Mauritius - Second Public Sector Performance Development Policy Loan Project

 PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB7246 Operation Name Second Public Sector Performance Development Policy Loan Region AFRICA Country Mauritius Sector Central government administration (40%); Other social services (30%); General public administration sector (30%) Operation ID P128140 Lending Instrument Development Policy Lending Borrower(s) Government of Mauritius Implementing Agency Ministry of Finance And Economic Development Date PID Prepared January 30, 2013 Estimated Date of Appraisal January 24, 2013 Estimated Date of Board March 26, 2013 Approval Corporate Review Decision Appraisal Other Decision Key development issues and rationale for Bank involvement 1. The Government of Mauritius continues to diversify the economy to enable the country to achieve a higher income status in the medium term. Since independence in 1968, economic growth in Mauritius has been built on a long tradition of economic and institutional reforms. Mauritius has been transformed from a predominantly agricultural economy based on sugar production to a diversified economy structured around textile exports and tourism and lately around financial services. In the mid-2000s, a bold reform program supported by the Bank addressed the erosion of Mauritius’ preferential trade status and rising commodity prices by strengthening fiscal consolidation, enhancing trade competitiveness, and improving the investment climate. Nevertheless, critical bottlenecks to Mauritius’ economic development remain, highlighting the need to reinvigorate public sector performance, to improve the quality of service delivery, and to support overall economic competitiveness. Progress in these areas will be a key determinant of whether Mauritius will achieve its aspirations to become a high-income country over the next two decades. 2. As anticipated at the time of Development Policy Loan 1 (DPL1) approval, the pace of reform in Mauritius continues to be slow due to the technical and political complexity of the necessary public sector reforms. The design and implementation of the new reforms in the public sector is complex. They cut across many areas and require close collaboration between many stakeholders. As a result, not only are technical solutions complex but the institutional process itself is complicated. This requires sector ministries to take a firm lead, although many lack the capacity to do so. These inherent difficulties are compounded by the large political capital required to move the reforms forward, which narrows the scope for making politically 1 difficult decisions. The new government program adopted in April 2012 seeks to prioritize those reforms that not only have the potential to yield broadly shared economic growth but whose implementation is also politically feasible in this difficult environment. However, hampered by these technical and institutional constraints, implementation is slow. 3. With economic growth slowing and global uncertainty mounting, the need for reform has become even more urgent. Mauritius’ exposure to the global economy ‒ especially to the European economies ‒ is taking a toll on domestic growth, which is now projected to slow to around 3.3 percent in 2012. This is below the 3.7 percent projection made when the first operation under this DPL series was approved (March 2012) and below the government’s budget projections of close to 4 percent GDP growth in 2012. While the economy proved to be highly resilient in 2008 and the government has the means to cope with these external shocks, the sustainability of economic growth will be highly dependent on the government’s ability to implement reforms to increase the efficiency of the economy. The fiscal position remains stretched, and any counter-cyclical fiscal policy will be difficult to sustain for an extended period of time, which highlights the need to increase public sector efficiency. To accelerate GDP growth while correcting external imbalances, Mauritius will need to undertake structural reforms to promote national savings, and raise competitiveness. Areas identified include access to better skills, improved infrastructure and a more efficient public sector. 4. This DPL series supports the strengthening of institutional, policy, and management tools required to address some of the challenges posed by these reforms. In this context, the DPL series focuses on achieving politically feasible reforms in the near term while laying the necessary building blocks to accelerate reforms in the medium-term. It does so by (i) supporting the creation of systems (the Social Register of Mauritius, the Human Resource Management Information System HRMIS, the trade portal, and the single window for trade) that will enable the government to define appropriate reform options as well as (ii) strengthening the institutions that coordinate the reform initiatives (the Office of Public Sector Governance, the secretariat for streamlining business regulations, and the National Empowerment Foundation). The DPL series focuses on three reform pillars: (i) strengthening services to support and empower the most vulnerable; (ii) streamlining trade regulations and processes; and (iii) improving human resource management in the civil service and the monitoring of SOE performance. DPL 2 will now help to consolidate these reforms while supporting the achievement of immediate results where feasible. Overall, the use of IBRD resources in this operation is in line with results expected, maintaining lending headroom should economic conditions would deteriorate in the medium term. 5. Program implementation since DPL1 has been generally satisfactory, with technical and institutional constraints having limited the progress made in some areas. While the political capital needed for bolder reforms is limited, the government remains committed to the reform program supported by this DPL, and progress has been made in all of the key areas. For instance, the Social Register of Mauritius (SRM) is already operational and registers the target population for all new social protection programs. The curricula for the first and second years of pre-vocational education are being rolled out, and the Public Management Information System is operational and includes a growing number of SOEs. However, the pace of implementation varies, reflecting both technical complexities (such as the need to develop various IT systems) 2 and difficulties associated with the need to coordinate the different institutions involved in the reform process, which in some instances is delaying the progress that was expected to be achieved by this time (i.e. the trade portal or pilot Human Resources management information system being operational). In this sense, the DPL is proving to be a useful tool. It continues to provide technical expertise and global best practice in the design of many of the required systems. Furthermore, it has in some cases filled a gap by acting as a catalyst for institutional coordination between the many stakeholders. Proposed Objective(s) 6. The development objective of the DPL programmatic series is to support improvements in the performance of the public sector in Mauritius by assisting the government to implement the following three reform pillars: (i) strengthening services to support and empower the most vulnerable; (ii) streamlining trade regulations and processes; and (iii) improving human resource management in the civil service and the monitoring of SOE performance. Preliminary Description 7. The proposed DPL is being prepared in coordination with the Bank’s Private Sector Competitiveness (PSC) DPL, which will be presented to the Board shortly after this operation. Both DPL series continue the close engagement that the World Bank has had with Mauritius over the recent years and will strategically serve to maintain the dialogue on areas essential for the long-term development of Mauritius. The two DPL series are designed to be mutually reinforcing and to address complementary aspects of the government’s reform program while ensuring that the Bank’s support remains sufficiently flexible. The PSC DPL series focuses primarily on strengthening the policy and institutional environment for private sector competitiveness, while this proposed DPL focuses primarily on the performance of the public sector. For instance, the reforms included in the PSP DPL in social protection will further support reforms supported by the PSC DPL with regards to SMEs and entrepreneurship schemes, by providing more effective resources for the affected work force. If the government is going to successfully weather the challenges ahead and prepare itself for the next phase of rapid and inclusive economic growth, the reforms supported by these two operations will be instrumental to that success. Annex 1 presents the policy matrix for the overall DPL series. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts 8. Although poverty is low in Mauritius there is evidence that economic reforms are broadening income disparity. In 2007, the number of poor represented only 8.5 percent of the 3 total population, equivalent to about 106,000 people,1 many of whom lived in 229 pockets of poverty.2 Yet, while poverty is relatively low, there has been a broad perception that recent economic reforms have not benefitted all Mauritians equally. In the period 2001/02 to 2006/07, better-off groups experienced significantly higher income growth than the poorest.3 This trend is likely to have persisted as Mauritius has continued its economic transformation from a relatively low-skilled agricultural and manufacturing base to a higher value-added service-driven economy. 9. Promoting inclusion and social cohesion continues to be a key element of the Mauritian development model. The government has renewed its efforts to ensure that economic growth is more balanced and equitable. This proposed DPL series supports these objectives as laid out in the new government program, Moving the Nation Forward by focusing on: (i) restructuring the social protection system to make it better targeted and more cost- effective and (ii) improving education outcomes, especially for the poorest households. These reforms remain important not only for ensuring that Mauritius’ development leads to equitable outcomes but also for ensuring that Mauritius has effective safety nets in place as its enters a period of considerable economic uncertainty. Environment Aspects 10. None of the reforms supported by the DPL series will have a direct effect on the environment, natural resources, or forestry. If supported, the reforms affecting SOEs and parastatals will focus on increasing transparency and monitoring the management of public companies but will have no direct relationship with investments in these areas. Historically, the record of environmental management in Mauritius, though not perfect, has been relatively good.4 Furthermore, all development partners recognize the strategic importance of environmental protection, and the AFD, the UNDP, and the EU are actively providing technical support to Mauritius in this area. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 20 Borrower/Recipient IBRD Others (specifiy) Total 20 1 As measured by the relative poverty line, which defines the poverty line as half of the median household income per adult equivalent. 2 There are an estimated 7,150 households living in pockets of very small slum communities consisting of 20 to 40 households. 3 IMF Article IV Consultations, January 2012. 4 See EU “Mauritius Country Strategy Paper 2008-2013,