PM caps Brussels property refurbishment at Lm2.5 million

Prime Minister Lawrence Gonzi said yesterday that he had given a specific order that the Lm2.5 million allocated for the refurbishment of the property known as Malta House in Brussels may not be exceeded.

He said that the decision to buy Malta House was taken unanimously by the Cabinet after he presented it with a memorandum based on a detailed report submitted to him by Mimcol, the government holding company. The building, he said, had not been in an original shortlist but was added later by Mimcol. Although the owner had wanted to lease the building, the government following expert advice, felt it was better to buy.

Dr Gonzi was replying to questions by the parliamentary Public Accounts Committee which yesterday held the first of three seven-hour meetings to discuss the purchase and refurbishment of Malta House.

The committee questioned Dr Gonzi for nearly 90 minutes after having previously heard former Foreign Minister Joe Borg for two hours. It questioned Malta's EU representative, Richard Cachia Caruana for more than two hours.

Dr Gonzi explained that the Cabinet decided to buy the property in May and an exercise was launched in June to identify what space was to be used exclusively by the permanent representation and what could be used for other purposes.

It was concluded that approximately 2,250 square metres of floor space, working out to about five storeys were required for the Malta mission, leaving four storeys and car parking for a different use, including allocation to other government entities which may need offices in Brussels

The government was currently considering the commercial need for entities, such as Air Malta and the Malta Tourism Authority to use such space and he would personally take the decision in the coming months. It had to be ensured that this decision was in the national interest and made political and commercial sense.

The Prime Minister said that the government would not lose tax benefits on the whole building if it rented out parts of it. It was not clear yet whether tax would have to be paid on those parts of the building rented out to commercial entities, but no tax would be charged when parts of the building were allocated to government organisations.

Dr Gonzi said that although the previous owners of the property had said they made a profit €1 million from the sale to Malta, this did not necessarily include taxes.

The Prime Minister presented the committee with a Mimcol report on how the property was selected starting from the identification of 16 properties which were then shortlisted to three. The property that was eventually chosen was not in the original 16.

The report and recommendations were signed by the team of people involved and had been drawn up in early February.

Dr Gonzi said that after he became Prime Minister he requested an update of the report, including the financing of the operation.

He then decided he should endorse Mimcol's recommendations for the purchase of the property and moved a memorandum to the Cabinet. A unanimous decision was taken in favour of the purchase after a discussion.

He said that soon after the 2003 election the Foreign Minister and Mr Cachia Caruana, then personal assistant to the Prime Minister, were asked to undertake a detailed exercise on the number of staff who would be required at Malta House. A very detailed report had been presented to the government on the nature of representation of other governments and what the new member states were planning to have. It was decided that Malta needed a minimum staff of 62 in Brussels.

Asked about Albert Mizzi's involvement in the deal, the Prime Minister said that Mr Mizzi had already been involved in the purchase of Malta House in London. So apart from his vast business experience, he also had experience in the purchase of an embassy building. He had been requested to give his opinion after the experts had already given their advice and when the number of properties had already been shortlisted to three. Mr Mizzi was then asked to negotiate on behalf of the government for the best deal possible.

The government, Dr Gonzi said, had also sought the advice of law and accountancy firms well versed in Belgian law since the contract was being drawn up under Belgian law.

Mr Leo Brincat (MLP) said it had been pointed out, not by the Labour Party, that the company which sold the property to the Maltese government included a nominee company with Maltese investors in it. Was this the case?

Dr Gonzi said he was hearing this for the first time and according to the information he had, it was not true.

Replying to questions by Labour MP Joseph M. Sammut, the Prime Minister said that at a certain point during negotiations, when he was not yet Prime Minister, the government had considered adopting the model used for London's Malta House, where the property was bought by a public entity and rented to the Maltese government. But although this had been a suitable method for the UK, had this method been used in Belgium, tax exemptions would have been lost.

It was because the system similar to that used in the UK had been under consideration that no financial allocation for the purchase was made in the budget for 2004. Supplementary estimates were eventually presented to Parliament to cover Lm6.5 million for the sale and Lm2.5 million for the refurbishment of the property.

Replying to other questions by committee chairman Charles Mangion (MLP), Dr Gonzi said that the government's policy was to buy the property it used for embassies abroad whenever possible.

Dr Gonzi said that Mimcol was informed of the availability of the property by e-mail in July. In August, the agents informed Mimcol that the owners were ready to sell but only following a 27-year rental period. That was not acceptable. Eventually agreement for outright purchase was reached.

Dr Gonzi said he was satisfied that Mimcol had operated in an independent manner, although the final decision was taken by the government and not by Mimcol.

Mr Cachia Caruana said the first serious discussion about acquiring a property to house the Maltese representation in Brussels took place in March 2002 on the sidelines of a meeting of the Council of Europe.

The issue had been followed on in May 2003 with the Prime Minister, the Finance Minister and the Permanent Secretary at the Ministry of Foreign Affairs, with the latter being detailed to prepare a list of suitable properties. In Brussels, embassy official Walter Mallia got in touch with five major estate agents and came up with a list of 16 properties.

Mr Cachia Caruana said that on May 26 or 27 he went to Brussels and met Joyce O'Connor, manager of Malta House in London and toured the properties. A property at 1 Rue Archimede was found ideal for the purpose.

Mr Cachia Caruana said he kept the Foreign Minister informed and discussed the property with Finance Minister John Dalli, getting the minister's agreement in principle on June 6, 2003.

Mr Dalli then decided to involve Mimcol in the exercise, and Mr Cachia Caruana said that on the same day he met the Mimcol chairman and chief executive along with the Finance Minister's private secretary. Five days later he was told that Mimcol representatives would visit Brussels to view the properties. To help with the exercise Mimcol chose three foreign individuals and Dr Peter Caruana Galizia, who had been involved in the drafting of legislation on the purchase of government property.

The Mimcol representatives visited Brussels on June 12 and financial parameters were laid down in the range of €17.4 million to €21.75 million.

Mr Cachia Caruana said he first saw the properties at 25 Rue Archimede and 11 Rue Schumann on September 22, and briefed the Prime Minister on the following day. On September 30 he met Mr Dalli and they agreed that the best choice was 25 Rue Archimede.

On October 15 Mr Dalli decided that Albert Mizzi should lead the final stage of negotiations.

Mr Martin Xuereb was chosen as architect in charge in view of his performance on previous government projects. Mr Cachia Caruana did not disagree because he knew Mr Xuereb, who had done some personal work for him previously.

Mr Cachia Caruana said he met Mr Mizzi on November 8. On November 13, he met Mr Dalli to discuss all issues regarding EU structures, specifically in the context of budget planning.

Negotiations on the property in Brussels continued throughout November 2003, and by the end of the month they were completely focused on 1 and 25 Rue Archimede, even though there were still problems regarding number 1.

On January 6, 2004, Mimcol circulated a draft report to the Prime Minister, the Finance Minister and members of the negotiating team. The report was finalised and presented to the Prime Minister and Finance Minister on February 9.

Mr Dalli later instructed Mimcol to delve into sources of financing for the property, and up to February the preferred model was the one that had been used for Malta House in London. On April 11 the Prime Minister was presented with a copy of the previous Mimcol report and the proposed financing model.

That Cabinet meeting was not attended by either Mr Dalli or Mr Cachia Caruana.

Answering a question by Dr Mangion, Mr Cachia Caruana said he was the point of contact between Mimcol and the government. Mimcol never reported to him but to the Minister for Investment, but he was always kept updated.

Answering another question, Mr Cachia Caruana said that neither the properties at 25 Rue Archimede nor 11 Rue Schumann had been on the original shortlist of 16 properties which he checked out, because Mimcol had identified the two properties under its own steam afterwards.

When Dr Mangion suggested that the Mimcol report to the Cabinet was incorrect, in that it said that Mimcol had put an additional property on the list, Mr Cachia Caruana confirmed that this was so because the additional properties were, in fact, two.

Mimcol's remit had been to recommend to the government the properties that could be purchased. The agent who had recommended the two properties not previously listed was the same one who had recommended 1 Rue Archimede. The Mimcol delegation first saw 1 Rue Archimede on June 16.

Mr Cachia Caruana said he had first seen the consultants' report after June 12, 2003, whereas he had only first seen 25 Rue Archimede and 11 Rue Schumann in July. Neither of the two properties were added to the list in pursuance of his own recommendation.

Replying to questions by Mr Brincat, Mr Cachia Caruana said the decision to buy the property as against renting, was taken by Mr Dalli in line with government policy.

His role after the project was passed on to Mimcol was to act as a liaison between the government and the agency.

Mr Cachia Caruana denied that he had influenced the choice of the consultants. He had only concurred with the choice made by Mimcol.

On a question by Investments Minister Austin Gatt, whether it was him who suggested the appointment of Dr Peter Caruana Galizia and Architect Martin Xuereb as consultants, Mr Cachia Caruana said that these were suggested to him and he agreed on the basis of the reasons Mimcol had given for their choice.

Mr Cachia Caruana said that by the beginning of 2006, some 62 persons were expected to be working at Malta House, as against the 37 in place today.

Dr Cachia Caruana said that he had never seen the contract of purchase.

Mr Brincat asked Mr Cachia Caruana whether he was a director of a subsidiary company which was involved in the contract for the refurbishing works of Malta House in London. Mr Cachia Caruana confirmed, and said that his one share was passed on to the government after the signing of the agreement. The subsidiary company was necessary for the government to give up its right of exemption and then recover VAT.

Dr Gatt pointed out that the hearing was not about the London property.

Dr Mangion said that the questions were in place because the way the London property was acquired had been proposed as a model for the Brussels purchase.

Mr Cachia Caruana agreed with Mr Brincat that if the tax regime in Brussels was not so rigid the government would have acted in the same manner as it had acted in the London case.

Mr Cachia Caruana said proposals for the building of further rooms on the roof of the Brussels property had been abandoned as the structure did not support more weight, and secondly, as it did not make economic sense.

On the refurbishment of the property, Mr Cachia Caruana said that there was a capping of Lm2.5 million set by the Finance Ministry which could not be exceeded.

Asked whether the question of transport costs had influenced the choice of the property, Mr Cachia Caruana said that he always maintained that he preferred his employees to attend committees and be at their desks writing reports rather than lose time travelling to and from office.

Dr Sammut asked whether the property which the government eventually bought was added to the list by the realtors after negotiations they were having with a third country failed because of the price. Mr Cachia Caruana said he could not reply to this question and it would be best answered by the Mimcol representatives.

He said the owners were more interested in keeping the place and renting it out than selling it. They had entered into a refurbishment contract and wanted the works to be completed as soon as possible.

Dr Mangion said that the Lm2.5 million refurbishment was only meant to make the premises habitable. It did not include furniture, security arrangements, IT and telecommunications.

But Mr Cachia Caruana said that these were included.

Dr Mangion observed that whereas it was originally estimated that between 4,000 and 5,000 square metres would be needed for the Maltese staff, how was it that now they were settling for half the space?

Mr Cachia Caruana said that 2,250 sq mt would be needed for a staff complement of 62 . The other space was intended for leasing to third persons and further needs.

Dr Mangion asked whether the government intended from the very beginning to act as a commercial trader by renting out part of the property.

Mr Cachia Caruana said it made sense to have more space than immediately necessary for the mission to the EU and the Brussels embassy. It also made sense to buy a whole block, rather than part of it, as it gave the government better control and third parties would have to act under the government's control. Mr Cachia Caruana said the ground floor was held by third parties, while floors one to four could be rented out.

Mr Cachia Caruana said that four properties of between 5,000 and 5,500 square metres had been considered.

All the properties that had been considered were within walking distance from the EU headquarters.

Replying to questions by Dr Gatt, Mr Cachia Caruana said the property at Schumann 11 was the most expensive. The final choice had been between the properties at Archimede 25 and 1, the latter being €1,000 more expensive per square metre.

Had the government opted for rental, over a 25 year period, it would have ended up paying more than the purchase price.

Mario de Marco (PN) asked Mr Cachia Caruana if he was involved in the recommendations for the government to opt for Archimede 25. Mr Cachia Caruana said the recommendations were made by Mimcol and he was not involved.

Mr Brincat asked whether the government had considered acquiring property without spare capacity.

Mr Cachia said no, as far as he knew as the initial consideration had been to use the London Malta House model.

Dr Sammut asked why Albert Mizzi was involved in the talks. Mr Cachia Caruana said the government had confidence in his negotiation skills.

Parliamentary Secretary Tonio Fenech told the committee the government had faced the choice of whether to borrow from the banks to pay for the property, or opt for an outlay from the consolidated fund. The latter was chosen for tax reasons.

Mr Fenech also defended the government's decision to buy, rather than rent. The rent, he said, would have been an initial €1.4 million, rising every year and payments would have surpassed €47 million over the 27 years of the rent.

He said that for budget purposes, the government would have liked to pay a deposit on the property this year and settle the amount next year but that had not been acceptable for the owners.

He said the valuations made by Mimcol clearly showed the property was the best and there had been no reason for the government to ask the auditor-general to carry out a value for money audit.

Mr Fenech said Malta currently paid €450,000 as rent for its current Brussels embassy, which had a floor space of 800 square metres. At that price, renting a floor space of 2,500 metres squares would cost Lm700,000 a year. This underscored the benefit of purchase over renting.

Mr Brincat asked whether another entity, such as the banks, could have bought the building and rented it out to the government for a period of time, before actual sale.

Mr Fenech said the finance ministry was of the opinion that it worked out cheaper to buy immediately.

Asked if some interest had been shown for rental of office space from the new property, Mr Fenech said he was not aware of such interest yet.

The committee yesterday also heard former Foreign Minister Joe Borg, now EU Commissioner and Foreign Ministry official Gaetan Naudi.

Dr Borg explained how the Maltese government started scouting for properties as soon as the EU accession talks ended, even before the referendum and the general election.