Is European Structural Funding to Industry being adequately utilised in Malta?

The following article was the subject of a debate that took place as part of the recently-held 2007 University of Malta 24th Annual Seminar on Financial Issues organised by Peter J Baldacchino Senior Lecturer, Financial Strategy and Auditing, with the participation of final year Bachelor of Accountancy (Hons) students Chris Cardona, Ray Dalli, Valerie Debattista, Glenn Mifsud, Mark Micallef and Neil Zammit. 

Introduction

Regional policy puts into practice the solidarity between the different countries forming part of the European Union. It helps to achieve one of the fundamental objectives laid down in the Treaty: the strengthening of the EU's economic and social cohesion by reducing inequalities between its regions (EU Commission, 2004).

The objective of European Union (EU) Structural Funding “is to promote the overall harmonious development of the Community and to reduce disparities between the levels of development of the various regions” (Planning and Priorities Coordination Division {PPCD} 2004a). Objective One of EU Structural Funds provides regions with the basic infrastructure which they continue to lack or to encourage investment in business and economic activity.

There are four types of Structural Funds; the European Regional Development Fund (ERDF) used for infrastructure and investment, the European Social Fund (ESF) used mainly for training and employment, the European Agriculture Guidance and Guarantee Fund (EAGGF) used for rural development and aid to farms, and the Financial Instruments for Fisheries Guidance (FIFG) used for the adaptation of the fisheries sector.

After various discussions held between representatives of the European Commission and the Maltese Government, it was decided that total Structural Funds would amount to €86.52m with priorities targeting “individual areas such as environment, roads, tourism, human resources, rural development and fisheries, and Gozo special needs” (PPCD, 2004a) as set out in the Single Programming Document for Malta. For the programming period 2004-2006, Malta was allocated €63.19m by the EU, while relevant Malta Government funds totalled €23.33m (PPCD, 2004b).  

Malta thus obtained the benefit of the highest level of grants available to the European Member States, on the basis that it faced both economic and social challenges, and thus it was important to ensure a sustainable management of the environment in Malta.

This research focused on four of the largest Maltese industries (tourism, fisheries, agriculture, and small & medium industries) that benefited directly from Structural Funds through four entities.  For the purposes of this study, information was obtained from semi-structured interviews held with representatives of three of the above mentioned industries as well as from the official web pages of the EU, the Planning and Priorities Co-ordination Division (PPCD) and the Malta Tourism Authority (MTA) among others.
It is to be noted that this study is limited to funds distributed to participants within the industries referred to above and therefore excludes other sectors such as waste treatment and environment, infrastructural projects and projects in Gozo. The amount of money allocated to the above entities selected under the respective measures is as follows:

Table 1: Money allocated to beneficiaries through Structural Funds 2004 -2006.
Source: PPCD, 2007 [online].

The Grant Scheme and the Application Process
Malta Enterprise launched two grant schemes; ‘Operations - Helping SMEs upgrade Standards’ and ‘Market Entry & Internationalisation - Helping SMEs Grow’. The objective of the former scheme was to continue to support enterprises to upgrade their operations, whereas the objective of the latter scheme was to improve business results and access to new markets through market development and internationalisation.

One of the disadvantages arising with these forms of project funding is that in the event of non-completion of a project, the responsible entity would not be in a position to disburse the sum allocated to it.  As a result of this there always remains the possibility of the respective country losing some of the funds. In order to minimise such loss, Malta Enterprise accepted applications for projects which in total were worth more than the sum allocated to it by the PPCD. Around 350 applications were received to benefit from the available grant schemes, out of which 160 projects were accepted. Twenty eight applicants benefited from both schemes mentioned above. 

Nonetheless by the date on which the schemes were closed off, 10% of the allocated sum had not been successfully disbursed by Malta Enterprise, although plans were already underway for the use of this balance. In order to make better use of this remaining balance, Malta Enterprise intends to run a pilot project of one of the schemes which is scheduled to eventually run during the 2007-2013 period.

In the case of the Rural Development Department the amount granted to them by the PPCD was divided between Measure 3.1, entitled ‘Investment in Agricultural Holdings’, and Measure 3.2 entitled ‘Improving the Processing and Marketing of Agricultural Products’. The main objective of Measure 3.1 was to strengthen the competitive basis of professional and other farmers as well as service providers by reducing production costs, modernising production methods, improving output quality, and diversification. This measure focused on all farmers and herdsmen and all the services that support them. On the other hand Measure 3.2 focused on improving the processing and marketing of agricultural products which eventually increased their competitiveness and added value.

The Fisheries Conservation and Control Division (FCCD) launched four schemes, one of which was a scheme to fund a large infrastructural project undertaken by the government (however this can also be taken over by any private entity interested in applying for an aquaculture scheme). The funds allocated for this scheme were used for the modernisation of aquaculture, marketing and processing, and fishing port facilities. The other schemes related to fleet funding and included fleet renewal, fleet modernisation and adjustment of fishing effort.

A problem encountered with regard to the schemes applicable to fishermen was the low turnout, with only 10 applications being submitted out of around 300 registered fishermen. Furthermore only 7 of these applications were accepted, that is around 2% of registered fishermen. One of the representatives of a local fishery co-operative explained that since the application period coincided with one of the busiest periods for local fishermen, these were generally unable to complete the application forms in time. It is hoped that this will not repeat itself in the forthcoming period.

During 2004 the Malta Tourism Authority (MTA) launched a grant scheme with the objective of increasing the competitiveness of tourism service providers in line with the objectives of Priority Axis 1 of the Single Programming Document for Malta 2004-2006. There were 158 applications submitted out of which only 54 eventually qualified for funding. The rest of the applications were rejected either because of ineligibility or because of non-attainment of the minimum pass mark. Through the scheme the private sector was to be directly supported in order to increase the sustainability of the tourism sector, focusing mainly on improving the quality of the physical product being offered by tourism and tourism-related enterprises. Additional assistance was also provided for studies and marketing initiatives.

The Application Process for EU Structural Funds
As shown in Figure 1, the process started with the EU Commission issuing the amount of funds to the Planning and Priorities Co-ordination Division, based on the budget approved for Malta by the EU Member States. The PPCD then allocated funds to a number of entities, and it was then up to each entity to launch schemes and projects, and evaluate applications, in order to utilise the funds in line with the ‘measures’ set out by the EU Commission. Entities set up evaluation committees so as to determine which applications to accept and which to deny, while a monitoring committee was also set up on a national level.  The purpose of the Monitoring Committee was to ensure that the objectives and targets of the measures are being achieved (PPCD, 2003).


Figure 1: Flow of EU Structural Funds in Malta

Scheme Awareness
Even though around 350 applications were received at Malta Enterprise, an entity representative stated that there were still entrepreneurs unaware of the availability of Structural Funds and of their potential use to increase competitiveness. This lack of awareness persisted despite the fact that potential beneficiaries had been informed through the press, through information meetings with clients, and through relationship managers within Malta Enterprise who visited clients at their premises. One possible contributory factor to this could have been that several entrepreneurs preferred to refrain from spreading the word with regards to the benefits arising out of such grant schemes in order to retain a competitive advantage over other enterprises.

In the case of FCCD, unlike Malta Enterprise, word of mouth was the main means of spreading awareness about the schemes being provided. In addition a notice was published in the local newspapers, the government gazette, and the FCCD website. Owing to the generally low literacy level of fishermen professional advice was in most cases sought when completing the application form. However due to the inadequate deadline set on the application this could not always be done on time. The division assisted a number of fishermen in filling in their applications so as to encourage more participation in the grant scheme.
The entities held meetings with potential applicants in order to provide more information and guidance on how to apply for the funds. From the interviews held with the entity representatives it emerged that this information campaign had a considerable impact and resulted in more phone calls and queries from those interested in applying for the funds.

Criteria for Selection
As expected, demand for Structural Funds was greater than the amount of funds available and as a result the EU established a set of criteria to be used to determine which projects should be eligible to benefit from such funds. This was to ensure that the money was directed towards projects in line with the EU’s objectives and that funds were utilised in the best possible manner.
For 2004-2006 it was decided that the criteria for eligibility in the case of projects undertaken in Malta should be based on those set by the EU without undertaking the necessary changes needed in order to adapt these criteria to the Maltese reality. This posed a number of problems since most of the applicants were individual entrepreneurs or SMEs whereas in the larger EU countries applicants are mainly large companies. This implies that some of the criteria might have been inappropriate to the local scenario.

According to one of the interviewees the process of determining the evaluation criteria during 2007-2013 will be improved. Under the previous scheme the commission set different criteria for each entity, meaning that applications were evaluated differently depending on to which entity the application was being made. At present representatives from Malta Enterprise, MTA and MEPA are discussing a common set of new evaluation criteria to be presented to the European Commission.

Grant Schemes
The schemes implemented under the EU Structural Funds for Malta 2004-2006 have been based on the principle of co-financing, which effectively means that projects submitted to their respective entities will be partially financed by the EU Structural Funds (under Objective One), the Malta Funds as well as the beneficiary’s. Moreover, the four entities interviewed imposed a grant limit per application.
Schemes run by Malta Enterprise had a project value limit of Lm5,500 (€12,811.55) per application submitted. Projects under Malta Enterprise and MTA were financed as follows:

1. 35% EU Structural Funds,
2. 25% Malta Funds, and
3. 40% Beneficiary.

This project value limit was set so as to ensure that the amount of funds available could be distributed between an adequate number of applicants. This limit was however found to be insufficient and therefore in the forthcoming period Malta Enterprise will be revising these limits upwards.

In the case of the Rural Development Department up to 50% of each project was financed by the EU provided that the grant did not exceed Lm50,000 (€116,468.67) per application received.
The grant limits imposed by the FCCD were calculated with respect to the gross tonnage of the fishing vessel. Projects of this entity were subject to co-financing rates varying from:

1. 35% to 75% EU Structural Funds
2. 5% to 25% Malta Funds, and
3. up to 60% Beneficiary.

Issues with Co-financing
One of the issues which arose upon the implementation of these schemes was that upon Malta’s entry into the EU the Maltese Government could no longer pay out grants to businesses in accordance with its previously-set policies, thus having to change the manner in which it provided support to firms and individuals. One of the basic principles of the EU and its Common Market policy is to create a level playing field between all parties across Europe.  This meant that as from 2004 Maltese Government aid had to conform to the so-called State-Aid Regimes as approved by the EU.

The State-Aid Regimes posed a problem in the sense that the EU Structural Funds projects were launched at a time when the Maltese budget for government funds had already been set without keeping the EU structural projects and grant schemes in mind. It was therefore difficult for the government to co-finance part of the schemes while remaining within the state-aid framework as requested by the EU, thus resulting in a sub-optimal situation. 

This situation is being remedied for in the 2007-2013 period, since the schemes are being designed after taking into consideration the state-aid regimes. This therefore allows a more favourable use of EU and Maltese Government funds. One must note that Malta had no other option available during 2004-2006 since projects for EU funding were launched just weeks after Malta’s entry into the EU, this not leaving enough time for planning ahead. Nonetheless, one could argue that such planning should have taken place in the time preceding EU accession.

Limitations of Co-Financing
The fact that most of the projects had to be partly financed by the private sector at times posed limitations, considering that firms may suffer from liquidity problems caused, for example, by very slow paying debtors. Consequently, cash is often used for operations and diverted away from investment. Furthermore, given the limited human and other resources available to SMEs, changes in their work schedules (due to new urgent orders) were accommodated at the expense of meeting the deadlines imposed by the entities concerned. This is because SMEs gave more importance to carrying out their pending work orders rather than on completing the projects for which they applied for funding.

On the other hand, fishermen and farmers gave top priority to projects financed via the grant scheme ensuring their completion by the stipulated dates.  This was aided by the fact that these projects had to be completed during off-peak periods.  Co-financing was not an issue in these two sectors since beneficiaries were willing to use private funds for co-financing given that in any case they still had to carry out these projects in order to comply with EU regulations which came into force recently.

Monitoring
Following the 1999 scandal, involving a number of top officials at the EU Commission, the latter has been carrying out more frequent checks to ensure that no beneficiaries abuse of the availability of funds. Thus the entities concerned have had to impose strict deadlines. However they did not carry out financial audits on their applicants given that in the case of companies these funds should form part of the audited financial statements, although audits of a non-financial nature were carried out.

When assessing the individual projects, importance was given to whether all invoices and relevant documentation had been submitted on time.  Periodic spot-checks were also carried out on site where the funds available were utilised.  In addition, both the entities administering the schemes as well as the beneficiaries were subject to audits from the National Audit Office, the Internal Audit & Investigations Directorate, the PPCD as well as the Directorate General for Regional Policy on behalf of the EU Commission.

Outcomes of the 2004-2006 Programming Period
A positive outcome of the 2004-2006 programme was that it helped to bring about a change in culture in Malta amongst entities and beneficiaries with regards to the use of funds.  The concept of EU Structural Funding introduced the notion of competition when applying for funds owing to the fact that not every application submitted would be successfully accepted, since only those satisfying the pre-set criteria were eventually selected for funding.  Industries and individuals therefore had to get used to the notion of having to give a justification upon requisition for funding as well as having to fill in forms and to provide information which prior to EU accession was not always required for benefiting from government subsidies. 

In this respect Malta was somewhat at a disadvantage in comparison to the East Europe accession countries since it had never benefited from pre-accession EU funds available to Eastern European countries and therefore lacked the application experience. In the case of Malta entities therefore had to learn to administer such funds within the few months preceding EU accession. This may have affected the smooth running of the projects although it also served as a means of learning valuable lessons for the next programming period.

Extent of the Use of Structural Funding by Malta
The allocation of funds to member states was subject to the national authorities and parties concerned adhering to target dates for the completion of projects. In Malta the media placed a lot of emphasis on the due completion on time of large-scale projects, so as to minimise the amount of funds lost.  The issue of adhering to the stipulated deadlines seemed to have left a positive effect considering that Dalia Grybauskaite, European Budget Commissioner, has been quoted in The Times (Malta) as saying that “Malta has performed impressively well, committing 69 per cent of its allocation. The average in the new member states until this month was 57 per cent” (Camilleri, 2007). When compared to Cyprus, which out of the 2004 new member states is closest to Malta in size, Malta’s performance compared well since Cyprus had up to that point only managed to commit 41 per cent of its allocation. 

Conclusion
Overall, Malta’s experience in the 2004-2006 Structural Funds Programme was a positive one. A number of enterprises and other beneficiaries made use of funds which would not have otherwise been available to them. Nonetheless, there is always room for improvement and it is hoped that in the forthcoming programmes Malta will use the experience gained to date in order to further help reduce any existing gaps with other EU member states.

Bibliography
Camilleri, I. (2007). Malta performs best in structural funds take-up. In The Times (Malta) on 25th September, 2007.
European Union Commission, 2004. The European Structural Funds – a solidarity policy. Available at http://ec.europa.eu/regional_policy/debate/document/forum2004/euratlas_en.pdf. Accessed on 25th September 2007.
Planning & Priorities Co-ordination Division, 2003. Structural Funds 2004-2006 Slideshow dated 16th December 2003. Available from http://www.ppcd.gov.mt/english/downloads/sf200406.pps
Planning & Priorities Co-ordination Division, 2004a. Structural Funds 2004 – 2006: Introduction. Available from http://www.ppcd.gov.mt/english/sf/main.htm
Planning & Priorities Co-ordination Division, 2004b. Structural Funds 2004-2006 Information Session Slideshow. Available from http://www.ppcd.gov.mt/english/downloads/infosf.pps
Planning & Priorities Co-ordination Division, 2007. Structural Funds 2004-2006. Available athttp://www.ppcd.gov.mt/english/sf/main.htm. Accessed on 21st September 2007.