The Business Observer Newspaper 18th June by Content House

INTERVIEW

Issue 28

June 18, 2015

Distributed with Times of Malta

Urgent changes needed to Companies Act Vanessa Macdonald A number of changes are needed to make the Companies Act more effective at protecting stakeholders – particularly creditors – when things go wrong in a company, the Malta Association of Credit Management believes. The Malta Association of Credit Management (MACM) has long been highlighting the shortcomings that have emerged over the past 20 years since the Act was introduced, particularly those relating to the penalties and administrative sanctions applicable. It therefore commissioned a comparative overview of the local law with relevant UK legislation. The MACM’s preliminary analysis of the overview identified both definitions that needed to be tightened up as well as changes to the remedies. The weaknesses emerge at every stage of a company’s operation, from the requirement to submit documentation to the Company registrar, to what happens when a company fails. Company registrar Joe Caruana recently told The Business

Observer that a new system is being put into place which will proactively remind companies when their documentation like annual accounts is due. In parallel, his team is going through the list of companies which fail to file, in an effort to identify which are active and which are not. One option would be for the registrar to have more powers to set the wheels in motion to declare a company defunct if it is not filing accounts – even if it is actually still operating – as happens in the UK, for example. Over the years, the courts have handed down judgments which clarified the difference between wrongful trading and fraudulent behaviour, but this is not the ideal way to tighten up definitions. When the decision to wind up a company is being taken by its directors, more clarity is also required on what constitutes an “intent to defraud creditors” and hence the associated liabilities. “The fraudulent director may be held legally responsible not only for contractual obligations assumed by the company, but also for any other types of obligation, including any statutory claims

made against the company (such as claims under planning legislation or tax legislation, among others, and liability in tort),” the report said, adding that this also covers debts and liabilities incurred prior to the fraud. However, while the article is “rather wide in scope”, the report’s authors felt that the need to prove “intent” has “definitely both weakened and also created great complications in the potential applicability”. “The ‘intent test’ will certainly be complete when directors tolerate a company to incur credit when it is understood that the creditors can never be paid…,” it wrote. The concept of wrongful trading is also in need of a rethink. “Various authors have attempted to list certain measures that should be taken in order to minimise exposure to liability for wrongful trading since the law, under article 316, does not give any form of direction as to what precautions are to be taken by a director in order to avoid this liability,” it said. When compared to the fraudulent trading provisions under Maltese law, the provisions relating to

ere are a number of issues which make it hard for sellers of new cars to compete on a level playing ﬁeld with sellers of used cars. ACIM president Maurice Mizzi believes there are numerous reasons why something should be done about it. see pages 12 and 13 >

NEWS IRISL was one of the Freeport’s major clients and the possible lifting of sanctions would pave the way for contact to be renewed. see page 5 >

wrongful trading are easily undermined, they felt. “This is because there isn’t the requirement to ascertain the element of fraud or dishonesty; in fact, what is required is simply unreasonable behaviour or negligence,” the report said. The problem is that this could be counterproductive and discourage business, it warned: “Indeed, there does appear to be a tendency towards judicial restraint in the imposition of liability for wrongful trading, a fear which stems from the fact that the imposition of such liability (other than in the most obvious of cases) might impede reasonable business decisions and cripple entrepreneurial activity.” The director general of the MACM, Josef Busuttil, is lobbying for the law to be fine-tuned as part of a campaign to improve decision-making when it comes to extending credit. “Things have improved. When the association started 15 years ago, only a handful of our members had a credit application form. Now it is standard practice. We believe that credit is the lifeblood of business – but those who extend credit need to feel secure about being paid,” he said.

NEWS e government has granted an 18-month extension for further exploration studies to be carried out in Area 3 – meaning that the concessionaire will probably conduct 3D seismic tests. see page 6 >

INTERVIEW APS chairman Lino Delia would like to see clear policies for various sectors, saying the problem is not so much funds as expertise and best practice. see pages 21 and 22 >

e Business OBSERVER

June 18, 2015

NEWS

PHOTO: SADIK GULEC / SHUTTERSTOCK.COM

Tax beneﬁts for UN pensioners The government has made good on its Budget promise to introduce a scheme to encourage former UN workers to retire here. A legal notice was issued, which exempts them from income tax on the pension as long as they also fulfil certain conditions – primarily that at least 40 per cent of the pension should be received in Malta. Any other income arising outside Malta will be subject to a 15 per cent tax rate. The beneficiary will need to either buy a house worth at least €275,000 if in Malta or €220,000 if in Gozo or the south, or rent a property for either €9,600 or more in Malta, or €8,750 or more in

Gozo. The beneficiary will not be allowed to sublet the premises. The scheme is open to those who receive a pension from the UN Joint Staff Pension Fund (UNJSPF), which was established in 1949 to provide retirement, death, disability and related benefits for its staff and those of 22 other organisations admitted for membership in the fund. As of 2010, the organisations had 121,138 active participants and 63,830 fund beneficiaries, while the assets of the UNJSPF stood at $41.4 billion. The tax status is not open to Maltese nationals, or to residents in Malta who already benefit from other residence schemes. To be eligible, they must also not spend

“Malta is not the only country to oﬀer tax beneﬁts to UN retirees. According to online resources, in 2013 a number of countries, including India, Singapore and the United Arab Emirates exempt all tax”

more than 183 days in any calendar year in another jurisdiction. They may also hold a non-executive post on the board of a company resident in Malta, or be involved with entities engaged in philanthropic, educational or R&D work in Malta. Malta is not the only country to offer tax benefits to UN retirees. According to online resources, in 2013 a number of countries, including India, Singapore and the United Arab Emirates exempt all tax, while the UK, Switzerland and several other EU member states tax monthly pensions but not lump sums. The US, Canada and France have special tax schemes for both.

e Business OBSERVER

June 18, 2015

NEWS

Freeport eyes renewed Iranian shipping contract IRISL CONTAINERS IN ISREAL. PHOTO: ISRAEL DEFENCE FORCES

Malta Freeport has renewed its contacts in Iran with an eye to renewing contracts with Iranian shipping lines should sanctions be removed later this year, sources said. Iranian national shipping line IRISL – which had some 170 vessels in its heyday – started using Malta Freeport as its Mediterranean hub in 2004 and had become its second largest client. It was first hit by US sanctions in 2009 and unilaterally pulled out of Malta in 2011, in the knowledge that Malta would have to apply sanctions by 2013. However, in 2009, its operations were taken over by a private company – the Hafiz Darya Shipping Lines (HDS) as part of a government privatisation move. HDS – whose contract with Malta Freeport predates the sanctions – continued to use Malta for a few years but as more and more ports on the Mediterranean route gradually politely declined its business, it abandoned its Malta route, also shutting its back office operations, which at one time employed a few

dozen people. HDS is still operating between the Middle East and the Far East, where sanctions are not applicable and trade flows were largely unaffected. Sources familiar with the current situation said that numerous countries were knocking on doors in Tehran seeking to establish commercial relationships which could be activated once the sanctions are lifted, particularly for industrial development. “There was a delegation of 40 top French companies in Tehran quite recently, and we understand that the Germans were not far behind.” However, Tony Nash, the global vice president of Delta Economics told the GTR magazine that France and Germany may get some business, “but not in a major way”. “Asian competitors would be there first but the Iranians also remember who their friends were through the sanctions,” he was quoted as saying. The loss of HDS had hit Malta Freeport hard but over the years it gradually replaced the

“ere was a delegation of 40 top French companies in Tehran quite recently, and we understand that the Germans were not far behind” line with others, recently signing contracts with two worldwide shipping alliances. “The question is whether the Freeport would have the capacity to handle its requirements. At the moment, it has capacity for 2.75m containers (TEU) but is increasing the number of cranes and expanding its footprint by 30,000 sq.m. so it depends what it will require – and when. “Even if Iranian trade with Europe starts to pick up again – which is by no means guaranteed given its ties with China – it will take time. “And from the shipping point of view, it will not be easy for HDS as its container business has all been absorbed by other shipping lines

and it will have to start from scratch. It will not be able to get back to where it was overnight,” the sources said. “It is more likely that HDS will succumb to the same pressures that other shipping lines faced, and form an alliance.” There are currently sanctions imposed on Iran by the US (since 1979), the EU and the UN (since 2002), as well as individual countries. An interim agreement in 2013 easing the sanctions was reached after it curbed uranium enrichment and gave UN inspectors better access to its facilities. However, Iran and six major powers (US, UK, France, Russia,

China and Germany) are hoping to reach an agreement for them to be lifted – all at one go, or in phases – by June 30. They hammered out a preliminary agreement on April 2, with Iran committing to reduce the number of centrifuges it operates and to other long-term nuclear limitations. Iran’s oil exports fell from 2.2 million barrels per day in 2011 to just 700,000 by May 2013, costing the country between $4 billion and $8 billion each month. Oil used to pay for half the government’s expenditure. Within months of the sanctions being lifted from financial services, Iran will be able to collect debts from overseas banks for oil payments of over $100 billion. Discussions on lifting the sanctions have already been extended twice and could be prolonged beyond the end of June – but commentators do not anticipate that they would be dropped if no agreement is reached by November 2015 when the US presidential election campaign is launched.

e Business OBSERVER

NEWS

Door left open for oil The only consortium currently studying the potential of finding oil has decided to persevere and has been given an 18-month extension, sources have confirmed. The original 2012 agreement ran out in early June but the government has agreed to give Capricorn Malta and Melita Exploration (subsidiaries of Cairn Energy and Rockhopper Exploration respectively) until December 2016 to carry out more studies in the contract area. The 2012 exploration study agreement covers Blocks 1, 2 and 3 of Area 3 in the Sicily channel, covering an area of 6,000 sq.km. The agreement allowed the consortium to carry out studies, reprocessing of existing data, acquiring new 2D seismic data and limited capital works, with the right to negotiate a production sharing contract on an exclusive basis thereafter. There was an option in the agreement saying it could be extended in order to acquire 3D seismic data, and the decision to go for this option is considered to be a positive sign.

Cairn told its shareholders that the work programme until now had consisted mainly of the reprocessing of existing 2D seismic data, at least 1,500 km of new 2D seismic data, and technical studies to correlate the old and new data, together with existing well data. “Hydrocarbons have been demonstrated in a number of plays in the area and with modern seismic data starting to unlock new potential, the basin offers a number of opportunities for discovery,” Cairn reported. The government has already received over $3 million from the consortium under the terms of the agreement. With the price of oil recovering all too slowly, and companies cutting back on

exploration all around the world, the news of the extension was particularly welcome. Last year, exploration of the Ħaġar Qim well in Area 4 was abandoned and, although the concessionaire Phoenicia Energy was granted an extension until January 2015 to conclude testing on the findings, it decided not to proceed any further. Phoenicia Energy Company is a wholly-owned subsidiary of Genel Energy plc, with Rockhopper holding a minority shareholding which it acquired from Mediterranean Oil and Gas for £29 million last year. The Area 4 concession is currently open for exploration by interested parties.

“With modern seismic data starting to unlock new potential, the basin oﬀers a number of opportunities for discovery”

| June 18, 2015

e Business OBSERVER

| June 18, 2015

industry ?? focus

Tourism: all about ﬁgures? €1.1 billion The total contribution from foreign travel and tourism in 2013.

This is forecast to rise to

26.4% The percentage of total employment from tourism represents 45,500 jobs – compared to world percentage of 8.9 per cent and Europe’s of 8.5 per cent. This is forecast to grow to 56,000 jobs by 2024.

KAROZZINI (HORSE DRAWN CARRIAGES) READY TO TAKE TOURISTS AROUND VALLETTA.

€1.7 billion by 2024

25.5% Travel and tourism’s contribution to GDP, compared to the world percentage of 9.5 per cent and Europe’s of 8.7 per cent.

e Business OBSERVER

June 18, 2015

INDUSTRY ?? FOCUS

e World Travel and Tourism Council published a report on the economic impact of tourism in Malta which raises some interesting points to ponder. It also compares Malta’s performance in 2013 with world and European ﬁgures. Here are a few highlights. SOURCE: WORLD TRAVEL AND TOURISM COUNCIL: ECONOMIC IMPACT 2014

2,375,000

147th

The number of foreign tourists by 2024.

Malta’s country ranking of the growth in tourism’s contribution to GDP for 2014-2024, which was forecast at 3.2 per cent.

4.4% 89th Malta’s country ranking of the growth in tourism’s contribution to GDP for 2014, which stood at 4.5 per cent.

Share of investment in Malta’s GDP derived from tourism, which amounted to €132 million in 2014.

21st Malta’s country ranking in relative contribution of tourism to both total GDP and total employment.

e Business OBSERVER

| June 18, 2015

OPINION

Tax transparency – the road ahead Nicholas Gouder In the last few years, particularly following the credit crunch, there has been a tangible focus on tax avoidance and clamping down on tax planning. Overnight, the rules of the game were changed and what was previously considered to be legitimate tax planning was condemned as being aggressive and morally incorrect. Governments of developed nations, in particular, started to take measures to clamp down on tax avoidance schemes and as a consequence levels of cooperation between such states has increased significantly. The OECD has spearheaded these advances and we have been hearing a lot about exchange of information, disclosure of beneficial ownership of companies and beneficiaries of trusts, tax transparency, the Foreign Account Tax Compliance Act (FATCA) and other similar terms whose sole intention is to pretty much narrow the ever shrinking window of opportunity still available to tax avoiders. As the world has become increasingly globalised it has become easier for taxpayers to hold capital and earn income outside their country of residence, which results in significant losses in terms of tax revenues for a number of jurisdictions. This, together with the economic crisis, has led to a number of countries to focus on obtaining information about their resident taxpayers in order to minimise these losses. One of the measures that will be taken by the UK will be the intro-

duction of a public registry of the individuals who have significant control of UK companies. This is expected to influence the customer due diligence undertaken, as UK companies will be required to identify those “persons with significant control” (PSCs). This registry is expected to be fully searchable and freely available online. Information has been exchanged for a number of years. Article 26 of the OECD Model Tax Convention and also the Multilateral Convention on Mutual Administrative Assistance in Tax Matters have provided a basis for all forms of exchange. However, the most radical step forward in exchange of information has been the US implementation of FATCA which is now being followed by the Automatic Exchange of Financial Account Information in Tax Matters, which will come into force in 2017. Although 2017 seems far off, taxpayers need to be aware, now more than ever, of how this automatic exchange of information is going to work in order to ensure that their structures are durable. First of all, it is important to note that this automatic exchange of information is not applicable to only EU or OECD members, but goes well beyond that. Some countries, known as the ‘early adopters’, will be implementing this initiative by 2017, with a second wave implementing it during 2018. In total more than 100 countries shall adopt this procedure. Malta, like most other EU member states, will undertake its first exchanges by 2017. In order to understand how this exchange will work, we need

to understand the scope of the following: ■ The financial information reported; ■ The account holders subject to reporting; ■ The financial institutions required to report. The OECD has explained the scope of the above in its recent publication, Standard for Automatic Exchange of Financial Account Information in Tax Matters. The scope of financial information reported covers different types of investment income, including interest, dividends, income from certain insurance products, sales proceeds from financial assets and similar types of income. The reporting requirements will not only be extended with respect to individual’s accounts, but shell companies, trusts and similar arrangements will be looked through by financial institutions. This information is expected to be exchanged within nine months after the end of the calendar year to which the information relates. Furthermore, reporting financial institutions will not only include banks, but also brokers, certain collective

“Discussions about tax transparency, exchange of information and so on are closely linked with discussions about the ﬁne line that exists between tax mitigation, avoidance and evasion”

investment vehicles and certain insurance companies. In order to ensure the timely exchange of information and a reduction of administrative costs for governments, the process will be standardised through what is known as the ‘Common Reporting Standard’ which contains the reporting and due diligence standard that underpins the automatic exchange of information which each country must follow. The scope of the information that will be exchanged is wide and far reaching and it is important for clients to seek expert advice before implementing any new structures and also to ensure that their existing structures are durable in time. Discussions about tax transparency, exchange of information and so on are closely linked with discussions about the fine line that exists between tax mitigation, avoidance and evasion.Following the Starbucks and similar cases, today we are speaking about ethical tax planning and not only of a distinction between what is legal and what is not. Nick Gouder is a partner at ARQ in Tax Ltd.

e Business OBSERVER

| June 18, 2015

INTERVIEW

Drivers of change e Association of Car Importers – Malta (ACIM) feels that it is at a disadvantage when it comes to competing against both importers of used cars, and individuals who bring in their own. Its president MAURICE MIZZI told VANESSA MACDONALD many things should be changed – and puts health as the motivator. You want to encourage new car sales because they are much more efficient and have reduced emissions.... ACIM and the government are working in parallel: to reduce air pollution on our roads as this is a serious threat to our health. One in every four have contracted cancer and, although it is not entirely due to the fumes emanating from old cars, it is a contributing factor in many cases. This is more important than business. It is our health. Many of the second-hand cars that are being imported are Euro 4 standard and have much higher emissions. We are now importing cars with Euro 6 engines, which have very low emissions. Euro 6 engines will become compulsory for new vehicles during the second half of this year; we are not even allowed to import new Euro 4 cars! But some of the second-hand cars which are being imported are actually quite new... The average age of the car population is 14 years, whereas in Europe it is seven. This is because of mild weather, and because there is no snow (or the salt to treat it) so cars last longer in Malta... Should you dump a car which is still working

just because it is older? Doesn’t the environmental impact of manufacturing (and scrapping) a car count? There is a difference between a new car which is then sold and is used for a few more years, and one which was brought in when it was already several years old and then spends more time on the road... And age is not the only factor; it also depends on the mileage. In the UK, they have much higher mileages than here where most people do between 5,000 and 8,000 kilometres annually. Also the second-hand cars being imported include leased cars and former self-drive cars, and you never know what their history is like... Over the last four or five years, used car sales overtook sales of new cars, because of the low sterling rate and a change in registration tax. Sterling is no longer so advantageous. Will this mean fewer used cars imported from the UK? One of the first rules of economics is that if you increase the price, demand will go down. So yes, I think the stronger pound will make cars from the UK more expensive... In the past five months, there were 500 fewer units imported from the UK than the same period of 2013.

“We believe that odometers are often tampered with to show a higher mileage before the car is imported – to reduce the registration tax that has to be paid – and then reduced to increase its resale value” Sales of new cars had gone down from 7,293 to 7,193, but went back up to 8,200 last year. What have you done to win back that business? People realised that all that glitters is not gold. They assumed that they are saving money but, in actual fact, they start having problems from Day One (unless the car is one or two years old) and you have to pay to sort them out. I have seen people crying when we show them the reality: that the car has been sprayed to look like new. The salt sprayed on the roads in the UK also takes its toll on the underside of the car and on other components. People buy cars from the UK but do not always realise that the

numbers on the odometer are miles and not kilometres! In any case, we believe that odometers are often tampered with to show a higher mileage before the car is imported – to reduce the registration tax that has to be paid – and then reduced to increase its resale value. We also see a lot of accidents, and while some are due to human error, some are due to faulty steering wheel geometry and bad brakes. With a new car, you have the peace of mind of five years’ guarantee for the car and 12 years for the body. In the UK, you are given a two-year guarantee on a used car – but what is the use of that if you are in Malta? It is very unfair that, as the official agents, we have to repair the cars under warranty!

People do not realise that, when we claim for warranty work from the manufacturers, they do not always refund us in full. We are subsidising second-hand cars... There must be lot of fools out there, then, because there were 11,000 used cars registered in 2014 – 2,000 more than in 2013. That is more than double the increase for new cars... If there are so many bad stories out there, why don’t they deter buyers? I can tell you about the stories I see. There might be the odd bargain but most are disappointed. And they also do not realise that selling a used car imported from abroad will only get you much less than what you would get had you bought it

e Business OBSERVER

June 18, 2015

INTERVIEW

new. In economics, you know that the cost is not just the purchase price; you must also deduct what you get for your car when you sell it. If you were to sit down and do the sums, you would find that buying a new car is more economical – even apart from the guarantee, lower fuel consumption and so on – than buying a second hand car. At the end of the day, price matters. One argument made by new car importers is that the principals impose standards relating to workshops, spare part inventories, staff training and certification – some even want exclusivity. Can you argue with them? You must be joking! We are actually examined by our principals, on every aspect of our work. And if we do not reach the standards, we are fined. They even tell us what diagnostic equipment to buy and failure to do so could mean losing the agency. Training is also very important as technology is changing so fast. We send our technicians to our principals every year, which is a very expensive exercise – we even pay for the training! ACIM’s members also spend millions building showrooms and upgrading them continuously. We are not getting back a return on that capital and in fact some of our members are not even profitable. It would have been better to leave their money in the bank and earn interest, rather than coming to the office every day, worrying about the challenges... ACIM members have to keep millions of euros worth of parts in our stores. However, we are not bound to hold parts for models unless we stock these models. So we do not cater for some of the models which are being bought secondhand from the UK. Years ago, most used-car dealers had a handful of cars; many did not even have a showroom and just parked them on the side of the road with a cardboard sign. But the situation is different now and many have large and elaborate showrooms.

I don’t know about second-hand dealers. I know that we spend a lot of money on our premises and do not get a good return. You still see a lot of used cars parked on the road with cardboard signs. Haven’t some ACIM members started selling second-hand cars themselves? We do it just as a side-line. We have leasing companies, so we have second hand cars ourselves. It’s very difficult for us to sell second-hand cars as we have a reputation and we cannot do things like tamper with odometers...Elsewhere this is done on a regular basis. So you don’t deliberately import used cars to sell? Perhaps some of us would import cars to order. But we don’t like doing it. It is not our main business. Good second-hand cars cost money. Another ACIM gripe is that the registration tax structure differs: you pay registration tax on the full value of a new car with all the optional extras, whereas used car dealers pay registration tax only on the value of the car itself. Are you lobbying for this to change? We had been talking to the previous government and now to this

“e fairest system is based on the polluter-pays principle. You would not pay any registration tax when the car is imported but you would pay every year according to usage”

one about this for some time. We should likewise only pay registration tax on the car itself. Optional extras, especially on luxury cars, can sometimes cost more than the car itself. We hope that this government will see that we are being treated unfairly in various ways. Everyone thinks that we make a lot of money on cars as they see the adverts on overseas media and compare prices. What they do not realise is that we have to include registration tax. Ten years ago, the government of the time got an English company – CABS – to work out the formula for registration tax, based on what happens to English cars. But they depreciate much quicker in the UK than in Malta. We believe the government should base the registration tax on the value of the second-hand cars in the domestic market, not on the market from which the cars are purchased. The formula is not very transparent and Transport Malta uses different valuations. Also in the UK, there are significant allowances for servicing, insurance, road licence and finance on leased cars. These were not copied into the Maltese system... We should encourage leased cars. Should the valuation be based on a benchmark or on what people actually paid? It should be based on what happens to a car in Malta. If you buy a car in Malta it depreciates by 20 per cent in one year. But the valuation is based on the typical UK depreciation if you bring it in from the UK. It should be the same... You once actually proposed – and used-car dealers supported it – doing away with registration tax completely. Is that viable for the government? It is viable for us. I don’t know if it is viable for the government as it would lose revenue. But it would make us happy – and also car buyers. Look at the votes the government would get... In my opinion, the fairest system is based on the polluter-pays

Points to ponder Ban importation of Japanese cars that are more than seven years old “The EU gives more importance to the freedom of movement of goods than it does to environmental health. So we would probably not be able to cap the age of imported cars from the EU. “If there were a way, I would say let us ban the importation of all old cars as other countries – like Kenya and Tanzania – are doing.” Enforce local registration of foreign cars “We also see a lot of cars displaying foreign number plates, many of which drive around for months. Are they insured? We are not convinced...” Clamp down on illegal trade “We know of Maltese who buy several cars in the UK and bring them down by transporter. They do not have a trading licence – and do you think that they pay income tax?” Set up permanent scrappage schemes “On behalf of ACIM, I would like to thank the Prime Minister and the Finance Minister and the government as the schemes help us. But we would like to see a permanent solution, rather than these sporadic schemes.” principle. You would not pay any registration tax when the car is imported but you would pay every year according to usage. This is being studied in northern countries, which are much more health conscious than we are. So instead of a lump sum, the government would get revenue spread over the years. Owners might pay more overall, but they also have the option to use the car less and save money. And that would encourage a modal shift in transport too. We have not made progress on this point as it affects revenue in the short-term but the government would get deferred revenue.

Used-car dealers also claim that it is not a level playing field. They find it unfair that they cannot import new cars but only ones which are six months old or which have 6,000 km on the clock... In Malta, you cannot have different showrooms selling the same brands of new cars. It would create anomalies. Apart from the fact that they make more profit than we do... They just wash the cars and sell them but we have to service them, stock millions of euro worth of spares, train technicians. It costs us the earth! We also have a duty to retain our present workforce of around 700 technicians.

e Business OBSERVER

June 18, 2015

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

Tourism: more than a numbers game The Business Observer is this morning hosting a business breakfast to discuss whether we should be patting ourselves on the back merely because we set a new record for arrivals every year. Months ago, Corinthia chairman Alfred Pisani challenged the notion and said that we should be going for quality rather than quantity – but his counterpart at the Fortina Hotel, Michael Zammit Tabone, is wary of taking what he sees as an elitist point of view which would exclude the ‘mass’ market that has served Malta so well for the past 50 years. We do admittedly have a tendency to look at the 1.7 million tourists as an entity set in stone that we merely add a few hundred thousand to every year. That is far from the case. An impressive 31 per cent of visitors have been to Malta before – but the rest need to be convinced that they should come to this island and not to any of the other destinations vying for their annual leave, some of whom may never even have heard of Malta let alone have any preconceived idea of Product Malta. Another aspect is whether we can continue to aim for growth. Is there a point at which Malta will need to put up a sign saying: “Sorry. Full up”? University lecturer George Cassar created panic when he said that Malta could not sustain many more than 1.7 million arrivals. The World Travel and Tourism Council (WTTC) published a report on the economic impact of tourism in Malta which raises some interesting points to ponder. It forecasts, for example, that Malta could host 2.375 million tourists by 2024. Even if the island managed to spread those equally over the whole year, if they stayed for eight days each (the current average length of stay), then it means 52,000 extra people on the island each and every

day, over a tenth of our population. Consider this in the context of 33,000 beds currently available in hotels. The WTTC forecast may turn out to be far-fetched but we do at some stage need to consider whether what we want – or need – are more tourists, or fewer tourists who spend more money. This is at the heart of the debate between quality and quantity, although it has somehow been reduced at times to an argument over whether we should have campsites with people eating straight out of tins and filtering their own water, an argument based on stereotypes which does very little to deepen the debate. What can we offer Mr Pisani’s dream demographic? Do high-net worth individuals staying at the Hilton appreciate being stuck in a traffic jam for a quarter of an hour because a bus is stuck behind someone double-parked outside a pastizzeria? Do cruise passengers off a topnotch liner want to pick their way through the dust and confusion at Castille Square? And assuming that we are able to attract a particular kind of tourist just because we say we will – which is clearly nonsense – does one preclude the other? Can six-star tourists at St George’s Bay happily co-exist with teenagers throwing up on the beach at 6am? Should we aim for nothing less than four star, assuming that threestar hotels are anyway losing so much money that they will soon become extinct? Should we just become a nation of six-star hotels with a boutique hotel on every corner in Valletta? Where would we get the trained staff to serve them? Of course, we must get better at everything that we do, whether we want three, four, five or six-star tourists. We should do so because people want value for money no matter how affluent they are. And because we should have a sense of pride.

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BUSINESS OPINION

Time for renewal (again)

Philip Von Brockdorﬀ The latest figures for GDP growth (four per cent in real terms in the first quarter) is no mean achievement for Malta’s small economy, now heavily reliant on its services sector. This growth can in fact be attributed to a significant degree to an increase in gross value added in the services sector. The impact of manufacturing, on the other hand, continued to shrink. Our greater reliance on the services sector, particularly financial, insurance as well other professional/technical services, is – of course – a positive development. One would expect services to continue to grow and drive forward economic growth in the future. In this context, and given the rapid changes taking shape internationally, it is again time for renewal in the Maltese economy. The services sector will no doubt emerge once more as the prime mover for change. Banking, insurance, remote gaming and professional/technical services will remain crucial. However, the services sector will also need to

THE SACRA INFERMERIA OF THE MEDITERRANEAN CONFERENCE CENTRE WAS USED AS A HOSPITAL FOR ALLIED CASUALTIES AFTER THE DARDANELLES CAMPAIGN. PHOTO: NATIONAL WAR MUSEUM

develop new areas for business opportunities so we need to act quickly to outcompete other jurisdictions. Two areas come to mind: higher education and medical tourism. Investment in both areas is not a novel idea. We have had for many years foreign students studying especially English as a foreign language at our accredited institutes. And of course, the number of

foreign (EU and non-EU) students continues to grow at the University of Malta and elsewhere. The difference now, however, is that with legislation in 2012 (recently amended), qualifications awarded locally by licenced and accredited higher education providers can be recognised anywhere within the EU and elsewhere (with some exceptions). That, coupled with our favourable climatic conditions,

makes further investment in higher education quite attractive. The associated risks – especially in ensuring and maintaining standards across the sector especially with an increase in the number of licenced and accredited institutions (both local and foreign-owned) – are obvious enough but that is something which the regulatory authority needs to come to terms with. The second sector is medical

“Economic renewal is always challenging, especially for a small population but over the centuries the Maltese population have learnt how to adapt”

tourism. Throughout history, Malta has made a name for itself as the ‘nurse’ of the Mediterranean, nursing wounded soldiers during the World War I and campaigns such as the Dardanelles. During this campaign, thousands of wounded and sick soldiers were cared for in several hospitals (most of which were makeshift) in places like Fort Chambray in Gozo. This historical link is important in promoting medical tourism and given our excellent international reputation in healthcare, this sector can grow and provide new job opportunities both in healthcare as well as in hospitality. Again, there are also risks associated with medical tourism, especially with regard to possible exposure to diseases but here again, our health authorities have always dealt with such risks expediently. The economic benefits associated with increased investment in both higher education and medical tourism cannot be downplayed. Indeed, they are likely to be considerable since both can draw potentially larger number of foreign students and patients to the Maltese islands. This would boost both spending as well as linkages with other services sectors. Economic renewal is always challenging, especially for a small population but over the centuries the Maltese population have learnt how to adapt. It will no doubt adapt again in the next phase of economic renewal. Philip Von Brockdorff is the head of the Economics Department at the University of Malta.

e Business OBSERVER

| June 18, 2015

CASE STUDY

Getting into a hotspot Vanessa Macdonald The woman at Melita’s head office reception in Mrieħel looked up expectantly when I turned up for my interview with the company CEO, Andrei Torriani. The reception was empty. No one sitting there waiting to resolve bills or generally complain. It is a positive, significant change. Last year should have been one of Melita’s finest. It had a “double digit” number of suitors clamouring to refinance it – at very competitive rates. It had rolled out a number of innovative products, from Melita Wi-Fi and Melita

Wi-Fi Travel to TV Everywhere, all of which were well received. It started the tenfold expansion of its data co-location centre in Madliena. And last but certainly not least, it started to overtake its competitors in various services. Instead, it got bitten by the very investment that was supposed to make it more customer-friendly. “We made a massive investment in Customer Relation Management and billing, to upgrade our platform and make it more IP centric. We now have the most advanced CRM and billing capabilities in Malta, not only in the telecoms space but generally

“e strategy worked, and Melita is now a market leader not only in its original stronghold – TV – but also in mobile for residential contracts and broadband. It is even increasing its ﬁxed line subscriber base in the business sector”

in any industry. It allows us to be a lot more efficient in servicing the customer,” Mr Torriani said. Unfortunately the roll-out did not go as planned and there were considerable complaints. The company bit the bullet and acknowledged its problems, offering a stream of free services to its customers as compensation for their loyalty. The strategy worked, and Melita is now a market leader not only in its original stronghold – TV – but also in mobile for residential contracts and broadband. It is even increasing its fixed line subscriber base in the business sector, he said.

e Business OBSERVER

June 18, 2015

CASE STUDY

“We are now the fastest growing telecommunications operator in Malta in all key performance indicators like revenue, earnings, customer numbers, households and businesses we serve. We are going in one direction while the other operators are going the other way,” he said. The new CRM system has given Melita the ability to offer self-care solutions, as well as to monitor problems and their resolution. “The MyMelita app we developed has been quite successful with over 11,000 downloads in a very short time. It allows customers to view and pay their bills, communicate with our contact centre, monitor data consumption, manage Melita Wi-Fi devices, locate the closest point of sale, top up their prepaid lines and so on. “If online banking were as simple as what we are offering our customers, everyone would use it! It is quite unique in the market; Vodafone has its own app which is more focused on prepaid services,” he said. Melita – like all operators in Malta and overseas – had to decide where to invest for the future. Although it bid for premium sports, it did so “pragmatically”, not really willing to go for rival Go’s jugular. It also decided not to get into a race with Vodafone for 4G – preferring to wait for advanced technology – and it focused instead on Wi-Fi, seeing this as the area with most growth. “All our investments technology-wise have been oriented towards the convergence between fixed and mobile broadband,” he explained. Opting for Wi-Fi was a quick win: in Europe 50 per cent of data usage is usually in one per cent of the network, so Melita was able to roll-out 45,000 indoor hotspots and 20 outdoor zones to offer a seamless Wi-Fi service along key areas like the Sliema/St Julian’s promenade. And unlike the throttled data available from public Wi-Fi hotspots, Melita Wi-Fi is a

next-generation service offering speeds on a par with its competitors’ mobile speeds. “Recent tests show 3G only gets around 16 Mbps whereas we offer 100Mbps outdoors. Speeds are mostly limited by the devices as we can deliver up to 100 Mbps!” Where both 4G and Wi-Fi are available, he believes the latter wins hands down for a number of reasons: all smart devices, old and new, can use Wi-Fi; Melita offers 10GB of data so there is no bill shock; and it can be used on multiple devices. “This is why we were recently awarded the Best Buy Award for broadband and for wireless broadband, an award which is not solicited but is based on research,” he said. Melita has also set itself apart from its competitors by accepting that it does not have to be the preferred supplier for all the four services – TV, fixed line, mobile and internet. This means customers can use a rival for other services but still use Melita WiFi, for example. “Our emphasis is not on getting people to bundle. Of course, we want their business and will keep trying to get all of it, but we prefer to offer an ecosystem which offers all the services from within it. “For example, apart from TV Everywhere, which is growing considerably, we have video on demand offering thousands of films and series’ episodes at any time,” he said. In the meantime, Melita is already planning the upgrade to an even more advanced Wi-Fi system, known as AC Wi-Fi, which will offer speeds of up to 1 Gigabit per second. Melita has also started rolling out 42Mbps speeds on its 3G network starting from busy localities such as Valletta, Sliema, Paceville and other areas. But does this mean that 4G has been ruled out? ““We will definitely offer 4G in the future as we appreciate that LTE has a role to play especially in providing wireless broadband in areas where data usage is not

“ere was a time when operators said that wireless was the future, but now these very operators are the ones buying up cable operators”

concentrated. But we are not interested in either launching a standalone 4G network based on the current LTE version that our competitors are using. “We are eyeing the most advanced 4G standards available, the so-called LTE-A and LTE-U . Network vendors will also offer convergence between Wi-Fi and mobile, so the customer will be able to roam between the two networks transparently. “At the moment, the switch from 4G to Wi-Fi is more manual but more advanced solutions from vendors will let the network do the thinking for you and provide the optimal experience,” he said. “Standards for it are being finalised as we speak by the relevant authorisation body, and all major vendors will be rolling this out in the near future. This will keep us in the lead for wireless high speed data in Malta.” Gozo has also been given attention. Historically, Melita’s mobile and Wi-Fi coverage there lagged that of its competitors but

Melita Wi-Fi has now been installed in Victoria, Mġarr Harbour, Xlendi and Marsalforn bays and the mobile service is “at least on par” with its competitors. The positive KPIs are not going unnoticed by the company’s shareholders, GMT Communications Partners (UK) and MC Ventures (US), which bought the majority shareholding seven years ago. Chairman Joe Gasan had said during an interview with Times of Malta in 2013 that, when it made the acquisition in 2007, it was planning to sell after eight or nine years. Mr Torriani would not be drawn on time frames. “It is wrong to think that private equity always wants a quick flip around, cutting costs and then selling. A large portion of private equity takes a long-term view and really looks at the potential for a business. We are very comfortable with our shareholders. They have to this day not taken any money out of the company, unlike the shareholders of both our rivals. They have taken a different tack, encouraging the best management practices and supporting investment, trying to grow the business. “Of course, they will take some money out at some point; they are investors in business to make money. I cannot give you a time frame though and there are multiple ways in which this could happen. “The reality is that we have been an international trendsetter, particularly in the cable industry. Cisco even prepared a corporate video about the solutions they sold to us but also about what we are doing here. And I have made numerous presentations overseas about our business model. “There was a time when operators said that wireless was the future, but now these very operators are the ones buying up cable operators. We are the test bed for first tier technology. It has been good for Malta, for Melita, for its shareholders and for the customers.”

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June 18, 2015

APPOINTMENTS

IFS Malta elects president CEO for Trade Malta Trade Malta Ltd, the public-private partnership between Malta Government and the Malta Chamber of Commerce, Enterprise and Industry, has appointed Anton Buttigieg as its chief executive officer, following a public call. Established last December and currently based at’ Tigné Point in Sliema, Trade Malta is an executive agency dedicated to supporting Maltese businesses to reach foreign markets with their products and services. He reports to the Trade Malta board of directors led by David Curmi as chairman and composed of John Mamo, Tonio Casapinta, Frank Farrugia, Stephen Sultana, Paula Calamatta and Andrew Imre Gatesy. Mr Buttigieg joins Trade Malta from Business Leaders Malta, where he was operations director. He was previously business administration and development manager at Panta Lesco, management consultant at market research and training firm Misco, and an economist at the Central Bank of Malta.

CFO for Malita Malita Investments plc has appointed Jennifer Tabone as chief financial officer with effect from June 1. Ms Tabone occupied the post of accounts manager at Malita since November 2011. She is a member of the Malta Institute of Accountants, the Association of Chartered Certified Accountants and a CPA warrant holder. She has completed further studies in international financial reporting. She worked at Go plc and some of its subsidiaries for nine years until November 2011.

Kenneth Micallef has been elected president of the Institute of Financial Services Malta (ifs Malta). Mr Micallef started his banking career in 1993 with Bank of Valletta and since then has had a number of roles within the bank. He currently heads the Office of the chief executive officer and is

the secretary of the bank’s management board. Mr Micallef has been an active committee member of the institute since 2003, and has been responsible for various institute activities including a number of financial literacy projects. Prior to being elected president, he served as vice

president responsible for education. The ifs Malta committee for 2015-2016 is composed of Joseph Agius, Peter Calleya, Anatoli Grech, Joseph Ricca, Paul Farrugia, Wendy Zammit, Mark Agius, Peter Gatt, Joseph Bugelli, Roberto Apap Bologna, Wilhelm Attard, Adrian Mallia and Kenneth Genovese.

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June 18, 2015

INTERVIEW ??

When problems crop up SOME PITKALA WERE FALLING MONTHS BEHIND IN THEIR PAYMENTS.

Vanessa Macdonald APS Bank is still involved in the payments connected to the Pitkalija – even though there are still some issues related to late payments that are being tackled, chairman Lino Delia said. The bank’s chairman is clearly not happy with the situation. The restructuring of the agricultural wholesale market at Ta’ Qali was meant to be part of a wider programme leading to a sustainable, competitive agricultural sector within the framework of the EU’s single market. This would have involved the setting up of new organisational structures, such as producers’ organisations, that could induce changes in the existing culture of carrying out trade in this sector. Capital investment was one means to such an end. “If such an objective is not attained, because the required mentality changes do not materialise or because capital is not allocated, then the sustainability of the sector would be put at risk,” he said. For example, the recent announcement that the funds allocated for the restructuring of the Pitkalija in this year’s government budget are not immediately available as planned would prolong the restructuring exercise. APS decided to withdraw its support to the Pitkali Settlement System because some Pitkala were falling months behind in their payments – in certain cases, the amounts due went up to hundreds of thousands of euros. As a result, a legal notice was issued in December 2014 saying that every Pitkal – who acts as middleman between the farmer and the market – had to deposit a bank guarantee equivalent to 10 per cent of their previous year’s turnover of agricultural produce .

Agriculture, Fisheries and Animal Rights Parliamentary Secretary Roderick Galdes said the bank guarantee was meant to ensure that Pitkala honoured their financial obligations to farmers. In the end, after much grumbling, the Pitkala produced the bank guarantee – but there has been little progress with the restructuring. This case is one that hits a number of Prof. Delia’s buttons. For a start, the bank has historically had strong ties to the agriculture sector – and the decision to withdraw from the Pitkalija system was a last resort. But more importantly he believes customers should take their duties as seriously as the bank does. The bank boasts a low home loan default rate, and he is quite open about the fact that the bank will only loan you as much as it thinks you can afford. “We relate the loan amount and the repayment period to a customer’s potential financial means. We aim to avoid unnecessary pressure on our customers to meet their financial commitments in the long run. The duration of the repayment period is seen within this perspective. So, we avoid extending, perhaps unduly, the repayment period in order to lower the amount paid monthly. This approach is seen as ethical from our point of view,” he said. In a world where ‘bank’ became a four-letter word, this statement actually comes across as moral rather than paternalistic. “We aim to remain competitive, thus rendering a service to our customers. But in the process the gains have to be mutual, for clients and the bank. It is only in this way that we can meet the expectations of all stakeholders, namely, our shareholders who provide the capital, our depositors who trust us with their savings, and customers who borrow funds to carry out their business or buy their

homes. Such an operational model tends to lead to relatively low provisioning in the long run”. Part of the reason for the low provisioning is due to the emphasis in the loan book on low-risk mortgages – although Prof. Delia pointed out that whereas facilities were usually drawn down within a few months of the sanction letter, for the past two or three years, it was now taking longer in certain economic sectors. “Borrowers tend to reconsider the perceived changes in selected markets and react accordingly. Thus they may ‘rush’ to benefit from the firsttime buyers’ scheme or postpone implementation of a project, say property development, to reassess market conditions,” he said. Having a strong presence in the mortgage sector is a double-edged sword: it may be less risky but the margins are very tight. “This means that we were always focused on having a very efficient operation and on getting volume,” he said.

The model seems to be working. In 2014, the group made a pre-tax profit of €12.8 million out of an operating income of €28.3 million. However, he believes that over the future, the bank needs to tweak its strategy to continue generating value added. It has to continue attracting savings – especially since it has to compete with both core domestic banks and non-core banks, some of whom have a very different risk appetite. And it has to keep supporting new demands for capital. The bank has already started to look overseas for lending opportunities, mostly through co-financing loans. It participates in projects that fit its vision of supporting the creation of sustainable economic systems. “Each exposure is small but the activity allows us to build up experience and competence while meeting our ‘social’ objectives,” he said. The bank is also getting involved in North Africa and the Mediterranean rim, through

“Over the past decade, there has been a massive capital injection in the Maltese economy through budget deﬁcits, EU and other foreign funds and the banks’ credit creation”

Coopmed, a new activity seeing European Federation of Alternative Banks (FEBEA) members collaborating with international and EU fund agencies. “We are partnering with banks within FEBEA to put in small amounts of share capital to develop institutions and investment in technology in North Africa. This project is a replica of Coopest, which gave rise to similar institutions in Eastern Europe. It is based on collaboration with selected institutions in a region who thus receive seed capital with which to generate a new source of funding in the area. Risks are carefully assessed and generally the results are positive and give participants a reasonable rate of return over the duration of the project,” he said. “The bank could even get on to the board of these institutions and take a much more proactive role than it did in the past.” The financing foray overseas is complemented by the provision of expertise. In a sense, it is a replica of the model the bank adopted in Malta with the setting up of APS Consult, a consultancy service aimed at improving the usage of funds in sectors like agriculture and fisheries, social welfare and sport. “We felt that what was lacking locally was not capital. Over the past decade, there has been a massive capital injection in the Maltese economy through budget deficits, EU and other foreign funds and the banks’ credit creation. This year alone, there is a projected injection of around €600 million in the government’s budget. The key questions are: ‘Where is it going?’ and ‘How is it being used?’ “What is often lacking in a community is the ability to bring people together, to work together, to organise sectors. Thus at APS ConContinued on page 22

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| June 18, 2015

INTERVIEW ??

Dividend policy helped APS grow Continued from page 21 sult we teamed up with consultancy firms from abroad to bring in directly experience from EU countries. For the sector of agriculture and fisheries we cooperated with the Danish Farm Advisory Services, and for the Sports sector we collaborated with the Istituto per il Credito Sportivo. One can learn a lot from the experience of others even in the basic architectural/structural design of projects.” There is still a lot to be done in various sectors. Economic activities have to be addressed in a holistic manner. He referred again to the Pitkali issue: “But similar considerations apply for herdsmen and fishermen, both with regard to the payments system and the modernisation of the abattoir and fisheries. And the switch to producers’ organisations as an effective instrument of operations and culture change has been rather weak – and in some cases an outright failure.” There has to be, in his view, better synchronisation between policy objectives and the means to attain them. “You need clear objectives, setting out what you want to achieve, over what time period, stating how you are going to monitor them and speedily rectify the shortcomings that are bound to emerge. Unless these units are in place you will end up with the situations that we saw recently at the Pitkali, or Mater Dei or the entrance to Valletta.” he said. “It is for this reason that the operations of APS Consult are being reconsidered with staff redeployed and its future involvement reassessed. We are still collaborating with public and private sector entities on several matters, like for example, social enterprises or family businesses – but our involvement will become more pronounced after we understand better the way

ahead so we can participate effectively. Our contribution to several sectors through seminars and other initiatives are still valid,” he pointed out, referring to the impressive stack of publications APS has commissioned on various topics. Within this context, what does he think of the setting up of a development bank? “To do what? If such a bank is given a wider objective of assisting development in, say, the Mediterranean or any other geographical area, then one may consider it. But its reason for being can be queried if restricted to Malta. “If we uphold the position that the Maltese economy did not lack funds but needs know-how to coordinate initiatives, simplify economic incentives and encourage entrepreneurship with long-term perspectives, then what is really needed is a ‘moderator’ to facilitate change, and encourage mergers to create stronger economic players and an understanding of where the value added in the future is coming from. From rentals? From competitive provision of other services? For whom are such services directed?” The development bank is not the only new bank that he is sceptical about. Prof. Delia is also not impressed by the growing number of banks opening in Malta, believing that the stress on quantity may be short-sighted, in the sense that it could lead to conflicting objectives and strategies by the respective institutions. An economist by profession, Prof. Delia sees such players as juggling within an imperfect ‘monetary union’ operating in the absence of a unified fiscal regime within the eurozone. “One can no longer refer to one euro system, even though no one is talking about it,” he said. “When Malta joined the eurozone, local banks opted for an interest rate regime which did not adopt the Euro Interbank Offered

“WE LOOK AHEAD POSITIVELY AND PREPARE OURSELVES FOR THE MORE STRINGENT CONDITIONS OF OPERATIONS THAT LIE AHEAD,” - APS BANK CHAIRMAN LINO DELIA

“What is often lacking in a community is the ability to bring people together, to work together, to organise sectors”

Rate (Euribor) as its base. They stuck to a different rate because their cost of funds had to account for local considerations. They supported this model for the past several years, notwithstanding the claims by monetary authorities in Malta to switch to a different rate regime. And they managed to generate a stable environment in

which local operators could create wealth while savers could still trust the financial institutions with their savings.” ECB president Mario Draghi is encouraging investors to move out of sovereigns and create cash to move into more risky product. In the process, the market has reduced the interest rates paid to record

lows, indeed in some cases even to negative territory. But retirees find it hard to understand the logic behind such moves and they still expect to preserve their savings and be given a ‘reasonable rate of return’. “I believe we acted responsibly, and the economic results for the Maltese islands in part speak for us. But one has always to look at the future with an open mind. And that is what we intend to do.” An area where the Churchowned APS differs from other banks is in its dividend policy. Most years, it pays around €2 million in dividends, but retains €5-6 million. “That is how this bank grew and we have to continue to rely on a prudent approach to dividends distribution in the future. Out of the shareholders’ funds of €110 million, €57 million is equity and the rest is accumulated profits. “We have to keep a very high ratio of capital to turnover because rules are going to become more stringent from the regulatory point of view over the coming years. But we are considering several options for the future. “Strong governance and prudent allocation of assets will continue to have a strong bearing on the future strategy of this institution”. APS is currently in the final stages of appointing a new CEO, who will work hand in hand with incumbent Edward Cachia until his retirement in January 2016. “This appointment will pave the way for many other changes. Not least the sources of capital growth which has to follow the decision regarding the way ahead for this bank and its subsidiaries. “This decision will involve not only the employees and the board, but also the shareholders. These are challenging but at the same time interesting times. We look ahead positively and prepare ourselves for the more stringent conditions of operations that lie ahead”.

e Business OBSERVER

| June 18, 2015

STOCK MARKET REVIEW

Germany’s DAX30 index in correction territory Edward Rizzo Many international financial journals regularly use certain terms to describe the state of equity and bond markets as well as currency movements. To enable local investors to gain a better understanding of the different phases of financial market cycles, I will provide a brief description of some of the more commonly used terms before reviewing recent market developments. When prices are rallying, the market is said to be in a bull phase. Bull markets are generally characterised by optimism, investor confidence and expectations that the positive sentiment will continue in the near-term. On the other hand, a correction is defined as a temporary decline of at least 10 per cent in an asset class interrupting an upward trend. A more prolonged correction may lead to a bear market when a price or an index drops by more than 20 per cent. Meanwhile, a stock market crash is a sudden dramatic decline of prices normally driven by panic as a result of major catastrophic events, economic crisis or the collapse of a speculative bubble. There is no specific definition of a stock market crash but the term commonly applies to steep double-digit percentage losses in a stock market index or an individual equity over a period of several days. Last week’s headlines highlighted that the German equity market, generally represented by the DAX30, entered into correction territory after the index dropped by

more than 10 per cent from its recent high of 12,374.73 points on April 10, 2015. German equities had experienced a bull market in the first three-and-a-half months of 2015 as the index rallied by 26 per cent between the start of the year and the high reached on April 10. The index first entered a correction phase on Tuesday, June 9, after it dropped below 11,000 points but after a mild recovery during the following two days, the German benchmark retreated below 11,000 points once again last Monday and Tuesday morning as fears intensified about an exit of Greece from the eurozone.

Many may question the reasons for such a strong start to the year and the sudden correction. The announcement in early January that the European Central Bank agreed to start its quantitative easing programme in March 2015 led to an immediate upward movement across eurozone equity markets including the DAX30. This rally continued well into March when the QE programme commenced. Amid heavy buying of sovereign bonds by the ECB, yields plummeted and the value to the euro also declined to a low of $1.05 against the greenback compared to a level of $1.40 in May 2014.

Investor sentiment across the eurozone improved as the ultra-low interest rates and a weak currency boosted economic activity mainly through higher export growth, which led to an increase in the value of foreign earnings of exporters. Some of Germany’s largest exporters – such as Adidas, BMW and Daimler – are among the largest constituents of the DAX30 index and consequently the rally in these equities propelled the benchmark to new record levels. Meanwhile, the decline in eurozone equity markets including Germany over recent weeks may be due to the recovery in the value of

the euro, following the rally in bond yields, as well as renewed fears over Greece. The euro climbed by over eight per cent in a few weeks from a low of $1.0456 on March 15 to a high of $1.145 on May 15. A stronger currency negatively impacts exporters; the share price of BMW, for example, declined by close to 20 per cent since the record high in March and Daimler dropped by almost 15 per cent. The sudden rally in bond yields since mid-April, despite the ongoing commitment by the ECB to continue with its QE programme until September 2016, is primarily due to the publication of data revealing stronger eurozone economic figures, improved credit conditions as well as indications of an uptick in inflationary expectations as confirmed by the upward revision in the ECB’s inflation forecast for 2015 to 0.3 per cent compared to the previous projection of no movement in prices (0 per cent). Apart from the improving activity across the region, the jump in the price of oil is one of the main reasons behind the upturn in inflation. Additionally, the decline over the past 10 days across eurozone equity markets is also due to renewed concerns that Greece may default on its loans and be forced to exit the eurozone. Greece decided to postpone a series of payments totaling €1.6 billion due to the International Monetary Fund by the end of the month. A default would have damaging repercussions for Germany and other eurozone countries which are among Greece’s creditors. Germany and France, the two largest economies in the eurozone,

e Business OBSERVER

June 18, 2015

STOCK MARKET REVIEW

would stand to lose some €160 billion alone from a Greek default. Following the sudden correction, what should investors expect from the larger eurozone equity markets over the coming months? Irrespective of how the performance of financial markets will pan out in the coming months, investors should brace themselves for further volatility in all asset classes. We are living in unprecedented times in view of the non-traditional monetary policy tools being used by the ECB (namely its asset purchase programme which is set to run until September 2016), the possibility of Grexit and the divergent stages of the world’s largest economies. Under such conditions, trends in financial markets and the correlation among different asset classes will be highly susceptible to a number of factors. Among the most influential is the publication of data across the eurozone, especially that related to inflation and economic growth which could lead to wild swings across bond markets and the single currency as was evident over recent weeks. Furthermore, financial markets in each region are also very much aligned to the monetary policy of each national central bank. Although various central banks around the world, including the

“Markets will remain on edge and any news, good or bad, can lead to signiﬁcant swings even within very short time frames” ECB, the Bank of China and the Bank of Russia, are implementing expansionary measures to bolster their respective economies, the US Federal Reserve has already closed off its asset purchase programme and is pondering whether to continue tightening its monetary

policy by starting to raise interest rates. The timing of this is likely to have a significant impact on currencies. A US rate hike in the next few months could result in the strengthening of the US dollar and a correction in US equities.

Meanwhile, a delay could lead to a softening in the US dollar and increased demand for the euro as investors could rotate their investment to Europe in view of the less demanding equity valuations in the region and the improved inflation prospects which should ultimately lead to a gradual rise in interest rates. The largest turmoil could be created by developments in Greece. This is the first time, since the creation of the euro in 1999, that a European country is close to bankruptcy with the possibility of leaving the single currency bloc. Given that the numerous possible combinations of outcomes and the extent of contagion across other member states in such a scenario is uncertain, markets will remain on edge and any news, good or bad, can lead to significant swings even within very short time frames. Given these various factors at play, local investors holding exposure to European equity markets should continue to follow developments closely as they unfold. Investors should also seek to ride out the inherent volatility across markets and take a longerterm view since equity markets could be supported by continued evidence of a recovery of economic performance and ECB support in the months ahead.

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. © 2015 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved

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June 18, 2015

BUSINESS UPDATE

Ballut Blocks marks 65 years as it invests for the future

INVESTMENT IN A MODERN CONCRETE BLOCK MANUFACTURING PLANT

Ballut Blocks is this year marking its 65th anniversary. Driven by the original beliefs instilled by its founders who came from the challenging business of agriculture in 1950, the company introduced innovative construction systems over the years. It was involved in groundbreaking infrastructure projects such as the Malta International Airport runway, the Kordin Grain Terminal, the multilevel intersection at TalQroqq, the Flood Relief Project in Qormi, and City Gate project in Valletta. In order to further reinforce its position as one of the principal manufacturers of construction blocks, Ballut Blocks has recently invested in a modern concrete block

manufacturing plant that is capable of producing 2,000 blocks per hour. Fully computerised and automated, this plant is also capable of producing concrete paving blocks. Ambitious plans are in hand to invest further in modern construction technologies. Asked about the company’s secret for overcoming the challenges that invariably come with the test of time, managing director Paul Vella said: “It’s about Ballut Blocks’ ability to reinvent and adapt itself. “This, coupled with a strong work ethic and a loyal workforce, is absolutely vital to any company aiming to achieve its goals.”

12-minuteWhy Malta? now promotes Malta in French A film by HSBC Bank Malta plc highlighting the attractions of living, working and running a business in Malta will be translated from English into French. Unveiled in December 2013 to coincide with the launch of the Malta Trade for Growth Fund, the 12-minute film Why Malta? is an excellent tool for business to use when talking to potential customers. As well as showcasing Malta’s inspiring potential and great opportunities, along with its rich and cultured history, the film highlights the island’s position as a centre of excellence in a number of sectors and a perfect international hub for business. HSBC Malta CEO Mark Watkinson highlights HSBC’s role in supporting Malta’s growth and adding value to its economy, as well as using its global connectivity to help companies prosper at home and

overseas.Through breathtaking visuals, the film describes Malta as a modern, cost-effective eurozone jurisdiction with attractive investment incentives, double-tax agreements with major countries and a clear regulatory framework. As HSBC Malta head of commercial banking Michel Cordina explains, HSBC’s aim is to connect customers to opportunities, with over 50 relationship managers on the ground providing that level of support and insight of the local market. Malta has a strategic location and has a huge potential to become a main hub as a logistics, warehousing and distribution centre, from which companies can service European and North African markets. Visit www.hsbc.com.mt/whymalta to view the ‘Why Malta?’ film.

DAVIDE FORNASIERO DURING THE TRAINING SESSION WITH WESTIN HOTEL BAR TENDERS.

Farsons hosts new EU brand ambassador for Campari and Aperol Recently, Farsons Beverage Imports Co. hosted one of the new EU brand ambassadors for Campari and Aperol, Davide Fornasiero. Fornasiero visited several outlets around Malta on May 21-22 alongside the local Campari and Aperol team. The aim behind the visit was to strengthen the Campari and Aperol Spritz brands within the local market. Fornasiero, assisted by local brand ambassador William Underwood, held various training sessions ranging from group training to one-onone visits with bar owners. Overall, the main messages for the Aperol Spritz brand were brand history, and the proper preparation/serving suggestion of the cocktail using the 3 ,2 ,1 method which allows the drink to be fully mixed without losing carbonation. The Campari sessions focused on brand history and the resurgence of the bitters, as well as the correct method of preparation for the Negroni cocktail and a focus on the new refreshing Campari Tonic drink.

e Business OBSERVER

| June 18, 2015

BUSINESS UPDATE

Vivendo puts ﬁnishing touches to refurbished Seashells Resort in record time

JOANNE DENNEY-FINCH, CHIEF EXECUTIVE OF IGD, ADDRESSING FARSONS DIRECTORS AND MANAGEMENT TEAM AT A BUSINESS BREAKFAST ORGANISED RECENTLY.

Farsons business breakfast focuses on the challenges and opportunities in international development The Farsons Group recently organised a business breakfast focusing on the subject of challenges and opportunities in international development, for its directors and management team. Presented by Joanne Denney-Finch, chief executive of IGD, a research and training charity based in the UK that provides leadership to the food and consumer goods industry, the discussion was centred on the global drivers of change, the impact on consumers and retailers, and the recipes for success.

This is the third such event organised by the group and gives its participants the opportunity to step outside of their work schedules and consider the implications of the international market place on their everyday work, with the help of respected and esteemed speakers. The event was opened by Louis A. Farrugia, chairman of the Farsons Group who commented on the importance of focusing on and working towards a future aimed at further growth and expansion, achieved through strategies of innovation and exports.

Seductive... stylish... party loving The 212 VIP Club Edition maintains the VIP promise of exclusivity and elegance but with a fresh twist… 212 VIP is completely inspired by the party scene of New York City. With the two new limited editions, we now go into the very heart and soul of the party – the music. We go into the best clubs to follow the world’s most renowned DJs. The VIP Men Club fragrance is full of fresh party attitude and urban sex appeal, with top notes

of Ozonic Ice and Caviar Lime, middle notes Nutmeg Wood and Pepper, and Gianduia Chocolate and King Wood for base notes. The VIP Ladies Club fragrance is bewitching, urban and sensual for nights that never end. At the top is a blend of Citrus Cocktail and Blackcurrant Sorbet notes, the feminine Jasmin and Sambac Petals at the heart, and the lingering notes of White Musk and Patchouli at the base.

The Seashells Resort at Suncrest in Qawra has opened its doors again after undergoing a complete revamp that effected every guest room and public area inside the hotel. Vivendo orchestrated this multimillion project, part of a five-year refurbishment programme undertook by AX Group, pouring hundreds of man-hours into planning every single detail of this ambitious overhaul and executing it to the highest standards in record time. The collaboration between Vivendo and Seashells Resort originally focused on refurbishing the Coral Cove Restaurant. However, Vivendo was subsequently given the opportunity to refurbish the entire hotel. Preparations for the upgrading of 452 rooms spread over seven floors began in earnest after the winning design for the new look was chosen by AX Group. As envisioned by designer Penny Apap Brown, the new Seashells Resort radiates a fresh

and bright look with stylish and modern white gloss and wood finishes all over, designed to uplift guests’ spirits through an enhanced sense of space that feels intimate and comfortable Vivendo was also involved in the creation of a custom-made mattress for the such projects called the ‘Malta Mattress’ which ensures a good night’s sleep on every one of the 900-plus single beds in the hotel. Guests can also relax on the new sofas available in suites, maybe while helping themselves to a complementary chocolate treat found on one of the 1,800 cushions adorning the new rooms. Soft furnishings by Istikbal were also sourced by the Vivendo team. AX Group gave glowing praise for the speedy turnover of this large-scale project by Vivendo, an essential factor in ensuring that spring and summer guests would benefit from a luxurious and warm welcome at the resort and make their stay in Malta ever more memorable.

e Business OBSERVER

| June 18, 2015

BUSINESS UPDATE

ermal insulation: is it worth it in Malta? Remember when you would enter your grandmother’s house and feel cosy in winter and cool in summer? That’s because houses were built with thicker walls back then, unlike today, with temperature change felt almost immediately in modern households. Let’s be realistic. A penthouse is a greenhouse in summer and a cold room in winter – so what can be done to change this? Simple insulation will get your household back to the comfort you deserve. Insulating walls in a house that has already been built is called retrofitting. To start with, the walls may be thermally insulated either externally or internally, and the effect is theoretically the same. To insulate the walls from the inside, one would need to fix an

80 years of refrigeration Frizoll was founded in 1935 and is a fourth-generation family-run business. Apart from being the leaders in local manufacture, they are also importers of industrial and commercial refrigeration. Frizoll’s main aim is to have a top quality product, as after 80 years of experience, a good product is always the best advertisement. The company also offers an extremely efficient aftersales service, with technicians located all over the island for a faster service. The company offers a very wide range of products including refrigerated counters, chest freezers, upright fridges and freezers, cold rooms, condensing units, stainless steel cabinets, warm displays and also spare parts, and is able to supply any refrigeration need for any establishment. Frizoll can supply fridges and freezers ready branded with your logo and in very-high-quality printing. They are the agents for Frost-trol, Framec, Zoin, Frigomeccanica, Royal-Frigo, Cryogiam, Artsteel, Aspex and PFI, and stock all types of refrigeration parts such as compressors, evaporator, control panels, fan motors and other related items. Frizoll are always looking for new cabinets which are energy-efficient, reliable and cost-effective.

insulating panel composed of a gypsum board coupled with a sheet of expanded polystyrene. Alternatively, the wall may be thermally insulated from the outside, through a method referred to as cappotto. EPS is glued to the outside walls and then plastered with a reinforced net using a special resin/cement plaster, which can then be finished to any colour or texture. Insulating roofs, which has a greater effect, is preferably done while building the house, by placing the EPS within the roof build-up. However, one may also retrofit an existing roof – from inside or the outside, by gluing insulating tiles (made up of tiles of your choice glued to EPS sheets), and grouting and sealing them using special grouting materials.