As we near the end of the 2022 electoral campaign, the Nationalist Party’s ‘star proposal’ has turned out to be one of the flakiest ever. Despite opening the campaign with a billion euro pledge to create ten new sectors, few have really believed the hype.
Let’s leave aside that the list of ten supposedly ‘new sectors’ sounds all too familiar. Many seem to remember that there is already an esports and video game development strategy and the annual report of the Malta Gaming Authority also shows that a considerable part of gross revenue of remote gaming operators is already from esports.
Many of us have played Candy Crush on our devices – by the Maltese-registered King.com Ltd, which has been in Malta for years.
As for AI, there is not just an implemented strategy for the public sector, but also active private sector initiatives. The same goes for 3D printing and specialised manufacturing clusters.
The weirdest ‘new’ sector mentioned by the Opposition is compliance and due diligence services. This is the same party that complains that firms are having to go through too many hoops supposedly because of the FATF decision. Now they seem to have changed their mind and think that compliance and due diligence can be a growth sector.
One area that will surely expand if the PN get elected is ESG certification. The PN made it a prerequisite of all their proposed incentives for business, including a reduced corporate tax. Now the issue is that to be ESG-certified is such an onerous process that in the EU only large firms employing 250 and more employees and with a turnover of €40 million are asked to do so.
Despite opening the campaign with a billion euro pledge to create 10 new sectors, few have really believed the hype.
The problem with the Nationalist proposal is that it completely exposes the inexperience and lack of practical thinking of the Opposition Party. They claim that it is possible for Government to just organise special funding for ten different sectors. Have they never heard of EU competition rules that are expressly set up so that firms in particular sectors are not attracted to a country by means of non-market based financing? How will they manage to pass through this proposal from the iron-fist of the Commission’s Competition Directorate General, which will consider any such scheme as illegal state aid?
But, leaving this aside, the scheme still makes no sense. We were initally told that half of the billion euro fund will be financed from unused public funds. Then, when the PN manifesto was published the proportion had gone up to €750 million. Maybe someone told them that it was impossible to claim as they had initially, that they would be able to find half a billion euro of finance from EU institutions to finance their castle-in-the-sky policy.
Irrespective of whether they get loans from the Maltese public or from the EU institutions, this policy would boost the national debt by 7% of GDP. Even if this is spread over 5 years, the policy would make Malta breach the EU’s fiscal rules.
Now that is rich. The Nationalists have spent years saying that Labour has increased Government borrowing to save 100,000 private sector jobs, and now they want the Government to borrow a billion euro with no idea of how many jobs this could create.
Nationalist spokespersons do not seem to have much details on the scheme. It seems that the money is seen in the form of loans given directly to firms. We have been told that all interest charged would be covered by the Government. No details were given as to duration of the loans, and on how Government will be able to process the credit applications of all these supposedly new sectors.
There is a reason why local banks tend to steer away from these sectors. Their credit risk is hard to evaluate and there is a higher probability of loans to go bad. That is why for any commercial bank to be interested in this enterprise, it would need a Government guarantee on the capital and interest. In fact PN candidate Joe Giglio said that he thought that there would need to be a guarantee. But that would be opening another can of worms. EU rules are clear that guarantees need to have a market-based guarantee fee, which could amount to 2%.
This would be added to the market interest rate at which the bank would be lending, which would mean that something like 7.5% per annum would have to be financed by the Government. Moreover, for the guarantee to be acceptable, Government will need to allocate a good amount of funds and ringfence it. For something as large as a billion euro in commitments, one would need at least €150 million held in reserve.
So, on top of the €750 million directly granted to firms, Government would need to find another €150 million. So, the scheme that was supposed to be costless is already locking away €850 million in Government financial assets. To this one has to add the interest and guarantee fee payments that Government would need to cover. This would total €75 million. In just five years we are talking of €375 million given away. So even if no loans go bad, over five years this supposedly money-making scheme that should ‘relaunch’ Malta’s economy would have gobbled up €1,225 million. Rather than generating money, it ends up in taxpayers having to spend more to keep it going.
The more we get to hear about this scheme the more it starts resembling some kind of Ponzi scheme which only keeps going until people (in this case taxpayers) keep on pumping money into it.