Allocation of eu funds in aid of private enterprise 2014 2020 by Malta Business Bureau

Allocation of EU Funds in Aid of Private Enterprise: Programming Period 2014-2020

Publication date: July 2013

An initiative by:

In partnership with:

Foreword The Malta Business Bureau is the EU business advisory office of the Malta Chamber of Commerce, Enterprise and Industry, and the Malta Hotels and Restaurants Association. Following the study on â&#x20AC;&#x2DC;Market Gaps in Access to Financeâ&#x20AC;&#x2122;, the MBB realized the importance of sourcing alternative credit to local businesses. The EU Structural Funds present a golden opportunity in this respect. With this in mind, the MBB, in conjunction with the Bank of Valletta, conducted a report that aims to identify whether the private sector is a better alternative to the public sector to make use of EU structural funds to meet the countryâ&#x20AC;&#x2122;s needs. Furthermore, the report puts forward recommendations for more efficient use of structural funds within a system that facilitates the take-up of EU funds by the private sector. We trust that the findings of the report present a strong case to Government on the need to invest more EU Funds in private enterprise.

George Vella President Malta Business Bureau

Table of Contents

Acronyms .................................................................................................................................................................................... 5 Tables ........................................................................................................................................................................................... 7 Figures.......................................................................................................................................................................................... 7 Boxes............................................................................................................................................................................................. 7 1. Objectives and Organisation of the Report ............................................................................................................. 8 2. Study Background ............................................................................................................................................................. 9 3. Programming Period 2007-2013: allocation of funds and outcomes ........................................................ 14 4. Incentives for an Improved Strategy ....................................................................................................................... 18 5. Way Forward: enabling the private sector to drive Malta’s growth, job creation and competitiveness. .................................................................................................................................................................... 24 6. Conclusion .......................................................................................................................................................................... 36 References and Bibliography ............................................................................................................................................ 39 Websites and Data Sources ............................................................................................................................................... 41 Appendix A – Market Size and Export Intensity ....................................................................................................... 42 Appendix B – Description of Grants Managed by ME and TSDU........................................................................ 43 Appendix C – Outcomes and Targets by Priority Axis (2007-2013) ................................................................ 44

Acronyms BOV

Bank of Valletta

DSWS

Department of Social Welfare Standards

EAP

Employment Aid Programme

ECB

European Central Bank

EDP

Excessive Deficit Procedure

EIB

European Investment Bank

EIF

European Investment Fund

EPEC

European PPP Expertise Centre

ERDF

European Regional Development Fund

ESF

European Social Fund

ETC

Employment and Training Corporation

European Union

FEI

Financial Engineering Instruments

GDP

Gross Domestic Product

GGE

Gross Grant Equivalents

GNI

Gross National Income

ICT

Information and Communication Technologies

JASPERS

Joint Assistance to Support Projects in European Regions

JEREMIE

Joint European Resources for Micro and Medium Enterprises

JESSICA

Joint European Support for Sustainable Investment in City Areas

MBB

Malta Business Bureau

MCAST

Malta College of Arts, Science and Technology

Malta Enterprise

MFF

Multiannual Financial Framework

Operational Programme

PPCD

Planning and Priorities Coordination Department

PPP

Public-Private Partnership

PPS

Purchasing Power Standards

RAG

Regional Aid Guidelines

R&D

Research and Development

SMEs

Small and Medium Enterprises

TAF

Training Aid Framework

TSDU

Tourism Sustainable Development Unit

UDF

Urban Development Funds

Tables Table 1: Europe 2020 Targets Table 2: Financial Allocation of Funds (Malta), 2014-2020 Table 3: Maximum State Aid Intensities (% of Gross Grant Equivalents), Malta Table 4: Financial Allocation per Fund (Malta), 2007-2013 Table 5: Allocation of Funds to the Private Sector

Figures Figure 1: GDP and GNI per head in Purchasing Power Standards Figure 2: Private Sector Investment

Boxes Box 1: The Impact of Structural Funds on the Italian Mezzogiorno (Percoco, 2005) Box 2: Good Practice Examples for Supporting PPPs Box 3: Good Practice Examples for Loan- and Equity-Based FEIs Box 4: Good Practice Examples for using Global Grants and Business Support Centres Box 5: Good Practice Examples for Internationalization Support Scheme Box 6: Good Practice Examples for System Audits and Tacit Approval Rules Box 7: Good Practice Examples for Blend Facilities and a Multiple Instrument Approach

1. Objectives and Organisation of the Report The European Union’s (EU) Cohesion Policy provides a framework for financing a wide range of projects and investments with the aim of encouraging economic growth in EU Member States and their regions. In 2010, the European Commission published its ideas concerning the future of the EU’s Cohesion Policy after the current programming period comes to an end in 2013. One of the most significant ideas put forward by the Commission was for each Member State of the EU to draw up a Partnership Contract that sets out an assessment of national development needs and defines priorities for the use of cohesion, rural development, marine and fisheries funds that would support Member States’ efforts to reach the targets for delivering the Europe 2020 strategies.1 Specifically, the Partnership Contract will constitute an agreement between the European Commission and the Member States regarding the use of EU funds. Negotiations between the Maltese Government and the European Commission are currently on-going. Within this context, this report has two major objectives. The first is to identify whether the private sector is (in some cases) a better alternative to the public sector to make use of EU Structural Funds to meet the country’s thematic objectives. In this sense, the report highlights the benefits of private sector investment and how funds related to the current programming period (2007-2013) could have been used more efficiently. The second objective of the report is to put forward recommendations for more efficient use of Structural Funds within a system that facilitates the take-up of EU funds by the private sector. The report makes use of both qualitative and quantitative analysis, including one-to-one interviews with key business leaders, analysis of economic and financial data, review of relevant literature as well as input from constituted bodies. The report is organised as follows:

   



Section 2 provides a background to the study; Section 3 reports on the outcomes for the period 2007-2013; Section 4 identifies the incentives for an improved strategy; Section 5 presents a set of recommendations for the allocation of EU funds for the programming period 2014-2020 as well as recommendations on how government and the managing authority can best enable the private sector to drive Malta’s development; and Section 6 presents the conclusion.

Europe 2020 is the EU’s growth strategy. It is based on five objectives (related to employment, innovation, education, social inclusion and climate change/energy) which are to be reached by 2020. See Section 2 for further details. 1

2. Study Background The EU’s Cohesion Policy aims to reduce regional disparities in terms of Gross Domestic Product (GDP) per head by promoting growth, job creation and competitiveness. This is made possible through investment supported by the European Regional Development Fund (ERDF), the Cohesion Fund and the European Social Fund (ESF), which together account for more than onethird of the EU budget. The ERDF is the largest of these funds and aims to provide support for investment in companies (particularly Small and Medium Enterprises (SMEs)) to create sustainable jobs, infrastructure linked to innovation, energy and transport, financial instruments to support local development, as well as technical assistance. On the other hand, the aim of the ESF is to improve employment by promoting training, education and life-long learning, enhancing social inclusion for jobseekers, and combating poverty. Finally, the Cohesion Fund finances activities related to TransEuropean Transport Networks and the environment. Cohesion Policy is implemented through programmes which run for the duration of the EU seven-year budget cycle. The current programming period ends in 2013 while the new one starts in 2014 and stretches to 2020. In an attempt to improve on what has already been achieved during the past and present programming periods, the European Commission is focusing on fewer investment priorities. In the words of the European Commissioner for Regional Policy, Johannes Hahn, “Cohesion Policy has already contributed a lot to building prosperity in the EU. But given the economic crisis, it must now become a motor for growth and competitiveness. By targeting investment on the keys to growth – SMEs, innovation, energy and efficiency – we will achieve a greater impact.” As noted in Section 1, the most significant idea put forward by the European Commission for the programming period 2014-2020 is that of linking the allocation of funds to the Europe 2020 objectives. The five targets to reach these objectives relate to employment, innovation, climate change and energy sustainability, education, and fighting poverty and social exclusion. Table 1 presents the targets for the EU as a whole as well as Malta’s targets. It shows that despite general economic progress there are serious structural challenges that need to be addressed with significant gaps in almost all areas (European Commission, 2012b). This is primarily the result of bottlenecks that continue to hinder Malta’s potential growth.

Table 1: Europe 2020 Targets2 Objective

Indicator

Employment Research and Innovation Energy Education

Employment Rate (%)

Social Inclusion

EU-27 Target 75.0

Malta Target 62.9

Current 63.1*

R&D Expenditure (% of GDP)

3.0

0.67

0.73**

Renewable Energy (%) Early School Leavers (%) Tertiary Education (%) Reduction of Population at risk of Poverty or Social Exclusion

20.0 10.0 40.0

10.0 29.0 33.0

0.4** 22.6* 22.4*

20,000,000

6,560 *2012; **2011

Partnership Contracts agreed between the Commission and the Member States will set out the commitments to concrete actions to deliver on the Europe 2020 Objectives. These are simply national strategies for the programming period 2014-2020 which identify the investment priorities for the country and the allocation (and mix) of funds for each of these priorities. More specifically, the Partnership Contract will contain:3  

  

The main development needs and growth potential of Member States which can be addressed by the European Structural and Investment Funds; Thematic objectives (whereby Member States choose out of a menu of 11 objectives in line with the Europe 2020 strategy)4 and an explanation as to why they have been chosen on the basis of development needs and funding priorities; An indicative allocation of support by the EU by thematic objective at national level for each of the funds; Conditions which will be the pre-requisite to EU funding; and Targets that Member States plan to reach by the end of the programming period as well as performance indicators and milestones.

Another change in comparison to the past programming period relates to the Cohesion Policy architecture which is going to be replaced by a new one. For Structural Funds (i.e. ERDF and ESF) the new architecture distinguishes between three categories of regions: less developed regions with a GDP per head of less than 75% of the EU average, transition regions with a GDP European Commission. See Draft Template and Guidelines on the content of the Partnership Agreement, Version 2 – 25.02.2013 4 The eleven thematic objectives are: (i) Strengthening Research, Technological Development, Innovation, (ii) Enhancing access/use/quality of info and communication technologies, (iii) Enhancing competitiveness SMEs, AGRI sector, Fisheries, Aquaculture, (iv) Supporting shift towards low-carbon economy in all sectors, (v) Promoting climate change adaptation and risk prevention/management, (vi) Protecting the environment and promotion resource efficiency, (vii) Promoting sustainable transport, remove bottlenecks key infrastructures, (viii) Promoting employment and supporting labour mobility; (ix) Promoting social inclusion and combating poverty; (x) Investing in education, skills and lifelong learning, and (xi) Enhancing institutional capacity, ensuring efficient public administration. 2

per head between 75% and 90% of the EU average, and more developed regions with a GDP per head of more than 90% of the EU average. The innovation relates to the second category of transition regions. The objective of the new system is to support the process of economic transition more smoothly. In other words, through the new transition system, the EU aims to (i) support those regions which will lose the convergence objective and could experience an economic shock due to sudden drop in EU funding, and (ii) support those regions whose GDP per head is above 75% of the EU average but which have not yet reached a fully accomplished economic transition. As an example, if no category for transition regions existed, the Polish region of Mazovia (with a GDP per head of 86% of the EU average) and the region of Inner London (with a GDP per head of 338% of the EU average) would be subject to the same rules. The new transition system allows more flexibility and differentiates between these two regions, in terms of the level of funding available, priority areas for investment and by applying different co-financing rates. As Malta’s GDP per head level (calculated on the basis of EU figures for the period 2006 to 2008) exceeds the 75% threshold that applies to qualify as a less developed region, Malta is now considered as a transition region.5 This means that Malta will belong to a category that has been allocated 10.76% of global resources and is subject to funds allocation rules that apply for transition regions. The funds dedicated to this category were allocated to each Member State on the basis of eligible population, regional and national prosperity, and unemployment rates. Importantly, the European Commission is proposing that for Member States in transition regions, at least 40% of Structural Funds shall be allocated to the ESF. Minimum allocations are also fixed for a number of priority areas where the EU has set itself goals. For example, for transition regions, at least 20% of ERDF resources at national level will be allocated to energy efficiency and renewable resources, while another 60% must be allocated for innovation and the improvement of the competitiveness of SMEs. Pending any changes due to negotiations currently taking place with the European Parliament, Malta received a total financial package of €1,128 million from the EU Budget for the programming period 2014-2020. Table 2 shows that Cohesion Policy accounts for the larger share of these funds, whilst the remaining share will be divided between (i) agriculture, (ii) migration and internal security, education and fisheries, and (iii) the connecting Europe facility, R&I and the environment. The funds allocated to Cohesion Policy amount to €776 million compared to €855 million allocated for Malta for 2007-2013. Cohesion Policy funds are to be used to co-finance projects undertaken by the public and private sector in EU Member States, with programme management and project selection taking place at the national level. The European Council Conclusions on the Multiannual Financial Framework (MFF) show that the co-financing rate for each priority axis in the operational programmes will be no higher than 85% for the Cohesion Fund and 80% for Structural Funds for all regions whose GDP per head for 2007-2013 period was less than 75% of the average of the EU-25 for the reference period but whose GDP per head is above 75% of GDP average of the EU-27. This 5

See Government of Malta, Press Release 0190, 8th February 2013.

would mean that the Maltaâ&#x20AC;&#x2122;s national contribution to projects supported by ERDF and ESF funds will have to be proportionately larger than it has been in the past.

Table 2: Financial Allocation of Funds (Malta), 2014-20206 1. Cohesion Policy and Agriculture of which: Cohesion Policy Agriculture 2. Migration and Internal Security, Education and Fisheries 7 3. Connecting Europe Facility, R&I and the Environment 8 Total Funding to Malta

â&#x201A;Ź millions 914 776 138 120 94 1,128

In addition, support needs to be granted in accordance with EU State Aid Rules. The idea behind these rules is that financing addresses real market failures and for state aid to be limited to the minimum necessary so that funds are used efficiently, overcompensation is avoided and distortions to competition limited. Changes from the current to the new programming period are also expected in this regard. The Regional Aid Guidelines (RAG) that apply during the 20072013 programming period will be replaced by a new set of guidelines which will bring significant changes to the maximum permissible aid intensity levels. Table 3 shows the maximum regional aid intensity levels that apply for Malta during the current programming period and those that appear in the Draft RAG for the new programming period. Notably, if the draft guidelines were to be adopted, Malta will no longer be able to grant any investment aid to large companies while the maximum aid intensity levels for medium- and small-sized companies would be cut by 20 percentage points of Gross Grant Equivalents (GGE) by 2020. However, feedback received from government authorities suggests that ongoing negotiations between the European Commission and the Maltese Government may lead to smaller reductions in the maximum permissible state aid intensities than those outlined in the Draft RAG.9

European Council Conclusions (7-8 February 2013). This includes the Education Programme Erasmus for all. 8 This includes an indicative â&#x201A;Ź63 million to support projects in the energy sector such as the connection to the European gas network. 9 The European Commission Press Release IP/13/569. 6 7

Table 3: Maximum State Aid Intensities (% of Gross Grant Equivalents), Malta 10 Size of Enterprise11 Large Medium Small

Current RAG

Draft RAG 2014-2017 0 25 35

30 40 50

2018-2020 0 20 30

Another new element of the next programming period is the ex-ante conditionalities which will have to be fulfilled before the funds are spent. One such conditionality relates to the Research and Innovation Smart Specialisation Strategy.12 Through this strategy, regions will be able to identify and focus their efforts on those sectors with the highest potential for growth. Sectors that have already been identified to contribute significantly in this regard include health and biotechnology, energy, climate change and environmental technology, ICT and high value added manufacturing, aviation, businesses based on intangible assets such as cultural and creative industries as well as the maritime and aquaculture sectors. Overall, it is noted that Malta is subject to a number of changes when it comes to funding and criteria for allocating EU funds for the new programming period: Malta will be allocated less Cohesion Policy funds than it was for the current programming period; Malta has to adhere to the Partnership Contract that focuses on the countryâ&#x20AC;&#x2122;s priorities for development; and Malta is subject to lower permissible state aid intensities.

European Commission (2013), Draft RAG. Different ways of characterising the size of enterprise exist. However, Maltaâ&#x20AC;&#x2122;s business register only provides data with respect to employment. Small enterprises are thus defined as those employing less than 10 employees, enterprises employing between 10 and 250 employees are considered as medium while those employing more than 250 are considered as large. 12 Smart specialisation means identifying the unique characteristics and assets of each country and region, highlighting each regionâ&#x20AC;&#x2122;s competitive advantages, and rallying regional stakeholders and resources around an excellence-driven vision of their future. It also means strengthening regional innovation systems, maximising knowledge flows and spreading the benefits of innovation throughout the entire regional economy. 10 11

3. Programming Period 2007-2013: allocation of funds and outcomes Malta was allocated a total of €855 million worth of EU Cohesion Policy funds for the current programming period which started in 2007 and ends in 2013. ERDF funds accounted for more than 50% of the total, around 33% were Cohesion Funds and 13% were ESF funds. Table 4 shows the monetary value per fund, including funds for European Territorial Cooperation.

Table 4: Financial Allocation per Fund (Malta), 2007-201313 Fund

EU Contribution (€ millions)

European Regional Development Fund (ERDF)

444.0

European Social Fund (ESF)

112.0

Cohesion Fund European Territorial Cooperation Total

284.1 15.0 855.1

The largest financial instruments benefiting the private sector were the ERDF funds managed by Malta Enterprise (ME). Businesses could benefit from grants for start-ups, innovation actions (for innovation and the environment), e-business development, research and development (R&D), energy and international competitiveness. Other ERDF funds which could be tapped by the private sector included grants for child care facilities and sustainable tourism projects which were managed by the Department of Social Welfare Standards (DSWS) and the Tourism Sustainable Development Unit (TSDU), respectively. Over and above these, private enterprises could benefit from the JEREMIE (Joint European Resources for Micro and Medium Enterprises) initiative in the form of a loan guarantee scheme. At the same time, ESF aid schemes offered private enterprise the opportunity to tap funds for the training of staff as well as the employment of disadvantaged persons. Together, the schemes allocated for direct use by private enterprise amounted to around €70 million, accounting for around 8% of the total EU Cohesion Policy funds allocated for Malta for the current programming period.14 A detailed breakdown of the funds that were committed or could be tapped directly by the private sector is presented in Table 5. It shows that €7.8 million managed by TSDU and €0.4 million managed by DSWS were committed to various projects.

Inforegio/PPCD. Funds allocated for the financing of infrastructure to assist enterprises are being excluded for reasons discussed in Section 5. 13 14

Table 5: Allocation of Funds to Private Enterprise15 Fund ERDF ERDF ERDF ERDF ERDF ERDF ERDF ERDF ERDF ERDF ESF ESF

Scheme E-business Development Environment (Innovation) Innovation International Competitiveness R&D Start-ups Energy Sustainable Tourism Childcare Facilities JEREMIE Training Aid Framework Employment Aid Programme Total

Implementing Body ME ME ME ME ME ME ME TSDU DSWS HF (EIF) ETC ETC

Committed Funds (€ millions) 2.4 1.0 6.3 4.2 3.1 1.5 12.1 7.8 0.4 10.0 8.9 12.2 69.9

Table 5 also shows that, to date, approved projects supported by ME amount €30.6 million.16 There was only one call when projects that achieved a pass mark of 50% were not supported. This happened in the 3rd call for the energy grant scheme which was oversubscribed by €3.4 million. These projects had to be turned down. Eventually, ME managed to obtain additional funding and will soon be launching a new call for energy grants. These observations suggest the need for (i) better allocation of funds since unnecessary delays are costly, and (ii) assistance to enterprise to ensure that their applications meet the required standards and conditions (see Section 5). The ERDF funded JEREMIE scheme was launched in 2010 to facilitate SME’s access to finance through the implementation of a first loss portfolio guarantee scheme. This was implemented through the European Investment Fund (EIF) (as the holding fund manager) and Bank of Valletta (BOV) as the financial intermediary following a tendering process. Government allocated €10 million for the scheme (€8.8 of which were ERDF), against which BOV created a loans portfolio of €51 million. This created a minimum leverage of 5.8x (without taking into consideration further recycling of funds once loans are repaid). The scheme proved to be a great success and should therefore be re-launched again in the next programming period. Another €21.1 million of ESF funds were committed to projects managed by Malta’s Employment and Training Corporation (ETC). In general, Malta has been having problems in absorbing ESF funds, but the schemes which targeted private enterprise have been fully

PPCD. More projects may be approved before the end of the current programming period since the appeals process covering the 4th Call for projects is still underway. A description of the various schemes is presented in Appendix B. 15 16

committed.17 In fact, it has been reported that the Training Aid Framework (TAF) and the Employment Aid Programme (EAP) are now closed due to full allocation of budgets. The fact that both schemes were oversubscribed goes to show the potential of such funds to be fully exploited by employers.18 Despite the commitment of almost €70 million to private sector projects, the Country Report on the Achievements of Cohesion Policy for Malta notes that Priority Axis I (which covers enterprise and educational infrastructure) is one of the least funded priority axis and for which funds seem to be in strong demand by SMEs (see Appendix C). The report further notes that as a consequence, the allocated funding may not be enough to achieve the policy objectives set in terms of the number of SMEs to be supported by grants or loan guarantees. At the same time, the report notes that most other priority axis have been allocated sufficient funds for the 20072013 programming period. This suggests the need to allocate funds more efficiently in the next programming period (see Recommendation 1). The expert evaluation report also suggests that an improved strategy is required with respect to programme administration and implementation. It is reported that during the 2007-2013 programming period, this proved to be a challenging task, particularly due to limited administration capacity of the managing authority and the implementing bodies. Such problems mainly reflect Malta’s size limitations resulting in proportionately higher administrative burdens. Unfortunately, these problems are hard to overcome since they result from inherent characteristics related to Malta’s geographic size. However, a new lesscentralised setup may be adopted in the new programming period to ease the burden of the managing authority and the intermediate bodies (see Recommendation 4). The expert evaluation report on Malta’s achievements of Cohesion Policy also reports considerable delays in the implementation of the operational programme (OP) at different stages of project implementation, namely, project selection, public procurement and planning permits. Problems outlined include insufficient quality of submissions and withdrawal of applications. These observations indicate that some stakeholders need more hand-holding in the application process. Again, this may be facilitated if the managing authority considers a new setup in the next programming period as well as continued support to investor readiness programmes (see Recommendation 7). In addition, it has been pointed out by the majority of stakeholders that there are delays in reimbursements. In fact, the European Commission (2013a) reported that expenditure rates in Malta are amongst the slowest in the EU along with those of Hungary, Italy, Slovakia and Romania. This increases the risk that available EU funds will be lost and intended objectives not achieved. The same stakeholders also pointed out that the process (to apply for and use EU PPCD reports that ESF funds allocated to Aid Schemes are now fully committed but payments are being made too slowly. 18 EAP had an oversubscription of around €4 million (see The Malta Chamber of Commerce, Enterprise and Industry, 2012). 17

funds) is way too bureaucratic. Some large companies that tapped ESF funds through EAP and TAF noted that the administrative process was relatively burdensome for insignificant sums of money. The managing authority together with the implementing bodies and relevant stakeholders should therefore design a system that ensures a less bureaucratic process.

4. Incentives for an Improved Strategy As noted earlier, the main objective of the EU’s Cohesion Policy is the reduction in regional disparities. These are typically measured by comparisons of Member States’ GDP per head in Purchasing Power Standards (PPS). For a country whose GDP per head is lower than that of the EU average, an increase in GDP per head relative to the EU average is indicative of convergence whilst a decline is indicative of increased regional disparity.

Figure 1: GDP and GNI per head in Purchasing Power Standards 88 86 84 % of EU average

82 80 78 76 74 72 GDP per capita in PPS 70

GNI per capita in PPS

68 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Kolov (2013) notes that before the beginning of the financial crisis in 2007 and the subsequent severe international recession in 2008 and early 2009, the GDP per head in most new Member States grew faster than that of the EU average and most had a GDP per head lower than the EU average. At the same time, GDP per head in rich regions in central and northern Europe grew at rates below the EU average. These two parallel developments made relatively poor and rich regions move closer to the EU average and therefore enhanced regional cohesion. However, Figure 1 shows that during the same period, Malta’s GDP per head declined steadily even though GDP per head was below that of the EU average. The observed increase in GDP per head from 2008 onwards is likely to have been driven by differences in growth performances between Malta and other Member States. In other words, the resilience of the Maltese economy to the international economic crisis and the deeper recessions experienced in other EU Member States, have led Malta’s GDP per head to compare

favourably to the EU average. However, as noted by Kolov (2013), such developments are the result of cyclical rather than structural developments such that it is not clear how durable this apparent convergence will turn out to be. In addition, Malta’s economic growth in recent years has been confined to certain niches that remit large proportions of profits to non-nationals.19 In fact, Figure 1 also shows that the gap between GDP per head and Gross National Income (GNI) per head has been widening since 2004.20 For these reasons, the observed developments in Malta’s GDP per head reflect statistical rather than real convergence. The inappropriateness of GDP per head as an indicator of a country’s level of economic development has led Malta to move out from the less developed countries category and is instead categorised as a region in transition. This adds to pressure on the Maltese Government to revise its strategy to concentrate future EU spending on priority areas to maximise the positive impact of such spending on the country’s economic development. Within this context, EU funds should continue to be utilised to finance projects aimed at enhancing Malta’s absorptive capacity. Here the concept of absorptive capacity refers to (i) the ability of employing transfers in the most productive way by having a sufficient level of human capital, and (ii) the ability of allocating funds in an efficient way, which can be facilitated by a high quality institutional setup. In the past, a significant share of funds (mostly ESF) has been allocated to improve the quality of Malta’s human capital. However, it is believed that further improvement in the administrative set up and better allocation of EU funds can help Malta make better use of Structural Funds to reach the EU’s policy objectives. It is widely accepted that public investment can create favourable conditions for private investment. In fact, some studies show that the impact of business incentives would be weak in the absence of pre-conditions for exploiting the entire potential of such support (see, for example, Bondonio and GreenBaum, 2006). Therefore, investment in infrastructure, the upgrading of industrial parks and the expansion of educational institutions (particularly MCAST and the University of Malta) amongst other projects carried out during the current programming period are all welcomed by the private sector as these may improve the productivity of private investment and ultimately result in economic growth. However, at the same time, there are a number of reasons that lead us to believe that there are aspects related to the allocation of funds that could and should be improved such that funds are most beneficial to the private sector:

For example, this is the case for a large number of companies operating in the financial services sector and the online gaming industry. See IMF (2012). 20 See PWC, 2013. GNI comprises the total value of goods and services produced within a country (i.e. GDP), together with its income received from other countries (notably interest and dividends), less similar payments made to other countries. 19

1. The small market constraint of the Maltese economy necessitates that economic growth is mostly export-led. Such export-led growth can only be the result of further investment in/by the private sector. Irrespective of how one measures market size, the Maltese market is the smallest in the EU. Indeed, Malta ranks 27th amongst all EU Member States both when market size is measured by population and when measured by an adjusted measure of GDP (see Appendix A). When the home-market size characteristic is complemented with the country’s high import propensity, it follows that Malta’s long term economic growth (and hence growth in GDP per head) must be mostly export-led. Thus, it is no surprise that in terms of export intensity, Malta ranks amongst the highest in the EU – third only to Luxembourg and Ireland (see Appendix A).21 The success on the international market of Maltese firms and multinationals operating from Malta is in part the result of past investment by the Maltese Government in infrastructure, education and other factors. However, Malta’s share in world exports can be described as volatile at best. Indeed, Malta’s share in world exports has been declining in 2010 and 2011, suggesting that the productivity of firms supplying the international market from the Maltese islands has been growing at a smaller rate than that of firms supplying the international market with similar products from foreign countries. This relative loss in competitiveness and the dependence of the Maltese economy on export-led growth suggest the need of further investment in productivity enhancing factors as well as measures that incentivise Maltese businesses to go international. As in the current programming period, the Maltese government may seek to provide incentives for private sector investment through grants and financial engineering instruments (FEI) aimed at co-financing investment in R&D, innovation actions, e-business development and internationalisation amongst others.

2. Investment in the private sector yields high rates of economic growth. There is no doubt that some degree of public sector investment is necessary to create favourable conditions for private sector operations and to improve Malta’s competitiveness. For example, public investment in roads, sewage systems, harbours and airports are likely to increase the productivity of the private sector. In this sense, public investment may have a ‘crowding-in’ effect on private investment. However, it is generally accepted that investment by the private sector yields higher rates of economic growth. In fact, while contrasting findings show that public investment may have either expansionary or contractionary impacts on GDP, the majority of empirical research shows that private

See also Azzopardi (2011).

sector investment yields positive rates of economic growth (see, for example, Afonso and St. Aubyn, 2008)22. Arguments that favour a larger allocation of EU Structural Funds to the private sector are also supported by research that shows that an optimal investment mix based on returns to investment results in better performances in terms of GDP growth. Indeed, Percoco (2005) shows that regions which have allocated Structural Funds in favour of private capital are those that have obtained the best return on investment as measured by GDP growth (see Box 1).

Box 1: The Impact of Structural Funds on the Italian Mezzogiorno (Percoco, 2005) Percoco’s (2005) study aims to provide insight on the growth effect of Structural Funds across Italy’s Southern regions (including Molise, Campania, Puglia, Basilicata, Calabria and Sardegna) whilst at the same time taking into consideration decisions made by regional governments on the allocation of funds amongst ‘factors’ with different levels of productivity. These include private capital, transport infrastructures, the stock of human capital and social infrastructures. Amongst these, private capital was the most productive factor. He finds that that the regions that have experienced the best performance in terms of economic growth are the ones that allocated funds more efficiently across productive factors. In other words, the regions that allocated more funds to the relatively more productive factors are the ones that had the largest positive impact on both short and long run economic growth. Results show Basilicata and Sardegna to be the regions with higher levels of allocative efficiency.

In addition, it also recognised that public sector projects require private sector uptake of related tenders such that public sector projects themselves create jobs and wealth for the private sector. However, it should be noted that such growth effects often only result in consumption effects which would not be expected to last in the medium-to-long term. In contrast, private sector investment typically yields higher levels of long-term economic growth and employment.

The European Central Bank (ECB) Working Paper of Afonso and St. Aubyn (2008) presents a study which includes 14 countries, namely, Belgium, Ireland, UK, Austria, Germany, Denmark, Finland, Greece, Portugal, Spain and Sweden as well as Canada, Japan and the United States. 22

3. Boosting private investment when the economy is in distress is likely to have a significant and permanent positive impact on the countryâ&#x20AC;&#x2122;s potential growth. Figure 2 shows that Maltese private sector investment peaked in 2007 and then followed a downward trend. In part, this decline follows the surge in investment that resulted from the expenditure of huge savings of Maltese Liri in the run-up to the adoption of the euro. This was a one-off event and we would not expect such relatively high levels of private sector investment to have been maintained in the years that followed. Our focus therefore shifts on other factors that have led to a slowdown in private sector investment. The observed decline in private sector investment may have been the result of the uncertainty that surrounded (and is still surrounding) the euro area and the European economy. This view is corroborated by the observed simultaneous decline in private sector investment in the EU-27. Since such negative short-term developments may have a lasting, near-permanent impact on the countryâ&#x20AC;&#x2122;s economic production, boosting private sector investment can have a long-lived impact on GDP.

Figure 2: Private Sector Investment 25

% of GDP

5 EU-27 Malta 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

The observed negative developments have two (not mutually exclusive) explanations. One potential deterrent of private sector investment are credit constraints, i.e. Maltese businesses may be finding it more difficult to borrow to finance their potential investment.

Another potential explanation is constrained demand, i.e. businesses are less willing to invest and borrow due to low business prospects.23 EU Structural Funds may therefore be used in an attempt to halt this downward trend in private sector investment by ensuring access to finance for businesses and by encouraging continued private sector investment despite temporary relative deficiencies in demand (see Section 5). This support to private sector investment is even more important if one considers that at 10% of GDP, the level of investment by the Maltese private sector is some 6 percentage points lower than that recorded by the EU-27 average (see Bonello, 2010).

The Mid-Term Evaluation Report also notes that many Maltese businesses had cash-flow difficulties during this period. 23

5. Way Forward: enabling the private sector to drive Malta’s growth, job creation and competitiveness. Section 4 identified a number of incentives for an improved strategy. It has been noted that export-led economic growth is Malta’s only sustainable long-term strategy and that investment in/by the private sector is the only possible means of improving Malta’s export performance. It was also noted that investment by the private sector typically has relatively high rates of return, that the level of investment by the Maltese private sector has been declining and that it is significantly below that of the EU average. In addition, Section 3 notes that Maltese businesses have faced several difficulties in applying and using Structural Funds. On the basis of these arguments and in an attempt to address these problems, this section puts forward a set of recommendations aimed improving the allocation of Structural Funds between the private and the public sector as well as recommendations aimed at enabling the private sector to drive Malta’s growth, job creation and competitiveness. Implementing this latter set of recommendations is necessary to ensure that the private sector has both the capacity and ability to absorb the Structural Funds allocated for SMEs.

Recommendation 1: Ensure efficient and sufficient allocation of Structural Funds that target areas which best meet the private sector’s investment needs. The Country Report on the Achievement of Cohesion Policy for Malta (2012) notes that, during the 2007-2013 programming period, Priority Axis I (that covers enterprise and educational infrastructure) was one of the least funded of the priority axis and for which there appears to be strong demand by SMEs. The report further notes that, as a consequence, funding allocated for this priority axis for the programming period 2007-2013 may not be enough to achieve policy objectives in terms of the number of supported SMEs. At the same time, the report notes that most other priority axis have been allocated sufficient funds. The insufficiency argument is also supported by Malta’s SBA Fact Sheet (European Commission, 2012)24 which notes that the share of public funds channelled to SMEs through EU regional funds is considerably lower than for the EU in general. Thus, it is recommended that the management authority undertakes an exercise that analysis the demand for different grants and other forms of financing during the 2007-2013 programming period to ensure efficient allocation of funds in the new programming period. Within this context, MBB supports the European Commission’s proposal that Structural Funds should in Malta’s case aim at fostering competitiveness and convergence with a general refocus of spending towards R&D, support to SMEs, quality education and training as well as inclusive labour markets that foster quality employment and social inclusion. In addition, MBB proposes to focus on supporting medium-sized enterprises that already produce or offer high-quality Small Business Act country fact sheets serve as an additional source of information designed to improve evidencebased policy making. 24

products and services to tap foreign markets (see Recommendation 5). This is the only way that Malta can achieve sustained levels of economic growth. It must thus be ensured that the ERDF and ESF funds allocated to the thematic objectives of (i) the enhancement of the competitiveness of SMEs and (ii) the strengthening of R&D are sufficiently large to meet the demand from the private sector. Initial estimates suggest that in the 2014-2020 programming period around €180-200 million should be allocated for direct use by the private sector. This figure is estimated on the assumption that the level of Maltese private sector investment as a percentage of GDP should converge with that of the EU-27. On average, between 2007 and 2012, Maltese private sector investment as a percentage of GDP was around 3.2% lower than that of the EU average. This is equivalent to around €200 million per annum, such that it accumulates to €1.4 billion over the 7 year budget cycle if Malta fails to close the gap. Assuming conservative aid intensities in the case of grants and a leverage of 5.8x for FEIs (as per JEREMIE in the current programming period), this would suggest an allocation in excess of €200 million over and above the €70 million allocated for the 2007-2013 programming period. However, it is suggested to allocate a total of €180-200 million for direct use by the private sector in order to provide the right balance between reducing the gap with the EU average and ensuring sufficient demand from the private sector for the allocated funds. Such an allocation would avoid having to turn down eligible project proposals by private enterprise because they are outcompeted by other applicants. Importantly, the funds allocated to the private sector must meet the demand for both grants and FEIs. Grants remain the most important source of financing for Maltese businesses.25 This is particularly the case for firms lacking the initial collateral to finance their initial stock or working capital; for companies having a low capital base; and for those companies operating in sectors whose sustainability is often a challenge (such as agriculture). In addition, the small market size of the Maltese economy makes grants a necessity if local firms are to successfully tap international markets. Complementing such grants are the increasingly popular FEIs which offer lending principally repayable support to projects through equity/risk capital or guarantees to intermediaries that provide lending to final beneficiaries that have difficulties to access finance. Recommendations relating to such instruments are presented later in this section of the report.

Recommendation 2: Continued public sector investment that enhances the country’s absorptive capacity without crowding-out private investment and with due consideration to Public-Private Partnership (PPP) opportunities. Government should continue investing in public sector projects that set the economy on a path of sustainable economic growth by facilitating private sector investment. This should be geared to improve Malta’s competitiveness by focusing on areas where the country lacks infrastructure, A survey conducted by Ernst & Young (on behalf of MBB) shows that grants remain the most popular source of financing for SMEs. 25

such as the construction of breakwaters for new yacht marines, fibre optic links between Malta and Gozo and between Malta and continental Europe, power generation and other public sector infrastructure. However, any public sector projects should avoid crowding-out private capital. This may result if EU funds are used to finance public sector projects that are close substitutes to private capital. There are also sectors where public sector entities are already in operation. In such cases, there have been instances where the support of EU funds might have given public sector entities an unfair advantage over private businesses for whom funds were not equally accessible. The waste management sector is a case in point.26 Such considerations are even more important if one considers the greater levels of efficiency typically achieved by private businesses when compared to the public sector. To overcome such situations, the Maltese Government may (in some cases) consider the possibility of PPPs. This would ensure greater involvement by the private sector which typically leads to faster project completion rates, higher return on investment and enables risk sharing between the private and the public sector. In addition, PPPs offer a unique opportunity for government to cut down its budget deficit amid the challenges that it is currently facing. These relate to the European Commission’s recommendation to place Malta under an Excessive Deficit Procedure (EDP) as well as longer-term public finance sustainability issues related to increasing pension and health care expenditure. In fact, the European PPP Expertise Centre (EPEC, 2011) reports that, in most cases, public entities are interested in combining EU Structural Fund grants with PPPs because they wish to service the necessary co-financing from private funds and/or because it sees value in an off-balance sheet treatment of the underlying asset. One way to make this work is for the Maltese Government and the managing authority to launch open competitions for the funding of PPPs in relation to specific objectives. An example of good practice in this regard is presented in Box 2. Furthermore, through the support offered by the Structural Funds, the JESSICA (Joint European Support for Sustainable Investment in City Areas) programme can also provide financing in the form of loans, equity or guarantees to PPPs (see Recommendation 3). Such elaborate projects may lead to situations where local authorities lack the necessary technical expertise to identify financial models that can satisfy the Commission’s criteria for the funding of PPPs. In such cases, government should consider appointing experts for advice in this regard. This can take place through JASPERS (Joint Assistance to Support Projects in European Regions) which provides advice during project preparation to help improve the quality of major projects to be submitted for grant financing under Structural and Cohesion Funds. This assistance is provided free of charge and is geared towards accelerating the absorption of available funds.

The Malta Chamber of Commerce, Enterprise and Industry (2009) argues that the creation of WasteServ Malta Ltd. has somewhat distorted the waste management market – a market which could have otherwise opened a number of opportunities for the private sector. In particular, it is noted that WasteServ operated on an unlevel playing field as data published by PPCD shows that it was supported by millions of euros of EU Structural Funds with the consequence of the private sector being squeezed out of the market. WasteServ should have been acting as an operator of the last resort. But since its inception, the private sector can attest that very often this was not the case. 26

Box 2: Good Practice Examples for Supporting PPPs Iceland launched a new kind of collaboration between public and private funders of innovation and industry. The idea is to stimulate innovation and entrepreneurship through open competitions for funding of public-private clusters for innovation. This targeted programme has been developed by the Federation of Icelandic Industries and the Icelandic Technology Development Fund to foster innovation through public procurement. There are a limited number of grants on offer – each a maximum of €182,000 for a 3 year period – for private enterprises in collaboration with a public buyer of goods or services. This grant covers a maximum 25% of total costs and the public buyer has to supply a minimum of 25% of the total (which can take the form of in-kind financing). The scheme targets education, health, welfare, energy and the environment.

Recommendation 3: Ensure adequate access to finance. Member States and managing authorities have the option of using part of the resources made available to them through the ERDF and the ESF to support FEIs. These instruments ensure that there is necessary financing for areas of national and EU interest and thus assist in correcting market imperfections that give rise to insufficient funding in such areas. In contrast to the 20072013 programming period, the FEI rules proposed for 2014-2020 are non-prescriptive to sectors, beneficiaries or types of projects. Instead, Member States and managing authorities may use financial instruments in relation to all thematic objectives covered by the OP. As noted in Section 3, in the 2007-2013 programming period, Malta’s only FEI was the JEREMIE scheme. This took the form of a first loss portfolio guarantee to be used for purposes of investments and capital expenditures undertaken by a wide spectrum of industries. The scheme proved to be a big success in terms of take-up, effectiveness and efficiency (see MBB, 2013).27 On the basis of this success and the EU’s intent of pushing towards an increased leverage effect of the EU budget, in the 2014-2020 programming period, there is potential scope to allocate more funds to support FEIs. Structural Fund regulations oblige managing authorities to undertake an ex-ante assessment to define the total value to be allocated to FEIs through a quantitative assessment of the market. This exercise should commence in earnest. Preliminary estimates suggest that as much as €2025 million of ERDF funds would be necessary to meet the demand over the next programming period. These should be used to:

Circa 480 facilities to about 430 SMEs having been approved since the inception of the JEREMIE scheme.

(i)

Extend the scope of the current JEREMIE loan guarantee scheme, possibly extending the scope of such an instrument to include additional eligible sectors (such as agriculture and agri-processing firms, fisheries and aquaculture); Introduce loan-based financial instruments;28 and Introduce equity-based financial instruments, i.e. funded risk-sharing ‘equity’ or ‘equity guarantee’ products.

(ii) (iii)

Best practice examples of how these financial instruments have been implemented in several EU Member States are presented in Box 3 below. Some of them relate to instruments based on Structural Funds (specifically, those related to the Languedoc-Roussillon region) while others are based on models adopted by development banks (specifically those related to KfW). The role played by the latter could instead be fulfilled by an intermediate body or a managing authority that makes use of Structural Funds.

Box 3: Good Practice Examples for Loan- and Equity-based FEIs 1.

In the Languedoc-Roussillon region (in France) a seed loan product aimed at start-ups was introduced with a planned direct leverage of a multiple of 2. It targets SMEs with less than 3 years since inception or entrepreneurs with the objective to build up their SMEs in the next 6 months. The product entailed an interest-free loan of up to €100,000 without any personal guarantee required. The risk sharing was split equally between the fund and the financial intermediaries administering it.

KfW Development Bank (in Germany) offers 5-10 year loans of up to €100,000 for capital expenditure and working capital with the maximum share of working capital limited to €30,000. It targets business founders, self-employed or small enterprises which have been active in the market for less than 3 years and require start-up capital. Alternatively, the loan may be used for takeovers or to acquire interest in an enterprise. The instrument works as follows: 

 

A commercial bank bears only 20% of the credit risk while KfW bears 80% - this makes it easier for banks to decide on the loan provided the proposed business idea holds the prospect of sustainable success; The loan interest rate is more favourable than a commercial bank loan; and On request, two repayment-free years may be granted, i.e. businesses only pay interest in the first 2 years. This is recommended in cases in which the business cannot be expected to generate profits from the very start.

The European Commission is currently discussing different off the shelf instruments, such as risk sharing loan funds, capped guarantee funds, co-investment facilities, renovation loans and urban development funds. This will provide guidance as to which products are best suited for Malta. 28

KfW Development Bank offers a subordinated loan with a term of 15 years and a maximum loan sum of €500,000 for borrowers that have a minimum amount of equity. It targets business founders, self-employed and small enterprises which have been active for less than 3 years and do not have enough equity. It is intended to strengthen the borrower’s equity base and to pave the way for debt capital. The model works as follows:    

Total investment consists of a 40% subordinated loan from KfW, 10% equity and 50% of borrowed capital; The full amount of the subordinated loan is available in full for 7 years before repayment begins; The interest rate is subsidised for the first 10 years with the first 3 years being heavily subsidised; and No collateral is required for the subordinated loan.

4. KfW Development Bank mobilises equity for young innovative companies with assistance from the German Federal Ministry of Economy and Technology. In doing so, KfW enters into participations (which in most cases do not involve KfW assuming part of the management of the company) with the precondition that at least one other investor (the Lead investor) also enters simultaneously into participation. KfW and the lead investor are subject to the same financial conditions and KfW participates with up to 50% of the investment sum which is co-financed by the lead investor and KfW. The Lead investor should manage and develop the company and gets remuneration from KfW in return. This is ideal for small, young, innovative and technology based companies which are not more than 10 years old. 5.

KfW offers an innovation programme for self-employed professionals and enterprises. It supports R&D measures (part 1 of the programme) and the introduction of new products, processes or services to the market (part 2 of the programme). In part 1 (the research development phase), up to 100% of investment costs are eligible for financing up to a maximum of €5 million per project. In part 2 (the market introduction phase), the programme covers 80% of investment costs up to a maximum of €2.5 million per project. The attractiveness of this programme is the 10-year fixed interest rate, a repayment-free start-up period, and the fact that business’ commercial bank is exempt from the liability for the subordinated tranche. This makes it easier for the bank to decide on the loan.

Similar FEIs may be funded by ESF.29 For example, Sicily and some Baltic countries have used ESF funds to set up FEIs for start-up companies. This would ease the difficulty that Malta (and many Member States) may face in absorbing the increase in ESF in the next programming period. In fact, the allocation of ESF funds to Malta is expected to increase from €112 million in 2007-2013 to an estimated €200 million in 2014-2020. Discussions with key stakeholders have led us to believe that government should allocate a pot of €10 million (over and above the 29

To date, Malta has only funded FEIs using ERDF.

allocation to FEIs from ERDF) to create the first loan guarantee with an initial start-up grant to assist start-up companies. In addition, EU countries can choose to invest some of their EU Structural Fund allocations in revolving funds to help recycle financial resources to accelerate investment in Europe's urban areas. This is possible through JESSICA – an initiative of the European Commission developed in co-operation with the European Investment Bank (EIB) and the Council of Europe Development Bank (CEB). Essentially, it is a FEI that promotes sustainable urban development by supporting projects in urban infrastructure, heritage or cultural sites for tourism, the creation of new commercial floor space for SMEs, university buildings and energy efficiency improvements amongst others. Thus far, Malta has not made use of JESSICA. Contributions from the ERDF can be allocated to Urban Development Funds (UDFs) which invest them in PPPs or other projects included in an integrated plan for sustainable urban development. Like JEREMIE, these investments can take the form of equity, loans and/or guarantees. Alternatively, managing authorities can decide to channel funds to UDFs using Holding Funds (HFs) which are set up to invest in several UDFs. This is not compulsory, but does offer the advantage of enabling managing authorities to delegate some of the tasks required to implement JESSICA to expert professionals. By combining Structural Funds with other sources of funding that may already exist, JESSICA can boost resources making it easier to provide support to a larger number of projects.

Recommendation 4: Government (in agreement with the European Commission) should entrust private sector non-profit intermediaries with the implementation and management of part of the Structural Funds allocated to Malta. These are referred to as ‘global grants’. The majority of Member States have decided to manage EU funds directly through state agencies. However, private sector non-profit business intermediary organisations can play a crucial role in further increasing the absorption of EU funds by managing part of the Structural Funds allocated to Malta. This would enable intermediaries to make optimal use of their knowledge of local sectors and makes it possible for them to assist in project selection, evaluation and eventual monitoring. Effectively, the global grant mechanism would be a response to the difficulties that SMEs face in accessing Structural Funds. The advantages of this mechanism are that: (i) (ii) (iii)

It is an extremely efficient instrument because it addresses actual SME needs and is flexible in both decision-making and the implementation of decisions; It is a specialised instrument that targets SMEs; It has strong legal and financial stability through contracts that specify the amount, duration and measure of financial support; and

(iv)

It is flexible to entrepreneurial needs due to the direct contact of global grant managers with many entrepreneurs.

In Malta, this role can be fulfilled by MBB. Specifically, it can: 

Administer small grants of say €5,000-€7,500 for the assistance of small companies (employing less than 50 persons) for the improvement of operations, people development, etc. Such grants can also be granted to recruit new university graduates at no cost to the employer (say, a 6 month enterprise training programme upon graduation). This will address skill shortages and increase the employability of young graduates.



Offer technical assistance to SMEs (employing less than 250 persons) to develop and submit EU funded applications to open calls for grants by intermediate bodies. This can take the shape of a PPP with consultancy service providers.

MBB has been informed that there are a number of banks interested to cover the guarantee which would be required for such an operation. This can be made possible if regulations are adapted from best practices of similar economies. Alternatively, government may also opt to manage a fraction of these funds through a PPP. Such as setup would be expected to result in greater efficiency and absorption of EU funds as MBB promotes available funds and supports small and micro enterprises in their applications for EU funds. This may also be a response to the general lack of project evaluation culture in Malta if MBB is assigned the task to formally evaluate programme implementation.30 Examples of good practice are presented in Box 4 below. In order to ensure that Malta has the necessary knowhow to manage such a system, it is recommended that the managing authority makes use of EU funds from the current programming period to fund a Maltese delegation (composed of private and public stakeholders) to learn from regions which have decentralised the management of EU funds whereby reputable intermediary business organisation could directly administer schemes in aid of private enterprise through the ‘global-grants’ model. This would enable MBB to learn about the administration of the global grant, the structuring of disbursement mechanisms and the due diligence processes put in place to ensure transparent and effective evaluation procedures.

The expert evaluation report on Malta’s achievements of Cohesion Policy reports that formal evaluations are seen as an administratively cumbersome exercise. 30

Box 4: Good Practice for Global Grants and Business Support Centres

In Andalusia (Spain), the ‘Agencia de Innovacion y Desarrollo de Andalucia’ (IDEA) acted as an intermediary body with the aim to support and promote regional SMEs. The procedures for the use of the global grant (which in 2000-2006 amounted to €446,507 million, of which €333,096 million were ERDF) were the subject of an agreement between the managing authority and the intermediary body. Its schemes provided strategic and financial support for enterprises and the promotion of clusters amongst others.

The Federal Administration of Belgium set up a decentralised network of 27 ‘SME Centres’. They provide frontline services to the self-employed, businesses and their representative’s assistance with filling forms and information about the state of procedures, the issuing of certificates, and the processing of declarations regarding the launch, modification of cessation of activities. The aim is to reduce the administrative burden on SMEs.

Recommendation 5: Increased support for businesses with export potential to tap foreign markets. Malta is currently host to a number of medium-sized family-owned companies that already produce or offer high quality products and services to the largest multinationals operating from Malta. Given their experience and expertise, these companies have the potential to break into foreign markets if they are provided with the right incentives.

Box 5: Good Practice Examples for Internationalisation Support Schemes In the Wallonia region (in Belgium), a coaching voucher system has been adopted. The vouchers give enterprises easier access to high-level experts who can advise them on the internationalisation of their activities. These coaches support them in management, financing, productivity and technical know-how. Each SME is entitled to 5 vouchers of €1,000 each. After 4 months of implementation, 27 SMEs had used the system for a total amount of €135,000. These enterprises came from a variety of sectors, including ICT, food and pharmaceuticals amongst others.

During the 2007-2013 programming period, such growth was mainly supported by the ERDF International Competitiveness Grant Scheme which supported enterprises that were willing to establish a new market or introduce a new service or product in an existing international market. The incentive was aimed to facilitate the building of internal capacities within the

enterprise so as to encourage more enterprises to internationalise. The scheme supported 50% of the eligible costs in relation to expenditure incurred for market development costs, engagement of a business development manager and active participation in international trade events. It was well received by stakeholders and the funds allocated to the scheme have been committed to various private sector projects. However, feedback from stakeholders also reveals that in many cases the scheme did not provide sufficient support for businesses to penetrate foreign markets. In particular, when SMEs export their products and services there is a risk that they donâ&#x20AC;&#x2122;t get paid. In order to address these concerns, it is recommended that the managing authority (with the assistance of EIF) creates a FEI that offers part guarantees so that it easier for local banks to support SMEsâ&#x20AC;&#x2122; exports of goods and services. Alternative support measures may take the form of coaching vouchers (see Box 5).

Recommendation 6: Improved institutional quality, elimination of bottlenecks and reduction in delays of reimbursements. Feedback from consultation with a number of relevant stakeholders also suggests that there is a need for continued improvement in institutional quality. On the basis of this feedback, it is desirable that: (i) measures that gauge the relative success of the management of EU funds should not overrate quantity as opposed to quality of spending; and (ii) the allocation of funds should be directed towards growth enhancing projects in timely and efficient manner, particularly by eliminating bottlenecks (particularly those which have to do with the simplification of funding procedures) and reducing delays in reimbursements. Thus, it is recommended that the managing authority audits the regulations and procedures that applied during the 2007-2013 programming period and introduces a tacit approval rule for all registration regimes to eliminate the risk of delays and long waiting times in project approval. Examples of good practice for audits and tacit approval rules are presented in Box 6 below.

Box 6: Good Practice Examples for System Audits and Tacit Approval Rules 1.

In 2007, the Swedish government introduced a comprehensive programme to reduce the administrative burden on small businesses. The programme has a bottom-up regulatory approach which translates into the following procedure: every regulation proposed by a government agency must be analysed from the point of view of the companies affected by it to make sure that regulation does not cause unnecessary administrative burdens. The evaluation procedure is marked by transparency, rigorous evaluations and follow-ups. These impact analyses are then audited by the Swedish Better Regulation Council to ensure that the aim of the policies is fulfilled with the least administrative costs for companies.

In 2011, Bulgaria introduced a tacit approval rule to eliminate the risk of delays and long waiting times which can hamper or discourage businesses from undertaking certain activities. The rule works as follows: if on the stipulated deadline there is no answer by the relevant authority, the registration is considered as accepted.

Recommendation 7: Ensure investor readiness. Over the years, the EU and individual Member States have demonstrated their commitment to bridge the finance gap faced by SMEs. However, complementary efforts are needed on the demand side, i.e. SMEs need to become ‘investment ready’ if they want to satisfy their investor needs. This refers to the capacity of an entrepreneur – who is looking for external finance – to understand the specific needs of an investor and to be able to respond to these needs by providing an appropriate structure and relevant information, by being credible and by creating trust to increase the probability of an investor to invest in the project (European Commission, 2006). An investor readiness project carried out locally by ME during the current programming period can be considered a success (see MBB, 2013). Thus, there is scope to re-launch such a programme in the next programming period. Other support which took the form of education seminars organised by local banks should also be encouraged.

Recommendation 8: Ensure the highest possible level of regional aid intensities to private enterprise. Malta’s current maximum permissible level of aid intensity appears to be providing a reasonable balance between protecting declining industries and allowing sectors to gradually become more productive. If the level of aid intensities proposed in the draft RAG were to be adopted, the aid intensity for large enterprises would be zero whilst those of medium and small enterprises would be reduced by 20 percentage points by 2020. This would make it more difficult for private enterprises to make use of Structural Funds. Government should therefore continue to lobby the European Commission to ensure minimal reductions in permissible state aid intensities.

Recommendation 9: Encourage blend facilities. Blend facilities refer to combinations of grant funding with financial instrument funding. For example, a facility could include grant funding, financial instrument funding and the remaining investment being financed directly by the SME. This hybrid setup would capture the synergies between assistance and the revolving nature of financial instruments. However, any new facility will be subject to state aid rules. Therefore, the administrative feasibility of this option would need to be further analysed as state aid may limit the blending of grants with FEIs and instead only allow for grants to be blended with loans priced on normal market-lending parameters. An example of a good practice is presented in Box 7 below.

Box 7: Good Practice Examples for Blend Facilities Hungary’s New Széchenyi Plan Combined Loan Guarantee tenders for micro, small and medium enterprises is a best practice example of a blend facility. The government provides EU-funded security for the tenders amounting to HUF 400 million. The new call for tenders is realised through a one-stop shop administration, with banks providing the full sum of the EU grant in advance for the duration of the implementation of the project. It is made simpler by the fact that security only has to be provided towards the finance provider. The enterprises need to finance 25% of the total cost while the rest of the project budget is given by a 25% non-refundable EU grant and a 50% bank loan.

Recommendation 10: Consider setting a minimum grant and loan values to avoid disproportionately large administrative burdens. During the 2007-2013 programming period, the average grant per enterprise was around €65,000 while the average loan amount in the case of JEREMIE was in the region of €90,000. The managing authority may use these values to come up with a minimum grant/loan value in order to reduce the disproportionately large administrative burden that may result when businesses apply for small grants. This minimum grant/loan value should be significantly lower than the average grant and loan values that were recorded in the 2007-2013 programming period but large enough to make it worth devoting the required resources to apply for and use EU funds.

6. Conclusion During the current programming period, private enterprise and the Maltese economy in general, have benefited greatly from EU Structural and Cohesion Funds. However, it is also apparent that further effort is needed to improve on the achievements of the recent past. In particular, it is noted that the improvement in Malta’s GDP per head from 2008 onwards may be temporary rather than permanent. It is believed that further improvements can only be achieved if funds are allocated more efficiently and if more funds are allocated to the private sector. Indeed, studies have shown that allocations which have favoured the private sector yield higher rates of economic growth. This is even more important when considering that investment (as a % of GDP) by the Maltese private sector has followed a downward trend in recent years and is well below that of the EU average. At the same time, the small country constraint necessitates that Malta’s growth is mostly export-led. This can only be achieved through investment by the private sector. For the 2014-2020 programming period, Malta has been allocated €776 million worth of EU funds for Cohesion Policy purposes. These funds are to be used to co-finance projects undertaken by the public and private sector, with programme management and project selection taking place at the national level. However, the European Commission has requested that each Member State is subject to a Partnership Contract for the next programming period. This contract sets out an assessment of national development needs that, in turn, provide the basis for an agreement between the European Commission and the Member States regarding the use of EU funds. In addition, Malta is subject to a number of changes relating to the criteria for allocating EU funds when compared to the current programming period. Specifically, Malta has been allocated less Cohesion Policy funds and is subject to lower permissible state aid intensities. Partnership Contract negotiations between the Maltese government and the European Commission are on-going. On the basis of the arguments raised in Section 4, this report put forward a number of recommendations for consideration by the managing authority in their ongoing negotiations: 1. Ensure efficient and sufficient allocation of Structural Funds that target areas which best meet the private sector’s investment needs. Initial estimates suggest that in the 20142020 programming period around €180-200 million should be allocated for direct use by the private sector in the form of grants or FEIs. 2. Continued public sector investment that enhances the country’s absorptive capacity without crowding-out private investment and with due consideration to PPP opportunities. Specifically, the managing authority should avoid using EU funds to support public sector projects that are close substitutes to private capital. To overcome such situations, the Maltese government may (in some cases) consider the possibility of

PPPs which, in turn, offer a unique opportunity for government to cut down its budget deficit amid the challenges that it is currently facing. 3. Ensure adequate access to finance: it is suggested that as much as â&#x201A;Ź20-25 million of ERDF funds would be necessary to meet the demand over the next programming period. These should be used to extend the scope of the current JEREMIE loan guarantee scheme, to introduce loan-based FEIs and to introduce equity-based FEIs. An additional â&#x201A;Ź10 million from ESF should be used to create similar instruments. 4. Government (in agreement with the European Commission) should entrust business intermediaries with the implementation and management of part of the assistance. In Malta, this role can be fulfilled by MBB through a global grant. This would be used to assist small companies for the improvement of operations and people development, and to offer technical assistance to SMEs in developing and submitting applications for grants by intermediate bodies. The latter can take the shape of a PPP with private consultancy services providers. As a first step, the managing authority can support an educational visit abroad for both public and private stakeholders. 5. Increased support for businesses with export potential to tap foreign markets. This may take the form of export credit guarantees or coaching vouchers that give enterprises easier access to high-level experts on internationalisation. 6. Improved institutional quality, the elimination of bottlenecks and the reduction of delays in reimbursements. This can be achieved by auditing regulations and procedures related to the 2007-2013 programming period as well as the introduction of tacit approval rules. 7. Ensure investor readiness by re-launching the successful programmes carried out in the current programming period. 8. Continue lobbying the European Commission to ensure the highest possible level of regional aid intensities to private enterprise. 9. Encourage blend facilities (i.e. a combination of grants with financial instruments) to capture the synergies between assistance and the revolving nature of FEIs. 10. Consider setting a minimum grant and loan values to avoid disproportionately large administrative burdens.

Finally, it should be noted that the weight attributed to some of these recommendations is highly dependent on the outcome of the on-going negotiations between the Maltese government and the European Commission. For example, if the maximum permissible state aid intensities

are significantly reduced, then one would expect the recommendation to allocate more funds to FEIs to gain in importance when compared to recommendations relating to the allocation for grants. In addition, it should also be noted that the Partnership Contract is only an agreement which sets the stage for discussions on Maltaâ&#x20AC;&#x2122;s OP. This would outline in more concrete terms Maltaâ&#x20AC;&#x2122;s priorities for the programming period 2014-2020.

References and Bibliography Afonso, A. and St. Aubyn, M. (2008) Macroeconomic Rates of Return of Public and Private Investment: Crowding-In and Crowding-Out Effects. European Central Bank, Working Paper Series, No. 864. Azzopardi, M.R. (2011) Social Policies in Malta, Commonwealth Secretariat and United Nations Research Institute for Social Development. Bondonio, D. and GreenBaum, R. (2006) Do Business Investment Incentives Promote Employment in Declining Areas? Evidence from EU Objective 2 regions. European Urban and Regional Studies, 13(3): 225-244. Bonello, M.C. (2010) Time for a reality check, Speech given at the annual dinner of the Institute of Financial Services, Malta. Centre for Industrial Studies (2010) Impact of Additionality on the Real Economy of the EU Member States. Prepared by Centre for Industrial Studies (CSIL), Milan for the Directorate General Regional Policy, European Commission. E-Cubed Consultants Limited (2012) Expert evaluation network delivering policy analysis on the performance of Cohesion Policy 2007-2013: Country Report on Achievements of Cohesion Policy: Malta. E-Cubed Consultants Limited (2011) Expert evaluation network delivering policy analysis on the performance of Cohesion Policy 2007-2013: Country Report on Achievements of Cohesion Policy: Malta. EPEC (2011) Using EU funds in PPPs: exploring the how and starting the discussion on the future. European Bank Coordination Initiative (2011) The Role of Commercial Banks in the Absorption of EU Funds. Report by the Working Group. European Commission (2013a) Cohesion Policy: Strategic Report 2013 on Programme Implementation 2007-2013. Report from the Commission to the European parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. European Commission (2013b) Regulation of the European Parliament and of the Council laying down common provisions on the ERDF, the ESF, the Cohesion Fund, the EAFRD and the European Maritime and Fisheries Fund covered by the Common Strategic Framework and laying down general provisions on the ERDF, ESF and Cohesion Fund and repealing Council Regulation (EC) No 1083/2006. European Commission (2012a) European Union Support Programmes for SMEs: an overview of the main funding opportunities available to European SMEs.

European Commission (2012b) Position of the Commission Services on the development of Partnership Agreement and programmes in Malta for the period 2014-2020. European Commission (2012c) SBA Fact Sheet 2012: Malta. European Commission (2012d) SBA Fact Sheet 2012: United Kingdom. European Commission (2012e) SBA Fact Sheet 2012: Iceland. European Commission (2012f) SBA Fact Sheet 2012: Bulgaria. European Commission (2012g) SBA Fact Sheet 2012: Belgium. European Commission (2006) Investment Readiness, Discussion paper for workshop. European Council (2013) Conclusions: Multiannual Financial Framework. Government of Malta (2013) Successful closure of negotiations for Malta on Multiannual Financial Framework for 2014-2020: Total EU funding of €1128 million over the next seven years. Kolov, A. (2012) The Impact of the Recession in 2008-09 on EU Regional Convergence, European Investment Bank. Malta Business Bureau (2013) Market Gaps in Access to Finance and the Feasibility of New Financing instrument in the EU Addressing the Credit needs of Maltese business. Percoco, M. (2005) The Impact of Structural Funds on the Italian Mezzogiorno. Region de Developpement, 21:141-153. Price Waterhouse Coopers (2013) An assessment of the proposed revisions to the regional Aid guidelines and their impact on Malta. The Malta Chamber of Commerce, Enterprise and Industry (2012) Towards the development of Malta’s Industrial Policy. Executive board of the Manufacturing Economic Group. The Malta Chamber of Commerce, Enterprise and Industry (2009) Position of the Malta Chamber of Commerce, Enterprise and Industry on the Solid Waste Management Strategy for the Maltese Islands – 1st Update.

Websites and Data Sources European Commission Eurostat Inforegio KfW Development Bank Malta Enterprise (ME) Planning and Priorities Coordination Division (PPCD) National Statistics Office (NSO)

Appendix A – Market Size and Export Intensity This section of the report presents data and indictors relating to market size and export intensity. We adopt two measures for domestic market size: (i) a region’s/country’s population, and (ii) an adjusted measure of GDP. The latter indicator takes into consideration the purchasing power of the individual (which is ignored by the first measure). The adjustment measure is defined as GDP less exports plus imports. In this setup, exports are assumed to be an indicator of supply while imports by locals are a measure of local demand and should therefore be added to GDP when estimating a country’s market size. Country export intensity is then measured as the share of total exports of goods and services in the country’s total GDP.

Population Value Rank Belgium Bulgaria Czech Republic Denmark Germany Estonia Ireland Greece Spain France Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom

10,573,969 7,734,215 10,328,639 5,444,447 82,215,632 1,349,486 4,200,628 11,123,817 43,555,406 63,083,937 58,760,344 764,647 2,270,898 3,361,705 472,498 10,086,949 403,887 16,327,459 8,228,052 38,239,394 10,489,049 21,715,108 2,013,074 5,393,707 5,269,020 9,109,276 60,590,968

10 16 12 17 1 24 20 9 5 2 4 25 22 21 26 13 27 8 15 6 11 7 23 18 19 14 3

Market Size (% of EU-27) Value Rank 2.5 0.7 1.6 1.3 18.7 0.2 1.0 2.3 9.3 14.3 12.9 0.1 0.2 0.4 0.2 1.3 0.1 4.1 2.0 4.3 1.8 1.8 0.4 0.7 1.2 2.1 14.8

8 20 14 15 1 25 18 9 5 3 4 26 23 21 24 16 27 7 11 6 12 13 22 19 17 10 2

Export Intensity Value Rank 0.79 0.54 0.65 0.50 0.42 0.77 0.91 0.23 0.27 0.27 0.27 0.48 0.47 0.59 1.61 0.76 0.87 0.72 0.53 0.37 0.31 0.34 0.63 0.79 0.42 0.48 0.28

5 12 9 14 18 6 2 27 24 26 25 16 17 11 1 7 3 8 13 20 22 21 10 4 19 15 23

Source: Eurostat

The reported data relates to averages for the period 2000-2012. It shows that: (i) Malta ranks last in terms of market size when using both population and an adjusted measure of GDP, and (ii) Malta ranks third in terms of export-intensity.

Appendix B â&#x20AC;&#x201C; Description of Grants Managed by ME and TSDU Below is a brief description of funds allocated for direct use by the private sector and managed by Malta Enterprise and the Tourism Sustainable Development Unit:

Scheme Title Start-up Scheme

E-business Grant Scheme Innovation Actions Grant Scheme Innovation Actions Grant Scheme - Environment R&D Grant Scheme Energy Grant Scheme

International competitiveness Grant Scheme for Sustainable Tourism Projects Childcare Scheme

Targets Business start-ups engaged in areas related to manufacturing, ICT, R&D, innovation, waste treatment, environmental solution, biotechnology and the production of innovative products and services. SMEs operating in a manufacturing industry and related services to propagate the use of ICT in daily business operations. SMEs operating in the manufacturing industry and related services, exploiting new ideas through product, service, process or organisational innovation. SMEs operating in the manufacturing industry and related services, implementing eco-innovation projects to contribute towards environmental sustainability. Grants to enterprise carrying out industrial research and experimental development activities. Enterprise sector which includes all enterprises and SMEs. The scheme will contribute towards reducing energy demand of these enterprises and through energy saving measures and through installation of new energy sources. All enterprises excluding government-owned or controlled SMEs. Hotels and restaurants and any type of enterprise implementing a tourism project. The sector that is targets pertains to the provision of child day care in Malta and Gozo.

Appendix C â&#x20AC;&#x201C; Outcomes and Targets by Priority Axis (2007-2013) The following table is extracted from the Country Report on Achievements of Cohesion Policy for Malta (2012). It provides an assessment of the relevance of the outcomes recorded with respect to the policy objectives as well as an assessment of the adequacy of the targets set. It is noted that the indicators chosen are not exhaustive but should be considered indicative of the countryâ&#x20AC;&#x2122;s needs in relation to the potential which may be achieved by the OP.

MALTA BUSINESS BUREAU Cornerline, Level 1, Dun Karm Street, Birkirkara, Malta MALTA OFFICE: Tel: +356 21 251 719 Email: info@mbb.org.mt BRUSSELS OFFICE: Tel: +32 485 981 124 Email: infobrussels@mbb.org.mt www.mbb.org.mt