Mauritius - First, Second, Third, and Fourth Development Policy Loan Projects

 ICRR 13971 Report Number : ICRR13971 IEG ICR Review Independent Evaluation Group 1. Project Data : Date Posted : 10/23/2012 Country : Mauritius Is this Review for a Programmatic Series? Yes No How many operations were planned for the 3 series? How many were approved? 4 Series ID : S116608 First Project ID : P101570 Appraisal Actual Project Name : Mauritius US$M ): Project Costs (US$M): $30M $30M Development Policy Loan L/C Number : L7416 Loan/ Loan US$M): /Credit (US$M ): $30M $30M Sector Board : Economic Policy US$M): Cofinancing (US$M ): Cofinanciers : Board Approval Date : 01/12/2006 Closing Date : 12/31/2006 12/31/2006 Sector (s): Central government administration (41%); General industry and trade sector (41%); Other social services (12%); Information technology (6%) Theme (s): Export development and competitiveness (29% - P); Public expenditure; financial management and procurement (29% - P); Micro; Small and Medium Enterprise support (14% - S); Regulation and competition policy (14% - S); Tax policy and administration (14% - S) Second Project ID :P106650 Appraisal Actual Project Name : Mauritius Second Project Costs (US$M): US$M ): $30M $30M Development Policy Loan (fy08) L/C Number : L4889 Loan/ Loan US$M): /Credit (US$M ): $30M $30M Sector Board : Economic Policy US$M): Cofinancing (US$M ): Board Approval Date : 02/28/2008 Cofinancers : Closing Date : 12/31/2008 12/31/2008 Sector (s): Central government administration (41%), General industry and trade sector (34%), General education sector (17%), General water sanitation and flood protection sector (8%) Theme (s): Export development and competitiveness (25% - P), Public expenditure, financial management and procurement (25% - P), Regulation and competition policy (24% - P), Education for the knowledge economy (13% - S), Improving labor markets (13% - S) Third Project ID :P112369 Appraisal Actual Project Name : Mauritius Third Project Costs (US$M): US$M ): $100M $100M Development Policy Loan L/C Number : L7679 Loan/ Loan US$M): /Credit (US$M ): $100M $100M Sector Board : Economic Policy US$M): Cofinancing (US$M ): Board Approval Date : 03/31/2009 Cofinancers : Closing Date : 12/31/2011 12/31/2011 Sector (s): Central government administration (45%), General industry and trade sector (30%), General education sector (15%), General water sanitation and flood protection sector (5%), Power (5%) Theme (s): Administrative and civil service reform (27% - S), Public expenditure, financial management  and procurement (19% - S), Education for the knowledge economy (18% - S), Export development and competitiveness (18% - P), Debt management and fiscal sustainability (18%) Fourth Project ID :P116608 Appraisal Actual Project Name : Mauritius Fourth US$M ): Project Costs (US$M): $50M $50M Development Policy Loan L/C Number : Loan/ Loan US$M): /Credit (US$M ): $50M $50M Sector Board : Economic Policy US$M ): Cofinancing (US$M): Board Approval Date : 11/12/2009 Cofinancers : Closing Date : 12/31/2011 12/31/2011 Sector (s): Central government administration (43%), General industry and trade sector (29%), General finance sector (14%), Information technology (14%) Theme (s): Regulation and competition policy (33%), Vulnerability assessment and monitoring (22%), Export development and competitiveness (22% - P), Macroeconomic management (12% - P), Public expenditure, financial management and procurement (11%) Evaluator : Panel Reviewer : ICR Review Group : Coordinator : Ismail Dalla Robert Mark Lacey Navin Girishankar IEGPS2 2. Project Objectives and Components: a. Objectives: According to the Program Document, the objective of the program was to support comprehensive structural reforms that respond to two major challenges : (i) the trade shock due to erosion of trade preference (ending of Multi-fiber Agreement) and high oil prices and (ii) the transition from low wage, low skill sugar and apparel exporter to innovative, knowledge and skill based services economy . The reform program was anchored in four pillars : (i) consolidating fiscal performance and improving public sector efficiency; (ii) improving trade competitiveness; (iii) improving the investment climate; and (iv) democratizing the economy through participation, social inclusion and sustainability (Development Policy Letter 1, para. 34, Nov 14, 2006), and was supported by a series of four DPLs . This ICRR uses this overall objective set out in the Program Document, and assesses relevance and efficacy in relation to the four pillars stated above . b. If this is a single DPL operation (not part of a series), were the project objectives/ key associated outcome targets revised during implementation? No c. Policy Areas: Each of the four DPLs covered the four policy areas, which correspond to the program objective, pillars, and performance evaluation framework stated above . These four policy areas are discussed below . I. Consolidating fiscal performance and improving public sector efficiency : This first policy area sought to improve fiscal performance and reduce the level of debt as a percentage of GDP through less borrowing and improvement in debt management. The DPLs supported the government in adopting a Medium Term Expenditure Framework to implement Program Based Budgeting (PBB) to increase predictability of resource envelopes for planning purposes and to upgrade its financial management information system . In order to contain debt, the government imposed fiscal rules in the budget of 2006/07 which stipulated that government should borrow only for investment and not for recurrent expenditures and that the level of public debt to GDP should decline. The Bank through its Treasury Department provided technical assistance to the government in debt management. This led to the enactment and proclamation of the Public Debt Management Act of 2008, which limits the Borrower’s public sector debt to a maximum of 60-percent of gross domestic product and provides for public sector debt reduction to 50-percent by the end of 2013 (DPL 3). II, Enhancing trade competitiveness : Industries in Mauritius servicing the domestic market were not competitive  and were highly protected. The cost of information technology was very high compared to other countries and process innovation was not encouraged . Under this policy area, the Bank supported the government ’s program of drastically reducing tariffs and opening up the domestic economy to foreign direct investment . Several policy measures were taken to deregulate the Information Technology and Communications (ITC) industry to reduce cost and improve efficiency . Mauritius faced ineffective regulation, anti -export biased policy distortions, red tape and discretionary interventions, which impacted negatively on trade competitiveness, thereby impeding flow of resources to growth sectors . Small Medium Enterprises (SMEs) were also promoted and given access to finance and other resources to foster their growth . III, Improving the investment climate : Under this policy area, the DPL series aimed to improve the investment climate in Mauritius to enable the country to attract foreign capital and talent . Reform programs addressed major bottlenecks which included shortage of skilled workers, rigidity in regulation on entry of foreign workers, an inflexible labor market, poor linkage between wage setting to productivity, poor infrastructures and ineffective bureaucracy. The program provided technical assistance to the government in some of these areas . IV, Democratizing the economy through participation, social inclusion and sustainability . This policy area focused on helping Mauritius make better use of existing human capital, create job opportunities, empower people through active labor market programs, and provide adequate social safety nets for the vulnerable. To soften the impact of trade and labor market reforms on its population, the government introduced an empowerment program to address the following : (i) land for social housing; (ii) land for small entrepreneurs; (iii) a workfare program emphasizing training and re -skilling; (iv) special programs for unemployed women; (v) tourist villages; (vi) assistance for outsourcing; and (vii) support for development of new entrepreneurs and SMEs. The government has been largely successful in these areas except for the special programs for unemployed women . The four DPLs included 25 result indicators (see table below). However, four macroeconomic indicators (GDP growth, unemployment rate, total number employed and FDI as % of GDP) were not related to specific policy actions. Out of the remaining 21 indicators, 17 were fully met and three were substantially met . Only one indicator, special program for unemployed women, was not met . Partially/ Not Indicators by Components Completed Substantially Complete Total Completed d I. Consolidate fiscal performance and improve public sector efficiency 3 3 II. Improve trade competitiveness 2 1 3 III. Improve investment climate 9 1 10 IV. Democratize the economy through participation, social inclusion, & sustainability 9 1 1 6 Total 17 3 1 21 Macro indicators (not related to policy actions) 4 d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Financing : Total financing of this series (4 loans) amounted to US$210 million. Initially the series consisted of three operations of US$30 million each. However, to respond to the unexpected fiscal impact on the government from the financial crisis of 2008, the Bank increased the amount for the third operation to US$ 100 million with a Deferred Drawdown Option. A fourth loan of US$ 50 million was added to this series to continue supporting the reform program. Dates : The first loan was approved in January 2006, became effective on January 31, 2007 and closed on December 31, 2006. The second loan was approved on February 28, 2008, became effective on May 29, 2008  and was closed on December 31, 2008. The third loan of US$100 million was approved on March 31, 2009, became effective on May 22, 2009 and closed on December 31, 2011. The fourth loan of US$50 million ($20 million higher than planned in the Country Partnership Strategy ) was approved on September 21, 2009, became effective on January 28, 2010 and closed on December 31, 2011. Other Donors : In addition to the Bank, three other donors (European Commission, Agence Fran çaise de Développement and African Development Bank (AfDB) are active in Mauritius. In 2009, the AfDB approved a three-year budget support operation of US$ 700 million. The first tranche of US$200 million was disbursed in 2009. The second tranche of US$300 million was disbursed by June 2010 and third tranche of US$200 million was disbursed in June 2011. The Bank worked closely with AfDB in preparing their respective operations . 3. Relevance of Objectives & Design: a. Relevance of Objectives: High The objectives of the DPL series were highly relevant in 2006 and remain so today. The main IEG Rating : High. objective of the Country Partnership Strategy (2006) was to help the government deal with short -term trade shocks and the transition to a more competitive and sophisticated economy, and was centered on the four pillars of the government’s strategy. They are consistent with the 2006 and 2011 Country Partnership Strategies and the reform programs of the government as set out in the Presidential Address to the Nation (2010-2015) in 2010. The continuing relevance of the four pillars of the program is reflected in the Country Partnership Strategy Progress Report (2011). b. Relevance of Design: High There was a clear linkage and causal chain between the specific policy measures supported IEG Rating : High. by the DPLs and the intended attainment of their objectives . The first DPL (2006) focused on key measures to tackle major constraints. The subsequent DPLs built on these measures and expanded the scope to associated areas. Under the first DPL, the focus was on reducing primary spending and tax expenditures to control the spiral of deficits and rising debt . In this connection, the Mauritius Revenue Authority was strengthened . The first phase of tariff reform was introduced and expanded under the subsequent DPLs . Tariff reform was adopted to increase price competitiveness of exports . To improve the investment climate, several key measures were introduced to simplify and streamline business registration, merging building and land use permits, simplification of issuance of development permits and trade licenses . To minimize the impact of the reforms on the affected groups, the government introduced the Empowerment Program with a budget of MUR 5.0 billion (US$ 156 million) over 5 years. Several key legislation were passed during 2006-2011 to remove regulatory impediments that were hindering competitiveness and to create new institutions that were needed to enable effective functioning of the transformed economy . 4. Achievement of Objectives (Efficacy): IEG rates the achievement of the program's overall objective -- to support the comprehensive structural reforms which respond to two major challenges : (i ( i) the trade shock due to erosion of trade preference (ending of Multi -fiber Agreement ) and high oil prices and (ii)ii) the transition from low wage, low skill sugar and apparel exporter to innovative, knowledge and skill based services economy -- as substantial . The implementation of the reform program was successful and most outcome targets were met or exceeded . Momentum for reform was high throughout the program . Notwithstanding external shocks from 2008 global financial crisis and the on-going Euro zone crisis, the government has been able to maintain macroeconomic stability and stayed the course of reforms . Economic activity did slow down during the crisis period but government was able to deal with the crisis because of the fiscal space created by undertaking the necessary fiscal reforms and improved debt management . The policy actions supported by the program were critical in achieving the project objective . Mauritius has succeeded in transforming itself from a low wage, low skill economy to an innovative and skill based economy . The success of the reform program can be attributed to (i) continued strong commitment by the government to the reform program, (ii) soundness of background analysis, (iii) flexibility in adapting to changing global market condition and (iv) ability to manage risks that were identified during the appraisal stage. The reform agenda had the political backing at the highest level, and consultations with stakeholders were thorough . The private sector was kept well informed of the relevance of policy changes . Government’s ownership throughout this series grew as key government officials gained more capacity and understanding of the necessity for the reforms, and built confidence to discuss policy changes with the Bank . Achievement of specific objectives is discussed below . Objective 1: Consolidating fiscal performance and improving public sector efficiency . The main objective of this reform was to improve fiscal and debt conditions and to contain current expenditures . Measures were taken Prior actions supported by the DPL series included passing of to stabilize revenue and reduce expenditure . (Prior legislation to abolish ministerial discretion over tax and duty exemptions, building capacity at the Mauritius MRA ) to strengthen tax administration, reducing primary spending and enacting and Revenue Authority (MRA) applying the Public Debt Management Act ). Fiscal performance and debt condition . On the revenue side, a number of policy changes in the tax system were introduced to stabilize revenue above 19% of GDP. Discretionary power to grant preferential import duty rates at ministerial level were abolished and tax administration was strengthened . Personal income tax was simplified by consolidating allowances and exemptions into a single general exemption set based on household income. The objective of raising revenue was achieved, and revenue as a percentage of GDP stabilized above 19 percent during the course of the program and rose to 21.3 percent in 2011. The objective of containing recurrent expenditure was to be achieved by annual cuts in primary spending by an additional 0.5% each year. The aim was to reduce debt to GDP ratio below the 68.8 percent (the 2006 level). In 2007, the government took a decisive step to cut primary spending by 2 percent of GDP, far exceeding the target of 0.5 percent envisaged. Lower government spending along with strong GDP performance led to a reduction of debt-to-GDP ratio from 69.2 percent of GDP in 2006 to 57.5 percent of GDP in 2011. In 2008, the government established a Debt Management Unit and adopted a debt management strategy . The Debt Management Act of 2008 was passed in the same year . The reforms implemented helped the government build fiscal buffers and weather the impact of the financial crisis by introducing a stimulus package of Rs 10.4 billion. The target on primary spending was not reached by the end of the operation due to use of public funds to stimulate the economy during the crisis period . State Enterprises . To improve public sector efficiency, the program supported the preparation of sector strategies, implementation (on a pilot basis) of performance management system, and preparation and implementation of reform plan for five state owned enterprises . The implementation of the performance management system was piloted within the Civil Service Ministry . Implementation of the action plans produced to address the challenges faced by the five government owned companies have been slow due to politically sensitivity. high . IEG assesses the efficacy of the first objective as high. Objective 2: Enhancing trade competitiveness The Government’s objective in this area was to transform Mauritius into an open, globally connected, low tax, business friendly country (duty free island). This was to be achieved through enhancement in trade competitiveness by (i) reducing anti-export bias that impedes private investment in internationally competitive activities; (ii) revitalizing existing sectors to raise productivity and release resources for higher productivity sectors and (iii) facilitating development of export sectors through reducing costs and making selected public Phased tariff reduction by cutting top ad valorem rate from 65 to 30 percent, reducing number investments. (Phased of top rated tariff lines and reducing average tariffs by 2 percent were prior actions supported by this program ). Tariff Reforms . During 2006-2010, the government aggressively implemented this reform . The number of tariff lines with zero rated tariffs increased from 74 percent in 2006 to 87 percent in 2010. In 2012 the Government abolished duties on a further 80 tariff lines (0.64% percent of total tariff lines). The authorities planned to eliminate tariffs on 95 percent of tariff lines. However, this was unrealistic to achieve, as analyses were not undertaken to assess the negative impacts of tariff reductions on domestic producers . There were no accompanying policies to mitigate this impact, nor were producers given enough lead -time to accommodate the policy changes. To counteract these effects, the government allocated budgetary resources in 2007/08 to support local firms in strengthening their capacity in product innovation, marketing and export promotion . Besides elimination of tariffs for 87 percent of tariff lines, the highest tariff band was also reduced from 60 percent to 30 percent. In 2005/06, 13 percent of tariff lines were subject to a tariff rate of 30 per cent or above and this reduced to 1 percent in 2010. Non -tariff barriers . In addition to tariff reforms, the government also took action to remove regulatory Non- impediments that were holding back trade competitiveness . The government set up a permanent regulatory review committee (the Non-Tariff Barriers (NTB) Review Committee). The responsibility of the Committee was to: (i) define the general principles of regulatory reform based on international best practice and to ensure that these are applied consistently across line ministries and departments; (ii) review all new and important  existing regulations; (iii) oversee the introduction of regulatory impact analysis as a key tool across the government; (iv) facilitate the intra-ministry coordination that is essential to address a wide range of the regulatory constraints, including duplication of requirements; and (v) encourage and assist the roll out of Information and Communications Technology solutions for trade facilitation across ministries and agencies . This committee effectively served as a platform for private sector to voice their complaints . The reforms include revamping of business regulations, streamlining of Non -Tariff Measures (NTMs), and promoting services trade. Government actions to reduce air transport costs by liberalizing air access has partially contributed towards the increased in number of tourist arrivals in the country from 0.78 million in 2005/06 to close to 1 million in 2011. To boost exports, a common regulatory regime across all sectors of the economy was introduced and measures to improve international connectivity were undertaken . The distinction between EPZs and non -EPZ producers was eliminated and the incentive regimes for EPZ and non -EPZ firms have been unified, for example by setting all corporate taxes at 15 percent. Anti-labor bias in the tax system was eliminated by removing a 25 percent investment tax credit, and the application process for licenses and permits streamlined to emphasize more on ex-ante approvals of business registration rather than ex -post verification of safety and health standards. Information and Communication Technology (ICT). ICT ). Amendments were made to the Information and Communication and Technologies Act that contributed to substantial increase in ICT -enabled business. The share of the ICT sector as a percentage of GDP has increased from 5.4 percent in 2007 to 6.4 percent in 2010, in accordance with the target . The international internet bandwidth has increased from 123 Mbps in 2006 to 1864 Mbps in 2010. Thanks to these measures, Mauritius has made significant progress in transitioning from a low wage, low skill economy to an innovative and skill based economy . For example, the country experienced a high real growth rate for the ICT sector (above 13 percent in 2009 and 2010). The value added of the ICT sector in 2010 was 14.1 percent higher than in 2009. Exports of ICT goods, including re-export rose by 68.1 percent in 2010 and exports of ICT services increased by 21.6 percent in the same year. Employment in the ICT sector increased by 3.7 percent in 2010. The ICT Development Index (IDI) which measures countries’ progress towards becoming information societies improved to 4.03 in 2010 from 3.83 in 2009, and Mauritius is ranked second among African countries after Seychelles (ICR). Exports . The target for the indicator ‘increase exports as a share of GDP ’ to 60% was not achieved in 2009 as exports suffered considerably from the global crisis and exports /GDP ratio fell to 47 percent. However, exports rebounded in 2010 and 2011. The export to GDP ratio increased to 50% in 210 and 53.4 in 2011. high . IEG assesses the efficacy of the second objective as high. Objective 3: Improving the investment climate Doing Business Indicators . The main goal of the government under this objective was to improve the investment environment by revising the regulations and streamlining unnecessary processes that were hindering investments. To achieve this objective, the government adopted several measures to : (i) facilitate investment; (ii) increase labor market flexibility; and (iii) attract skilled foreign workers . With a rank of 20 in the Ease of Doing Business indicators, Mauritius is one of the best -ranked African countries. Several Doing Business Indicators (number of days to start business, number of days it takes to enforce commercial contracts, public credit registry, and number of days spent dealing with construction permits, and difficulty in firing index) were included in the program with specific targets . All targets related to these indicators were achieved. The enhanced investment environment contributed to the increase in Foreign Direct Investment from Rupee 2.8 billion in 2006 to more than Rupee 12 billion in 2010. To facilitate doing business by streamlining registration practices, the Business Facilitation (Miscellaneous Provisions) Act was approved in 2006. It included a wide range of measures to expedite business registration, amending and abrogating several laws . The Act made the Registrar of Companies a one -stop shop for entrepreneurs, and changed the role of the Board of Investment from granting discretionary approvals for investment projects to facilitation . It also relaxed restrictions on granting work and residency permits . The number of registered companies increased from 29,330 in 2007 to 33,002 in 2011, an increase of around 12 percent. A Competition Commission was established to prevent anti -competitive behavior. The Commission has broad powers to intervene and correct the situation through fines and /or other punitive measures. Skilled labor . The problem of shortage in skilled labor was partially resolved by easing the entry of foreign workers in the labor market by (i) creating a single occupational permit; (ii) combining residency and work permits; and (iii) legalizing conversion of tourist to business visas . With the promulgation of the Employment Rights Act (2008), a “flexi-security