The Business Newspaper 10th March Issue

INTERVIEW

Issue 46

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March 10, 2016

Distributed with Times of Malta

Base Erosion and Profit Shifting may not sound terribly dramatic but it is currently the biggest threat to Malta’s economy. Aldo Farrugia from the Office of the Commissioner of Inland Revenue explains why. see pages 12 and 13 >

NEWS Malta will face fines from the European Commission if it does not reach its renewable energy targets by 2020. As yet the interconnector is not being used to buy ‘clean’ energy – but will it have to be considered as the deadline looms? see page 3 >

Lab Wharf investment sorely needed Vanessa Macdonald Ten years after Valletta Gateway Terminals took over the 30-year concession for Deep Water Quay, Magazine Wharf and Laboratory Wharf in Grand Harbour, little has been achieved out of the investment list promised by its first CEO. In August 2006, then CEO Peter Darley said that two gantry cranes were to be installed at Laboratory Wharf, and that it was looking at extending the quay as well the hinterland.

However, although the cranes were installed, the idea of excavating into the headland below Corradino to create space has not materialised.

The cranes extended the capacity of the harbour to handle ships up to Panamax size, but this requires considerably more space on land. Mr Darley had hoped that the five hectare

hinterland could be expanded to increase the throughput of containers from 34,000 annually to 150,000 – using the existing reservoir. Transport Malta figures indicate that in 2015, 81,000 containers were handled.

VGT was obliged through the concession agreement to spend a minimum of Lm6.7 million (€15.6 million) over the 30-year con-

“Getting gate permanently moved to a wider stretch of access road is proving impossible”

cession, starting with a Lm5.2 million (€12.1 million) injection. It also had to pay an annual concession fee of Lm350,000 (€815,000).

Sources said VGT has been doing all it could to find more space and it is using every centimetre of the current 10,400 sqm compound.

However, at peak times, the main operator, Sullivan Maritime, said that there was chaos, as the photo above shows, with a bottleneck at the gate controlling flows.

“The gate was recently moved temporarily to accommodate filming but getting it permanently moved to a wider stretch of access road is proving impossible, much to VGT’s frustration,” Sullivan Maritime managing director Ernest Sullivan said.

And the lack of space is frustrating for its principle, shipping line Grimaldi, which accounts for 90 per cent of the business there.

Continued on page 6

NEWS Businesses in Malta will not be pleased to learn that the time it takes to get paid has not improved but has actually deteriorated, from 83.50 days to 91.67. see page 5 >

OPINION e director general of the Malta Insurance Association, Adrian Galea, analyses the proposals for the setting up of an entity to ensure safety at public events, and puts forward some suggestions. see page 15 >

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NEWS

ENEMALTA STAFF IN THE INTERCONNECTOR’S DISTRIBUTION TUNNEL. PHOTO: CHRIS SANT FOURNIER

Interconnector not using renewable energy Enemalta is not buying renewable energy via the interconnector, according to its spokesman – even though doing so would help Malta meet its national targets.

The 120-kilometre Malta-Sicily interconnector connects Malta’s electricity grid with that of continental Europe. Enemalta started importing electricity through the €200 million connection in April 2015.

Under the EU Renewable Energy Directive, by 2020, 10 per cent of the electricity consumed in Malta should come from renewable sources.

The most recent progress report from 2015 indicated that some member states, including Malta, “need to assess whether their policies and tools are sufficient and effective in meeting their renewable energy objectives. In 2013/2014 Malta had a

trajectory of only three per cent”, the European Commission representation in Malta said.

The EU’s Renewable Energy Directive promotes cooperation among EU countries to help them meet their renewable energy targets, which can take the form of statistical transfers of renewable energy, joint renewable energy projects and joint renewable energy support schemes.

“Yes indeed, Malta could improve its renewable energy performance either through the physical import of renewables or through statistical transfers,” a spokeswoman for the office said.

Enemalta is buying electricity through a five-year framework agreement with Italian energy company Enel Trade, which allows it to participate in the various energy markets. Enemalta said at the time that it opted

“Malta faces fines should it miss its targets but these have never been quantified”

for a trader to ensure that it retained full flexibility over the use of the interconnector by being able to purchase from whichever market channel offered the most advantageous rates.

The Enemalta spokesman said that the company was “committed to continue supporting Malta in its efforts to meet European green energy targets through other initiatives, including the consolidation of the national electricity distribution network to provide the necessary capacity for further investment in grid-connected renewable energy systems, such as PV panels”.

Questions sent to the Energy Ministry two weeks ago were not answered by the time of going to print.

Malta faces fines should it miss its targets but these have never been quantified.

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NEWS

Payments taking longer Businesses in Malta will not be pleased to learn that the time it takes to get paid has not improved but has actually deteriorated, from 83.50 days to 91.67.

The Malta Association of Credit Management reported an increase of 8.17 days between the annual average for 2014 and 2015, which it measures as the Average Days Sales Outstanding (DSO).

The survey was conducted amongst its members: suppliers and service providers selling on credit in Malta, hailing from all sectors of the Maltese economy.

“When this figure is compared with the DSO of 34 days for Europe, there is surely much to be desired. The average DSO for Malta is in fact higher than that of Italy (80 days) according to the European Payment Index published recently by Intrum Justitia,” the MACM said.

The sad situation has been highlighted several times over the years – but seems an impossible nut to crack. In fact, in 2010, the DSO was 78.5 days, and that for 2013 was 90.93 days. The MACM did not conduct the survey for 2011 and 2012.

Debtors represent on average about 40 per cent of the total assets shown in the balance sheet of most firms and these assets are liquid. Therefore, an increase in the DSO could have an impact on the creditworthiness of the firms and could hinder further investment in businesses as more creditors and corporations would be reluctant to provide credit facilities, sell on credit or extend credit.

The MACM cautioned that a number of external factors may influence the DSO figure, so it was advisable to benchmark the the figure with that of the same industry – data which is available to MACM members.

“e situation has been highlighted several times over the years”

Leading by exampLe The worsening dSO is a clear sign that the Late payment directive – which allows credit to be extended up to 60 days (from 30 days) only if both parties agree – is clearly not having much of an impact. Josef busuttil, the director general of the malta association of Credit management, believes that this is a matter of growing concern.

Late payment in commercial transactions is one of the main concerns of the Maltese business community. Companies across all sectors of the Maltese economy are facing liquidity problems, evident from their audited accounts filed at the Registry of Companies.

We also see a great deal of bartering going on, especially in the construction industry, with building developers exchanging property as payment to their sub-contractors. Bartering has a direct negative effect on cash flow and hence late payment.

Other firms complain that as a result of late payment, they are unable to restructure appropriately in order to face the new challenges and opportunities of today’s market demands.

People in business are well aware that in Malta customers request long credit terms from their suppliers, sometimes running to 120 days – depending on the industry – and yet fail to honour even these credit terms, or even worse issue post-dated cheques upon due date. Hence, they continue to benefit from the suppliers’ money.

A report issued last year by the European Union referred to late payment as the major

cause of business insolvencies, threatening the survival of businesses and resulting in numerous job losses. Keep in mind that late payment has a domino effect: if a supplier is not paid on time, he may not be able to honour his own commitments.

The Late Payment Directive does not only set down credit parameters: it also gives victims the right to impose late payment interest, as well as compensation for the expenses incurred to recover past-due money from the trade customer.

Here in Malta we have a fast track judicial system under section 166A by which a firm can obtain judgment after 30 days but it is limited to €23,000. What if the outstanding amount is higher than this? The directive states that an enforceable title should be obtained within 90 days irrespective of the amount of debt!

However, although legislation and the law court may sometimes help businesses to recoup debts, procedures are expensive and not always a good tool – but rather something to use as a last resort.

Moreover, let us also keep in mind that for government-to-business payments, the deadline is 30 days and exceeding this has to be “expressly agreed” and

“objectively justified in the light of the particular nature of the contract”.

The Commission’s report clearly noted that public authorities are not leading by example and are paying their suppliers remarkably late.

Reading between the lines, it is evident that suppliers often grant better credit terms to public authorities than they usually grant to their business customers, and that public authorities are paying later than the business customers.

The report itself states: “Late payments by public administrations undermines the credibility of policies and contradicts declared policy objectives to provide for stable and predictable operating conditions for enterprises and foster growth and employment.”

It warns that something needs to be done: “Given the importance of public procurement in the EU (more than €1.9 billion per year), late payment by public authorities has a strong negative impact on enterprises, notably SMEs. Many public authorities do not face the same financing constraints as businesses and late payment in their case is avoidable. It should therefore be more severely sanctioned when it occurs.”

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NEWS

Positive ongoing concerns in quays Continued from page 1 “Grimaldi’s services bring an average of 700 trailers a week, and hundreds of cars for transhipment. But we are turning away considerable amounts of work as there is simply not enough space. Ships handle thousands of cars so it is simply not interesting to them unless we can handle more than the current 1,000. We actually used the Freeport for one contract,” Mr Sullivan said.

“And with all this talk about Malta as a logistics centre, why are we not planning for value added work? We could be a distribution centre with pre-delivery services like cleaning cars and so on…”

The situation at times verges on the ridiculous: empty containers sometimes have to be parked off site and Mr Sullivan recounted an anecdote about one that was found parked in by cars during a football match.

That section of the Grand Harbour handles a mishmash of sectors, with grain and cement adjacent to each other, as well as fresh fish and scrap metal.

The extension of the quay would allow more efficient berthing – and sources warned that if another operator wanted to compete with Grimaldi, it would be very difficult for it to do so – particularly for Ro-Ro operations.

Repairs have been underway on Deep Water Quay – previously used for Ro-Ro – for the past three years but these are the remit of Transport Malta. Sources said it seemed unlikely that Ro-Ro would ever return there when the works are finished in a few years’ time, but rather that it would

be used for cruise liners or passenger ferries.

VGT ignored questions about what investment it has made to comply with the concession conditions, or about what it intends to do in the coming years.

It reacted, however, to a question about the impact of the acquisition in 2011 by Mitsui of Portek’s 55 per cent shareholding – which sources believe is behind the slowdown in investment.

“Portek has been a net contributor to our operations here in Malta, via Valletta Gateway Terminals, which has been a positive ongoing concern from inception and has played a key role for the local Maltese economy,” a VGT spokesman said.

“Going forward, both shareholders are determined to not only reinforce the contribution we make locally, but to support government initiatives in linking and developing trade between Malta and the Mediterranean Region at large.”

“It seems unlikely that Ro-Ro would ever return there when the works are finished in a few years’ time”

Maltese firm gets North American contract Maltese firm SMS has won the contract to handle Norwegian Cruise Line’s operations in eight East Coast ports, with just weeks to set up its infrastructure.

SMS International Shore Operations, a subsidiary of the SMS Group, established itself in 2012 in Miami, handling NCL’s vessels, building on a partnership that already covered shore operations in Denmark, the UK and Rome.

That operation has grown dramatically, and SMSISO already handles around 90 per cent of all the traffic in Miami, for several companies as diverse as Carnival, MSC and Disney. The company already employs 1,200 people there.

“The first call of the new contract is on May 5 and we have to have everything in place,” SMS-ISO managing director Sam Mifsud said from his office in Malta, carefully watching a live webcam feed from Miami, where it handles some 800 calls every year – a total of 3.2 million passengers this year.

The new contract covers eight ports: Vancouver, Prince Rupert and Victoria in Canada, and Seattle, Los Angeles, San Francisco, San Diego and Astoria in the US. SMS-ISO will be port agents, ground operators and shore excursion handlers.

The contract will involve 300 calls a year (1.2 million passenger movements) and will require 600 new staff to be recruited.

SMS-ISO has since 2012 extended its NCL contract in Europe to the Netherlands as well as adding other cruise lines.

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INDUSTRY FOCUS

Preparing for the Internet of ings e rapid changes in technology offer superb opportunities for Maltese software companies to grow. A few leading firms share their experience and give advice for companies on the verge of expansion.

Infusion Solutions

BMIT JACK MIZZI, CHIEF MARKETING & BD OFFICER Organic growth or merger and acquisition?

BMIT has adopted both approaches in different scenarios. Both have their risks and benefits but usually the choice is determined by the organisation’s business objectives and its growth appetite as well as the market dynamics. The key benefits I see relate to the ability to manage better how to grow, and manage associated risks. At the same time, this usually comes at a cost in terms of stretched resources and longer time to act. Conversely, an acquisition allows for quick entry or expansion into the market but carries higher risks in terms of fit, integration and synergies as well as management complexities.

IT services are the easiest to internationalise. What would you recommend to companies seeking overseas markets?

First of all, make sure your business is ready to make the leap. Look at markets with the least resistance when you’re initially expanding overseas and aim to find the right

partners to help you establish your business in the target market. Trying to strike the right balance between ease of access and market opportunity is also key to successful expansion.

Big data is being touted as the next game changer. How is your company tapping into this opportunity?

The emergence of big data is a result of more and more businesses deriving value and insight from the analysis of large data sets.

Naturally, big data requires big data processing, storage as well as high volume connectivity. That’s where BMIT comes in.

We operate a portfolio of cloud services, including infrastructure and storage which are easily scalable, providing cost-effective and scalable solutions. Moreover, our recent multimillion investments in a new data centre, a 40Gbps redundant and international network and top-end connectivity to the internet provide the underlying building blocks to enable big data players to start operating out of Malta.

KRISTOFF ZAMMIT CUTAJAR, DIRECTOR & FOUNDER Organic growth or merger and acquisition?

Hitting growth targets is challenging, especially in our industry where things change so fast and product development is always on fast forward.

Being part of a larger group made sense for us and our new reality as part of Mizzi Organisation is exciting. The acquisition has provided us with the tools to push forward on our product development and internationalisation plans.

IT services are the easiest to internationalise. What would you recommend to companies seeking overseas markets?

Yes, in principle software as a service is ‘easy’ to internationalise. However, the biggest mistake one could make is underestimating the effort and cost. Products need to be robust, proven and backed by an organisation that instils confidence. Service levels are critical.

Clients today expect things ‘yesterday’ and being available to support your products and client requests and queries is essential. Never underestimate the importance of soft skills

even in our techy world! People buy people at the end of the day and our industry to all intents and purposes is that same. There is a difference between a downloadable app and a software solution, obviously. I would also stress the importance of ensuring you are selling a product that is market ready. There is nothing worse than leaving a bad taste in a customer’s mouth in the early days.

Big data is being touted as the next game changer. How is your company tapping into this opportunity?

Big data is expected to bring about the next ‘revolution’. We have developed an online business intelligence tool that provides real time customer data analytics and uses taxonomies and complex algorithms to build user personas on the fly, thus building invaluable profiles of users even if they are not logged in. The tool is already raising interest within the finance, gaming and retail markets. One of the most powerful features of FlexiTe is the ability to learn and grow with each individual user. It’s an exciting time.

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INDUSTRY FOCUS

Seizing the potential of big data Continued from page 9

JAMES GATT, SALES & MARKETING MANAGER

commercial sense, we may consider otherwise. Ultimately, our goal is to safeguard the interests of both our employees and of our existing clients, who have trusted us in supporting their business.

Organic growth or merger and acquisition?

Our company has been growing steadily in an organic manner and our plan is to continue doing so.

Our small size gives us the ability to react quickly to the market’s needs, therefore using this to our advantage. We never limit ourselves, however, to any eventuality, and therefore if the opportunities that come around are viable and make

IT services are the easiest to internationalise. What would you recommend to companies seeking overseas markets?

Our company is only minimally engaged in exporting its services. However, our most basic recommendation in this respect would be that, before engaging in the international market, any company should not only have a vision but also a con-

Focus Software

crete plan, adequate resources and a clear will to engage in the international playing field.

Big data is being touted as the next game changer. How is your company tapping into this opportunity?

Our company is one of the frontrunners in Malta in this respect. Our latest product, the Focus 360 Business Suite, introduced a solid ERP system which, using the latest technologies, presents businesses with a real opportunity for developingbusiness intelligence through daily procedures, providing the means to analyse data to reveal vital market and business insight.

SG Solutions ALEXANDER WELLS, SENIOR MANAGER Organic growth or merger and acquisition?

Acquiring another business can be a great way to grow quickly but it is imperative to have a sound business case first. The sort of questions you should ask yourself are: do we have enough liquidity to make such an acquisition?

Will this introduce cost savings through economies of scale? Do the ICT products and services complement the business portfolio and strategy? Will this open up an additional customer base where we can cross-sell our existing offerings?

At SG Solutions we are no strangers to mergers and acquisitions, having gone through two acquisitions locally in Malta, plus also the acquisition of Apple retail outlets abroad (via a joint venture).

IT services are the easiest to internationalise. What would you recommend to companies seeking overseas markets?

When considering overseas ventures, it is critical to ensure you have local people there who know the business and market inside out. ICT services are of a human nature, so having a local presence is a must.

ISB Ltd ALAN DARMANIN, DIRECTOR Organic growth or merger and acquisition?

From a numbers and figures perspective, one could argue that any strategic move that leads to business growth, being it organic or inorganic, is justifiable. This is arguably true as long as it is sustainable growth. Having said that, however, everyone here at ISB is passionate about what we do (business software development), which is in fact the main reason why we have been growing organically for the past five years, expanding our client base both locally and internationally.

IT services are the easiest to internationalise.

What would you recommend to companies seeking overseas markets?

Overseas markets are demanding and come with big expectations. Luckily, Malta has excellently trained IT

Computime Software JOHN WOOD, CEO Organic growth or merger and acquisition?

Computime has traditionally grown in an organic manner through a steady process of acquiring more customers, adopting more products and services, and developing its workforce. At the same time, acquiring other companies, whether with an objective of expanding one’s current offering or else to complement one’s current business, has been proven to be a very powerful vehicle for accelerated growth.

IT services are the easiest to internationalise. What would you

graduates who love challenging projects. ISB has long understood and leveraged on this by recruiting some of the best business analysts and software developers, allowing the company to undertake bigger scale projects that are more typical when competing internationally.

Big data is being touted as the next game changer.

How is your company tapping into this opportunity?

ISB has been interested in big data projects since 2012 and invested heavily in research and proof-ofconcept development.

In January 2015 we saw this investment bear fruit with ISB undertaking its first big data project for an international eCommerce set-up using technologies such as Scala and MongoDB, allowing high-volume throughput and big data processing.

ISB is continuing to invest in big data research, specifically in the areas of querying and searching.

“Companies in larger economies tend to seek out specialist business knowledge” recommend to companies seeking overseas markets?

Vertical specialisation is, in my view, one possible route to overseas success in the international market, when talking about business software applications. Many Maltese business software companies tend to be generic by nature, due to the particular characteristics of the Maltese market. However, in our experience, companies in larger economies tend to seek out special-

ist business knowledge as opposed to technical skills when selecting IT service partners.

Big data is being touted as the next game changer. How is your company tapping into this opportunity?

We’re tapping into big data from the analytics perspective, which is essentially turning an organisation from reactive actions to live actions.

Computime Software has developed a solution called AXON to facilitate data capture and provide real-time data monitoring of vast amounts of live data points, identification of complex event management and ability to immediately act upon specific data patterns. AXON also provides the ability to create live dashboards, trigger alerts and push actions across multiple systems based on events captured from the data streams.

Big data is being touted as the next game changer. How is your company tapping into this opportunity?

Apart from the huge amount of social media data that businesses want to analyse, there is also the huge number of unstructured documents bouncing around.

We have a business section dedicated to document management and office automation that provides great tools for processing and accessing the information your business needs quickly and easily.

Plus, as the EMC partner, we have the infrastructure and skills to support it!

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INTERVIEW

Juggling a taxing workload Vanessa Macdonald Aldo Farrugia, the director general for legal and international affairs at the Office of the Commissioner for Revenue, is back on a plane again, using every spare minute to read the hundreds of pages of documentation on taxation that are being churned out constantly by the European Commission, the OECD and the G20 – not to mention media reports on tax clampdowns against banks, corporates and even countries.

Somewhere along the way, over the past 20 years, the distinction between illegal tax evasion and tax avoidance has been lost. Whether evaded or avoided, the bottom line is that tax revenue was being lost and countries – their backs against the wall because of the global slowdown – were trying to see how they could recoup it. The scale of the problem is immense: the OECD estimates that $100 to $240 billion are being lost every year through tax avoidance.

“If you are the director of a multinational company, you have a duty to do all you can to get the highest return for your shareholders – within the law. On the other hand, governments are saying that this was not the original spirit of the double taxation treaties. There is no denying that the current international tax framework has been misused,” Mr Farrugia said.

“The problem arises when one avoids paying tax by creating an artificial way of doing things. This

is why, for example, the G20 and the OECD are against the use of ‘empty’ companies – so-called brass plate companies – which have no substance and exploit double taxation treaties.”

But, as his colleague at the Finance Ministry, Anthony Vella Laurenti, commented, tax engineering has become so sophisticated that international tax regimes are not able to keep up.

The scramble to bring tax regimes up to date is being tackled by the European Commission, the OECD and the G20 countries (see box), but it is not yet clear what impact these changes will have on Malta, which uses a competitive tax system as one of many tools aimed at attracting foreign direct investment.

Mr Farrugia, as do many other practitioners and regulators in Malta, bristle as soon as the low-tax rates are mentioned: “Having a tax system that offers the possibility of refunds could trigger the perception that we have a low tax or abusive regime – which is not the case,” he said, pointing out that Malta’s tax system was approved by the EU under its 1997 Code of Conduct, as well as under state aid rules.

One of the main points he stresses is that Malta has an imputed tax system, very different to any other in Europe, and one which does not discriminate between companies or sectors.

The system is based on the principle that profits should be taxed at the level of the ultimate beneficial owner.

THE EUROPEAN COMMISSION, THE OECD AND THE G20 AND ALL PUSHING TO CURB NOT ONLY TAX EVASION BUT ALSO ABUSE OF TAX AVOIDANCE MEASURES.

“We have to survive as a nation and there would be an issue if we were not able to attract FDI”

“So if you are an individual resident and domiciled here in Malta, you would be taxed at progressive rates, up to 35 per cent. If the shareholders is a resident in another state, they should be taxed at the rates applicable there, which is why we give refunds of the tax paid here, on the assumption that they will pay the tax in their home state – which is the sovereign right of that state.

“We are transparent so anyone who wants to ask us whether the

person got a refund or not would be given that information,” he said.

“As a small country we start off from a point of disadvantage and in order to attract FDI, we have to offer some form of incentive. Otherwise why would a company come and invest in Malta if they can invest say in Germany etc.?

“We have to survive as a nation and there would be an issue if we were not able to attract FDI. This is why we also ensure that there are other reasons for companies to come here and stay here,” he stressed.

Malta has been very robust when it comes to tax evasion measures, but although the Inland Revenue Department and Finance Ministry are in favour of measures to also curb tax avoidance, there are boundaries which it hopes to maintain.

“In line with the principle of subsidiarity and proportionality, we feel that where a state can do things domestically, it should be left up to the member state. This is where we have differences of opinion with the Commission, which are being discussed,” Mr Farrugia said.

He pointed out that fiscal matters have sovereignty issues, as parties choose tax systems to suit political ideology, using tax as an economic tool to fuel social welfare.

“Each country has its own needs.

You cannot have a ‘one size fits all’ model for all countries,” he said emphatically.

However, this determination to defend our turf is only part of the picture, one in which Malta is cooperating fully with both the European Commission and the Global Forum.

It is currently actively involved in the EU discussions on the directives on transparency and anti-tax avoidance, and as well as on one of the 15 OECD Base Erosion and Profit Shifting (Beps) action plans – that on proposed multilateral instrument.

This is a proposal to try to come up with one instrument to amend all the existing bilateral tax treaties, trying to bring them in line with the Beps minimum standards.

“If all the bilateral tax treaties were to be renegotiated, it would take years. They want to do it in one go by coming up with standard terminology – even though the intention is not to harmonise them – but of

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INTERVIEW

course, this is proving to be very complex as each country has very different texts in their tax treaties.

“What will the impact be for us?

For Malta, which has over 70 double taxation treaties, it cuts both ways.

There are things which will help us from the perception point of view but some of the benefits in our tax treaties could be lost, which would affect our competitiveness – as it will that of many other countries. The situation is still in a state of flux and there are still many discussions going on,” he said.

On the European Commission front, things are moving more quickly on the issue of transparency – Directive for Administrative Cooperation (DAC IV) – but less so when it comes to anti-tax avoidance, in spite of efforts by the current Dutch presidency to move it along.

But for Mr Farrugia, keeping tabs on all these fronts is taking up a tremendous amount of time, compounded by the fact that there are other initiatives on the sidelines, such as the OECD’s attempts to help developing countries improve their internal capacity to cope. The European Commission is also doing more work on arbitration – another of the 15 OECD Beps action plans – which deals with dispute resolution mechanisms.

The aspect which seems to preoccupy him most is the sheer size of the OECD Beps project which borders on the overwhelming: “Nothing of this magnitude has ever been carried out before. It does not only look at direct taxation but even consumption taxes like VAT in the digital economy.”

“Implementing Beps recommendations, if not done carefully, could hurt Malta. Supposedly it would put everyone on the same level-playing field. But because of our situation, size and even location (on the periphery), we cannot be compared to other (even small) jurisdictions on the continent, like say Luxembourg. We don’t have human resources that can commute across our border. To import things is more difficult. So we have natural disadvantages and that is why I pointed out that tax is an essential economic tool. To be put

on the same legal footing as others without taking into consideration these factors would in reality mean that we are placed at an economic disadvantage.”

One of the biggest questions is how far all these attempts could go, bearing in mind that fiscal issues can only be changed by unanimous vote according to the EU treaty.

“I am sure that there are many who would like a harmonised system, after all there are those who believe in a federal Europe. But there are different federal systems. For example, Canada has a federal system but the income tax is common to all, while the US has federal system but the tax differs from state to state. But a federal EU? We are talking about both ‘if’ and ‘when’…”

In the meantime, he stressed that the jurisdiction as a whole has kept its standards, rejecting the temptation to set up brass plate companies, for example.

“There are thousands of companies so there could be some, but it is certainly not our policy. We always strive for substance, such as assets and employees, and in some sectors, particularly the regulated ones, this is seen as being very important.

“What we want, after all, is investment that produces employment, brings know-how and leads to more business.

“Of course we are somewhat wary of change. If these new systems are implemented we would have to change our legislation and we don’t know how those who are present will react.

“It would not affect our imputed tax system but it could change the perception of Malta. The impact depends on whether investors anticipate that tax administrations would start asking a lot of questions and making their life difficult. Which is precisely why we have always fought attempts to label us as a tax haven…We have always abided by international standards and we are committed to transparency.

“There should not be any fearmongering. It is not all doom and gloom. But it is a challenge. We are doing all that we can to get the best position for Malta.”

HOW IT ALL BEGAN The international clampdown on tax evasion did not start yesterday but developed over the past 20 years, escalating as a result of corporate scandals fuelled by greed, the financial crisis of 2008, and – to be honest – plain and simple civic society pressure.

At some point, zero tolerance for tax evasion started to spill over to tax avoidance, which is slowly but surely becoming a ‘four-letter word’ – even if it is perfectly legal.

The first move was taken in 1997, when EU member states agreed on a Code of Conduct for Business Taxation, prompted by growing awareness of worrying trends. It encompassed criteria for the determination of harmful tax regimes within the EU including the need for tax transparency.

The Code is not hard law, but any country joining the EU binds itself to abide by it, and in fact, a number of member states had to make changes to their tax regimes.

In the meantime, under pressure from countries losing tax revenue on a massive scale, the OECD had started to look at the most aggressive tax systems and in 1998 released a report on harmful tax competition. One of its main thrusts was tax transparency, as an opaque jurisdiction from a tax point of view poses a barrier for other countries’ abilities to collect revenue.

The Global Forum on Transparency and Exchange of Information for Tax Purposes was eventually set up using the OECD as a platform. Membership to this group was (and continues to be) open to all: 131 jurisdictions – including non-state ones like Jersey and the Cayman Islands, for example – signed up to it.

A system of monitoring was set up to look at tax legislation relating to tax transparency and also at its actual implementation.

For a few years, the howls of protest were more or less silenced, but the protracted financial crisis that started in 2008 moved the emphasis from countries to corpo-

rates and the international tax framework in general.

In 2013, the G20 prompted the OECD to study ways in which multinationals could evade or avoid taxes. The result was an ambitious action plan, split into 15 areas, aimed at creating a modern international tax framework. The final package was delivered on time in October, 2015: 15 reports – over 1,000 pages in all – of detailed analysis and recommendations.

The recommendations of the so-called Base Erosion and Profit Shifting (Beps) project range from minimum standards to guidelines, a compromise reflecting the differing views of countries within the G20 and the OECD. Not to be outdone, in June 2015, the European Commission issued a paper entitled Fair and Efficient Corporate Tax System in the EU. This was followed up in January 2016 by its Anti-Tax Avoidance Package, which comprises proposals for two directives, one on transparency and another on antitax avoidance measures. There is also a recommendation about member states’ tax treaties, and a communication about how the EU should deal with non-cooperative jurisdictions, raising the possibility of a common blacklist for non-EU countries.

All these initiatives – thankfully – eclipsed the Common Consolidated Corporate Tax Base (CCCTB), proposed by the European Commission in 2011. The idea was that a multinational in Europe would consolidate all its

profits for tax purposes in one return in one jurisdiction. So far, so good. The controversial part was that member states where it was active would then take a piece of the pie, according to a formula based on sales by destination, number of employees and salaries paid, and assets.

The OECD is not in favour of the apportionment system, preferring the approach of Beps, where taxation is linked to economic activity. CCCTB looked dead in the water but there are now attempts to salvage parts of it. The international aspects have been incorporated in the proposed anti-tax avoidance directive and for now, the ‘consolidated’ part of the proposal will be dropped.

This is music to Malta’s ears.

The CCCTB formula would not have worked to Malta’s advantage as multinational companies would have few assets here, low domestic sales, and lower employment and salaries and wages. On the basis of this formula, Malta would only get a pittance of the tax, even if a significant amount of the valueadded was generated here.

This is one of the reasons why Malta had objected to the consolidation and to the apportionment. CCCTB was also going to be optional, meaning that a jurisdiction would have had to operate two tax systems in parallel – a purely domestic one for multinationals that did not opt in, and an international one for those that did – adding to the administrative burden.

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

Editorial Vanessa Macdonald, Assistant editor, Times of Malta.

EDITORIAL

Economic fall-out of Panamagate The island is waiting with bated breath for the next episode in Panamagate, but whatever happens, one thing is clear: any last vestiges of innocence have been lost.

What is the impact of all of this on the business world? Political credibility and stability are among the highest rated parameters for foreign direct investment: in the EY Attractiveness Survey it ranked second for 85 per cent of those surveyed, right behind stability of social climate (90 per cent), and even above the 75 per cent who cited corporate taxation.

How can it help a government trying to portray itself as worthy of the votes it was entrusted with by those disgruntled with its predecessor to have a minister who sets up the sort of financial invisibility cloak used by unsavoury characters with skeletons to hide – even if he himself claims to have a clear closet?

Is there more to come? If there were, the scandal would slip out of the hands of the spin-doctors foolhardily trying to pretend this will all go away.

But let us assume that there is nothing more to emerge… Then the timing of the revelations is interesting: the story was broken before ministers made their annual declaration of assets. As it is, Minister Konrad Mizzi is able to claim that he fully intended to declare his interest the trust etc. and we can only speculate about whether this really would have been the case.

Had the story waited, and his assets been those already declared, he would have been hoist by his own petard. Why not wait? This may imply that the motivation for the leak was not political but commercial revenge. Which would raise yet more questions…

What about the Nexia BT implications? The firm should have done enhanced due diligence, given that Dr Mizzi is a politically-exposed person, including questions about the reasons for the set up and the

provenance of any money – given that these structures (in Panama or elsewhere) are usually only justified for large amounts of money Dr Mizzi has repeatedly claimed – at this stage only €92 is linked to the setup – was earned.

His CV on the ministry website gives little insight into how he made enough money in the UK to pay outright for a property there in a relatively short time. But if the job was so lucrative, it seems strange that he gave it up to come to work for Enemalta as its chief information officer for a relatively paltry salary.

Of course, Nexia BT may have done everything as it should have.

However, if the enhanced due diligence was not done and a suspicious transaction report was not made, given the circumstances, Nexia BT must incur the full wrath of the Accountancy Board, the Financial Intelligence Analysis Unit and the Tax Compliance Unit.

And where did the leak come from? Unless the information was obtained through hacking – an eyebrow-raising possibility – only a handful of people in Nexita BT should have had access to it.

What are the implications of having a mid-tier firm which has a key person hobnobbing at Castille, which gets involved in the setting up of structures that are “poor judgment”, and which has cracks in its confidentiality?

Will Nexia International be regretting its 10-year alliance with Nexia BT and wondering about Brian Tonna’s judgement, just as economist Gordon Cordina did, preferring to put himself at arms’ length from the possible fall-out?

Malta is facing one of the greatest threats to its economy from Base Erosion and Profit Shifting, which would wipe out our imputed tax system. This is the worst time for political and commercial crises.The government needs to take decisive action before more harm is done.

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BUSINESS OPINION

Public safety should come first

Adrian Galea In January, Occupational Health and Safety Authority CEO Mark Gauci drafted a report on permits issued for public events, suggesting a new health and safety body coupled with insurance policies in certain cases.

SAFETY OFFICERS ON THE INCIDENT SCENE AT THE PAQPAQLI CAR SHOW IN DECEMBER. PHOTO: STEVE ZAMMIT LUPI

The Malta Insurance Association strongly supports the government’s aim in strengthening public health and safety during public events. The association agrees that there are many legislative weaknesses and inconsistencies in the regulation of public safety. Insurers also welcome the fact that this Preliminary Report recognises the need for improving standards and the need for requiring insurance coverage for such events.

To date, public events remain very limitedly regulated and event organisers have little to go by when it comes to ensuring the safety and security and efficient risk management of public events.

Establishing higher standards is, however, no panacea for the

“ere should be no artificial presumption that a public event organiser is at fault – unless it is shown that he has failed to comply with the new standards” avoidance of accidents. Better regulation must come hand in hand with a real and effective implementation of such standards.

It should be kept in mind that the availability and affordability of any liability insurance will very much depend on the effectiveness of such risk prevention measures. Terms for such insurance cover will very much reflect the risk-mitigating impact of any

newly implemented prevention measure. Insurers will align insurance terms and premia to the average severity and average frequency of similar risks. Such alignment would take account of claims history, industry data and any other relevant information. A policy of insurance would also contain terms and conditions, that are specific to each insured risk, and which reduce moral

hazard – that is to say the tendency of a policyholder to apply a lower level of caution once the risk is transferred to the insurer.

Such underwriting terms and conditions would enable insurers to design products that match the risk level of their customers.

This implies that there will not be any one uniform insurance solution for similar public events, and that any insurance cover will

include excesses and limits of liability which are appropriate to the specific risk profile and the undertakings and warranties provided by the policyholder.

Consequently any insurance requirement should respect riskbased terms and pricing, as these would encourage risk-reducing behaviour by inducing policyholders to take on prevention measures in exchange for negotiation on the terms and conditions of the insurance policy.

The association agrees with the report that the Occupational Health and Safety Authority Act applies solely in connection with employment. Although there are relationships between occupational safety and public event safety, yet insurers would disagree with a presumed fault regime or the inversion of the onus of proof.

Any new regulatory regime should represent a first basic step in improving current standards: there should be no artificial presumption that a public event organiser is at fault – unless it is shown that he has failed to comply with the new standards.

While drawing the attention of the authorities to the above basic principles, the association supports this initial scoping exercise and looks forward to engaging with more specific comments once the government’s detailed recommendations are made known.

Adrian Galea is the director general of the Malta Insurance Association.

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e Business OBSERVER

| March 10, 2016

INTERNATIONAL NEWS

Big US banks to take on tech rivals with instant payments David Henry Depositors at some of the largest US banks are finally going to get the chance to do something quick and simple: send money to another person’s account instantaneously by mobile phone.

The idea has been in the works for at least five years, and in the meantime, Silicon Valley has made incursions into the industry’s role as a payment intermediary. But now, big banks including JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co and US Bancorp are starting to

plug into a system they jointly own, called clearXchange, that will allow each others’ customers to transfer money in a flash when they split a dinner check, rent payment or vacation bill.

“What we are doing now is delivering payments in real time, which is what our customers have

asked for,” Mary Harman, managing director for payments at Bank of America, said in an interview. The bank is one of two that have started rolling out the system to customers.

While technology companies like PayPal Holdings and Facebook Inc already offer snazzy payment apps that appeal to young consumers, the banking industry has a crucial advantage because it controls how quickly money actually moves between bank accounts. Individuals transferred some $200 billion to one another using mobile phones and computers last year, according to Javelin Strategy & Research.

Bank executives and analysts who closely track payment systems say that if clearXchange is fast, functional and user-friendly, banks can make up for lost ground.

Bank of America plans to announce that its customers can transfer funds instantly through clearXchange with customers of US Bancorp, which said last week that it was plugged into the speediest part of the network. JPMorgan Chase & Co and Capital One Financial Corp representatives told Reuters they plan to offer the service later this year.

Analysts expect Wells Fargo & Co and PNC Financial Services Group Inc to do the same. Their representatives declined to comment.

Those six banks are among the seven largest by deposits in the United States. Regional bank BB&T Corp is also one of the seven owners of the network, but is not ready to announce its plans, a spokesman said.

Citigroup, which has the fourth most US deposits, has not joined clearXchange. A spokeswoman declined to say why. Citigroup uses an older network called Popmoney, which is owned by Fiserv Inc, for personto-person payments.

Today, if a customer wants to transfer cash to another person digitally – whether on an app like Paypal’s Venmo, or through an individual bank’s payment transfer system, like Chase’s QuickPay – it usually takes one to three days for money to move to an account at another institution. On clearXchange, the cash can move instantaneously with the tap of a finger.

The initiative is particularly important for banks as their customer base shifts from a generation that cashed paper checks and got mortgages by walking into a branch, to one that goes online first to transact and borrow. It’s important for banks to cater to 18-to-34-yearold Americans in the so-called Millennial generation as they enter their prime years for borrowing and saving.

But adapting to these behavioural changes was a low priority for US banks after the financial crisis, as they grappled with losses, fines, new regulations and slow revenue growth. In short order, financial technology startups filled the void – not just in payments, but in areas ranging from student loans to financial planning. If banks don’t catch up quickly, they may end up losing some young customers altogether, analysts said.

“There is a short window of opportunity for the banks,” said Michael Moeser, director of payments for Javelin.

For clearXchange to be successful, it needs to reach a critical mass of participants so that depositors will be able to transfer funds among most of their friends, relatives and colleagues. Until more banks connect to provide immediate service, the network has little value.

Any US bank or credit union can participate in clearXchange, and its owners hope many more will. The

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INTERNATIONAL NEWS

network says its members represent two-thirds of US deposits.

Banks in other parts of the world are making similar moves.

In the UK, for instance, there is an app called Paym that allows individuals to transfer up to £250 ($355) to another user’s bank account. Nordic countries are leading the way toward a cashless society, with mobile payment apps Swish in Sweden and MobilePay in Denmark.

Analysts expect the mobile banking market to keep growing as consumers become more aware of apps, and as the technology improves.

Venmo, which launched in 2012, handled $7.5 billion of person-to-person payments last year.

In January, the company moved $1 billion between individuals – up tenfold in two years, said Bill Ready, PayPal’s global head of product and engineering, who brought Venmo to PayPal as part of a 2013 deal.

Those figures track well below the $22 billion of cash swapped

“While these apps send immediate alerts that money is on the way, they still rely on banks to make sure cash is available and move it.”

digitally by Bank of America customers last year, or the $20 billion Chase QuickPay handled. But Venmo is growing rapidly, and its popularity has come almost entirely by word of mouth, as friends ask friends to sign up, said Ready.

Facebook’s Messenger app offers a similar service.

While these apps send immediate alerts that money is on the way, they still rely on banks to make sure cash is available and move it. And, unlike banks, they have no control over the speed at which that occurs.

“As a Bank of America customer, when I hit send, a couple of seconds later the US Bank customer will see the money in their account,” said Bank of America’s Harman.

Even so, Ready, the senior PayPal executive, said he is sceptical clearXchange will be a success.

“The banks have a hard time working with one another,” he said, adding that it would be difficult for them to “recreate the viral nature of Venmo”.

Facebook representatives declined to comment on the banks’ plan, but said the company is continuing to improve Messenger’s payment functions.

The banking industry’s advantage could be short-lived, though.

The network that Venmo and others often use to transfer funds will begin phasing in daily settlement in September. That network, called the Automated Clearing House Network, is a not-for-profit association whose members are financial firms.

“If Venmo becomes real-time,” said Javelin’s Moeser, “then the banks have no differentiator anymore.”

Banks that are part of clearXchange realise they must overcome the buzz and momentum that existing apps have gathered.

They are working to come up with a catchier name than clearXchange, and hope to launch a marketing campaign around the middle of this year, said Harman.

“The important thing,” she said, “is that we are acting now.”

(Reuters)

Chinese hunt for property from Dubai to Manchester Clare Jim As Chinese property investors heat up prices in many of the world’s biggest cities, China buyers are now searching beyond traditional hot spots for bargains and higher returns, ranging from land in Dubai to student housing in Manchester.

The investors range from wealthy individuals and private equity funds buying residential units to companies and funds setting up local joint ventures to invest in property projects.

“People invest in emerging markets for higher yields, lower entry prices, and higher capital appreciation,” said SPV Global director Clara Yeung.

“Some invest for vacation purposes ... good prospects for an economy or political situations, for example, the World Expo 2020 in Dubai or the change of governor in Myanmar are some other reasons to invest in these emerging markets.”

Chinese were the seventh biggest property investors in Dubai last year, pumping in $463 million in the first nine months of 2015 compared with $354 million in all of 2013, according to Sajid Ali, director of Sumansa Exhibitions who organised a Dubai property show in Hong Kong in January.

Chinese institutional real estate investment in New York and Sydney was close to $6 billion and $4 billion, respectively, last year, up from $1.2 billion and $3.5 billion a year ago.

“One can buy seven studio apartments in Dubai for the average price of a studio apartment in Hong Kong’s (Central) area,” Ali said, adding returns on investment in Dubai are as much as 7.2 per cent, compared with 2.8 per cent in Hong Kong.

BUILDINGS UNDER CONSTRUCTION FOR THE AL HABTOOR GROUP IN DUBAI. PHOTO: ASHRAF MOHAMMAD/REUTERS

One would-be buyer who gave only his surname Chen, said he is considering apartments in either Dubai or Bangkok.

“It’s impossible to buy in Shenzhen now, prices are too high,” said Chen. Home prices in the southern Chinese city in January were up 52 per cent from a year earlier.

Dubai developer Nakheel said Chinese bought 70 per cent of its almost 600 townhouses sold at Warsan Villa, a development close

“One can buy seven studio apartments in Dubai for the average price of a studio apartment in Hong Kong”

to its Dragoncity shopping mall.

Nakheel also sells land, which is for freehold in Dubai.

“Many Chinese bought land from us; they want to develop and they want it for rental because it’s around a 10 per cent yield for the development,” said chairman Ali Rashid Ahmed Lootah.

Student housing, already a hot target for private equity, is also increasingly attracting Chinese investors, some of whom buy such properties without even visiting them first.

“It’s different if you’re buying a £3 million mansion in London and you want to see it. They’re buying primarily for investment, as long as the figures are right they’d be buying anything,” said Julie Harvey, director of property investment company Pinnacle Alliance based in London.

Student housing is close to campuses which are not usually in central areas. In Manchester, their rental yield rate is around eight per cent and their capital growth was around 10 per cent last year, according to Harvey. (Reuters)

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BUSINESS OPINION

Increased deal activity for Maltese banks

David Pace What is driving the deal flow?

Radical changes in the economic and regulatory environment are leading to a rethinking of banks’ business models.

Wafer-thin margins and higher compliance costs motivate consolidation within the sector. At the same time, a number of established European banking groups came under fire as they sought state assistance to allay financial troubles. Against this backdrop we continue to witness the shedding of non-core assets and a wave of geographic retrenchment, also impacting certain local subsidiaries of international banking groups.

The reputation of the Maltese jurisdiction, coupled with the regulator’s firm yet approachable disposition, continues to sustain interest in new local banking operations with a preference, at times, for the acquisition of an ongoing operation as a mode of entry.

Reasons underpinning the latter’s preference includes knowledgeable financial services personnel and their trusted relationships with key stakeholders in the industry, operational processes and procedures already in place that are compliant with local requirements, together with specific financial assets that may be of value to the acquiring entities.

Meanwhile, developments in technology and the digital era continue to drive niche banking offerings. Promoters of such banking models are keen to meet the required robust standards while keeping operating structures lean and cost effective – and Malta fits the bill in this regard.

The Maltese jurisdiction is also seen in a favourable light by large industrial/trading groups interested in a banking division to service the needs of group members, as well as customers and suppliers.

Pricing of banking deals The limited number of local transactions does not allow for meaningful transaction

Banking M&A deal activity (2008 to date) 2

“e seller [must be allowed] to groom the bank in a way that increases its appeal to the buyer audience” insights, as prices reflect transaction specificities. However, on a more general level, prices are reflective of global price-to-book (PB) multiples that are still below pre-crisis levels and currently averaging at a marginal premium above book. Also, mirroring developments at a European level are belowbook pricing scenarios arising as vendors are tasked to exit investments in non-core banking units with limited time frames and resources to groom for sale.

The future?

At a European level, M&A activity in the banking space is predicted to continue in bear mode as the major banks continue to restructure and digest new regulation. The ECB’s AQR is expected to give rise to an additional round of non-core and regulatorydriven sales. This could impact local

2

1

1

1

0 2008

2009

Series 1

2010

1

1

2015

2016 (Q1)

*

0 2011

2012

2013

2014

KPMG ANALYSIS AS AT MARCH 2016, BASED ON MERGERMARKET, CAPITALIQ, TIMES OF MALTA, AND INTERNAL DATA. *NO. OF TRANSACTION (COMPLETED OR ANNOUNCED)

banking M&A by presenting target opportunities. On the buy side, the increasing appeal of consolidation of second tier domestic (core) players could also spur interest in transactions.

Sharing insights from our experience in banking M&A transactions From a sell-side perspective, it is critical to dedicate sufficient resources and time to prepare the asset for the market. This will typically entail juxtaposing the key areas of value of the bank with knowledge of what is eing sought in the buyers’ market, allowing the seller to groom the bank in a way that increases its appeal to the buyer audience.

This process will typically be supported by the preparation of high-level key information at an early stage in the process, coupled with the implementation of actions to opti-

mise the bank’s target structure, such as asset carve-outs or reduction of capital.

Looking at a transaction from a buy-side point of view, a key factor is the extent to which the acquirer can be specific on its strategic rationale for the acquisition, reflecting it in a clear and robust view of the target’s synergistic potential. Validating the deal rationale through a focused due diligence is also an important element of a successful acquisition. Finally, all this needs to be mirrored in the business plan to be presented to the regulator when seeking its approval for the transfer of ownership.

Keeping an open and proactive communication line with the regulator is highly recommended as a key contributor to a smoother and timelier transaction execution, whether buying or selling a bank.

David Pace is the KPMG partner for advisory services.

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INTERVIEW

Fortune favours the brave

Medserv chairman ANTHONY DIACONO was recently in Sharjah to complete the $45 million acquisition of Middle East Tubular Services, which has pipe handling and servicing bases in Sharjah, Oman and Iraq. Vanessa Macdonald asked how this step, which doubled the size of Medserv, ties in with the group’s strategy in Malta.

What was the intention behind the acquisition: new geographical areas or new services?

It is mixture of both obviously.

The company always wanted to diversify its geographical footprint but more important, I think, is the synergy between the two companies and the added-value it can give both ways.

meet this new reality. Everyone is downsizing and it is a very nervous market out there. But we see this as an opportunity not a threat.

METS is the first step. The Middle East is a target achieved and our strategy team is already thinking of other areas and other businesses so that we can offer our clients better value going forward.

$45 million is a huge amount.

How long will it take you to recover your investment?

The figure in my head is 4.2 years, but we sincerely hope that we can improve on that.

You are looking at Trinidad and Tobago, East Africa and the Middle East. Isn’t there the danger that you are spreading yourselves too thinly on the ground too quickly?

It is not exactly a quick process.

We have been working on the Middle East now nearly two years.

When we say we are looking at other areas it does not mean we will announce something tomorrow.

This business has long lead times, and so do we. We are accelerating our development because there is opportunity now. What

You raised $45 million at a time when oil prices are low and Iraq is still high risk. What made you take this huge leap?

We take a very long-term view of the industry. Our view is still that this is the industry to be in. Yes, oil prices are restructuring and yes, the industry is restructuring to

everyone is referring to as a downturn can also be looked at from the other side: is the glass half empty or half full?

I think it is half full and the opportunity to make certain moves is now. You lose the opportunity if you wait until it is comfortable.

So fortune favours the brave – or the foolhardy?

(Laughs) I am obviously optimistic. We look at everything extremely seriously and the board is very good at this now. We have a solid board back in Malta. We know where we are going to be in five to 10 years’ time.

One of the surprises is that the events in Libya were not a disaster for you but rather were turned into a positive…

You will find that in every situation in life, when there is a very Continued on page 22

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e Business OBSERVER

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INTERVIEW

‘We are saturated, which is the price of success’ Continued from page 21

given the nature of your operations and the fact that you’re thinking long term, why didn’t the group express any interest in Marsa Shipbuilding?

We went there and we examined the site and did our assessments. But we thought that the investment we made where we are today could not be bettered anywhere else in Malta.

So we decided not to bid.

difficult event, it creates a lot of opportunities – but you have to react to them. We try to put ourselves in our clients’ shoes to identify what they are going to need, either to suffer the least damage or to continue operating in the new scenario.

So we analyse the situation and make sure that we are always adding more value for the client in the real circumstances of that time.

The situation in Libya is unfortunate – many of our friends are stuck there waiting for things to settle down. Companies had invested billions there and needed to continue and we offered a way to do so without losing their investment.

Our order book in Malta is full for three to five years.

What did you do with your base in Misurata? You had a 30-year lease there…

We took a decision. We needed to pull out and did so in agreement with the Misurata authority. We shut down our base and brought our equipment out, also in agreement with the authorities there.

We did, however, keep our office in Tripoli which is still functioning and servicing companies, as they still need to have a base to operate from out of Libya.

We will be the first back in Libya when things settle down. We don’t know whether it will be in Misurata, Tripoli or elsewhere. In my opinion, the Libya of the future will be different to the Libya of the past. So we will have to rethink where we need to be. As usual, we need to follow our clients to give them the best possible solution and there is more than one in the new Libya.

Your facilities in Malta are saturated, both in terms of office space for your clients and in terms of storage space. Have you got room to grow in Malta?

That is very true. We are saturated, which is the price of success.

If you do require more hinterland or quay space, is there the possibility that you will collaborate with the winning concessionaire, Ablecare?

I never say no to anything. If it makes business sense, we will consider it. My mission is to increase value to our shareholders.

My mission is to make sure that we keep the strong dividend policy we have in place. And that way all the stakeholders will benefit from it. If it makes good business sense there is no reason we would not consider any solution.

“We will be back in Libya when things settle down.

We don’t know whether it will be in Misurata, Tripoli or elsewhere” But I’m finding a lot of support from the authorities in Malta. They react very fast when we need space.

While we were in the Middle East, I got a call asking for storage

for tons and tons of pipe in Malta.

Again, just a call to the authorities resulted in help so that we can accommodate the request. So far, we still have areas we can use.

There has also been a lot of investment in our warehousing, to rationalise the way we use space.

We are now going higher and higher, obviously in line with the relevant standards to make sure that we do not put anyone at risk.

I am not really seeing an issue in terms of meeting our clients’ demands. There is still space in Malta that can be used more efficiently which will allow us to take on new business.

One of the limiting factors is the quay. The Freeport has just had its quay extension request turned down by Mepa. Is that a problem?

Yes, it is a limiting factor but in my opinion there are still some quays that can be regenerated

with some investment to create more deep water quay space.

It is very important that the few quays we have in Malta are used extremely efficiently. We should not make mistakes and give quays to white elephant projects.

The group had situations in 2015 where our clients needed quay space. We did not waste any time trying to do that out of Malta, but used Greece and Cyprus. The world has become small and we find good quay space elsewhere which meets our clients’ demands.

The clients know what Medserv offers and when we recommend a location – which is not necessarily in Malta – they know we are offering the best solution.

Now, with the METS acquisition, we can also start considering the Middle East as part of our solution.

You extended your lease at the Freeport a few years ago. However,

Anthony Duncan is now getting on and let’s say you are on the way to getting on. What about succession?

We – and the board – are very conscious of that. We are referred to as the ‘white-haired brigade’ in the company. We are supported by young professionals coming up who do all the work and they are also now being involved in the company’s strategic processes.

So yes, succession planning is in place. We know the way forward.

There are different options but the bottom line is always the same: this company has its own identity.

It is not tied to either myself or Anthony Duncan.

There is a team and I intend to make myself totally redundant.

Although I am still involved at strategic level I can assure you that the company can continue post-Anthonys!

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e Business OBSERVER

| March 10, 2016

STOCK MARKET REVIEW

MIA reduces dividend ahead of investment programme

Edward Rizzo The 2015 financial statements published by Malta International Airport plc on February 24, 2016, should not have contained any

surprises for market participants and investors who follow the regular company announcements issued by the airport operator.

MIA publishes its traffic results on a monthly basis and given the fact that aviation income accounts for 70 per cent of overall revenue, the movements in passenger volumes are a very reliable indicator for MIA’s financial performance.

Moreover, on November 17, 2015, MIA had also disclosed to the market that during the 2015 financial year, it would be registering a one-off gain of €1.86 million on the sale of its equity stake in Valletta Cruise Port plc.

In fact, pre-tax profits of MIA during 2015 increased by 14.3 per cent to €29.8 million and excluding the one-time gain on sale of the shareholding in the

cruise line operator, the growth in pre-tax profits of 7.1 per cent is very much in line with the increase in passenger movements of 7.7 per cent.

“However, the major item of interest to the market was the final dividend recommendation”

However, the major item of interest to the market was the final dividend recommendation. This time last year, the final dividend had surged by 77.8 per cent with the overall dividend payout ratio for 2014 rising once again to 88.5 per cent following the gradual downward trend in the dividend payout from 91.4 per cent in 2008 to 70 per cent in 2013.

The recommendation made by the board of directors of MIA on February 24 to reduce the final dividend payment by 12.5 per cent to a gross dividend of €0.1077 per share (€0.07 net of tax) clearly disappointed the market. As trading resumed on the Malta Stock

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STOCK MARKET REVIEW

Exchange on February 25, the share price of MIA dropped by 8.9 per cent to an intraday low of €4.30 before partially recovering to the €4.50 level, representing a decline of 4.7 per cent over the previous day’s close of €4.72 when the equity had also traded up to a fresh intraday record level of €4.76.

Since the interim dividend distributed in September 2015 was unchanged at a gross dividend of €0.0462 per share (€0.03 net of tax), the overall dividend with respect to the 2015 financial year of €0.1539 per share (net: €0.10) is 9.1 per cent lower compared to the record dividend distribution of €0.1693 (net: €0.11) paid out in respect of the 2014 financial year.

During last week’s briefing with the financial community, MIA’s chief financial officer Karl Dandler defended the company’s decision and clearly indicated that the dividend policy was based on the long-term strategy of MIA and the ambitious investment programme announced a few months ago.

The CFO indicated that while in early 2015 there was no concrete plan for the expansion strategy, the situation is different now and MIA have a very clear idea of the overall development of the airport including the investment related to the non-aviation sector which was announced in the media on December 21, 2015.

Mr Dandler also argued that other European airports did not have such aggressive dividend payout ratios.

MIA’s CFO announced that the company’s intention was to finance the capital expenditure required for the terminal expansion from the company’s internal cash flow while external financing would be considering future projects such as SkyParks 2 and the business hotel.

CEO Alan Borg gave financial analysts a more detailed overview of the expansion plans in the years ahead. Phase 1 of the €8 million investment programme, which will start in the fourth quarter of 2016, is expected to be completed in just under two years.

The terminal expansion as part of Phase 1 will entail the reorganisation of the check-in hall (increasing the desks from 28 to 34), the relocation of the security area increasing the number of security lanes from

four to six and the relocation of the La Valette Lounge, which will make way for the security area. The new passenger lounge will be on level 3 replacing the bistro overlooking the runway.

These changes to the terminal will also lead increase the size of the duty free walk-through shop from circa 850 sqm to 1,500 sqm.

The timing of Phase 2 of the terminal extension has not been determined as yet, although the CEO indicated that this can take place at the end of 2018 immediately after the completion of Phase 1.

The €20 million major extension will include an extension to the check-in hall and departures area (the number of desks will increase by a further 15 to a total of 49) as well as an additional three gates to 21.

The expansion of the terminal as part of the second phase will also include new space for food

and beverage outlets. Moreover, with respect to the non-aviation sector, the more significant investment would include a €40 million development on a footprint of 4,000 sqm.

This will comprise a business hotel and another commercial development following the success of the Sky Parks Business Centre.

MIA’s CEO also indicated that this project, which still requires approval from the Malta Environmental and Planning Authority, will include the construction of an additional floor of parking on top of the existing car park.

MIA’s executive management did not indicate when this project may commence but Mr Dandler remarked that when the time comes, the company would assess whether to finance this project via bank loans or via the bond market. While this ambitious investment programme is exciting news for shareholders, the more

immediate focus for investors will be on the number of passengers passing through the terminal given the direct impact on the company’s financial performance.

The airport operator, together with other industry stakeholders (the Malta Tourism Authority and the Tourism Ministry) have been successful in attracting additional airlines to Malta and in getting existing airlines to increase the number of routes over recent years.

In fact, since 2005, the only two years when passenger growth decreased were 2006 and 2009.

Meanwhile, since 2010, total passenger movements have grown at an average increase of six per cent per annum from 3.3 million in 2010 to 4.6 million in 2015.

More importantly, while a number of new airlines will be flying to Malta in 2016, the major impact this year is expected to come from

“e more immediate focus for investors will be on the number of passengers passing through the terminal given the direct impact on the company’s financial performance”

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results.

Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report. © 2016 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved

Ryanair with an additional 10 routes starting from May 2016.

On the other hand, however, the market will be attentive to developments surrounding the fate of Air Malta and how this will affect seat capacity of the airport’s largest client, especially in the short to medium term.

The news regarding Air Malta will not only play a determining role in MIA’s financial performance going forward but naturally also on the resultant dividend to shareholders.

Given the current interest rate environment which is expected to remain subdued for a prolonged period of time, the dividend of MIA and other companies becomes a more important consideration for all investors.

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

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PKF, Finance Malta to promote Malta to captive owners in New York conference PKF is supporting Finance Malta in its quest to promote Malta as a financial services centre during a conference in New York on March 29.

The conference will focus on what the island can offer to American current or prospective captive owners or insurance companies which are seeking to tap into their European risks. It will showcase the benefits of setting up in Malta as the domicile of choice, which despite tough competition fielded by established jurisdictions, is successfully attracting international companies seeking an alternative EU jurisdiction.

As an EU member state and EIOPA member, Malta has contributed to the development of Solvency II and its expertise has grown thanks to the open dialogue with the local one-stop-shop authority, the Malta Financial Services Authority. It also enjoys the enviable position as the only full EU member to provide Protected Cell Companies, which do not incur the additional financial costs associated with both establishing and running of an insurance vehicle.

The island is fully equipped to cater for PCC structures, since we were the forerunners in legislating these structures in

THE ENTRANCE TO THE BAR ASSOCIATION BUILDING IN NEW YORK, WHERE THE CONFERENCE WILL BE HELD.

the Solvency II arena in Europe and are set to continue introducing innovative products in the near future.

The PCC concept has also been taken further to include insurance intermediaries and now Securitisation Cell Companies (SCC). The main advantage for a cell within a PCC for small-to-medium-

sized companies is the rule for a lower capital requirement, in comparison to the capital required to set up a standalone captive or insurance company.

Each cell is obliged to have capital relative solely to its risks, while the minimum capital requirements will apply to the PCC as a whole.

PKF Malta has an insurance team providing specialised services to the insurance industry. It works closely with specialised service providers within the local industry to cater for your needs.

As an integrated member firm of PKF Group, it also works closely with international offices to deliver specialised technical solutions to the local insurance industry.

Last month, PKF staff attended the Insurance and Risk Linked Securities (ILS) conference organised by Securities Industry and Financial Markets Association in New York in order to discuss further the emerging trend wherein the ILS markets are expanding their products to cater for a more diverse range of cedents, which is still in its early stages. It appears that opportunities for growth in the US market are open for Malta to secure its share.

The conference will be held at the prestigious Bar Association building at 42 West, 44th Street in New York. One may register for free today by visiting www.eiseverywhere. com/ehome/index.php?eventid=162215. For sponsorship opportunities or to attend this event, contact Anna Golis, research and development manager on AGolis@pkfmalta. com or by calling 2148 4373.

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Technoline achieves ISO 9001:2008 certification Technoline is pleased to announce that it achieved ISO 9001-2008 certification in December 2015, following a thorough audit of the company’s Quality Management System involving most team members, the company’s sales, installations, advisory services and technical aftersales services.

Technoline customers may now feel assured that all processes are managed using an internationally-recognised standard that assures quality and promotes continuous improvement “ISO certification highlights the thoroughness with which we harness quality within our company’’, explained Simon Cusens, Technoline’s CEO. “This is a testament of our commitment to quality also instilled in our internal processes and culture at all levels of our operations. This certification is by no means a forgone conclusion, but represents a dynamic process of continuous improvement.”

Established in 1978, Technoline is one of the leading life sciences equipment providers in Malta, employing a specialised team which has the necessary technical, IT, medical, and scientific qualifications

and experience. While the range of brands that Technoline represents allows it to meet customers’ needs and expectations, it is the quality of service that permits the company to differentiate its offerings in a competitive market, backed by the services of a full technical aftersales support and maintenance staff complement.

Betting Connections team continues to grow Betting Connections has strengthened its forces, with seven new hires so far in 2016 and plans to expand further in the coming months.

With a team of 32 members now in place, the connectors pride themselves on a personal approach to their structured and quality-driven recruitment solutions.

“Our team is the KAY VELLA, HEAD OF strongest it has ever RECRUITMENT AT been!” says Kay Vella, BETTING CONNECTIONS. head of recruitment.

“With 12 nationalities in all, there are more than 15 languages spoken by the team. Our members come with a range of experience and knowledge both from recruitment and iGaming. We are excited to continue our successful growth into 2016.”

“We have always believed that the development of our team is paramount in order to grow in tandem with the industry,” said Duarte Amado, managing director and co-founder. “This is set to be our biggest year yet!”

Renovations have almost been completed at Betting Connections’ offices in Sliema. The space boasts a welcoming and friendly environment that can accommodate further team growth in 2016.

To find out more about Betting Connections’ recruitment solutions, call 2720 4520 or email info@bettingconnections.com

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Malta Stock Exchange’s significant development over the last 25 years Cliff Pace Following the enactment of the Malta Stock Exchange Act in 1990, the Malta Stock Exchange commenced its trading operations on January 8, 1992. Today it is a fully-fledged regulated market which successfully fulfils its role as an effective venue to raise capital finance, with 25 years’ experience and active involvement in the development of the Maltese capital market.

The Exchange provides a structure for admission of financial instruments to its recognised lists, which may then be traded on the regulated, transparent and orderly secondary marketplace. The main participants in the market are issuers, stock exchange members, and investors. Apart from admission and trading, the Exchange also offers a comprehensive range of back–office services, including maintenance of share and bond registers, clearing and settlement, and custody services through its inhouse Central Securities Depository (CSD). It also has a link with Clearstream Banking in Frankfurt, Germany and in Luxembourg, facilitating international access to the Depository.

When the Exchange started trading, there were just 32 government stocks admitted to listing, with a nominal value of €290.24 million.

Turnover during the first year of operations of the Exchange reached €27.25 million, and the number of investors registered back then was just 8,313.

Compare that to the end of December 2015: trading last year was just below the €1 billion mark, the market capitalisation value was €11.6 billion, and the number of investors now stands at more than 74,0000. These figures clearly show that the Exchange has transformed and developed significantly over the last 25 years.

In fact, the last 25 years have proved to be a very successful growth phase that has seen the listing of over 40 companies, and the issuance of over €15 billion in equity, corporate and government bonds and treasury bills.

This certificate of success must be equated to the fact that this activity took place on a developing island economy with a GDP of €6.8 billion and a population of just over 400,000, the source of much of the investment.

There is a clear appetite for new opportunities for investment among a very ‘retail’ investor base ensuring that subsequent issues are likely to be consistently successful. This level of confidence in the market by investors combined with the increasingly entrepreneurial private sector has created an environment that allows the capital market to co-exist with the traditional banking sector.

This ensures a supply of new

listings and related investment opportunities coming to market under the Main Listing structure regulated by the MFSA, or Prospects, a new product for SMEs looking for access to the capital market for financing or succession planning requirements.

The performance of the MSE has been very positive. The Malta Stock Exchange Index closed 2015 at 33 per cent over the previous year, one of the world’s best performing indices. The MSE’s index performance is a testimony to the Maltese economy, being one of Europe’s best performers. Consumer confidence is also quite strong, which along with other positive economic fundamentals should augur well for the Maltese equity market.

“e Exchange looks forward to the next 25 years with confidence, energy, and strategies that will ensure continued growth” During 2016, and beyond, the Exchange will continue to focus on the domestic market, but will also seek to attract international business from China, Turkey, Italy, Spain, Eastern Europe and the Middle East to take advantage of Malta’s cost effective listing solutions. The newly-launched Prospects, focusing on SME needs, is also generating a lot of interest from the business community in Malta and overseas.

Another strategic move by the Exchange was the introduction of the MSE Sharia Compliant Index, which helps to place the Exchange in a position to explore opportunities within Islamic Finance.

It’s been an active and successful 25 years. The Exchange looks forward to the next 25 years with confidence, energy, and strategies that will ensure continued growth, confidence, and stability in an environment where the capital market will play an ever-increasing and critical role in ensuring economic growth.

The Malta Stock Exchange’s 25th Anniversary events are being supported by BOV, Rizzo Farrugia, Curmi and Partners, Calamatta Cuschieri, FinanceMalta, Farsons, Mapfre and Izola Bank.

Cliff Pace is product and business development manager, Malta Stock Exchange.