Small states like Malta have one problem in common, the handicaps related to their size. They are disadvantaged in attracting foreign direct investment given no natural resources and their limited national market. Governments have the opportunity to give an advantage to businesses called State Aid. The primary advantage of State Aid is to favour countries that are unable to attract FDI. In a perfect world, if companies have access to capital markets and are attractive to foreign investors, they should receive less aid and their development should be financed by private flows. State Aid can take several forms; a grant, a loan or a loan guarantee at a lower interest rate than the market rate, an interest subsidy, a tax exemption or a contribution to a company’s capital. Moreover, four criteria have to be satisfied to qualify as State Aid, the aid must be granted by the State or from States resources, the aid will distort competition, the aid must favour certain businesses or the production of certain goods and the aid affects trade between member States.
However, State Aid law limits government action, in that any State Aid offered to a company must be first approved by the European Commission before implementation except for State Aid which is considered not to have any impact on trade in the domestic market and competition. For the latter case, it’s more particularly mentioned in the regulations governing State Aid, the de minimis rule which stipulates that the same company may only receive a maximum amount of de minimis aid of €200,000 over a period of three fiscal years. This threshold is reduced to €100,000 for transport companies. The initial threshold of €100,000 was doubled for the period 2007-2013 and maintained until 31st December 2020 by the European Commission which finally concluded that increasing this threshold would lead to many risks for competition and trade in the single market.
Moreover, there is a ‘one time, last time’ principle which authorises government to grant aid to a company for only one restructuring plan in order to “avoid the use of repeated rescue or restructuring aids to keep firms artificially alive”. This principle can cause an array of problems for small economies and the case of Air Malta, the Maltese national airline, it is a perfect example of the enormous consequences which could result from the restrictive practices of State Aid.
In 2012, the Commission approved the €260 million of aid that the Maltese Government had requested to turn Air Malta into profit but over the years this proved to be insufficient to offset the millions of accumulated losses. That is why in 2016, the Maltese Government sought to re-inject more funds into the airline but this was refused conforming to the ‘one time last time’ principle. In 2018, Air Malta have finally succeeded in make a small operating profit for the first time in 18 years as set out in its Annual report published in March 2019 mainly due to financial flows from sale of slots at Gatwick and London Heatrow airports that the Maltese Government acquired from Air Malta through a new “wholly government-owned company” named Malta Air Travel Limited (2018). The strategy is for Air Travel to own Air Malta’s landing rights in various airports and lease them back to the airline. The fact remains that to date, Air Malta has a negative equity of €33.9 million and is still dependent on government funding.
The survival of this airline is essential for a small State like Malta because without a national airline it may have negative consequences on businesses and tourism if Air Malta’s only option is to stop its flights. Indeed, small economies like Malta with a high degree of openness are dependent on tourism and international trade making it vulnerable to any economic shock caused by any reduction in the number of flights.
We know that State Aid remains a vital source of funding for many developing economies with markets sometimes seen as unattractive but such restrictions lead the Maltese Government to request lifting of EU’s State Aid rules so that Maltese companies can make additional efforts to improve competitiveness and so to be more likely to attract FDI.