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With the return to parliament after the summer recess we notice that politicians are gearing up for a busy winter session full of surprises. One such surprise is the presentation of the 2006 budget three weeks ahead of schedule.
Traditionally budget time is the third week of November. This year we are seeing an early presentation because of diplomatic pressures on parliamentarians resulting from hosting the Commonwealth conference and the state visit of Colonel Gaddafi. Perhaps that is why we were issued last July with a precursor consultative document. This was labelled “To live a better life.” Unmistakeably this was a novelty.
Usually no such document was ever presented to the electorate three months ahead of budget week. Indeed the idea to gather as much grass roots support ahead of the MCESD consultative meetings was a clever move. No doubt there will be a multitude of suggestions from civil society which hopefully will be tabulated and examined alongside the detailed recommendations covering sectarian interests by the constituted bodies and union officials at MCESD. It is uplifting to note that GRTU as an active associate of the MCESD has been vocal to promote the interests of its members particularly the small and medium sized enterprises. It has been lobbying with parliamentarians to promulgate laws that can nurture higher growth in this sector. Running a small business has never been more challenging. Over the past decade SMEs endured more volatility than larger firms – making it exceedingly difficult to achieve a reasonable return on capital and deliver sustained performance. Some may criticise SMEs in that they are too fragile in their stature resulting in an underutilisation of resources.
But because they are smaller, this should not mean they are inherently riskier and be side tracked by banks and credit suppliers. But here one may ask who are these SMEs and how important are they for the national economy? There are a number of definitions. A traditional one is to consider entities employing under 10 people as micro enterprises. Higher up in the pecking order we meet those firms employing from 10 to 50 and these cover about 90% of the local economy. Turning to the EU, in general we find that firms employing 50 to 259 are classified as SMEs making up 99% of the jobs market. Why are SMEs to be singled out by our parliamentarians in the 2006 budget. The answer is that as a common rule, small businesses play a vital role in replacing jobs lost through bad start-ups, recession, natural wastage or through long-term structural changes in the economy. It is a fact that due to volatility 10% of SME disappear after the first year of operation. Their main weakness is that they tend to finance their growth from internal sources which invariably is limited. In particular these companies or unincorporated bodies tend to be more risk averse due to their resource limitations.
Notwithstanding their size they are more entrepreneurial in their approach. Studies have shown that SMEs are proud of their product, act on their own and do not follow others. Their risks tend to be calculated risks and moderate by comparison. As an example in Gozo some 2880 self employed persons are predominately centred towards the retailing functions followed by furniture making and a substantial percentage engage in part-time farming.
Professor Debono under the auspices of MCST, prepared a detailed study on innovation trends in Malta. In his presentation one reads that SMEs are considered as innovative where they introduce new products or processes through either in-house activities or a combination with other firms. Furthermore, one finds from the study that there is no venture capital fund.
The good news is that last November Dr Gonzi promised in the budget speech for 2005 a venture fund of Lm 4 million. To date this fund has not been sourced. Commentators agree that this is an encouraging start, but it is considered as too little to finance R&D research in innovation and supply necessary seed capital.
Fortunately, the EU regards Small and Medium Sized Enterprises as a great source of employment generation with 63 per cent of the community workforce employed by SMEs.
Two 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 analyses 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 & development, and additionally schemes with long term aims to improve local infrastructure, training, and employment opportunities.
Another possibility is to incorporate provisions in 2006 budget assistance targeting SME ’s 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.
It is a feeling of deja vu that the administration has it in mind to reduce time and costs by lowering government induced costs. Mindful of our budget constraints the opposition spokesman for industry laments that we are investing less than is expected in knowledge based technologies and thus reducing the potential of this important driver of productivity. It goes without saying that government should focus more on the needs of SMEs.
Unfortunately, in the past they were found to be low on the rank of the pecking order due to ingrained prejudices against start-ups and smaller entities within the ivory tower of bureaucracy.
Consequently we look forward to see some financial or fiscal stimulus carved out of the 2006 budget proposals. Many are proposing that a concession is granted to smaller firms to be taxed at a lower rate.
Why not introduce lower wage taxes on fresh recruitment?
To balance the tax leakage, perhaps a one-time surcharge can be added on the high profit rollers in certain sectors. 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 two feet. They are fragile yet resilient as new born babies. Many will wither away unless bureaucracy and red tape is weeded out from the slippery path up the nursery slopes. Let’s hope the exchequer packs some nursery rhymes into our 2006 budget.
gmm@pkfmalta.com
The author is a partner with PKFMalta , an audit and business advisory firm
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