Mauritius - First Public Sector Performance Development Policy Loan Program

 Document of The World Bank FOR OFFICIAL USE ONLY Report No. 61571-MU INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$20 MILLION TO THE REPUBLIC OF MAURITIUS FOR A PUBLIC SECTOR PERFORMANCE DEVELOPMENT POLICY LOAN February 27, 2012 Social Protection Department AFCS4 Country Management Unit Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MAURITIUS - GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 3, 2012) Currency Unit = Mauritius Rupee US$1.00 = Rs 29.30 Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AFD Agence Française de Développement (French Development Agency) AFRITAC Africa Regional Technical Assistance Center South AFT Aid for Trade BOI Board of Investment BoM Bank of Mauritius CMS Customs Management System COMESA Common Market for Eastern and Southern Africa CPE Certificate of Primary Education CPS Country Partnership Strategy CRS Confidential Reporting System CSR Corporate social responsibility DBM Development Bank of Mauritius DDO Deferred draw down option DPL Development Policy Loan DSA Debt Sustainability Analysis EAP Eradication of Absolute Poverty Program EC European Commission EPZs Export processing zones ERCP Economic Restructuring and Competitiveness Program ESS Education Sector Strategy ESW Economic and sector work EU European Union FDI Foreign direct investment GDP Gross domestic product GTER Gross tertiary enrollment rate HBS Household Budget Survey HPC Housing and Population Census HRMIS Human Resources Monitoring Information System IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment ICAC Independent Commission Against Corruption ICT Information and communications technology IMF International Monetary Fund IOC Indian Ocean Commission IT Information technology JEC Joint Economic Council of Mauritius MCCI Mauritius Chamber of Commerce and Industry MID Maurice Ile Durable (Sustainable Mauritius) MERI Mauritius Exchange Rate Index METAP Mauritius Economic Transition (Technical Assistance) Project MNS Mauritius Network Services Limited MoBECC Ministry of Business, Enterprise, and Cooperatives MoFED Ministry of Finance and Economic Development MoSIEE Ministry of Social Integration and Economic Empowerment MoSS Ministry of Social Security, National Solidarity and Reform Institutions MoU Memorandum of Understanding MRA Mauritius Revenue Authority MSDCP Manufacturing and Services Development and Competitiveness Project MCSAR Ministry of Civil Service and Administrative Reforms MTEF Medium-term expenditure framework NEF National Empowerment Foundation NEP National Empowerment Program NGO Non-governmental organization NTBs Non-tariff barriers NTMs Non-tariff measures OPSG Office of Public Sector Governance PBB Program-based budget PEFA Public Expenditure and Financial Accountability Assessment PFM Public financial management PIMS Parastatal Information Management System PMS Performance management system POPs Persistent organic pollutants PPP Public-private partnership PRB Pay Research Bureau PRC Permit Review Committee PSC Private Sector Competitiveness PSIA Poverty and Social Impact Analysis R&D Research and development RBB Results-based budgeting RIA Regulatory impact analysis Rs. Mauritius rupees SADC Southern African Development Community SC Secondary certificate SM Statistics Mauritius SMEs Small and medium-sized enterprises SOEs State-owned enterprises SRM Social Register of Mauritius TFSIVG Trust Fund for Social Integration of Vulnerable Groups TIA Trade impact assessment TVET Technical and vocational education and training UNCTAD United Nations Commission on Trade and Development ZEP Zones d’Education Prioritaires (Priority Education Zones) ii  Vice President: Obiageli Katryn Ezekwesili Country Director: Haleh Z. Bridi Sector Manager: Lynne D. Sherburne-Benz Task Team Leaders: William Wiseman/Rafael Muñoz Moreno iii  REPUBLIC OF MAURITIUS PUBLIC SECTOR PERFORMANCE DEVELOPMENT POLICY LOAN TABLE OF CONTENTS LOAN PROGRAM SUMMARY ........................................................................................... vi I. INTRODUCTION ........................................................................................................1 II. COUNTRY CONTEXT ..................................................................................................3 A. Recent Developments And Macroeconomic Policy Framework in Mauritius....... 3 B. Macroeconomic Outlook and Debt Sustainability ................................................ 4 III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES .......................... 10 A. Rebalancing Growth ............................................................................................ 10 B. Enhancing productivity ........................................................................................ 11 C. Consolidating social justice ................................................................................. 13 D. Achieving fiscal consolidation and macroeconomic resilience ........................... 14 E. Public Budget Consultative Process and Transparency....................................... 15 IV. THE BANK’S SUPPORT FOR THE GOVERNMENT’S REFORM PROGRAM ...................... 16 A. Link to the Country Partnership Strategy ............................................................ 16 B. Collaboration with the IMF and other Donors .................................................... 16 C. Relationship to other World Bank Operations .................................................... 18 D. Lessons Learned .................................................................................................. 18 E. Analytical Underpinnings .................................................................................... 19 V. THE PUBLIC SECTOR PERFORMANCE DEVELOPMENTPOLICY LOAN .......................... 21 A. Operation Description ......................................................................................... 21 B. Policy Areas ......................................................................................................... 24 B.1 Strengthening Services to Support and Empower the Most Vulnerable............. 24 B.2 Streamlining Trade Regulation and Processes..................................................... 31 B.3 Improving Human Resource Management in the Civil Service and the Monitoring of SOE Performance ............................................................................................ 35 VI. OPERATION IMPLEMENTATION .............................................................................. 43 A. Poverty And Social Impact................................................................................... 43 B. Environmental Aspects........................................................................................ 44 C. Implementation, Monitoring, and Evaluation ..................................................... 45 D. Fiduciary Aspects ................................................................................................. 45 E. Risks And Risk Mitigation .................................................................................... 46 Annex 1: Operation Policy Matrix ..................................................................................... 49 Annex 2: Letter of development Policy ............................................................................. 52 Annex 3: IMF Assessment Letter ....................................................................................... 58 Annex 4: Statement of Loans and Credits .......................................................................... 62 Annex 5: Country at a Glance ........................................................................................... 63 Annex 6: Map of Mauritius (IBRD 33446) .......................................................................... 65 iv  TABLES Table 1: Selected Economic Indicators 2007-2010 ......................................................................... 3 Table 2: Quarterly Gross Domestic Product, Selected Sector Growth Rates .................................. 4 Table 3: Macroeconomic Indicators 2010-2016 (percent) .............................................................. 5 Table 4: Macroeconomic Indicators under Alternative Scenarios 2010-2013 (percent) ................. 5 Table 5: Fiscal Framework (percentage of GDP) ............................................................................ 6 Table 6: Public Sector Financial Requirements (Rs millions) ........................................................ 7 Table 7: External Financial Requirements (US$ million) ............................................................... 8 Table 8: Proposed Prior Actions for DPL1 and Triggers for DPL2 .............................................. 21 Table 9: Total Social Assistance Expenditure (2008/09) .............................................................. 24 Table 10: Public Enterprise Debt (Rs millions and as percentage of GDP) .................................. 41 FIGURES Figure 1: Unemployed Population by Education Attainment ....................................................... 30 Figure 2: Aggregate Annual Revenues and Operating Budgets of the 15 largest SOEs (2005- 2011).............................................................................................................................................. 40 BOXES Box 1: Good Practice Principles on Conditionality…………………………...…………………..23 This Loan was prepared by an IBRD team consisting of Will Wiseman (Senior Economist, Co-Task Team Leader), Rafael Muñoz Moreno (Senior Economist, Co-Task Team Leader), Sawkut Rojid (Economist), Khoudijah Maudarbocus- Boodoo (Private Sector Development Specialist), Alvaro Gonzalez (Senior Economist), Chunlin Zhang (Lead Private Sector Development Specialist), Jacques Morisset (Lead Economist), Fadila Caillaud (Economist), Mona Haddad (Manager Trade Department), Olivier Cadot (Senior Trade Economist), Mariem Malouche (Economist), Uma Subramanian (Program Manager, Trade Logistics, Investment Climate Advisory Services), Peter Ladegaard (Regional Program Manager, Investment Climate Advisory Services), Lorraine Blank (Consultant), Raj Soopramanien (Lead Counsel), Wolfgang Chadab (Senior Finance Officer, CTRLA), Emma Mistiaen (Operations Officer), Vasish Ramkhalawon (Operations Officer), Mariella Beugue (Team Assistant), Nadege Nouviale (Team Assistant), Joanna Watkins (Consultant ), Phillippe Leite (Economist), Nick Manning (Advisor), Maria-Teresa Benito-Spinetto (Research Analyst), Alain D’Hoore (Lead Economist), and Patrick Kabuya (Senior Financial Management Specialist). v  LOAN PROGRAM SUMMARY REPUBLIC OF MAURITIUS PUBLIC SECTOR PERFORMANCE DEVELOPMENT POLICY LOAN Borrower Republic of Mauritius Implementing Agency Ministry of Finance and Economic Development Financing Data IBRD Loan: Development Policy Loan (DPL). The proposed loan amount is US$20 million. Operation Type Programmatic DPL (two operations). The proposed operation is the first of the series. Main Policy Areas Social Protection, Education, Trade Competitiveness, Civil Service Reform, Public Enterprise Reform. Key Outcome Indicators  Number of people with less than a secondary school certificate in the Placement for Training program under the National Empowerment Foundation, reflecting an increased poverty focus.  Number of households in the Social Register of Mauritius (SRM), which will serve as the basis for an integrated database for poverty targeted programs.  Percentage of students entering Year 1 and completing the pre- vocational education cycle, reflecting increased access to quality secondary education.  Number of regulations on which a decision is taken after review, reflecting a reduction in unnecessary business regulations.  Number of ministries involved in issuing certificates/permits/clearances connected to the national single window, thus indicating greater administrative harmonization and a reduced administrative burden for business.  Time needed to settle the Customs administrative penalty amount, reflecting increased transparency and efficiency in the application of Customs appeals.  Gradual reduction in the time needed to process the prescription of Schemes of Service and in the number of Schemes of Service, reflecting increased flexibility in the civil service.  Number of state-owned enterprises (SOEs) included in the quarterly performance reports prepared by the Office of Public Sector Governance (OPSG) and published on the OPSG website, indicating better monitoring of SOE performance and reform. Program Development The development objective of the DPL programmatic series is to Objective(s) and support improvements in the performance of the public sector in Contribution to Country Mauritius by assisting the government to implement the following Partnership Strategy three reform pillars: (i) strengthening services to support and (CPS) empower the most vulnerable; (ii) streamlining trade regulation and processes; and (iii) improving human resource management in the vi  civil service and the monitoring of SOE performance. Risks The implementation of the proposed reform program entails a number of risks: (a) The challenge of maintaining macroeconomic stability in the face of uncertain global developments. The government has the means and tools to cope with external economic uncertainties, though a firm commitment will be needed to rein in public expenditure if a substantial economic slowdown materializes. (b) Political risk that may affect the pace of the reform program at a time when the need for reform is most urgent, given global economic uncertainties. Many of these second generation reforms will have redistributive effects and the government may find it difficult to overcome some resistance from vested interests. This complexity is further compounded by the withdrawal of one party from the government coalition in July 2011, which has left the government with only a slim majority in Parliament. This DPL aims to mitigate this risk by supporting reforms that will bring returns in the short term while putting in place the building blocks necessary to expedite the broader reform program in the medium term. (c) Limited institutional capacity within the sector ministries to lead and implement the reforms. 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 enable line ministries to enhance their institutional capacity where needed. Additionally, the DPL itself will build bridges between the different ministries involved in the reform program, thereby enhancing coordination. The Bank’s analytical work program will support these reform areas while also enhancing the 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 most relevant for maximizing impact. (d) Allegations of corruption that have been at the center in the national debate for the past several months. These allegations are under investigation by the Independent Commission Against Corruption (ICAC). Corruption is not only an impediment to investment but also triggered a political crisis in Mauritius when accusations reached the highest level of government. This risk is mitigated by the fact the government appears to be supportive of the ICAC and respectful of its independence. Operation ID P125694. vii  REPUBLIC OF MAURITIUS PUBLIC SECTOR PERFORMANCE DEVELOPMENT POLICY LOAN PROGRAM DATA SHEET Date: February 27, 2012 Lending Instrument: Development Policy Country: Republic of Mauritius Lending Operation: Public Sector Performance Board Approval Date: March 27, 2012 Development Policy Loan Effectiveness Date: June 30, 2012 Operation ID: P125694 Closing Date: December 31, 2012 Team Leader: William Wiseman Sectors: Central government administration Sector Manager/Director: Lynne (40%); Other social services (30%); General Sherburne-Benz public administration sector (30%) Country Director: Haleh Bridi Themes: Social safety nets (25%), Administrative and civil service reform (25%), Export development and competitiveness (25%), State owned enterprise restructuring and privatization (25%) Environmental screening category: Special Development Policy Lending: [ ] Yes [X] No Crisis or Post-Conflict Situation (exception to [] Yes [ X] No OP8.60): [ X] Yes [] No Programmatic: [ ] Yes [X] No Deferred Drawdown Option: Subnational Lending: Operation Financing Data [X] IBRD Loan [] IDA Credit [] Grant [] Other: Total Bank financing (US$m.): 20.00 Proposed terms: IBRD Fixed Spread Loan payable in 18 years, (including 5 years grace period) Tranche Release Information Single tranche to be released upon effectiveness. Does the operation depart from the CAS in content or other significant [ ]Yes [X] No respects? Does the operation require any exceptions from Bank policies? [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Program Development Objective (PDO) of the DPL programmatic series is to support improvement in the performance of the public sector in Mauritius by assisting the government to implement reforms within the following three pillars: (i) strengthening programs that support and empower the most vulnerable; (ii) streamlining trade regulation and processes; and (iii) improving human resource management in the civil service and monitoring of SOE performance. viii  PROGRAM DOCUMENT REPUBLIC OF MAURITIUS PUBLIC SECTOR PERFORMANCE DEVELOPMENT POLICY LOAN I. INTRODUCTION 1. Recent economic reforms in Mauritius have built on a long tradition of economic growth and transformation. Since independence in 1968, Mauritius has achieved substantial economic growth of around 5 percent per annum, which has underpinned its economic transition from a predominantly agricultural economy based on sugar production to a diversified economy structured around textile exports and tourism. However, by the mid- 2000s, with the erosion of Mauritius’ preferential trade status and rising commodity prices, it was evident that more reforms were needed to further the country’s transition from a labor- intensive economy to a high-value-added knowledge and services economy. 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 competitiveness; (iii) improving the investment climate; and (iv) widening opportunities. The reform was broadly successful in restoring competitiveness, achieving economic growth, and creating employment 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 of the Euro crisis in 2010. 2. However, the reform agenda remains unfinished and critical constraints to economic development, particularly with regard to public sector performance, have become increasingly evident. There is substantial room for improvement in the performance of the public sector, particularly with regard to parastatals and public companies. The performance of the public sector significantly lowers the quality of service delivery and undermines overall economic competitiveness. Reform will be necessary to bring the sector up to the necessary level for Mauritius to achieve its development goals. 3. The uncertain status of the global economy and the risk that this poses for Mauritius makes the need for reform even more urgent. 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 is likely to continue. The fiscal position remains stretched with public debt still high and is only projected to decline by a modest amount in the medium term. Therefore, any counter-cyclical fiscal policy will be difficult to implement if these external threats materialize. This highlights the need for measures that would substantially increase public sector efficiency. Additionally, current account deficits, although high, have so far been financed mostly by 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 only 1 a few markets (Europe) and products (tourism and textiles) could lead to a further deterioration in the current account deficit. This suggests an urgent need to accelerate reforms to increase competitiveness and position the economy to access new markets and develop new products. 4. However, this second generation of public sector reforms is likely to be more difficult and more politically sensitive to implement than the first. In 2010, the new government adopted a five-year plan, with a commitment to continuing the basic direction of structural reforms (increasing public investment, fostering economic competitiveness, and making the public sector more efficient) but with an increased emphasis on social programs to ensure that all segments of the population benefit from economic growth. This plan is adequate as a basis for regaining competitiveness and reducing poverty in Mauritius. However, the design and implementation of these reforms is complex. While the nature of the previous reforms allowed the Ministry of Finance and Economic Development to coordinate and lead the reform process, the current reform program is being led by a number of different sector ministries whose capacity is weaker, thus making coordination more problematic. Moreover, this second generation of reforms is likely to affect a wide range of public sector stakeholders, some of whom are well organized and influential and who may effectively resist reform. This complexity has been compounded by the withdrawal of one party from the government coalition in July 2011, which has resulted in the government having only a slim majority in Parliament. As a result of all of these factors, the pace of reform implementation has slowed down in Mauritius, and the government seeks to prioritize those reforms that not only have the potential to yield broadly shared economic growth but are also politically feasible to implement. 5. The support provided by this proposed DPL will help the government to overcome many of the challenges that it faces. The government continues to see DPLs as a useful vehicle for supporting policy reform in Mauritius, not only the financing itself but also the technical assistance and policy dialogue that the Bank can provide through its DPLs. The Bank can offer global knowledge and best practices and can ensure that discussions of the reform agenda are evidence-based, which also provides additional support to those championing the reform program. The approach is particularly important in the current context where the reform process has slowed down. 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. The DPL series aims to do this by supporting the creation of systems that will enable the government to define appropriate reform options as well as the strengthening of the institutions that can coordinate and consolidate the reform initiatives. 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 regulation and processes; and (iii) improving human resource management in the civil service and the monitoring of SOE performance. 2 7. The proposed DPL is being prepared in coordination with the Bank’s Private Sector Competitiveness (PSC) DPL. 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 will focus primarily on strengthening the policy and institutional environment for private sector competitiveness, while this proposed DPL will focus primarily on the performance of the public sector. If the government is going to successfully weather the possible 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. II. COUNTRY CONTEXT A. RECENT DEVELOPMENTS AND MACROECONOMIC POLICY FRAMEWORK IN MAURITIUS 8. The negative impact of the 2008/2009 global economic crisis in Mauritius was partially contained by a short-term fiscal stimulus package that also aimed to build the country’s long-term competitiveness and enhance its investment climate. This package was made possible by the government’s relatively comfortable fiscal position prior to the onset of the crisis. This fiscal space allowed the government to adopt an expansionary macroeconomic policy, with both fiscal and monetary components. Between 2009 and 2011, fiscal stimulus measures cumulatively accounted for about 7.5 percent of GDP, with a focus on large infrastructure projects and targeted programs to assist firms and workers.1 One salient feature of these targeted programs was the close coordination between the public and private sectors in which the government agreed to support firms as they restructured while the private sector did its utmost to preserve employment. As a result, job numbers were maintained during the crisis, and the unemployment rate remained stable at 7.3 percent in 2009 compared to 7.2 percent in 2008. Table 1: Selected Economic Indicators 2007-2010 2007 2008 2009 2010 Real GDP growth (%) 5.7 5.5 3.0 4.1 Exports of Goods1 (Rs. M) 64,265 59,015 56,162 61,997 Of which textiles 27,584 23,907 23,360 23,992 Tourism Earnings (Rs. M) 40,687 41,213 35,693 39,457 FDI 11,514 11,419 8,793 13,948 Current Account Deficit (% GDP) 5.4 10.1 7.4 8.3 1. Excluding ships’ stores and bunkers Source: Statistics Mauritius 9. Growth picked up in 2010 but has not yet reached 2008 levels. GDP growth accelerated to 4.1 percent in 2010 from 3.0 percent in 2009 (Table 1). In line with the 1 A salient initiative was the Mechanism for Transitional Support to Private Sector (MTSP, which came to be known as the “Mauritius Approach