George M. Mangion | Wednesday, 10 June 2009

The aftermath of EP elections

Amid the furore of the EP election results, one may be excused to notice how the day-to-day problems of smaller enterprises may be ignored. Yes, the electorate is either celebrating the results or simply acting nonchalant now that the smiling faces of candidates are no longer gracing our screens in the privacy of our homes and bars. Yet, Europe in general has seen the attendance at the polls (except in Malta) dwindling each year since 1979 to below 43 percent. Why is this apathy so huge considering the mammoth effort and expense (about €18 million) spent by the Commission to inculcate a sense of belonging among 370 million people in the 27 countries? Certainly one cannot begrudge the EU project and the deep sense of federalism that is surrounding its elected leaders - all trying to lever more power to Brussels spruced away from each of the national parliaments. But then not everything works well in this dream union of disparate countries. Just think on the futility of moving parliament each month from Brussels to Strasburg talks millions about the costs of bureaucracy and waste that is associated with keeping up with the egos of the founder members. Still, life goes on while the major political parties tend to gauge their popularity (and eligibility to govern) once every five years through the results garnered at these elections. Cynics may retort that this is one of the positive outcomes of such elections as it keeps the party in power on its toes. Really and truly one cannot underestimate the efforts made by European leaders to bail out companies in distress and on the whole this has also helped in an indirect way small and medium sized enterprises. It is now a cliché to say that running a small business has never been more challenging.
It is at this juncture that no efforts need to be spared by banks and Malta Enterprise to help SMEs restructure their business during a recession and avail themselves of the opportunity to restructure and invest in research and development. It is encouraging to read that the BoV Start-Up financing package was launched to assist SMEs during the initial years of their operations so that the business can concentrate on its core operations. It hopes to assist start-up businesses with their short-term financing requirements, giving them greater freedom and flexibility.
At last we have a bank which is understanding the immediate difficulties faced by the recession and is not afraid to assist SMEs to finance the purchase of their business assets including commercial vehicles, plant and machinery, information and communication technology among others. Direct help and less rhetoric was the main theme of a recent conference targeting the needs of European SMEs addressed by the minister of finance. Mr Fenech said a Malta Enterprise call for applications from SMEs to benefit from EU funds had been overwhelming, and a fresh call was in the pipeline. The schemes are financed by the European Regional Development Fund and are part of Malta’s 2009-2013 funds allocated to it by the European Union. In all, there were 212 applications for grants. The schemes provide assistance to a variety of businesses, ranging from large established industries to start-up SMEs aimed at ensuring they develop into independent, innovative and well-performing businesses.
Alan Camilleri, as chairman of Malta Enterprise, praised the resilience shown by medium sized entities when faced with the recession. In my opinion this amply reflects the fragile nature of their setup not being cocooned in the public sector hegemony having to fend for themselves. SMEs know that the buck stops at home and there is no back-up when the overdraft hits the limit. Their own existence is marked by the unpaid extra hours that the owner-managers put up to attract marginal business while cutting overheads to placate their bank managers. It is all very well to muse over the usual rhetoric from well placed civil servants and directors of government funded agencies who preach about being optimistic in the face of adversity. The mantra of belt tightening and running on empty is very tempting to preach but for the owner-managers who face the shortage of cash and resources plus the disadvantages of working in a non-level playing field it feels like living a perpetual nightmare. Maintaining a full workforce is a demanding task now with the full labour taxes and the statutory bonuses associated with employment. In some European countries the government has given subsidies on labour taxes such as no tax on overtime in France to encourage retention of employees but this is nowhere in the pipeline in Malta. Again little or nothing is being done by the government agencies to promote Malta in a tangible manner except for over-hyped events where an overkill of political peers deliver never ending speeches on the merits of their ministries. Gone are the days when the Malta Development Corporation brings in the bacon by way of new manufacturing units or assisting in the extension of existing incumbents.
Take for example the Irish experiment ably managed by the IDA (Irish Development Agency), which is a government funded agency responsible for the success of the now partly defunct Celtic Tiger. Prior to 2007, the success story of IDA was merely attributed to a no-nonsense approach by its civil servants in Ireland to address the competition from all quarters and to succeed to attract foreign direct investment that made the Irish economy the envy of others. Without sounding like a gloom monger, I think that preaching about the merits of innovation and research and development to cash-strapped SMEs in Malta is like flogging a dead horse. Back to Malta, if the recession is to be successfully harnessed we need to see a major change in the government’s approach to SMEs (currently perceived as the Cinderella or the enfant terrible).
Before starting to preach productivity to all and sundry the government can very well start reorganising itself and push its own productivity expected from a well nurtured army of about 35,000 workers. Over the past year SMEs endured more volatility than larger firms – making it exceedingly difficult to achieve a reasonable return on capital and deliver sustained performance. Three years ago the Commission adopted a package of documents outlining policy towards small and medium-sized enterprises across Europe, the so-called SME package. The package analysed how the Member States, the candidate countries and the European Commission are implementing the principles embodied in the European Charter for Small Enterprises. EU funding comprise financial support for capital investment, aid for research and development, and additionally schemes with long term aims to improve local infrastructure, training, and employment opportunities.
With so much bureaucracy in Brussels how can small firms ever try to access the gravy trail?
Perhaps some direct hand holding is to be provided by Malta Enterprise and Finance Malta. Extra funding to finance this may need to be incorporated in 2010 budget. This, apart from assistance targeting SMEs in order to tap ICT technologies. Invariably, ICT stands for growth in this expanding market. Economists stress that innovation and diffusion of ICT technologies is especially important for small and medium sized enterprises. Mindful of our budget constraints and the ballooning deficit the opposition spokesman for industry laments that we are investing less than is expected in SMEs and thus reducing the potential of this important driver of the economy. Many are proposing that a concession is granted to smaller firms to be taxed at a lower rate. Why not introduce a lower wages tax on fresh recruitment? To balance the tax leakage, perhaps a one-time surcharge can be added on the high profit rollers in certain sectors. To conclude, in the prevailing conditions of ever-stronger competition, and cash flow contagion every small and medium sized firm must struggle to stand on its own. Let’s hope the exchequer packs some nursery rhymes now post the announcement of the MEP results.

George Mangion
Partner at PKF – an audit and business advisory firm



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10 June 2009

Malta Today


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