paris Motor Show in 2010 in its definitive form. This all-electric saloon is aimed at private buyers or fleet owners looking for a prestige vehicle that respects the environment.

The design of the Fluence is modern and sleek. From its

headlights and the details in its grille, to the specially blue chrome – a signature that this belongs to the exclusive Renault Z.E. range.

The style of the Renault Fluence Z.E. rocks the status quo: stating that you can be intelligent, elegant and ahead of the game at one and the same time.

A major innovation on Renault electric vehicles is the preconditioning system. When the car is plugged in, the driver can programme preheating or precooling of the cabin. An Eco Mode function is also available on Renault Fluence. Activating this function limits operation of the air conditioning and heating system to increase range by up to 10 per cent.

The Mitsubishi i-MiEV was given the ‘Most Advanced Technology’ award at the 2009-2010 Car of the Year Japan final judging. Innovation and efficiency are assured by its brake energy regeneration system which captures kinetic energy during deceleration and converts it into

electric energy to recharge the battery as you drive.

Consisting of 88 cells, the iMiEV’s high-capacity lithium-ion battery pack offers an impressive 160km cruising range per charge.

It’s smooth and quiet, even while accelerating and produces no vibrations at all when stopped.

The MiEV is powered by an electric motor mounted under the trunk that sends 66 horsepower and 145 lb-ft. of instant torque to the rear wheels. Power is provided by a 16-kWh lithium-ion battery located under the chassis.

In the ideal driving conditions the i-MiEV can go 130 kilometres on a

single charge. Although Mitsubishi claims that the car can achieve a top speed of 81 mph, don’t expect it, nor the traditional zero-to-100kms sprint, to come quickly.

Revealed at the Hanover Motor Show in 2010, the Renault Kangoo Z.E. was voted International Van of the Year 2012. It was the first Continued on page 6

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NEWS ??

Transport one of the main drivers of Maltese economy Continued from page 5 electric vehicle to win this title. It is a simple but highly technologically advanced and incredibly ecofriendly convenient van. Reliable, practical and functional with features identical to the petrol or diesel model on the road. Under the bonnet is a motor developing 44 kW, the equivalent of 60 hp. It runs on a lithium-ion battery with an energy capacity of 22 kWh, placed under the floor.

It is fully adjustable with a loading space that ranges from 1.3 to 4.6 m³ and a 650kg load capacity.

Something that Renault products have become known for is their ingenious and practical storage areas, and the Kangoo is no exception.

The transport sector is one of the main drivers of the Maltese economy and the services industry. The government’s impetus to reduce pollution and to have a cleaner environment is not just a declaration on paper, but is about adopting a policy that will see the tangible introduction of a clean transportation system.

The government is striving to introduce more renewable fuels

to sustain an economically-viable and more environmentallyfriendly transport sector. The Transport Ministry is committed to the implementation of electromobility because it believes that it is one of the solutions that will enable Malta to achieve its 2020 climate change and energy targets.

The relevance of electric mobility to the Malta land transport situation will have a number of different beneficial aspects.

These will range from effects on traffic emissions, transport energy use, patterns of electricity generation, and effects on health, urban planning and road communications.

The Ministry for Transport and Infrastructure, in conjunction with Transport Malta, have launched a scheme in the form of a grant to be an incentive for the purchase of battery electric vehicles and battery electric quadricycles.

Any electric vehicle registered under this scheme can be used solely for private use. An eligible person shall only be entitled for one grant under the scheme. If the individual is registering an electric vehicle with the required

“Individuals registering an electric quadricycle may apply for a grant of €1,500” MITSUBISHI I-MIEV

specifications one may apply for a grant of €4,000. On the other hand, those individuals who register an electric vehicle and deregister another motor vehicle which is at least 10 years old from the year of manufacture may apply for a grant of €5,000.

Individuals registering an electric quadricycle may apply for a grant of €1,500.

From outside, most electric cars look exactly like fossil fuel-powered cars. An electric car lacks a tailpipe and gas tank, but the overall structure is basically the same.

Under the bonnet, instead of a huge engine all you will see is an electric motor and its controller.

The electric motor needs no oil,

no tune-ups, and since there are no tailpipe emissions, it does not necessitate any smog checks.

The electric vehicle power source is the battery which acts as a ‘gas tank’ and supplies the electric motor with the energy necessary to move the vehicle.

This gives the car acceleration.

When the vehicle is idle there is no electrical current being processed, so energy is not being used up. The controller acts as a regulator, and controls the amount of power received from the batteries so the motor does not burn out. This battery powers all of the electronic devices in the car, just like the battery in a gas-powered car.

Everything else in the electric car is basically the same as its gas-powered equivalent: transmission, brakes, air conditioning, and airbags. Since electric vehicles use an electric motor, the driver can take advantage of the motor’s momentum when pressure is applied on the brakes. Instead of converting all the potential energy in the motor into heat, like a fossil fuel-powered car does, an electric car uses the forward momentum of the motor to recharge the battery. This process is called regenerative braking.

There are close to 100 electric car charging stations in Malta and Gozo.

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e Business OBSERVER

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INTERVIEW

All roads lead to Rome... and New York ALFRED PISANI and his family opened a restaurant in the villa left behind after his father died, and within 2 years borrowed a million liri from the banks to open a 156-room hotel there. At 76, he shows no sign of slowing down. He talked to VANESSA MACDONALD about IHI’s plans.

In 2014, you reported a profit of just €266,000 out of a revenue of €124 million. Wouldn’t it be more prudent to build up profits before you embark on more new projects?

There are two ways of embarking on new projects. One is by taking additional cash that you have generated from your present activities, putting them into reserve for a new development.

This is the strategy we followed for the past 12 years, reinvesting and reinvesting.

It is very difficult to find an outside partner when you are not known. We had to do it on our own, step by step, starting with a small investment and generating surplus to re-use for the next development.

I think Corinthia has sufficient exposure now, and today, when we go to an investment house – whether in the US or Europe – to raise funds, it is quite different and the activity stands alone.

So the approach has changed and we want to divest some properties because we feel they have reached a certain maturity in their value. Selling them would give us a profit, part of which could be used to distribute dividends, and part for investment.

IHI gave an interim dividend of 3c per share last year, its first and only – although shareholders have also been given bonus share issues. What is the dividend policy going to be going forward?

We recognise that we need to issue dividends and we are conscious of the fact that we have lagged in the issue of dividends.

You mentioned divesting properties. What do you have in mind?

THE BALLROOM AT CORINTHIA’S LONDON HOTEL.

Initially, when we opened hotels under the Corinthia brand, we needed time to prove ourselves.

It takes time to build up a name for yourself.

If you see the formula used by many investment companies, including hotel investors, we did what many others did: we were both owners developing our own properties and managers.

The opening of our hotel in London was the latest move. It was very successful and we have outrun our competition.

So when we go to an investment house today and say we would like to build a hotel under the Corinthia brand, we find people willing to act as owners, with us as operators. This is bringing about a shift that we will take advantage of.

However, we need other types of business models. In the US, it is quite common for companies to invest, wait a maximum of 5-6 years and then selling to realise a capital gain which can then be reinvested.

This is a very aggressive approach but it has a lot of merit.

We could not do this at the beginning as the buyer would probably have changed the brand.

Now, that we are internationally known, we will sell on the condition that our brand retains the management.

So which properties are you going to put on the market?

The board has not consciously decided to do it in any particular order but if we had an offer which

matches the price we feel is correct, then we would consider it.

Half the shareholding in Corinthia Palace Hotels is held by Lafico, which has been buffeted by what has been happening in Libya over the last few years. What is the impact on its interest as a shareholder?

Lafico has been a shareholder in the parent company since 1974. A total of $6 million was put up then, shared equally between Lafico and us.

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INTERVIEW

Since 1974, not one more penny was put into CPHCL. The company has since evolved into a group of separate entities with their own capital – and decisions at IHI, Mediterranean Investments Holdings or Corinthia Hotels International are taken by the respective boards.

Lafico is not directly involved except for appointing directors, which is obviously very important.

But if your question is whether if, in the light of what has been happening in Libya, will this put restraints on the shareholder, the reply is that the ultimate companies are quite distant from the original shareholders.

The instability is having an impact on both Bab Africa and Palm City.

What are your plans?

We are running the operations with a minimal number of employees. We have people working one week on and one week off, cutting costs to a bare minimum. Fortunately there is still income from the offices next to the Tripoli hotel as the tenants are still there. And occupancy at Palm City is still above 50 per cent because the contracts there were for long periods and most opted to keep them going.

Obviously if things stretch out longer and longer, the situation will become more of a concern. It is not an easy time.

The fair market value of the Libyan investments will also be affected... You were very proud of the fact that your value to loan ratio was 70 to 30. It will hurt that.

This is an ongoing discussion with valuers and auditors. If someone were sick and did not go into work for a day, his value would not change. But with accounting standards it is a bit different.

We are in discussions with the valuers at the moment. However, using the same argument, the properties where the enterprise value has improved will be re-valued upwards and I would like to believe that the eventual setting off would be very close.

The acquisition of Island Hotels Group (IHG) took many by surprise. What are your plans for Ħal Ferħ, for the Golden Sands hotel and for Island Caterers?

“When we go to an investment house today and say we would like to build a hotel under the Corinthia brand, we find people willing to act as owners, with us as operators” Golden Sands is a timeshare, 50 per cent of which is owned by IHG, and there is already a plan for how to sell the remaining weeks. I do not see any point of change there. It is a very well oiled machine that runs efficiently.

In the case of Ħal Ferħ, there is 85,000 sq.m. of land with a building permit. It is a beautiful location with tremendous scope. We are very excited about it and now want to look at the drawings a bit more thoroughly.

If you believe in Malta, the way I do, you will believe that we are at the beginning of what we could become. We are unique in so many ways: our location, our size, our climate, our stability, our understanding of the North African and European cultures, our history and culture, our industrious population... We should aim to match the best.

We have to look at the human element: can we give a better service? Can we improve the general product of our infrastructure?

Why can’t we offer the same – if not more – than the South of France? I believe we can bring our product up to the highest standards, across the country and infrastructure.

Will you keep the Radisson brand at Golden Sands?

I don’t think I would have any objections.

And Island Caterers? How would that fit in with your joint venture, Catermax?

This is a very interesting opportunity. These are two companies competing and providing the same service – both at a very good level.

I see a very strong synergy and we have to see how, over a period of time, we could bring these to work in harmony.

You are paying €37 million in cash and €13.4 million worth of shares to the IHG shareholders. Stockbroker Edward Rizzo calculated that you were paying the shareholders €1.49 per share, compared with the market price at the time of €0.57 – also pointing out many other possible complex interpretations. Do you agree with his workings?

The sellers are very sensible people and the buyers are also sensible.

No deal can be done unless it is good for both sides.

You have to analyse the enterprise value of IHG and deduct any liabilities and you come to a net value of €50 million, which was discussed with the auditors.

We then said that we would like to see a style of merger included, so the 36 million shares in IHG were paid for at par in cash. The difference of €14 million was paid as shares in IHI, so we had to value the IHI shares and agreed that for every €1.49 you would get one share. So for €14 million worth of value, we gave them nine million shares. Is that fair, when you consider the stock market?

In Malta in particular, the stock market value is very influenced by perception and the issue of dividends. On both these counts, IHI is affected by what you hear about Libya and St Petersburg, which tends to push us down.

This was not a valuation of assets; it was an enterprise valuation – and on the balance sheet, it was €1.13 or so. So you get a perceptive value of €0.62 but then an enterprise value, a true value given by the auditor, and the market value, which is independent of actual performance. Of course, if you were to sell, you would not do so at that value.

We came to the conclusion that the IHI share value was €1.49.

Given your plans for St George’s Bay, taking over the Radisson in St Julians was very obvious. But why did you decide to take over the rest of IHG? We started by discussing the hotel. But IHG felt that the hotel represented 70 per cent of their assets, and selling would dilute that.

Hence they preferred a total deal.

I could see their point of view, so we moved ahead collectively, and this is why we had the element of a merger. IHG will remain IHG and whatever arrangement we make with regards to any hotels would remain internal.

What are you planning for St George’s? Will you take over the footprint of the Marina, the current San Ġorġ and the Radisson?

There are persistent rumours that you will also take over the Institute of Tourism Studies. Are they true?

ITS is nothing to do with us. As regards the rest, we see it as one site...

The six-star concept will become a reality and it could persuade other hotels – and other service providers – to raise their standards but still give value for money. Then price structures will go up across the categories.

Malta can attract the most discerning clients. We get their yachts but not their owners. It could take us years, but we will get there.

Is it going to be a highrise and will it have any residential elements?

We need a development with at least two hotels of a very high standard, and we must ensure that a sixstar level in terms of room size and corridor area...

What do you consider to be a highrise?

A 30-storey tower...

A 30-storey tower? We may not be too far from that. But let us see.

You estimate that the London hotel is already worth double the €300 million it cost. Are you able to command the same rates as other hotels with stronger brands?

Is occupancy what you expected?

In December, we outrun our competitors in terms of rates but I cannot say that for the whole year.

Our London hotel has about 40 suites and seven penthouses.

No one else has that many so when there is a month with high demand, we definitely do better as

they fetch a lot of money. With more time, we aim to increase the rates of the standard rooms. By 2016, we will be matching our competitors’ average room rates – or exceeding them.

You are finally going ahead with Rome. Have you found investors for the project? Have you found the right location?

There is a sovereign fund and an Italian bank involved but we will be the developers and the managers.

Discussions have been going on for around 20 months, and obviously the Italians who are selling the property demand a lot, as do the buyers.

If we do a good job for the fund and they trust us – and we believe it will be the best hotel in Rome – then we can then do this again and again in other countries.

In December, you referred to a joint venture in the US. Is your New York dream going to become a reality?

Yes, I am going there next month to try to close a deal.

At the age of 76, you still show no sign of slowing down. When will you say that you have done enough?

Let me be philosophical. I never worked because I wanted to have €5 in my pocket. I was presented with a responsibility and always felt I should give my best.

If you sow 100 seeds in the soil, nature will ensure that 95 will grow.

You don’t need huge feasibility studies to tell you this: the figures are in any case never certain...

Choose good ground, water the seeds, look after them – and let nature do the rest. There is a natural energy that you just need to tap.

But in the midst of all of this, you still get problems. At times I wonder what I did in the past to deserve these!

Why am I still here? For how long? It would be great to be selfish and to dedicate my time to the simple pleasures of life that matter...

Just as a mother has a responsibility to her children, gradually letting them go, I have done the same and have relinquished some 70 per cent of the day to day operations of the group. We have extremely capable people. In the future, I believe we will be 10 times as strong as we are now.

e Business OBSERVER

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February 26, 2015

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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

Publishers Allied Newspapers Ltd. Content House Group Ltd.

A solution for pensions?

Ten years after the Pensions Working Group was asked to come up with a formula for pensions, we are still no closer to a solution – as was clear from the speakers at the recent ifs-Malta conference.

The terms of reference were twofold: they had to be sustainable for the government which financed them; and they had to be adequate for the pensioner seeking to retain the lifestyle to which he had become accustomed while working.

For some time, the pensions model has been based on the World Bank’s three pillars: a state pension; an occupational pension; and private pensions.

This was based on the principle that the state has a duty to ensure a minimum standard of living – but what is ‘minimum’? Are we looking at a safety net to prevent people from falling into poverty or enough to ensure pensioners can still go out to eat and travel overseas?

And the private pension pillar is based on the concept that some people are in a fortunate enough position to be able to put even more aside – but who might need an incentive to do so. Why? Because it is in the government’s interest to have affluent pensioners, not a ‘burden’ on society in terms of benefits, but part of the motor that keeps the economy turning.

The devil, as they always remind us, is in the details.

Let us start with the adequacy of the state pillar. The UK pension is only 22 per cent of pensioners’ income. We are still aspiring to 67 per cent. And sustainability?

The UK spends eight per cent of GDP on pensions. We are spending over 10 per cent and the figure will go up to 16 per cent by 2060. Is the UK too miserly or are we too generous? Governments juggling finite resources would clearly like to shift the burden from the first pillar... but to whose shoulders?

It is still too early to decide whether the introduction of private pensions will prove to be a success – although the likelihood is that they will merely displace money from other savings products. But private pillar pensions are meant to be the cherry, not the cake.

Which brings us to the second pillar: occupational pensions. Should these be mandatory or voluntary? Should the employee choose how much he or she wants to give? And should the employer also contribute?

For years, we were told that employers needed to juggle their own finite resources to keep their heads afloat and to bring more economic growth.

But potential providers of private pensions are anxious to get enough take-up to justify the investment they will have to make. They needed a solution which would help government shift that burden on to the shoulders of the pensioner-in-waiting without making it mandatory (a political bomb), and without asking employers to contribute (another political bomb). A solution presented at the conference was for the employee to be automatically enrolled in the scheme of his employers’ choosing, but with a choice to opt out, and without the employer actually forking out a cent of their own. In the UK only nine per cent bother to opt out.

Not quite an occupational scheme but one they hope will prove a politically (and economically) palatable one. At least until the time is ‘right’.

And for pensioners? Consider this, also presented at the conference.

Person A puts aside €300 a month for 10 years, from age 22 to 32. Person B puts aside €300 a month for 30 years, from age 32 to 62. They would both end up with €285,000. Would they opt out if they understood the magic of compound interest? Is auto-enrolment a political cop-out giving in to commercial interests – or a feasible interim solution to prevent poverty from escalating?

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BUSINESS OPINION

Finally, quantitative easing for eurozone

Philip von Brockdorff The long-awaited decision by the European Central Bank has finally been taken amid some resistance, it must be said. In November last year, governing council member Ewald Nowotny had said that the ECB “never should say never” to quantitative easing, but he added that such a programme was not in sight. He also stressed that the ECB should not be jolted into action every month.

Despite resistance, and only a couple of months later, the ECB announced an expanded asset purchase programme aimed at adding the purchase of sovereign bonds to its existing private sector asset purchase programmes. So what changed between November 2014 and January this year?

In my view, this is due to the recognition that the policy in the eurozone could no longer rely on the tightening of fiscal policy accompanied by structural reform to kick start economic recovery.

Moreover, the austerity programme imposed on Greece especially (and the emergence of a

strong leftist movement in Greece and Spain) threatens to destabilise the political ‘hegemony’ enjoyed by mainstream political parties across the EU since World War II. For far too long, the EU has ignored the lessons of economic history and is now acting in haste to address further gains by political parties on the extreme left and extreme right amid low economic growth rates and low inflation.

This in my view goes a long way

to explaining ECB’s move to resort to asset purchasing.

Asset purchases provide monetary stimulus to the economy in a context where ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households.

The ECB took this decision in a situation in which most indicators of actual and expected inflation in the euro area had reached historical

lows, with potential second-round effects on wage and price-setting.

Total monthly purchases will amount to €60 billion until at least September 2016 with the ECB hoping that asset purchases (with a medium-term target for inflation set at 2 per cent) will address the existing saving glut across the eurozone that threatens economic recovery and the future prosperity of the EU. The ECB will buy bonds issued by eurozone central governments,

“For far too long, the EU has ignored lessons of economic history and is now acting in haste to address further gains by political parties”

agencies and European institutions in the secondary market against central bank money. And in doing so it hopes to stimulate muchneeded investment within the EU. What is surprising in all this is why it has taken so long for the EU to respond effectively to address the eurozone’s flagging economy. The answer is simple. Germany, especially, fought this move tooth and nail insisting that eurozone countries would refrain from reforming their economies if the ECB were to launch quantitative easing.

Allowing for differences of opinion as to what constitutes structural reform, history has shown that reform alone will not work. Germany itself required vast amounts of dollars via the Marshall Plan coupled with institutional change to help to rebuild its economy following World War II. And has Germany forgotten that its iconic VW was saved from the ravages of World War II by the British army? Production of the car designed for Adolf Hitler was restarted with an order for 20,000 Beetles for the British forces stationed in Germany.

As John Maynard Keynes realised last century, capitalism (which is the dominant economic force) when faced by a crisis as in 1929 and more recently in 2008, will not pick itself up, dust itself off, and strive towards renewed growth and capital accumulation. Instead, governments (and taxpayers) have to pick up the pieces. And resorting to quantitative easing to re-ignite economic growth is yet another measure aimed at picking up the pieces.

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e Business OBSERVER

| February 26, 2015

CASE STUDY

Neglected Libya rigs will need to be scrapped Many Libyan onshore rigs have been more or less abandoned with little or no maintenance being done – and will probably have to be scrapped if neglected for much longer.

A Maltese company servicing the oil and gas industry, Bluhull, said that since one of the rigs had been attacked, the majority of the rest had been shut down as they were considered to be obvious targets.

“Rigs cannot be abandoned for any length of time,” Bluhull managing director Jonathan Borg said.

“It is not a matter of just flicking the ‘on’ button again. They will need a complete overhaul before they can start operations again. The owners of these rigs are asking us to go there but we prefer to heed the government’s advice to keep away for the time being.

“We would be able to do the maintenance if they could get the rigs to us, but the operators don’t have any transport of their own. So everything is at a standstill. Once Libya opens up again, there is a strong possibility that these rigs will end up being sold as scrap and replaced with new ones.”

This presents an opportunity for Bluhull, which represents a company that specialises in the building of new rigs from 750hp to 2,500hp, with a 3,000hp rig in R&D phase. They would be able to provide a new rig within just six to seven months.

Onshore rigs are considerably smaller as they do not require the massive platform to support the drill, the accommodation and the equipment, lying just a few metres above the ground.

For example, a basic 750hp rig costs $10 million and $11,000 per day to operate. And unlike an offshore rig that needs to be

“We would be able to do the maintenance if they could get the rigs to us, but the operators don’t have any transport of their own”

towed to a facility or new location, onshore rigs are fairly easily dismantled and loaded on to a fleet of trucks.

Libya may be going through tough times, but stability would mean massive spending to bring its 80 oil and gas fields back into production.

In addition, Bayphase, an oil and gas consultant, estimates that $42-70 billion will be required over the next 15 years to unlock the country’s full production potential.

Fortunately for Bluhull, Libya is only a small part of its operations, which are mostly focused on the Middle East. However, it is not the only threat to the industry. Oil companies have been cutting back on planned expenditure in 2015 by as much as 15 per cent because of reduction in the price of oil, not only in drilling but also in exploration.

This could not have come at a worse time: more than 200 new

rigs are already on order for delivery over the next six years.

“The majority of drilling rigs have been in service for the past 30 to 35 years, which are considered to be old,” Mr Borg said.

“Larger companies were selling off their old fleet to smaller oil companies and concentrating on newer state-of-theart, more efficient rigs.

Especially for companies working in deep seas, they can only be competitive if they have the latest rigs,” he explained.

However, although most oil companies only contract rigs for three to five years on average, others are bound by 10-year contracts, which gives them little leeway.

“These companies are hurting but they appreciate the cyclical nature of oil prices and have to believe that within that time frame the price of oil could recover,” he said.

“In the medium term, all rigs built before 2000 will be phased out or sold on. The rig owners will have to slash their day rates if they want to survive.

“Another consequence of this is that there will be a surge in rig scrapping, which is rarely carried out in Europe because of costs and environmental concerns,” he said, adding that industry experts have calculated that around 140 will have to be scrapped in the next six years, double the number in the previous six years.

The replacement of old rigs with new ones will have an impact on Bluhull’s operations, as – just like a new car – they require far less maintenance. They also do not need re-certification for the first five years.

Mr Borg is not overly concerned, convinced that the company’s track record will keep his clients loyal.

e Business OBSERVER

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February 26, 2015

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CASE STUDY

They are currently completing fabrication of equipment for a client in Singapore and will sign another contract in the next few months which will involve the recruitment and training of 25 crew members.

Another crew of 25 is currently on a rig being towed from the Ivory Coast to the Falklands, with maintenance under way as it is being moved. Bluhull also does maintenance and certification of rigs on site while drilling is under way, saving the operator huge amounts.

But although it has operations going on all over the world, Mr Borg would dearly like to see more work coming to Malta.

“What does an offshore rig require when it comes into a facility for maintenance or certification?

It needs three things: sufficient seawater depth; a safe quay; and some hinterland.

“The decisive factor is draft as a rig would require at least nine to 11 metres all the way from open water to the quay. And the seabed must also be quite ‘clean’ and firm as the rig has to be stable.

“Another thing that is often overlooked is that the so-called departure draft could be a few metres more. This is because it makes sense to load the rig with as much equipment as possible before it leaves the facility, to save on the expense of shipping it out or of going somewhere else to load it...” he explained.

Hinterland is also important as the work can be done much more smoothly and thoroughly when the decks can be completely cleared, with all the equipment being put into safe storage.

There is another factor which could prove decisive: flexibility with regard to third-party contractors.

“We do not want workshops where I have to accept the prices

THE REPLACEMENT OF OLD RIGS WITH NEW ONES WILL HAVE AN IMPACT ON BLUHULL’S OPERATIONS.

of one operator. We are not interested in that. We want open access to three or more so that I can get the best price on behalf of my client,” he stressed.

Mr Borg believes that Palumbo ticks the right boxes, with Malta Freeport as another viable option. He is not as convinced about public support for more rig stops, though.

“Unfortunately, people see rigs very differently to ships. Admittedly, they are massive and not the most visually aesthetic equipment, but they are not an environmental threat. They are just floating piles of metal with no oil on board! They drill wells and the oil gets taken off straight away,” he said.

BLUHULL MANAGING DIRECTOR JONATHAN BORG

“ere is another factor which could prove decisive: flexibility with regard to third-party contractors”

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e Business OBSERVER

| February 26, 2015

ADVERTORIAL

What is TTIP and is it relevant to Malta?

Stefano Mallia There is no two ways about it – the Transatlantic Trade and Investment Partnership (TTIP) will be the largest trade and investment agreement ever, which studies estimate, will result in some €119 billion of additional growth per annum for the European economy.

If done correctly, the economic benefits are substantial and in the current climate, it is not something we can afford to discard. So far there has been very little debate in Malta about TTIP and this could mean we risk missing a very important opportunity. Through my involvement in the European Economic and Social Committee (EESC), I am seeing

many EU member states debate TTIP very seriously with the business community and civil society taking a very proactive stance.

With this in mind, the EESC and the Malta Chamber of Commerce, Enterprise and Industry will be organising a joint event on March 9

with the aim of providing practical hands on information concerning the TTIP. The event will answer questions such as: “What is TTIP all about?”, “Is TTIP relevant to Malta?” and “Will SMEs benefit from TTIP?” It will be aimed at businesses that are either already trading with

the US or are interested in doing business with the US. Key officials from the US Trade Department and from the EU Commission who are involved in the negotiations, as well as the participation of Ambassador Gina Abercrombie-Winstanely and Christian Cardona, Minister of the Economy, Investment and Small Businesses will participate.

We will also have the practical experiences of businesses that have either invested in the US or else are an American investment in Malta. ☐ For more information e-mail johanna.calleja@maltachamber.org. mt

Stefano Mallia is vice president of Employers’ Group, EESC

e single most important decision when you build

Mitsubishi i-MiEV: the ideal electric car The Mitsubishi i-MiEV is one of the first 100 per cent electric cars to have hit the roads. It is the ideal vehicle for Malta for several reasons.

Zero emissions: an equivalent internal combustion engine vehicle is less efficient and emits carbon; cheaper to run, as much as 20 per cent cheaper than an equivalent internal combustion engine vehicle; 30-40 per cent more torque than a conventional car, resulting in better acceleration especially in a low speed range; zero noise: no range anxiety due to short distances in Malta, especially when charging

points are installed; less maintenance costs – no more oil and filter changes.

‘Fill up’ while you sleep at less cost. Overnight charging from domestic socket. Low registration fee and zero annual road tax.

Starting from €15,950 including the government grant and scrappage scheme, Mitsubishi i-MiEV is available from Industrial Motors Ltd in Blata l-Bajda. Book your test drive today by calling 2596 9641/3, visiting www.mitsubishi.com.mt or sending an e-mail to infoiml@iml.mizzi.com.mt

Choosing the right building contractor is the single most important decision you have to make.

Your choice will see you working together on a daily basis for months, and in the case of larger projects, even years. The firm you choose has to be honest and truthful, competent and reliable, and the more they are in control of the required resources and materials, the better.

Over the past 46 years, GP Borg has built a sound reputation for delivering what is promised by when it is promised; on time, to specifications and on budget. This has been possible thanks to the continuous hands-on and energetic approach of all family members and staff

alike, an open work ethic and continued re-investment in the business.

Today, GP Borg can pride itself on having handled a substantial amount of the most demanding and prestigious construction projects on the island in a consistently reliable manner.

No matter how large or small your construction project may be, make sure you make the right decision when choosing your building contractor.

Your choice of contractor should not be governed solely by price, but by reliability, quality and project continuity – remember ‘L-irħis għoli’ (cheap can be expensive)!

Capping card payment fees The regulation on interchange fees has been approved by the Economic and Monetary Affairs Committee (Econ) of the European Parliament.

The regulation seeks to establish caps on the interchange fees at 0.2 per cent of transaction value for debit cards and 0.3 per cent for credit cards.

It is generally expected that this regulation will lead to savings in cards transaction costs which should benefit both business and consumers.

The proposed text is subject to the endorsement of the European Parliament and Council which is expected to happen towards mid-2015.

The proposed regulation together with a number of other developments relevant to the banking and payments industry will feature during the second annual banking and finance law seminar being organised by Ganado Advocates in collaboration with the Malta Bankers’ Association.

The line-up of speakers will include industry leaders who will share their insights on the latest topical issues affecting the industry. A panel of experts, moderated

by James Bonello, general secretary of the Malta Bankers’ Association, will also discuss latest developments in antimoney laundering legislation.

The seminar will be held on Thursday at the Hilton Malta hotel. For further enquiries send an e-mail to cborg@ganadoadvocates.com. www.ganadoadvocates.com

Are you switched on to the electric revolution?

Z.E. = Zero Emissions. Renault unveiled four electric concept cars at the 2009 Frankfurt Motor Show with a promise to make them widely available to motorists. Since then, Renault has publicised each milestone in this ambitious and unique project, securing government backing, signing partnership agreements and testing battery safety.

Renault has focused on training its network, sales staff, technicians and repairers with the aim of offering customers seamless service.

Electric vehicles were first tested in The Sims virtual community before

being put through real-world trials involving more than 400 EVs and a panel of users.

To date, Renault has delivered more than 37,000 electric cars worldwide. Renault is demonstrating its drive for innovation, clearly investing in a future with mankind at its core.

Electric cars are no longer a dream, but a reality accessible to all.