Opinion - Jason Azzopardi | Wednesday, 21 May 2008
Speech delivered by Parliamentary Secretary for Revenues and Lands Jason Azzopardi on the occasion of the Malta Association of Credit Management Annual Conference last Thursday
In recent years, our country has seen a substantial development in the state of its Public Finances and the Economy at large.
Since Malta’s accession to the European Union apart from the adoption of the Euro as the national currency, our country has seen the Gross Domestic Product registering substantial growth, public finances now on a sound footing and tax burdens on the decline. All these factors, coupled with initiatives meant to boost our country’s competitiveness, have led Foreign and Local Investment to reach its all time highs. We have managed to generate enough employment to make up for jobs lost in the challenging reality of globalisation.
Our country has so far managed to live with globalisation challenges. However, the international economic scenario keeps on sending us messages that we can never underestimate. It would be irresponsible, from the part of the Government and from all stakeholders in business to stay passive in front of challenging realities such as the high levels of commodity prices, and the overall economic outlook particularly in the US.
Such economic realities present evident strain on the working cash flows of our business community and this makes credit a central and essential feature of every economy. It is not right for credit to be seen as a means of survival for struggling businesses. On the flip side, if used and managed wisely, credit could be seen as a tool for the facilitation of trade. Effective and efficient use of such tool would, most definitely be perceived to enhance the purchasing power and the ability to invest. It is recognised that the use of credit would therefore help in the market positioning of the enterprise. Thus, best practice in credit management in Malta will help us to optimise our competitive advantage.
In itself, one could also see credit as a key driver in the development of financial services. Indeed, over time, credit has led to the development of a variety of financial institutions, asset managers, institutional investors and other financial intermediaries, all of whom provide a wide range of services along the value chain.
The fact that cash and cash equivalents are the life-blood of every entity in business remains widely recognised. Whoever is in management has the responsibility to ensure sufficient levels of cash to sustain the operations of the entity in question. Here it is crucial to emphasise the need for all of us to watch out the level of credit put in business operations. An optimal balance between the level of amounts receivable and amounts payable should always be kept and all business entities should pay continuous attention not to get carried away with abusive credit practices. Effective credit worthiness assessment and continuous monitoring of the liquidity situation of each and every entity is encouraged.
Lack of balance between the amounts receivable and those payable on the balance sheet of an enterprise might not only cause possible bankruptcy of the entity concerned but would also trigger higher levels of finance costs which would significantly increase the costs of the products being promoted. This would in no doubt impinge on the competitiveness of the local enterprise, with ripple effects being felt on the economy at large.
As credit continues to be an integral part in the management of working capital of every enterprise, one could see various credit management practices and supporting tools developing. As to the practice of bartering, where outstanding balances are settled in kind, one must bear in mind that products or services that are exchanged in the barter transactions are not necessarily easily convertible into cash as would be required to meet business obligations. I say this with particular emphasis to the entities operating in the construction sector, where this practice seems to be quite taking up.
Debt factoring is also being promoted as an easy solution to the entities’ debt collection problems. The Government also recognises that this is a niche that can generate a positive effect on the economy. The responsibility of the authorities is to ensure that this practice, that can expose the consuming entities to undesirable risks, is well regulated, and, in this regard, effective regulation of this service is enforced as it continues to develop.
Notwithstanding the Government’s efforts to be a regulator rather than a player in the market, it is still recognised that the Government still has a key role in making the life of the enterprise easier. The presence in the balance sheet, of balances, sometimes long outstanding, due to or from the Government needs to be addressed.
The Government recognises that such amounts outstanding distress the liquidity situation of your business. To this end, the Government plans to ease the situation through a series of reforms meant, not only to make the revenue departments more efficient and effective in their operations but also to be in a position to offset long outstanding amounts due. I also plan to review the existing rules governing penalties charged in respect of VAT and Income Tax.
The Government is also committed to ensure that adequate legislation for the protection of creditors is enforced. It is not deemed in anyway fair, that irresponsible individuals, in the course of unfair trading practices, conveniently use the limited liability associated with their shareholding in the company and let amounts payable to accumulate to an extent which would not be sustainable. The business community should keep in mind cases where the corporate veil was lifted and the directors were held directly responsible for their lack of good corporate governance practices.
The efforts and the commitment of the Government should not be considered in isolation. Adequate market knowledge is crucial in the management of working capital, particularly in credit control practices. In this respect, one can never overemphasise the sterling work that is done by the Malta Association of Credit Management. The idea behind the pooling of information for as a tool for members to use in the exercise of credit control in no doubt helps the business entities to enrich their knowledge of the market, thus, preventing transactions that create irrecoverable balances to result.
Without compromising the ethical values that guide us in the development of our policies, enhancement of business performance should be a holistic commitment. Government, people in business and the society at large should make their own the 2015 Vision for the excellence in priority areas.
Government during this legislature is focusing the strategy on sustainable development. I cannot see how we can develop a sustainable business environment without having good to excellent credit management practices. In the months to come, I appeal for everyone’s commitment for the establishment of common policy towards sustainable development.
21 May 2008
ISSUE NO. 536