JOINT ECONOMIC COUNCIL

 

MEMORANDUM ON 2007/2008 BUDGET

 

 

1.         INTRODUCTION

 

The object of this Memorandum is to outline the views of the Joint Economic Council (JEC) with respect to the present economic context and to summarise our proposals regarding the 2007/2008 Budget. 

 

 

2.         PRESENT ECONOMIC CONTEXT

 

2.1       Competitiveness of Mauritius

 

The year 2006/2007 has been a year of mixed achievements. 

 

The reforms and openness of the economy triggered in the 2006/2007 Budget demonstrated clearly the strategy of Government to improve the long term competitiveness of Mauritius. The rationalization of the fiscal regime, the Business Facilitation Act, the review of the compensation mechanism and the opening up of the air access policy have had a positive impact on investment.  Indeed, the hospitality and leisure cluster (hotels and IRS) as well as other sectors, namely, textile and clothing, seafood hub and ICT performed well.

 

However, price control and the unexpected manner in which such control was imposed, the delays in implementing some major reforms namely, with respect to the public transport system, port congestion and sugar sector have had adverse effects on the overall competitiveness of the country.  There prevails, unfortunately, a general uncertainty with respect to the business environment which has to be changed, especially at a time when investment rate should go further up from the present 24% of GDP to 30%.

 

The five most problematic factors for doing business in Mauritius identified by the Global Competitiveness Report 2006/2007 are:-

 

(i)                inefficient government bureaucracy;

(ii)             restrictive labour regulations;

(iii)           access to financing;

(iv)           inadequately educated workforce; and

(v)              inadequate supply of infrastructure.

 

In addition to the issues mentioned above, Mauritius ranks poorly, 107th among 125 countries with respect to public finance management and government deficit.

 

The above explains the inability of Mauritius to improve its global competitiveness.  The economy, in spite of a GDP growth of 5% in 2006 has still lost 20 places in the Global Competitiveness Index over the last five years.  The rank of Mauritius, as such, has fallen from 35th in 2002/2003 to 55th in 2006/2007.

 

Table I

Global Competitiveness Index

 

Year

Rank

2002/2003

35

2003/04

46

2004/05

49

2005/06

52

2006/07

55

 

Source : Global Competitiveness Report 2002/2003, 2003/2004,

  2004/2005, 2005/2006 and 2006/2007

 

2.2       Investment potential

 

The JEC, in its 2006/2007 Budget Memorandum highlighted that the investment potential in the emerging economic model within the next five years could reach Rs 160 billion in the following clusters:-

 

(i)                Hospitality and Leisure cluster (Rs 120b);

(ii)             Seafood and Land Based Oceanic cluster (Rs 10b);

(iii)           ICT cluster (Rs 3b);

(iv)           Knowledge cluster (Rs 2b);

(v)              Sugar cane cluster (Rs 15b);

(vi)           Textile, Clothing and Fashion cluster (Rs 10b)

 

In order to optimize the investment potential, Mauritius should not only accelerate the reforms contained in the 2006/2007 Budget but should also embark on some of the new reforms, which would be vital to put Mauritius on a global competitive trajectory.

 

 

3.         OBJECTIVES OF THE 2007/2008 BUDGET

 

In the light of the encouraging results of the reforms and initiatives in  2006/2007, we believe that the 2007/2008 Budget should pursue the reform process with renewed impetus and should focus on the following main objectives:-

 

(i)                Embedding the Business Facilitation Act in the day-to-day business environment;

(ii)             Strengthening of the regulatory environment in some key sectors;

(iii)           Improving access to finance, especially for SME’s;

(iv)           Implementing major infrastructure reforms;

(v)              Changing the labour environment;

(vi)           Improving the public finance position of Mauritius; and

(vii)         Strengthening the Empowerment Programme.

 

3.1       Embedding the reforms of the 2007/2008 Budget

 

The profound changes contained in the Business Facilitation Act has yet to be embedded in the day-to-day business environment of Mauritius.  The streamlining of the 465 permits within the regulatory bodies and the harmonization of some legislations have yet to be fully implemented at the level of the various Government Authorities. The Joint Government/Private Sector effort to overhaul the business environment along the lines contained in the Business Facilitation Act should be completed by the end of 2007 to reach the target of placing Mauritius among the top 10 countries in the next edition of the “Doing Business ” report.

 

·        Modernisation of the Civil Service

 

In order for the Business Facilitation Act to become a reality, it is also essential to reorient the civil service toward economic objectives and give it the power and skills to design and mount development strategy.  This would involve, among other things, the following:-

 

(i)                increased professionalism in general;

(ii)             a civil service performing as a facilitator for socio-economic development rather than an implementer of regulations; and

(iii)           a significant reduction in the number of parastatal bodies.

 

3.2       Strengthening the regulatory environment

 

Mauritius needs strong and independent regulatory bodies on its march to becoming more competitive.  In that context, there is an urgency to either put into place or strengthen regulatory bodies in the following areas where huge growth potential exists:-

 

(i)                Air access;

(ii)             Energy;

(iii)           Telecommunication infrastructure;

(iv)           PPP projects;  and

(v)              Anti-dumping legislation .

 

3.2.1   Air Access regulatory body

 

The partial opening up of the air access has yielded very positive results.  There will be pressure for further opening up and, as such, Mauritius needs a predictable environment regarding air access policy as well as a strong independent regulatory body to negotiate bilateral air services agreements (BASA) with an increasing number of air carriers.  Accordingly, an appropriate unit with competent “know-how” should be set-up within the next six months.

 

3.2.2   Proclaim the Utilities Regulatory Act

 

The energy sector is one with huge investment potential.  As such, over and above a clear policy with respect to the sector, there is a need to set up a Utility Regulatory Body for the regulation of utility services in the interest of customers and suppliers of such services.

 

In that context, Government should proclaim the Utility Regulatory Authority Act which has already been approved by the Legislative Assembly and take necessary measures to set up the appropriate body as early as possible.

 

3.2.3   Information & Communication Technologies Authority

 

The ICT sector is emerging as a promising sector and employment opportunities could go up to 10,000 by next year.  However, Mauritius must position itself as a destination which can ensure continuous telecoms availability, where even a downtime of 0.1% will not be acceptable. Furthermore, companies should be able to contract with more than one telecommunications carrier for redundancy.

In view of the above, ICTA should be able to lay down the investment conditions for bringing more competition and investment in the telecommunications infrastructure.   Competition will subsequently reduce further the cost of telecommunications in the country.

 

3.2.4   Operationalizing the Public Private Partnership Legislation

 

There is an urgency to operationalise more effectively the PPP legislation as the PPP instrument is an ideal tool to maintain capital expenditure without putting pressure on public debt and the budget deficit.  Furthermore, the PPP framework offers a transparent and fair process to invite requests for proposals in any sector.

 

Appropriate measures should be taken to strengthen the capacity of the PPP Unit as to give it the means to implement a larger number of projects. 

 

3.2.5   Anti-dumping legal framework

 

As Mauritius is moving fast towards reduction in tariffs, it is essential that an appropriate framework with clear mechanisms and legislations are put into place to avoid dumping by large international producers.  Such a legislation would enable non-EPZ companies to adjust to the global context and even export to the region.

 

·        Calendar for privatisation

 

In the light of the competitive environment and new regulatory framework to be set-up or strengthened, Government would be able to unbundle the activities of such parastatal bodies as CEB and CWA and privatize further Mauritius Telecom and Air Mauritius.

 

3.3       Access to finance, especially for SME’s

 

There is consensus among stakeholders for extending the coverage of the existing Credit Information Bureau to non-bank lending institutions including hire purchase companies and financing houses.  This may well be achieved through an independent Credit Information Bureau which could eventually become a Credit Rating Agency. Such an agency would improve risk management capabilities, encourage portfolio diversification and usher in an era of responsibility among credit providers and borrowers.  Furthermore, it would expand credit and improve access to finance to emerging entrepreneurs and SME’s.

 

A number of institutions, local as well as international have expressed serious interest in the setting up of the Credit Information Bureau and Rating Agency and we would, therefore, invite Government to put into place the appropriate policy and legal framework to allow private operators to move in this direction.

 

3.4       Improving transport and port infrastructure

 

Mauritius is presently classified in the category of “efficiency-driven” economies as opposed to factor-driven and innovation-driven economies.  At this stage of its development, efficient infrastructure will be a key determinant of the economy and, accordingly, it is critical that we address the problems of public transport as well as that of port infrastructure as soon as possible.

 

·        Public transport infrastructure

 

During the year 2006/2007 a major initiative was undertaken to develop a transport package with a view to meeting the challenge of traffic congestion.  The cost of the traffic congestion to the economy is immense and its adverse impact on productivity huge.  The transport package, also know as the Richmond package, which obtained agreement on the part of various stakeholders, namely, transport operators, private sector and representatives of trade unions, focused on the following main areas:-

 

(i)                construction of an open bus way from Curepipe to Port-Louis;

(ii)             construction of an express way from Quatre Bornes to Port-Louis on the motor way;

(iii)           construction of a by-pass from Terre Rouge to Ebčne; and

(iv)           introduction of congestion fees on private cars.

 

The strength of the Richmond Package is in the sequencing of its implementation. As such, it does not exclude further improvement over the years and replacement of certain options, namely the open bus way by other options.  The proposed package allows for an implementation calendar which can be triggered immediately. 

 

In the light of the above, the JEC would invite Government to send a very strong signal in the forthcoming budget for the decongestion of road traffic.

 

·        Port infrastructure

 

In the light of our consultations with key sectors of the economy, it would appear that Port-Louis is losing out in terms of its efficiency vis-ŕ-vis neighbouring countries.  The time and cost of handling containers are two factors which are discouraging shipping lines to use Mauritius with serious adverse effects on our exports and overall competitiveness.

 

The competitive edge in logistics will be a key determinant of our exports not only for our re-structured textile sector but also for the seafood hub and the post-reformed sugar sector.  It is also pertinent to highlight that our objective to make Port-Louis a container hub and a logistics centre would be undermined if shipping lines were to move out of the port.

 

In this context, and on a basis of public-private partnership, we would urge Government to invite major world companies to enter into strategic alliances in the port sector against set benchmarks and performance indicators. Such partnership would improve the overall efficiency of our port.

Furthermore, in order to position Mauritius as a competitive regional hub, we should be compliant with the international supply chain security standards.  In this context, the JEC would suggest the urgent implementation of the cargo community system under the PPP mode.

 

3.5       Labour environment

 

The setting up of the National Pay Council is an important step in the right direction.  The new economic model of Mauritius deserves a much more flexible labour environment which would encourage collective bargaining without undermining a general sense of fairness for all parties.  The proposed review of the Industrial Relations Act (IRA) and the Labour Act is vital and the private sector would be prepared to undertake its fair share of responsibility in reaching this objective.

 

However, as highlighted by the MEF, it is crucial that both the IRA and the Labour Act be revisited concurrently to ascertain fundamental reforms.

 

3.6       Improving public finance

 

The inability of Mauritius to reach an acceptable level of budget deficit could undermine the global competitiveness of the economy and jeopardize the investment environment.  In that context, the reforms undertaken in the last budget both on the expenditure side as well as on the revenue front should be maintained.

 

On the expenditure side, the JEC believes that a more effective use of the PPP legislation could reduce significantly the public capital expenditure without cutting down on essential investment.  On the recurrent side, continued effort must be applied to increase the number of Ministries to adopt the Medium Term Expenditure Framework (MTEF).

 

Furthermore, the targeted approach of social welfare against the universal approach should be maintained. 

 

The financial difficulties of many parastatal bodies are a serious cause for concern.  Poor management, unsustainable non-market pricing policies, sub-optimal use of resources (including labour) are among the factors accounting for problems in most parastatals.  We would suggest that Government continues to review the existence of a number of these bodies as was done in the case of the DWC in the 2006/2007 Budget.

 

On the revenue side, the harmonization, simplification and wider coverage of the fiscal regime should bring better results.  In that context, ways and means to encourage the mainstreaming of the informal sector in the economy is vital.  The embedding of the Business Facilitation Act should also assist in this endeavour.

 

3.7       Strengthening and deepening the Empowerment Programme

 

The Empowerment Programme launched in the 2006/2007 Budget has been one of the major innovations with respect to caring for the most needy in a ‘sustainable’ manner and not creating an over-dependency syndrome on the State.  The two key characteristics of the Empowerment Programme are the public/private partnership in the delivery of programmes and the optimum utilization of existing institutions.  While a major campaign is being launched to raise the awareness of the Empowerment Programme at the level of the business community and the population at large, we would like to suggest that the 2007/2008 Budget rallies all the public sector institutions to put the Empowerment Programme activities high on their agenda.

 

 

4.         CONCLUSION

 

At the present juncture of its economic development, Mauritius needs clarity in its strategy and should avoid contradictory decisions.  While we recognize the validity for an inclusive economic development and the urgency to empower the most vulnerable groups of our society, Mauritius must maintain the focus on improving its competitiveness in the post-preference global context.

 

 

 

 

 

 

JEC

30 May 2007