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Network News • 23-07-2020

A watershed of EU funds over the next seven years

Author: George Mangion
Published on Business Today 23 July 2020

This time, the majority of Malta’s allocation will come in the form of cohesion funds, which are EU funds intended to reduce economic disparities between regions. Prime minister Robert Abela reported from Brussels with great aplomb announcing that Malta is set to receive about €2.4 billion in aid over the next seven years. Such positive news came after a tiresome four-day summit, where the 27 EU countries agreed on an unprecedented €1.8 trillion budget.  This is a historical occasion given the opposition of the so-called “frugal four members” who opposed the granting of €500 billion (part of a €750 billion COVID-19 economic recovery fund) in direct grants to help ailing economies such as Italy, Spain, and southern Med countries.

The allocation combines just over €1.9 billion in funding allocated to Malta from the EU’s core budget – its multiannual financial framework, as well as €327 million granted as part of a coronavirus stimulus package. As a parenthesis, last month Prof Scicluna warned against the use of the grants saying they may come with conditions to be imposed on Malta to accept a tax harmonization scheme which will cripple its attraction as a friendly tax domicile.

Let us give some background to this triumphal scoop by prime minister Robert Abela.  During the EU’s previous budget round, for the 2014-2020 period, Malta was allocated €1.1 billion through the EU’s budget.

This time, the majority of Malta’s allocation will come in the form of cohesion funds, which are EU funds intended to reduce economic disparities between regions. Malta stands to receive €934 million in such funding and €191 million in funding for agriculture. It is interesting to observe that €101 million of this combined cohesion policy and agriculture allocation are from the COVID-19 recovery package.

On strategic investments, research and innovation, and the environment, the funds reach €162 million, of which €16 million are from the post-virus stimulus package. With hindsight, one recalls that Dr Gonzi, the Prime Minister who was re-elected in the 2008 election, was ebullient announcing then that in the 2006-2013 budget period, Malta had benefitted from almost €1 billion.

At that time Malta’s GDP exceeded the EU 75% average, possibly resulting from the admission of poorer countries which revised the average downwards – to Malta’s detriment.  The good news of the €2.4 billion EU allocation over the next seven years has to be seen in the background of a €2 billion extra borrowing to finance various recovery schemes.

Debt may reach 60% of GDP by the end of the year (up from about 47%). The constituted parties criticised the government saying that the recovery packet paying €800 (less 10% FSS) monthly for each furloughed worker was a short-term measure especially for hotels, restaurants, and a few other sectors.  The entire economy was hard hit by the four-month lockdown ordered by the health superintendent.

Ponder on the stark fact that such sectors faced zero revenue during the lockdown and most retained their workers on condition that they top-up salaries by €400 to the €800 received as a wage supplement. This has temporarily restrained the jobless queue (aid expected to end by September) otherwise about 20,000 are technically idle by end of September.

MHRA had cautioned the government that unless the seaports and airport are immediately opened for business, then the 9,000 full-time workers (and 7000 part-timers) in hotels will face dismissal.  The rushed decision to open for visitors is a risky one considering that the second wave of COVID infections had gripped certain European countries.

It is no surprise that the perennial question of safety first at the cost of economic survival was a ranging topic on social media. The opening of the airport on 1st July, alas resulted in only a trickle of visitors (mainly on low-cost airlines) and reality has dawned on us that the return to pre-COVID conditions will take years to be reached.

A recent Deloitte study, (commissioned by MHRA) shows inter alia that the drop in hotel revenue in 2020 due to the sharp decrease in guest booking might leave some hotels facing a wipe-out when it comes to cash generation. Deloitte advised that the sector needs the right corrective action to ensure the tourism industry is in a position to rebound when the pandemic is over.

Deloitte’s Financial Advisory and Hospitality Sector Leader, in its survey, had analysed international consumer sentiment survey data in Med countries to discover that one cannot realistically expect an accelerated recovery of global tourism trends. In summary, some of the more important observations include that 65% of international hoteliers believe that they would not achieve pre-COVID levels of business before 2023.

A possible five-year hiatus is a dire picture for the local hotels and restaurant sector which has been painstakingly built over the past 50 years.  Now with more EU funds at our disposal, we may sit back and rethink a permanent remedy to the fallacy that over the years, we went for the quantity, not quality.

The rates charged at top hotels in Malta are still competitive but at their level, they cannot sustain the requisite quality so the image of a “sun, sea and cheap beer” island has been exacerbated by the sponsoring of low-cost airlines. The mantra “go for quality, not quantity” has also been the battle cry of ecologists who oppose the idea of 3 million airline passengers plus another one million cruise liner arrivals which up to last year were clogging our roads and contributing to unprecedented air and noise pollution.

The MHRA, also called for more embellishment on the island to attract better-paying tourists. The solution is ephemeral. Unless a root and branch overhaul is made of hotels and other restaurant amenities which are under-performing then we continue to dig our own hole-deeper. Ideally, we take a leaf from the Irish solution to their problem of a collapsed property sector which in 2007 sent its main banks to the bankruptcy register.

In September 2008, Dublin made a decision to offer a blanket guarantee to its banks, tying the solvency of the state to the health of Ireland’s financial and property sectors. When the crisis gathered pace the government was forced to inject €64bn into its main lenders, eventually forcing the country into an EU and International Monetary Fund bailout.

A brilliant solution was to set up an SPV – a special purpose vehicle – to buy and manage the debts. Likewise, a Malta administration (with private shareholders) can set up an SPV (or a Foundation) to acquire at current market values selected under-performing hotel properties and restaurants.

Over a five-year scenario, these assets will be acquired by the SPV, pulled down and public gardens and/or social housing facilities will be built – thus trimming a surplus low-performing bed stock. The SPV can make use of the COVID recovery funds just announced in Brussels to help pave the way to reform our holiday resort industry (balance funded by MDB).

Pray, let us go for quality, clean air and upgrade the island’s credentials.

Author: George Mangion
Published on Business Today 23 July 2020
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