Mauritius - Second Private Sector Competitiveness Development Policy Loan Project

 PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Feb 1, 2013 Report No.: AB7236 Operation Name Mauritius Second Private Sector Competitiveness DPL Region AFRICA Country Mauritius Sector General industry and trade sector (45%); SME Finance (20%); Information technology (20%); Credit Reporting and Secured Transactions (15%) Operation ID P132510 Lending Instrument Development Policy Lending Borrower(s) GOVERNMENT OF MAURITIUS Implementing Agency Ministry of Finance and Economic Development Ground Floor, Government Centre Port Louis Mauritius Tel: (230) 2012-339 amansoor@mail.gov.mu Date PID Prepared January 18, 2013 Estimated Date of Appraisal February 1, 2013 Estimated Date of Board April 25, 2013 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with appraisal and negotiation of the operation. Other Decision Key Development issues and Rationale for Bank Involvement 1. Having successfully become an upper middle income country, Mauritius now strives to become a high income nation1. Ranked only behind South Africa in the Africa Region on The World Economic Forum; Mauritius is recognized as one of the most competitive and business- friendly destinations2. Mauritius has moved from an import substitution strategy which was not very successful given its small local economy towards greater export diversification through industrialization. From being a predominantly agricultural economy based on sugar production it has been able to diversify into textiles exports, tourism and more recently financial services, offshore global business and ICT which have developed as the economy’s new pillars. However, achieving the high income nation status requires keeping up to and surpassing the pace of reforms set by its competitors. 1 Government Program 2012-15, GoM, April 2012. 2 The Doing Business Ranking has moved from 24 to 19 in the 2013 Doing Business Report 1 2. The manufacturing sector in Mauritius is facing increasing competitive pressure from increasing global competition in the export markets especially in light of the ongoing European slowdown which being the country’s main export market is taking a toll on Mauritius’ economy. GDP growth is estimated to be 3.3 percent in 2012, vis-à-vis the 3.7 percent projection made when the first operation of this DPL series was approved (March 2012), and below government budget projections of close to 4.1 percent. The European economic downturn has had a significant impact on Mauritian exports in 2012 with declines both in tourist arrivals and export earnings from the major European markets. 3. The competitiveness agenda thus remains centre piece to achieving the Government’s program of reforms. With a view to weather the slowdown accompanied by the current global economic crisis; to boost economic growth through higher productivity and to increase high value added exports, the new Government Program adopted in April 2012, and the 2013 Budget Speech astutely remains committed on continuing to support the competitiveness agenda for development of the manufacturing and services sector. It emphasizes the need to gain greater global competitiveness through the need to promote technology investments to improve quality of Mauritian exports to enable entry into new markets abroad and also reemphasizes the need to prioritize the SME sector which is an important source of job creation and growth. 4. There has been encouraging progress in implementing the reform program since the PSC DPL1; with reforms in some sectors going beyond what was initially envisaged. These include more substantial regulations being passed to operationalize the Mauritian Insolvency Act 2009 making debt resolution regimes more effective; the development of a National Broadband Policy (NBP) and the implementation of policy reforms to increase competition in the ICT sector. Through the Bank’s non-lending technical assistance (NLTA) technical assistance and support was provided to help develop a pipeline of financial and private sector development policy reforms for this Second PSC DPL. This proved to be a very useful tool, as it helped provide technical expertise and global best practice on policy and institutional issues informing policy dialogue. Proposed Objectives 5. This development policy objective of this DPL series is to strengthen the policy and institutional environment in Mauritius to support competitiveness and enterprise development. The operation will achieve this by supporting reforms in three integrated and mutually reinforcing pillars (i) improving competitiveness and growth of enterprises, (ii) improving access to finance, and (iii) promoting ICT and e-Gov for enhancing competitiveness and transparency. Preliminary Description 6. The proposed Second PSC DPL (PSC DPL2) is being designed in coordination with the Second Public Sector Performance (PSP) DPL. Both the DPLs are designed to be mutually reinforcing to address complementary aspects of the Government’s reform program. The PSP DPL focuses primarily on the performance of the public sector, while this PSC DPL focuses primarily on strengthening the policy and institutional environment for private sector competitiveness. It is the combination of the reforms supported by these two operations that will 2 help Government improve its competitiveness, increase its resilience, and prepare it for the next phase of rapid and inclusive economic growth. For each of the three pillars that will be supported by this operation, prior actions have been identified that create the basic institutions to unlock reforms. The specific measures that have been agreed to as prior actions for the Second PSC DPL are presented in Annex 1. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 15 Borrower/Recipient IBRD Others (specifiy) Total 15 Risks and Risk Mitigation 7. The implementation of the proposed reform program entails a number of risks that had been identified at the preparation of the First DPL and are still relevant: (a) the challenge of maintaining macroeconomic stability under growing uncertain global developments; (b) a slowdown in the momentum of reforms, exacerbated by the slim government majority in the parliament; and (c) limited institutional capacity within sector ministries to lead and implement the reforms. The more detailed identification of these risks and the proposed mitigation measures are provided below. 8. The first and perhaps the most important risk is that the macroeconomic stability may be affected given the growing uncertainty in the global economic climate, particularly in the European economies to which Mauritius remains highly exposed. These global economic uncertainties represent a significant threat to a small open economy such as Mauritius. Overall, the Mauritian economy has proven its resilience in 2012 with an estimated GDP growth of 3.3 percent, despite all the headwinds to growth on the external front and lowers than expected expansionary fiscal policy. Furthermore, on the external front, the increasing levels of foreign exchange reserves (projected to be at six months of imports in the medium term) provide an additional 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 trend towards reorienting exports towards new markets (particularly Africa) will also help. On the fiscal front, the slowdown in the growth of public revenues is being more than compensated by the containment of public expenditure, with a reduction of the fiscal deficit and public debt. Should revenues dip, this would require an acceleration of efficiency gains in the public sector, and additional use of the remaining funds from the National Resilience Fund created in 2011. The government is also extending the maturity of the public debt further reducing roll-over risks, as the majority of debt is domestic and there is currently excess liquidity in the domestic capital markets. 3 9. The second risk is that a narrowing political reform space affects the pace of the reform program at a time when the need for reform is most urgent. The pace of reform in Mauritius has slowed in recent years and the appetite for further aggressive reform appears modest at this time. There are several ways to mitigate this risk. To the extent that the proposed program has been designed to mitigate this risk by supporting reforms where consensus exists, helping to put in place building blocks to expedite the reform program in the medium term. 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. Finally, 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. This has been useful in the implementation of the reforms supported under this operation. 10. The third risk is that of institutional constraints, including limited capacity in sector ministries, which might make it more difficult to effectively design, implement and monitor the reforms. Underlying institutional political economy constraints and the narrowing reforms space identified above combined with limited institutional capacity in some sector ministries can limit the effectiveness and progress of reforms. This is evident from the different pace of reforms across line ministries. The Bank is supporting the government to help mitigate this risk by bringing specialized staff to complement the DPL dialogue in selected areas, and promoting a public debate through articles and technical notes. Additionally, the DPL itself is a catalyst between the different ministries involved in the reform program, thereby enhancing coordination. Also, the Bank’s portfolio in Mauritius is designed to help strengthen capacity tailored to the needs of a Middle Income Country (MIC). Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts 11. The DPL supported reforms are expected to have in general a positive impact on the poor and the vulnerable in the following ways: (i) strengthening the SME programs that will enable SMEs to become more productive, (ii) increasing access to finance to firms that do not have access to immovable collateral and alleviating this constraint by further facilitating movable collateral, (iii) the introduction of a specialized MSME bank and (iii) increasing competition in the telecom sector making mobile services more affordable. Combined, these measures are aimed at raising private sector competitiveness and increasing investment, including 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. Environment Aspects 12. None of the reforms supported by the DPL series are likely to have a direct effect on the environment, natural resources, or forestry. Beyond the immediate focus of the DPL, other Government policies and development objectives such as increasing tourist arrivals by 2015, 4 expanding the port and airport, relieving traffic congestion, and making the business climate more investor friendly may have an environmental impact. Historically, the record of environmental management, though not perfect, has been relatively good.3 The Safeguard Diagnosis Review carried out in October 20104 shows that Mauritius’ environmental policies are sufficiently robust and are being implemented satisfactorily. Contact point World Bank Contact: Smita Kuriakose Title: Economist Tel: (202) 458-9003 Fax: Email: skuriakose@worldbank.org Borrower Contact: Ali Mansoor Title: Financial Secretary, Ministry of Finance and Economic Development Tel: +230 201 2339 Email: amansoor@mail.gov.mu 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 3 See EU “Mauritius Country Strategy Paper 2008-2013,