Thursday, January 21, 2016

Taking Flight: Balearic investment

Capital investment. Its definition is as follows: "Funds invested in a firm or enterprise for the purposes of furthering its business objectives. It may also refer to a firm's acquisition of capital assets or fixed assets. Sources of capital investment are manifold and can include equity investors, banks, financial institutions, venture capital and angel investors. While capital investment is usually earmarked for capital or long-life assets, a portion may also be used for working capital purposes."

So much for the short business lesson, but it is necessary in order to underline what follows. Dun & Bradstreet (D&B) is one of the foremost providers of business information. Its latest report into business performance in Mallorca and Spain reveals one very heartening aspect for the island and the Balearics: the percentage rise - and so relative rise - in the number of businesses created in 2015 was greater than elsewhere in Spain. A seven per cent increase is contrasted with a 0.4% decrease nationally, the decline explained by businesses which close as well as open.

While this is positive news, it disguises another finding by D&B. Last month, the level of capital investment for the whole country was up by a staggering 87%. In December alone, 2,600 million euros were invested. In the Balearics, the figure was equally staggering: capital investment was down by 75% compared with December 2014. This followed what had otherwise been a decent year of investment growth - slightly more than 100% for the year as a whole. But it is the December figure which should be attracting more attention than it is. Indeed, it should be setting the alarm bells ringing.

What one can say is that capital investment, unlike much other business activity in the Balearics, is not determined by the season. In fact, the off-season would typically be a time of high investment for projects that are, hopefully, designed with long-life assets in mind: hotels, just to take one example. As can be seen nationally, there most certainly isn't a seasonal downward factor at play: quite the opposite. In the Balearics, this was true also of December 2014. So why did the figure for last month collapse so dramatically?

A reason could lie with investment that had already been made. One does need to be somewhat cautious in highlighting one month's performance in the context of what otherwise was a decent year. Nevertheless, the slump should raise eyebrows.

There are currently, or have been, highly positive factors going the Balearics way in terms of business and economic development. In addition to all the investment that has been noticeable in the past couple of years since recession drifted away, there has been a benefit for the Balearics from what has been and is happening in Catalonia. Because of the drive towards secession, and just as importantly high rates of tax, businesses have been getting out of Catalonia. Since 2012, some 200 have relocated their operations to the Balearics.

It doesn't necessarily follow that because a business moves its base, mainly for tax reasons, investment increases. This isn't the point. What is, is that there has been confidence in coming to the Balearics, courtesy of a more agreeable corporate tax regime (and no question of secession). This confidence has been matched by investment from whatever source. This is why there have been the highly positive factors for the islands.

But consider what happened between 2008 and 2011 when the previous PSOE-led government was in power. Businesses left the Balearics. The reason? Simple. Tax.

The benign business conditions in the Balearics are changing. Tax amendments by the current government create one such changing condition. Another is government policy, no better characterised than the recent decree that will directly hit the tourism and construction sectors, the two sectors that attract the greatest levels of investment.

The decree hadn't of course been announced in December, but the signs were becoming increasingly clear. Investment made during 2015 was, in part, in order to ensure that projects were in place and couldn't be undone by legal reform. The healthy total investment figure for 2015 was thus partially influenced by necessity.

The Balearic government, primarily the president and vice-president, refer to investment that will be forthcoming, seemingly oblivious to how policies might in fact stall investment. For the vice-president, Biel Barceló, there is the other hat that he wears: the innovation one. He wishes to see greater investment in technologies as a means of economic diversification. This is laudable and would be even more so were he to identify what he actually means and adopt a position that might make technology investment attractive. He might, however, note that there was a flight of investment in high technologies nationally last year. Which was perhaps a case of investors seeking returns from the tried and tested: bricks and mortar and tourism.

Was December just a blip? We are about to find out.

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