Monday, June 20, 2016

Living off the fat of public land

There can be good economic reasons for granting public land to developers. But is it justified when it is purely for private profit?

Photo: Steve Zammit Lupi

Xwejni Bay is a picturesque inlet just off Marsalforn where salt is still produced from the pens cut out in the rocks.
The idyllic setting provides a perfect getaway, but it could have been a different story had the Borg Olivier government of 1969 not denied a development grant to the Pisani brothers.
It was a time when the Borg Olivier administration was trying to diversify the economy and encourage a fledgling tourism industry by giving hoteliers favourable terms and public land on the cheap.
The model worked, and Malta gradually started seeing hotels going up, providing much needed employment in sectors other than the British services.
Fast forward three decades and that very same model based on generous terms and the use of public land continued to be used by subsequent administrations.
In the 1990s, the Fenech brothers pulled down the Hilton hotel and rebuilt it within the confines of a bigger project that included a yacht marina hewn into the rocky coast and hundreds of luxury apartments.
Controversy surrounded that project, later to be known as Portomaso. The entire area was leased by the State to the developers for Lm191,000 (€445,000) until 2114. It was eventually sold to the developers for Lm800,000 (€1.8 million) in 2006, which pales into insignificance when considering the going rate for the luxury apartments the developers were allowed to build.
But Portomaso is not the only private project to have benefited from the State’s generous terms. The Tigné and Manoel Island development by the Midi consortium, which did not include hotels, was another exercise involving public land handed to investors, almost exclusively for real estate purposes.
Roll forward to the present day and once again the government is adopting a similar strategy to shift the real estate market up a gear.
In St George’s Bay, Corinthia is discussing new terms for the concessions given to it by the State in the 1990s to develop five-star hotels: it now wants to be allowed to develop private residences alongside a six-star resort.
A stone’s throw away, the government is willing to give up the site comprising the Institute for Tourism Studies to the Seabank Group for the development of a hotel, hundreds of luxury apartments and commercial outlets.
Another luxury real estate project is planned for the public land at the derelict White Rocks complex in Baħar iċ-Ċagħaq.
The public is subsidising big developers to build exclusive properties for the few who can afford them
It seems the economic model adopted in the 1960s is very much alive and kicking five decades later. But with a buzzing economy driven by private-sector investment and employment at an all-time high, is it still necessary to give up public land for private gain?
In 1997, Michael Briguglio was one of a handful of activists who went on a hunger strike to protest the Portomaso project.
The lasting legacy of that desperate action to save the environment was the Ombudsman’s recommendation to have parliamentary scrutiny each time public land is transferred for private, commercial purposes.
Environmental activists went on a hunger strike in January 1997 to protest the Portomaso project that saw the Hilton hotel being rebuilt along with hundreds of luxury apartments, a yacht marina and a business tower.Environmental activists went on a hunger strike in January 1997 to protest the Portomaso project that saw the Hilton hotel being rebuilt along with hundreds of luxury apartments, a yacht marina and a business tower.
This is why the land transfer at Żonqor Point in Marsascala and the Dock One buildings in Cospicua to the Sadeen Group for the creation of a higher education institute had to be brought before Parliament last year.
It is the same reason that any changes to Corinthia’s concession terms at St George’s Bay will have to be approved by Parliament, as will the land transfer of the ITS to the Seabank Group.
Today a sociology lecturer, Dr Briguglio argues that an economic model based on the cheap exploitation of land has “different and at times contradictory characteristics”.
This model can have a multiplier effect by creating jobs in different sectors and promoting relative stability, he says.
But there is also a deleterious effect from giving up public land for projects that largely result in residential units that are out of reach for ordinary citizens.
“The public, through its taxes, is basically subsidising big developers to buy land at cheap prices to build exclusive properties for the few who can afford them. Consequently, residents may be elbowed out of certain areas which become increasingly commercialised,” he says, quoting from an environmental planning study for the Tigné area in Sliema.
Dr Briguglio says that this model can, and increasingly does, create environmental precariousness and social inequality, resulting in a lack of public space for enjoyment by the community.
It is also a model that is causing increased strain on aspects of public infrastructure such as roads and water.
“When developers stop making profit, they simply abandon the sites or resort to even more greedy proposals. Manoel Island is a case in point, with rubbish and debris all over the place and closed access to the public,” Dr Briguglio says.
Manoel Island had to be developed as part of the Tigné project, but Midi wants to sell it off and has been waiting for the right investor to come along. While Fort Manoel has been restored, the rest of the island remains a shambles with no public access.
Smart City in Kalkara has suffered a similar fate, as most of the site is excavated and hidden behind hoarding, a far cry from the bustling IT village with hotels and luxury residences once promised.
Dr Briguglio’s concern does not stop with the use of public land as a giveaway. It is a concern linked to the emphasis being placed on the construction industry as a generator of economic prosperity.
“It is the type of model which can burst, as was the case in Spain and Ireland, with dramatic social and economic repercussions,” he says.
He asks how many more thousands of apartments the country can build, when so much vacant property exists.
It is a question that many have asked over the years. Finance Minister Edward Scicluna also warned recently about the rush by developers as they seemingly try to outdo each other with high towers and luxury apartments.
While some of these projects are on privately owned land, others require government concessions. Some are even hoping for fiscal benefits to moderate the exponential costs associated with high-rise.
In an interview with The Sunday Times of Malta, Seabank Group CEO Arthur Gauci insisted a hotel on its own on the ITS site would not be viable if the company were to pay commercial rates for the land. “The numbers just don’t add up.”
Mr Gauci is not the first to posit this argument. It falls squarely within the context of fiscal incentives used to attract foreign companies to Malta, the difference being that companies generate employment, while luxury apartments generate profit for the sellers. The Corinthia Group has argued that if Malta wants to amplify its profile as a top-end destination, it requires high-end development, which includes residences that may attract foreigners.
But for Sandro Chetcuti, president of the Malta Developers Association, the government should hold on to public land for a rainy day.
We cannot have an economy that depends on real estate
He says the real estate sector is passing through a revival which does not need extra stimulus from the government.
“Public land can be used to stimulate investment in tourism or education, but we have to be careful because too much use of cheap public land risks distorting the market,” Mr Chetcuti says.
He notes that the land in St George’s Bay where the Corinthia wants to build a six-star resort was given to hoteliers in the 1990s for the construction of two five-star hotels and one four-star resort.
“At the time the country lacked five-star investment, and it may have been justified to give up public land for the greater economic good. But if you want to refurbish and upgrade these hotels, does it make sense to reduce them to two hotels and shift the onus of the project to real estate?”
Mr Chetcuti says a real estate component may be justified to part-finance a project, but he fears that in some of the proposals being floated, the hotels are simply an excuse for residential development.
“This will be the start of the road to perdition, and it could be a high-risk model for the country because we cannot have an economy that depends on real estate,” he says.
His cautionary tone echoes that of Chamber of Architects president Chris Mintoff, who recently wrote about the Montebello syndrome. Mr Mintoff warned against a get-rich-quick mentality in the construction industry that shuns good sense and proper planning.
Mr Chetcuti appeals to developers “who are enthusiastic about their projects because of the feel-good factor now to consider things well”.
He points out that it is only recently that the industry “painstakingly” exited a situation of oversupply that dragged it down. It makes little sense to have more of the same or too many of the same, he says.
Project proponents are convinced that there is a market for what they are planning to offer. The Individual Investor Programme and other initiatives to attract wealthy foreigners to Malta have jolted the high-end property market.
According to the Central Bank of Malta’s annual report for 2015, business and consumer sentiment has continued to improve.
Sentiment has significantly improved and turned positive in the manufacturing, retail and construction industries.
These developments led to a four-percentage-point increase in 2015, ensuring the index remained above its long-term average of 100.
Economic projections show Malta registering healthy growth over the next two years.
The country is riding a wave, but how long it will last is anybody’s guess. The caution has been expressed; whether it will be heeded is another matter altogether.

Time machine: 1969

An extract from a supplement appearing in the Times of Malta in June 1968 to commemorate the opening of the Corinthia Palace Hotel in Attard.An extract from a supplement appearing in the Times of Malta in June 1968 to commemorate the opening of the Corinthia Palace Hotel in Attard.
The Pisani brothers of Corinthia fame wanted to develop a 690-room hotel in Żebbuġ, Gozo, and applied for a £400,000 grant from the government.
At the time, the Borg Olivier administration was bending over backwards to encourage investors to open up hotels, as the country sought to bolster a fledgling tourist industry.
According to a declassified Cabinet memo released last year, the request by the Pisani brothers was turned down, because they had already benefited from a grant to develop the Corinthia Palace in Attard.
The Pisani brothers had transformed a family restaurant just opposite San Anton Gardens into a 320-bed hotel and obtained a grant of £173,333 for the development. The generous terms also included a 10-year tax holiday and exemptions on customs duty on construction materials used for the Attard hotel.
This was just one example of how the administration at the time supported investment in tourism. Other projects at the time were also supported in this way as post-independence Malta sought to diversify its economy and move away from its reliance on the British services

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