PKF welcomes opening of Development Bank

Subsidies granted to individuals or general measures open to all enterprises, such as general taxation measures or employment legislation, do not constitute State aid.

Despite the general prohibition of State aid by the EU, in certain circumstances the General Block Exemption Regulation (GBER) justifies government intervention when this is undertaken in view of general economic development. Accordingly, in view of ensuring a well-functioning and equitable economy, Article 107 of the Treaty on the Functioning of the European Union (TFEU) exempts specific categories of aid which shall nonetheless be considered to be compatible with the internal market.

After assessing Malta’s proposal to set up the MDB in the light of these exemptions, one of which justifies State aid intended to enable the development of certain economic activities or areas, and where such aid does not adversely affect trading conditions to an extent contrary to the common interest, the European Commission gave the green light. To this end, the bank will carry out non-commercial activities particularly intended to facilitate access to finance small and medium sized companies (SMEs) and to support large infrastructural projects when investment is insufficiently available from the market.

The MDB will have the power to make loans to, or investments in, any person who is engaged or is about to engage in an enterprise or project in or for the benefit of Malta, or give guarantees in relation to any such person to cater for the provision of finance for a specified set of circumstances which are stipulated in the Bill for the Malta Development Bank Act, 2016. Among the designated investment ventures, the MDB can finance enterprises, businesses and projects, particularly those contributing to a high quality, dynamic and innovative economy; provide suitable access capital to SMEs, the professions and business start-ups; finance projects undertaken by cooperatives, social enterprises and housing projects, especially those involving urban renewal; as well as fund infrastructural projects, particularly those geared towards enhancing Malta’s competitiveness.

The bank, wholly owned by the government, will have an initial authorised capital of €200 million, allowing it to leverage this to around €1 billion of loans in due course. However, the initial paid-up capital is expected to be around €30 million, with further capital pay-ups depending on the growth of the bank’s business. Aside from this capital injection, guarantees and tax exemptions will total around €55 million. The MDB will have a guarantee from the Maltese government on both the assets and liabilities side, the extent of which will be negotiated with the Ministry of Finance.

When announcing the European Commission’s decision, Deputy Prime Minister Louis Grech portrayed the MDB as a financial institution specialising in development and one which will not be guided solely by the profits of the shareholders. Indeed, its purpose is to support entrepreneurship and socio-economic development by providing promotional investment and financing, financial and advisory services, as well as by issuing securities or otherwise raising funds or capital in support of those services.

It will therefore act mainly as a second-tier financial institution crowding in established credit institutions, stepping in when private commercial banks fail to provide adequate financing to certain lines of business, categories of clients or types of enterprises that meet a bank’s social and economic mission, or, if such financing is available, it is not offered at normal market terms and is not appropriate to reach a bank’s purpose. In this manner, the MDB is envisioned to stimulate investment and growth by means of easier access to finance. By virtue of its role as an intermediate platform, the MDB can also participate in EU financial instruments, such as COSME (EU programme for SMEs), Horizon 2020 or the European Fund for Strategic Investments (EFSI), which offer further sustenance to small and medium sized companies.

As long as the MDB does not compete with or crowd out viable financing from commercial banks, private investors and other private financial intermediaries, it can start direct lending and provide financing on market terms. However, the bank can only offer financing directly and not in syndication with other financial institutions on condition that this does not exceed 25 per cent of its overall lending and is provided under schemes tailored for the business concerned.

In general, given that the bank’s aim is to address lacunae in the financial structure, it shall act as a wholesale intermediary in coordination with and via other financial institutions, be they aided or non-aided. It will therefore work with commercial banks to carry out due diligence and project-sustainability studies so as to ensure that only commercially viable projects will benefit and will not be used to accommodate entities which fail to get financing due to weak business models and strategies.

On a broader scale, the MDB, together with other investment platforms and NPBs, will have a predominant role in Europe’s economic revival. Such ancillary source of funding for SMEs and the infrastructure sector will nurture the much-desired sustainable growth in the levels of investment which the EU saw plummeting since the global economic and financial crisis in 2007.

In conclusion, by acting as a stepping stone for facilitated access to finance, the MDB is set to contribute to the Investment Plan’s goal of boosting job creation and economic recovery in