29 March - 4 April 2001

Singapore in the Mediterranean

by George Mangion

An important law called the Business Promotion Act was recently enacted which, according to Economic Services Minister Josef Bonnici is intended to amend the Industrial Development Act. The new law is reported to promote both manufacturing and service industries. The key concept is the rewarding of firms who manage to increase their added value. Firms in these preferred sectors would enjoy reduced rates of taxation, tax-credit incentives linked to investment allowances especially when coupled with employment growth.
The law targets a number of preferred sectors such as electronics, pharmaceuticals, software development, recycling and others. The new law allows existing business which falls outside the “selected sectors” to qualify for select-sector benefits when it foregoes certain rights previously enjoyed under the Industrial Development Act. Such an enabling legislation can be very useful to attract new investment and set up state-of the-art industries.
However, it seems to miss the point of promoting the new economy sector such as E-Commerce to and from the island. As we are starting a new millennium, it is anticipated that e-commerce will be one of the greatest economic, as well as technological developments the world is to experience in the 21st century.
For decades, international business has largely been the preserve of multinational companies, operating across the globe in areas of research, development, sales and marketing. Operating on-line allows employees from different locations to work on the same service or product, creating a truly virtual office environment. Automation of processes and supply chain rationalisation allow a company with for example one employee to source suppliers within the increasing globalisation opportunities offered by the online environment. Having said this why do our legislators not realise that the window of opportunity within the dot.com did not last forever and has now started to signal its retreat?
In the past weeks, industry giant Cisco Systems, the world’s biggest supplier of equipment to connect computers to the internet, announced plans to cut its workforce by up to 16 per cent and warned that the US slowdown looked longer and deeper than first thought and was spreading to other parts of the world.
The crash in Internet stocks and the uncertain economy in the US have venture capitalists sailing against the wind in choppy seas. Most claim they are not worried. “We invest for the long-term”, is their hackneyed refrain. But the truth of the matter is that for the past three years venture capital has invested for the short-term. And now, like the day traders, they are paying for their sins. Since the crash of Nasdaq April 2000, for the first time in a decade, the index, which harbours tech stocks, has lost more than half their money on their investments. This is in spite of the threefold reduction of 150 points in the discount rate by the US Federal Reserve. Taking advantage of a wide-open IPO window, venture investors rushed thousands of start-ups to the public market and in the process made billions of dollars. Now these junk IPOs have come back to haunt them. More than 117 dot-coms failed from September 1999 to October 2000, according to the Boston Consulting Group. The result is that badly burnt public investors are sick of start-ups.
With dot-coms falling like flies after their sky rocketing rise, software and technology companies will be hoping to entice old-economy to invest in business-to-business and business-to-consumer platforms. One company that was whipped into submission is Flooz.com an online currency company championed by Whoopi Goldberg. It was always assumed that consumers were more willing to accept an entirely new brand for a new type of business – the success of internet brands such as Amazon.com seemed to reinforce that view. For all the talk of bursting bubbles and dot.com failures, it is easy to forget that the internet has changed our lives irrevocably. New economy companies use technology to achieve high growth and in the long-term exceptional profits. Companies raising fresh rounds of capital face a whole new wave of resistance. Are we preparing our minuscule capital market for such eventualities, which are rocking the boat on international waters? On the international scene we see that the market is saddled with companies with marginal business models and little hope of ever turning a profit.
Rumours abound that even top-tier Venture Capital (VC) firms won’t be able to return money to their investors because of a plethora of losing dot-com bets. The writing on the wall was also involving Intel where it was about to cut 5,000 jobs to reduce operating costs. Acknowledging that many of their portfolio companies may never go public, VCs now are eagerly exploring spin-off opportunities. Some of the larger firms that frenetically increased the pace of their investing over the last few years – like Softbank Venture Capital.
Back to the local scene. There is not enough encouragement in the Business Promotion Act for start-up firms who specialise in web design, multimedia assignments and other E-Business related work. Notwithstanding our geographical isolation as an island we are endeavouring to use Internet connectivity to host virtual shopping malls and process data through call centres for world users clicking locally hosted web sites. We may have missed the bus during the golden age of the dot.coms which dawned in the early 1990s in sunny Silicon Valley.
Not all is lost.
A revival of the start-ups will bounce back and if Malta plays its cards well we may hook on the bandwagon. This could be achieved in a relatively short time if bandwidth and high speed connectivity which has now been made accessible by Maltacom and/or Melita Cable keeps going down in price. Today we know that bandwidth cost in Malta is uncompetitive, being three to four times the European standard. There is enough talent in the local Internet service providers to compete on a world-wide basis provided access to the web is available at a decent speed and affordable prices. Of course the liberalisation of the telecommunications industry in Malta is the right step forward for a number of young firms who are waiting for the next big bang while striving to survive in the competitive world of E-commerce. Another innovation is the massive investment paving the way for a gradual introduction of interactive TV services by Melita Cable. To the average consumer, this means that without the need of any odd keyboard commands, pure internet/video streams plus virtual shopping malls can be enjoyed by all the family in the comfort of their homes. Again this technology does away with download delays, random freezes, cryptic error messages normally associated with dial-ups.
In the UK, the gaming industry has taken favourably to this technology. Ladbrokes, for example already has interactive TV services on CWC, Telewest and Ondigital and will soon launch NTL. On the Sky platform already boasts of over five million households.
To conclude we must nurture this young cyber-industry consisting of website designers, software specialists and engineers. The days of massive labour intensive manufacturing units are slowly receding to the new economy which is cleaner and is less harmful to our fragile environment. This is a golden chance to navigate our way in the global electronic market by promoting a quality product which stands out in the crowd among the web-farms that may be attracted to host their servers in Malta. Let us hope that we can learn from the recent crash in Internet stocks and the slowdown in the US economy. Will Malta be the “Singapore financial model of the Mediterranean” and attract new E-business by improving our competitive edge within the global “virtual” e-market.

George Mangion is a partner with Pannell Kerr Forster, certified public accountants and auditors.