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PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
December 30, 2011
Report No.: AB6908
Operation Name
Region
Country
Sector
Operation ID
Lending Instrument
Borrower(s)
Implementing Agency
Date PID Prepared
Estimated Date of Appraisal
Estimated Date of Board
Approval
Corporate Review Decision
I.
Mauritius First Private Sector Competitiveness Development
Policy Loan (PSC - DPL)
Africa
Mauritius
Finance and Private Sector
P126903
Development Policy Lending
Government of Mauritius
Ministry of Finance and Economic Development
December 9, 2011
January 10, 2012
March 29, 2012
Following the corporate review, the decision was taken to
proceed with the appraisal of the operation.
Key development issues and rationale for Bank involvement
1. Mauritius has an impressive development record. Only a handful of countries have
defied the odds, transformed their economies, sustained growth acceleration over
decades and joined the ranks of middle income economies. Maintaining the status requires
keeping up to the pace of reforms set by its competitors. Mauritius' ambitions are far greater
as it envisions moving up the ladder and joining the ranks of upper middle-income countries.
In addition, the competitiveness of the Mauritian economy is at risk amid fears of another
global downturn fueled by the crisis in Europe. Accelerating reforms is the best response to
emerging global uncertainties.
2. Recent economic reforms in Mauritius have continued a long tradition of economic
growth and development. Since independence in 1968, Mauritius has achieved substantial
economic growth of around 5 percent per annum, which has underpinned an economic
transition from a predominantly agricultural economy based on sugar production toward a
diversified economy structured around textile exports and tourism. However, by the mid2000s, with the erosion of its preferential trade status and rising commodity prices, it was
evident that reform to further transition Mauritius from a labor-intensive economy toward a
high value-added knowledge and services economy was needed. As a result, in 2006 the
Government implemented a bold reform program structured around four pillars: (i)
strengthening fiscal consolidation and public sector efficiency; (ii) enhancing trade
competiveness; (iii) improving the investment climate; and (iv) widening opportunities. The
reform was broadly successful in restoring competitiveness, and achieving economic growth
and employment creation in higher value added sectors. Moreover, the reform helped to
consolidate government expenditure and reversed the upward trend in public debt. This
provided the necessary space to adopt temporary counter-cyclical fiscal and monetary
policies to mitigate the negative impact of the global financial crisis in 2009-10, and the Euro
crisis in 2010.
3. However, the reform agenda remains unfinished and critical constraints to economic
development, particularly with regard to competitiveness agenda, have become
increasingly evident. There is substantial room for improvement. The World Bank till very
recently was supporting the Government’s competitiveness agenda through the
Manufacturing and Services Development and Competitiveness Project, along with the
Mauritius Economic Transition Project. In March 2011, the Bank was requested by the
Government to cancel the two sector Investment Loans (ILs) – that were at an early stage of
implementation - and prepare a new DPL. The new DPL, while focusing on competitiveness,
would broaden and deepen the areas of focus in light of the evolving development priorities
of the island nation. The DPL was thus deemed a more appropriate instrument for
engendering the necessary policy and institutional reforms - as opposed to an IL with a focus
on public investment and capacity building measures.
4. The uncertain status of the global economy and the risks this poses to Mauritius adds
new urgency to reform. Global economic uncertainties pose an increasing threat to a small
open economy such as Mauritius, primarily on two fronts – the fiscal position and the current
account deficit. Slower global economic growth could depress domestic growth and tax
revenues, yet pressure to finance government priorities would likely continue. The fiscal
position remains stretched, with high public debt, which is only projected to decline by a
modest amount in the medium-term. Therefore a counter-cyclical fiscal policy would be
difficult to implement if these external threats materialize. This highlights the need for
measures that substantially raise public sector efficiency. Additionally, current account
deficits, although high, have to date been financed mostly through high Foreign Direct
Investment (FDI) and inflows to the financial sector, but this could quickly reverse if
international financial markets deteriorate. The concentration of the country’s exports on a
few markets (Europe) and products (tourism and textiles) could lead to a further deterioration
of the current account deficit, which requires an acceleration of reforms to improve
competitiveness and position the economy to access new markets and develop new products.
5. The support provided by this proposed DPL is instrumental in helping to overcome
many of the challenges the Government faces. The proposed Private Sector
Competitiveness Development Policy Loan (PSC-DPL), in an amount of US$15 million
(equivalent to SDR XX), is the first in a series of two annual programmatic operations in
support of the Government’s medium-term reform program that centers on competitiveness
and equity as its twin pillars.
6. The Government continues to see DPLs as an important vehicle for supporting policy
reform in Mauritius. While financing may be needed, it is the technical assistance, policy
dialogue and additional support to reform champions that the Government most values in the
World Bank engagement through DPLs. The proposed DPL is being prepared in coordination
with the First Public Sector (PSP) DPL. The two DPL series are designed to be mutually
reinforcing and address complementary aspects of the Government’s reform program. The
PSC DPL series will focus primarily on strengthening the policy and institutional
environment for private sector competitiveness, while this PSP DPL will focus primarily on
the performance of the public sector. It is the combination of the reforms supported by these
two DPLs that will help government improve its competitiveness and resilience; and prepare
it for a next phase of rapid and inclusive economic growth.
II.
Proposed Objectives
The development objective of the DPL programmatic operation is to strengthen the policy
and institutional environment in Mauritius to support competitiveness and enterprise
development. The operation will achieve this by: (i) facilitating competitiveness of enterprises;
(ii) improving access to finance; and (iii) promoting Information and Communication
Technology (ICT) and e-Gov for enhancing competitiveness and transparency. The proposed
DPL is consistent with the CPS objectives presented to the Board in October 2006 and the CPS
Progress Report of May 2011. The proposed DPL is aligned with four CPS pillars, in particular
improving competitiveness and investment climate along with inclusion and fiscal consolidation.
The DPL operation is well aligned to the new Africa Strategy that focuses on competitiveness
and employment as one of its two themes.
III.
Operation Description
The proposed DPL, in an amount of US$15 million is the first in a series of two annual
programmatic operations in support of the Government’s medium-term reform program.
The development objective of the programmatic series is to strengthen the policy and
institutional environment in Mauritius to support competitiveness and enterprise development.
The DPL series is aligned with the budget cycle, which is the primary vehicle used by the
government for introducing new policy initiatives. There will be two DPLs in this series, one in
2012 and one in 2013. The DPL series takes a pragmatic approach to support the policy agenda
over a two year period in which realistic results can be defined and achieved. The approach is to
focus on those reforms that can be completed in the short-term while building the necessary
foundations for broader reform over the medium-term. The DPL series is the principal
instrument identified in the Bank’s Country Partnership Strategy for supporting the
government’s reform program. For each of these pillars, prior actions have been identified that
create the underpinnings to support the reform processes. The specific measures that have been
agreed as prior actions for the first DPL are presented in Annex 1.
IV.
Tentative financing
Borrower
International Bank for Reconstruction and Development
Borrower/Recipient
Others (specify)
V.
0
15
Tranches (if applicable)
($m.)
First Tranche
Second Tranche
Etc.
Total
VI.
15
15
Institutional and Implementation Arrangements
7. The government, represented by the Financial Secretary at the MoFED, and the World
Bank, represented by the co-task team leaders, will formally meet to jointly review the
progress of the two complementary DPLs - PSP DPL and PSP DPL programs - together
with other Government and World Bank representatives as appropriate. The
implementation of the loan will require close coordination between the Bank and the
respective institutions responsible for the implementation of the DPL. These include the
Ministry of Finance and Economic Development, Ministry of Business, Enterprise and
Cooperatives, Ministry of ICT, the Registrar of Companies, the Registrar General and the
Central Bank, all of which will provide the requisite baseline data from which to measure
outcomes by the end of the program. MoFED will assist in the coordination of information
reporting on the program’s monitoring indicators. These will be tracked, discussed and
assessed among the Bank team and implementing agencies both by staff based in the field
and during the DPL missions. Periodic monitoring will take place through field missions and
through staff based at the Bank’s country office and an implementation report will be
prepared every six months for discussion with the World Bank.
VII.
Risks and Risk Mitigation
8. The implementation of the proposed reform program entails a number of risks: (a) the
challenge of maintaining macroeconomic stability as a result of uncertain global
developments; (b) a slowdown in the momentum of reforms, exacerbated by the withdrawal
of one of the parties from the government coalition in July 2011; and (c) limited institutional
capacity within sector ministries to lead and implement the reforms. The details of these risks
and the proposed mitigation measures are provided below.
9. The first and perhaps most important risk is that macroeconomic stability may come
under stress given uncertain global economic developments, especially pertaining to the
European economies to which Mauritius remains highly exposed. Global economic
uncertainties continue to present a significant threat to a small open economy such as
Mauritius, primarily on two fronts – the fiscal position and the current account deficit.
Slower global economic growth would depress domestic growth and tax revenues, yet
pressure to finance government priorities would likely continue. The fiscal position remains
stretched, with high public debt, which is only projected to decline by a modest amount in the
medium-term baseline scenario. This would make it hard to implement counter-cyclical
policies should some of these external threats materialize. Also, current account deficits,
although high, have been adequately financed mostly through high FDI and inflows to the
financial sector. This however could quickly reverse if international financial markets
deteriorate. Finally, the concentration of the country’s exports on a few markets (Europe) and
products (tourism and textiles) and its large share of imported commodities could further
deteriorate the current account deficit.
10. This said, the Government has the means and tools to cope with external economic
uncertainties while a firm commitment will be needed to rein in public expenditure if a
substantial slowdown materializes. On the external front, the current level of foreign
exchange reserves provides a buffer against a potential deterioration in the balance of
payments. Mauritius’ floating exchange rate also facilitates correction of external imbalances
in the medium term. The recent trends of an export reorientation toward new markets (i.e.
Asia and Africa) and new products will also help. On the fiscal front, if the global economy
slows down and the growth in public revenues eases, the fiscal deficit could deteriorate to
levels significantly above the government’s baseline projection of 3.8 percent of GDP. The
Government is mindful of these risks. A wider deficit (up to 1.2 percentage points of GDP)
could be financed by the recently created National Resilience Fund, which used public
savings from 2011 and before. Should revenues dip further, additional adjustment would
require either a slowdown in infrastructure implementation and/or an acceleration of
efficiency gains in the public sector, which should be manageable but require firm
commitment. Furthermore, the relatively large percentage of debt that is maturing highlights
the vulnerability of public debt to the performance of the domestic financial sector, even
though roll-over risks are currently low, given the fact that the majority of debt is domestic
and there is an excess liquidity in domestic capital markets.
11. The second risk is political risk that may affect the pace of the reform program. This
relates to the political (in)stability following the withdrawal of one faction from the ruling
coalition, in July of this year, with the government now having a relatively slim
Parliamentary majority. This may pose potential implications on a slowdown in the
momentum of or the effective blockage of the reforms by certain stakeholders. The private
sector reforms supported by this DPL program will have a redistributive effect, sometimes
eliminating the rents, subsidies and privileges of certain groups. The Government may find it
difficult to overcome some of these vested interests, some of which are well organized and
influential. This is particularly true since many of the reforms may only pay dividends in the
medium term while costs will certainly be evident in the short term.
12. There are several ways to mitigate this risk. A slim majority is not unprecedented in
Mauritius and there is no reason to assume that the current majority will not be able to
complete its current term. Nonetheless, to the extent that the proposed program has been
designed to coincide with the remainder of the current majority’s term of office, a slim
majority presents a risk – albeit manageable – which needs to be recognized. First, the
Government’s focus on growth of SMEs shall support its inclusion agenda. Moreover over
the medium term the acceleration reforms for engendering competitiveness and growth will
generate better conditions for job creation, Second, the Government’s stress on strengthening
the safety net, primarily by enhancing programs under the NEF but also potentially Social
Aid, may provide immediate relief to the most vulnerable, thus overcoming their resistance
to some of the reforms. Third, better communication will be key to building consensus
around the reforms, using visits to Mauritius by high level practitioners and management to
raise awareness and understanding about the reforms and their benefits, both within the
Cabinet and more broadly.
13. The third risk is the issue of corruption which has been at the center in the national
debate for the past several months. Allegations of corruption are the focus of multiple
investigations by the Independent Commission Against Corruption (ICAC). The latest
political crisis was the outcome of such an investigation reaching the highest level of
government. Corruption could well be a major impediment to investments. This risk is
mitigated by the fact the government appears to be supportive of ICAC and respectful of its
independence.
14. The fourth risk is that sector ministries might not have sufficient institutional capacity
to implement the reforms. Compared to the previous DPL program in which MoFED
played an active role in leading and coordinating the reform, this new set of reforms will be
led in many cases by sector ministries. This will involve a broader set of stakeholders, which
means that building and broadening consensus around the reform agenda will be essential.
Institutional capacity of sector ministries to design and implement these sector reforms may
be limited, particularly in the newly created ministries.
15. The Bank and the Government have signed a Services Agreement for Reimbursable
Technical Assistance (RTA) to support institutional capacity. This RTA will complement
the Bank’s program and allow line ministries to enhance their institutional capacity where
needed. Additionally, the DPL itself will be a way to build bridges between the different
ministries involved in the reform program, thereby enhancing coordination. The Bank
analytical work program will support these reform areas while enhancing institutional
capacity of sector ministries. In addition, this analytical work program has been coordinated
with other Development Partners to leverage limited resources and to focus on areas that are
more relevant for achieving impact.
VIII. Poverty and Social Impacts and Environment Aspects
Poverty and Social Impacts
16. The DPL prior actions are unlikely to harm the poor, while several prior actions have
the potential to deliver positive impacts on poverty over the medium term. Both the
improvement of investment climate, strengthening of small and medium enterprise (SME)
programs and improving access to finance are expected to have significant, if indirect,
poverty and social benefits. The measures aimed at raising private sector competitiveness
and increasing investment, including foreign direct investment (FDI), are designed to support
a virtuous cycle of growth, employment generation and productivity gains. Reform measures
supported by the three pillars are targeted at decreasing business costs and creating better
conditions for private local and foreign investments and ultimately leading to job creation.
17. Supported policies under this first operation will not have a significant distributional
impact. However, the restructuring of the Development Bank of Mauritius (DBM) could
have a potentially negative distributional impact on workers and hence on poverty levels. In
practice it is highly unlikely that such impact will materialize as the employment impacts of
these measures are limited. One third of the three hundred employees of the DBM are
involved in the core banking business and will most probably retain their employment,
another one third of the work force is aged 55 and above, and might be incentivized to take a
voluntary retirement scheme; losing a job might not necessarily result in an income shock for
their households. As regards the rest of the workforce, the specific risks will be clearly
identified during the due diligence carried out by professional transaction advisors and
formal measures to mitigate the employment shock on redundant workers will be put in place
by ensuring that (i) appropriate clauses are included in the divestiture contracts, (ii) proper
budgeting are made to compensate retrenched workers according to the law, and (iii) a
retraining and re-skilling program is put in place through the Placement and Training
Program under the National Empowerment Foundation. The World Bank is supporting the
strengthening of active labor market programs of the NEF under the Public Sector Efficiency
DPL. The rationalization of SME programs will improve the capacity of the Government of
Mauritius (GoM) to provide targeted business development services while at the same time
reallocating workers where they might be more productive in an attempt to improve
efficiency. These reforms will yield direct benefits to lower income segments of the
population
Environment Aspects
18. The DPL prior actions are unlikely to harm the poor, while several prior actions have
the potential to deliver positive impacts on poverty over the medium term. Both the
improvement of investment climate, strengthening of small and medium enterprise (SME)
programs and improving access to finance are expected to have significant, if indirect,
poverty and social benefits. The measures aimed at raising private sector competitiveness
and increasing investment, including foreign direct investment (FDI), are designed to support
a virtuous cycle of growth, employment generation and productivity gains. Reform measures
supported by the three pillars are targeted at decreasing business costs and creating better
conditions for private local and foreign investments and ultimately leading to job creation.
IX.
Contact point
World Bank
Contact: Asya Akhlaque
Title: Senior Economist
Tel: (202) 458-8780
Fax: (202) 614-8780
Email: [email protected]
Borrower
Contact: Ali Mansoor
Title: Financial Secretary, Ministry of Finance and Economic Development
Tel: +230 2012339
Email: [email protected]
X.
For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop
Annex 1: Proposed Prior Actions for DPL1 and Triggers for DPL2
Constraint
Objective
Prior Actions
(DPL1)
Pillar 1: Improving Competitiveness and Growth of Enterprises
Growth of enterprises Improve
Cabinet approval of
constrained by weak
outreach and
consolidation of
skills development
quality of
SME programs
and training, quality
Business
under MoBEC
control & standards
Development
and marketing and
services (BDS)
related business
programs
development services targeted towards
(BDS).
SMEs.
Despite the
enactment of the
Insolvency Act in
2009, there has been
little or no enactment
of implementing
rules and regulations.
This has significantly
limited the ability of
the new Act to create
an efficient, orderly
and transparent
liquidation and
rehabilitation
process.
Facilitating,
through the
implementation
of existing
legislation, firm
exit by providing
the framework
for the
rehabilitation of
stressed
enterprises to
seek temporary
protection from
their creditors
without forcing
them into
bankruptcy.
Indicative Triggers
DPL2
Implementation of an
Action Plan for
consolidation of SMEs
program under SMEDA
that includes (a)
establishing an interagency strategic
coordination
mechanism; and (b)
Developing a
framework that sets up
guidelines on costsharing, target groups,
types of services and
M&E systems
Ministerial approval
and publication of
the (i) registration
guidelines and
application form to
register Insolvency
Practitioners in
Mauritius, (ii)
prescribed forms for
Statutory demand as
per Section 180 of
the Insolvency Act,
(iii) prescribed forms
for Proof of claim as
per Second Schedule
of the Insolvency
Act.
Ministerial approval and
publication of a code of
ethics for insolvency
practitioners; and
establishment of
procedures by the
Director of the
Insolvency
Service to deal with the
suspension and removal
of insolvency
practitioners from the
registry
Cabinet approval of
a decision to: (a)
transform DBM into
a financially viable
Adoption of a detailed
restructuring plan and
implementation of
selected actions.
Pillar 2: Improving Access to Finance
Growth of SMEs
constrained by
limited supply of
specialized financial
Provision of
specialized menu
of financial
products/services
products.
for SMEs
through the
restructuring of
DBM into a
sustainable
MSME financial
institution.
MSME Bank with
governance,
operations, and
supervisory
arrangements in line
with international
practice; and, (b)
seek private sector
participation in
DBM.
Inadequate collateral
(movable and
immovable assets).
Increase access
to credit through
reforming land
titling
procedures and
secured
transactions laws
and registries.
Facilitate
enhanced access
to finance by
reducing the
risks associated
with limited
information on
potential
borrowers.
Amend the
Transcription and
Mortgage Act to
reduce the time
taken to register
property from 15
days to 48 hours
Cabinet approval of
legislative amendments
to the Civil Code and
other laws to allow the
setting up of a modern
movable collateral
registry.
The coverage of the
credit information
bureau is expanded
to cover at least 60%
of adult population
in the registry
Regulation from the
Ministry of Renewable
Energy and Public
Utilities to enforce the
accuracy of the name on
the utility bill to match
the name of the actual
user.
Limited credit bureau
coverage.
The Bank of Mauritius
to establish and publish
eligibility criteria and
licensing guidelines for
the setting up of private
credit information
bureaus
Pillar 3: Promoting ICT and e-Gov for Enhancing Competitiveness and Transparency
There are two broad
Promote
Cabinet approval of
(i) Implementation of
challenges:
investments in
the National
mechanisms to
(i) to promote
affordable and
Broadband Policy.
monitoring policy goal
continued investment ubiquitous
progress;
in high fixed cost
broadband
broadband networks
networks by
(ii) Initiation of
in an environment
signaling the
institutional review to
where the policy
government’s
establish an independent
environment is
long-term policy
ICT regulator.
unclear; and (ii) to
intentions
promote competition
in markets where the
dominant player has a
near monopoly
market in some
markets but there is
nascent competition
in others.
The National
Broadband Policy
provides a set of
goals and targets but
does not give ICTA
the regulatory tools to
achieve some of
these.
clearly, credibly
and
convincingly.
Due to some systemic
weaknesses, such as
absence of
compliance or
enforceability
mechanisms, coupled
with a shortage of
funds for recruiting
additional staff, the
National Information
Security Strategy has
not gained
momentum and its
final steps not
completed, not yet
allowing for secure
online transactions to
be executed.
To promote
widespread
adoption and use
Public Key
Infrastructure
(PKI) so that the
private sector
can execute
secure electronic
transactions.
To reform
regulation so that
is applied in only
markets where
necessary and
allows
competition
where possible.
Cabinet approval to
amend the
Information and
Communication
Technologies Act
(ICTA) of 2001 to
provide ICTA the
mandate to regulate
markets where
operator(s) are
deemed to exert
significant market
power.
Cabinet approval of
ICTA’s plan to
ensure the widest
adoption of the PKI
technology.
Implementation of
ICTA plan on PKI
adoption.