Malta most difficult place to do business in Europe, 102nd of 185 economies surveyed by World Bank

While the Maltese authorities may continuously heap praise on the island’s ‘easy’ regulatory framework and the country’s attraction to foreign direct investment, the people at the World Bank appear to be of quite another opinion.

According to a World Bank report released this week, access to credit, dealing with construction permits and red tape in starting businesses, obtaining electricity and enforcing contracts have made Malta one of the least businessfriendly countries in Europe – and the world.

In Malta’s debut in this year’s World Bank annual report, Doing Business 2013, the institution found that Malta is, in fact, the most difficult place to do business in the whole of Europe, candidate member states included.

Out of the economies of 185 countries analysed by the World Bank in terms of the ease of doing business in them, Malta is ranked in a most dismal 102nd place. Greece, in a far better 78th place, was the second-most difficult place in which to do business in Europe. Denmark, in global fifth place, was the EU’s easiest. The majority of EU member states rank in the global top 50 and as such are apparently at least twice as easy to do business in than Malta.

The report, subtitled Smarter Regulations for Small and Medium-Size Enterprises, compares business regulations for domestic firms in 185 countries. Among the Malta contributors are the country’s top law firms, as well as top architectural, construction, shipping and audit firms and government bodies such Malta Enterprise, the Malta Environment and Planning Authority, the Freeport Corporation, the Inland Revenue Department, the Finance Ministry, the Land Registry, the Occupational Health & Safety Authority, Enemalta, the Malta Financial Services Authority and one of the country’s major banks.

The area in which Malta performs worst is in ‘Getting Credit’, where it is placed 176th. Those faring worse than Malta in the area were only Syria (176), Djibouti, Madagascar and Sao Tome and Principe and Tajikistan (all at 180), and Palau (185).

Malta is 167th on the list when it comes to dealing with construction permits, 150th for starting a business, 121st for enforcing contracts and 111th for getting electricity.

The best advantage Malta has, according to the World Bank, was in terms of paying taxes, where the country was ranked 27th, trading across borders (34th), resolving insolvencies (67th), protecting investors (70th) and registering property (80th).

Not only are the findings somewhat more than concerning from the point of view of local businesses, but the authoritative annual report is also used by countless corporations and business when taking the very delicate decision about expanding overseas.

The Doing Business report sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations. It measures and tracks changes in regulations affecting 11 areas in the life cycle of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers.

Starting a business: 150th place

At a global 150th, the ease of starting a business is one of the weak links in Malta’s business chain. According to the World Bank assessment, there are 11 procedures involved, which take 40 days to complete at a cost of 8.9 per cent of the country’s income per capita, a common denominator used for comparative purposes.

The report notes: “Formal registration of companies has many immediate benefits for the companies and for business owners and employees. Legal entities can outlive their founders. Resources are pooled as several shareholders join forces to start a company. Formally regis- tered companies have access to services and institutions from courts to banks as well as to new markets. And their employees can benefit from protections provided by the law. An additional benefit comes with limited liability companies. These limit the financial liability of company owners to their investments, so personal assets of the owners are not put at risk. Where governments make registration easy, more entrepreneurs start businesses in the formal sector, creating more good jobs and generating more revenue for the government.”

Getting credit: 176th place

The getting credit index is where Malta fares worst of all. It was ranked in 176th place and, on a scale of zero to 10, is given a three on strength of legal rights and zeros across the board for depth of credit information index, public registry coverage and private bureau coverage.

The report notes: “Two types of frameworks can facilitate access to credit and improve its allocation: credit information systems and the legal rights of borrowers and lenders in collateral and bankruptcy laws. Credit information systems enable lenders to view a potential borrower’s financial history (positive or negative) – valuable information to consider when assessing risk. And they permit borrowers to establish a good credit history that will allow easier access to credit. Sound collateral laws enable businesses to use their assets, especially movable property, as security to generate capital – while strong creditors’ rights have been associated with higher ratios of private sector credit to GDP.”

Construction permits: 167th place

Dealing with construction permits, where Malta is ranked 167th, takes 237 days, involves 11 procedures and costs 243.9 per cent of income per capita.

The report notes: “Regulation of construction is critical to protect the public. But it needs to be efficient, to avoid excessive constraints on a sector that plays an important part in every economy. Where complying with building regulations is excessively costly in time and money, many builders opt out. They may pay bribes to pass inspections or simply build illegally, leading to hazardous construction that puts public safety at risk. Where compliance is simple, straightforward and inexpensive, everyone is better off.”

Enforcing contracts: 121st place

Enforcing contracts, meanwhile, required 40 procedures, 505 days and costs 35.9 per cent of the claim in question. Malta was ranked in 121st place.

The report notes: “Well-functioning courts help businesses expand their network and markets. Without effective contract enforcement, people might well do business only with family, friends and others with whom they have established relationships. Where contract enforcement is efficient, firms are more likely to engage with new borrowers or customers, and they have greater access to credit.”

Getting electricity: 111th place

Getting electricity, where Malta ranks 111th, deals with five procedures, takes 136 days and costs 463.6 per cent of income per capita.

The report notes: “Access to reliable and affordable electricity is vital for businesses. To counter weak electricity supply, many firms in developing economies have to rely on self-supply, often at a prohibitively high cost. Whether electricity is reliably available or not, the first step for a customer is always to gain access by obtaining a connection.”

Registering property: 80th place

Registering property, where Malta ranks 80th, involves seven procedures, takes 15 days and costs 5.2 per cent of income per capita.

The report notes: “Ensuring formal property rights is fundamental. Effective administration of land is part of that. If formal property transfer is too costly or complicated, formal titles might go informal again. And where property is informal or poorly administered, it has little chance of being accepted as collateral for loans – limiting access to finance.”

Protecting investors: 70th place

Malta was ranked 70th for its investor protection. In terms of protecting investors, and again on a scale of zero to 10, it got a three for the extent of disclosure index, six for director liability, eight for ease of shareholder lawsuits and 5.7 on the overall investor protection index.

The report notes: “Investor protections matter for the ability of companies to raise the capital they need to grow, innovate, diversify and compete. If the laws do not provide such protections, investors may be reluctant to invest unless they become the controlling shareholders. Strong regulations clearly define relatedparty transactions, promote clear and efficient disclosure requirements, require shareholder participation in major decisions of the company and set clear standards of accountability for company insiders.”

Resolving insolvency: 67th place

Resolving insolvency, meanwhile, where Malta ranked 67th, takes an average of three years, costs 10 per cent of the estate and has a 39.2 per cent recovery rate.

The report notes: “A robust bankruptcy system functions as a filter, ensuring the survival of economically efficient companies and reallocating the resources of inefficient ones. Fast and cheap insolvency proceedings result in the speedy return of businesses to normal operation and increase returns to creditors. By improving the expectations of creditors and debtors about the outcome of insolvency proceedings, well-functioning insolvency systems can facilitate access to finance, save more viable businesses and thereby improve growth and sustainability in the economy overall.”

Trading across borders: 34th place

In trading across borders, where Malta ranked 34th, six documents and 11 days are needed to effect an export and seven and nine respectively to import. The cost to export reaches $855 per container and he cost to import is $970.

The report notes: “In today‘s globalised world, making trade between economies easier is increasingly important for business. Excessive document requirements, burdensome customs procedures, inefficient port operations and inadequate infrastructure all lead to extra costs and delays for exporters and importers, stifling trade potential. Research shows that exporters in developing countries gain more from a 10 per cent drop in their trading costs than from a similar reduction in the tariffs applied to their products in global markets.”

Paying taxes: 27th place

Malta was ranked 27th for ease of paying taxes, with just six payments effected a year and 139 hours per year needed to accomplish that.

The report notes: “Taxes are essential. They fund public amenities, infrastructure and services that are crucial for a properly functioning economy. But the level of tax rates needs to be carefully chosen – and needless complexity in tax rules avoided. According to Doing Business data, in economies where it is more difficult and costly to pay taxes, larger shares of economic activity end up in the informal sector – where businesses pay no taxes at all.”