[ANALYSIS] Five questions raised by Muscat’s defence of Corinthia deal

Addressing supporters in Zebbug on Sunday, Muscat presented a political defence for the proposed land deal which would see Corinthia investing in a six-star hotel while being allowed to develop 100,000sq.m of apartments on space presently allocated to hotel development.

In a nutshell Muscat’s argument was the following; The development of a 6-star hotel – made possible by offering 100,000sq.m of apartments on cheap public land –  will attract more high-end tourists whose presence will boost higher paid Maltese jobs in a sector which presently only employs lowly-paid foreigners.

His defence of the deal was based on trickle-down economics; the greater the size of the economic cake, the more crumbs will fall off the table of the rich.

He argued that through this development the country could attract tourists who don’t mind paying €5,000 or €6,000 a night. This would mean better salaries for Maltese people working in the sector.

“If I wanted to bring the minimum wage up, I could do so tomorrow. But this would mean that those on a minimum wage would be dismissed by their employers, who would choose to employ less people to save costs. So, it’s not a matter of raising the minimum wage, but of having a bigger cake and taking the entire economy up a level.”

However, while Muscat once again manages to convey a coherent vision for the country’s future, his defence of the Corinthia land deal raises a number of questions.

1. Can’t we have a stand alone 6-star hotel without subsidising it with public land?

The St George’s Bay peninsula is already leased to Corinthia for €200,000 a year. As things stand they can already develop a 6-star hotel as the only limit they have is on developing apartments on the same site.

The only change with the deal offered by government is that they will be allowed to build 100,000sq.m of apartments while redeveloping the Corinthia San Gorg as a 6-star hotel. In a presentation the Ministry for Tourism argued that the development of a luxury hotel requires significant investment, including “the re-development of the whole area to ensure a suitable and complementary environment”. Alfred Pisani has excluded rebuilding the San Gorg hotel anew on the pretext of restoring visibility to the De Redin tower presently enclosed in the hotel itself as this would raise the expense planned for its redevelopment from €90 million to €130 million.

“It would affect the feasibility of the project. We’re treading on new territory here, in the sense that this is Malta’s first experience in six-star luxury. If there is a priority to which we can adapt without demolishing the hotel, I don’t see any reason to do that… we feel we have a project that is attractive and that even the way our architects will raise the two storeys and treat the façade, will be as spectacular as what we achieved in London.” However, the question facing government and Corinthia stands: Is a 6-star hotel investment not feasible in the absence of residential development on cheap land?

2. Could we not have secured a better price for the land while still benefiting from the trickle-down effect of the 6-star hotel?

One may well see the benefits of having a 6-star hotel constructed and even accept the logic of offering surrounding land for real estate. But at what price? The land, costed at some €121 million, will be priced at a premium of €17 million and another €35 million in ground rent redemptions, after IHI was granted €57 million in “credits” for the demolition of two of the three hotels that presently occupy the peninsula. The question facing Muscat is: Couldn’t he have secured a better price for this stretch of prime land which could have used for social projects like housing accommodation for the less well off?

READ ALSO: Lawyer takes on St George's Bay Corinthia project

3. Why should a 6-star hotel necessarily employ Maltese workers?

As Muscat himself acknowledged the tourist sector presently relies on lowly-paid foreigners. He hints that 6-star hotels pay better than existing 4 and 5 star hotels.

Since the Maltese have stopped working in this sector due to low pay, Muscat assumes that the new 6-star hotel will re-attract Maltese to this sector. The agreement signed with government does not include any reference to working conditions and the nationality of the staff.

Therefore, what Muscat is saying is based on an assumption which can only be tested in the next decades. But an Economic Impact Assessment conducted by KPMG for the nearby DB high-rise development (which also includes an emphasis on upmarket facilities) states that the project is expected to attract more foreign workers to Malta, “particularly EU nationals originating from countries that are currently experiencing an economic slowdown.

And while the project is expected to push wages for skilled and professional work upwards, it is not expected to push wages in the hospitality sector upwards.

“As wages are typically sticky, an increase in unskilled labour supply may result in a stabilisation of salaries particularly in the retail and hospitality industries.”

4. Muscat talks about greater spending by foreigners. Couldn’t this also result in higher prices for the Maltese?

High spending tourists will probably contribute to the multiplier effect, generating more economic activity with their spending.
Although this depends on how much the wealth will spread out from the confines of the resort, it is fair to assume that these tourists may spend more in restaurants, taxis and entertainment.

Their presence could also fuel new forms of retail catering for their tastes. Still there is also the risk that the presence of a category of residents and tourists with a high disposable income will further inflate prices in way which excludes locals.
This may well contribute to the creation of enclaves where locals are simply driven out by higher prices.

5. Haven’t we already done all this before with poor results in terms of quality jobs and value added?

There is nothing new in offering cheap public land for residential apartments to encourage innovative sectors in the economy.

Muscat himself compared the land valuation in St George’s Bay favourably to Smart City where 60,000sq.m of residential development was also part of the equation to encourage investment in IT and media offices. Smart city itself stands out as a cautionary tale on how promises of job creation tend to be displaced by the allure of more profitable gains from real estate.

Other projects located on public land like Portomaso have also attracted a fair share of high spenders to Malta without revolutionising the tourism sector. While the advent of a six star is a new frontier for the sector, it remains to be seen how far this will contribute to more Maltese jobs in the tourism sector.

READ ALSO: Developers think Corinthia land transfer could be illegal state aid