JOINT ECONOMIC COUNCIL

MEMORANDUM ON 2008/2009 BUDGET

1. INTRODUCTION

The object of this Memorandum is to highlight the views of the Joint Economic Council (JEC) with respect to the economy and to submit its proposals in the context of the 2008/2009 Budget.

2. PRESENT ECONOMIC CONTEXT

The economic reforms undertaken over the recent years with the prime objective of moving Mauritius from a preference driven-economy to one which would be competitive at the global level have indeed started to show results. GDP grew by 5.4% in 2007 compared to 5% in 2006 and is expected to reach 6% in 2008. Investment rate has gone up from 24.3% in 2006 to 25.1% in 2007 and the Private Sector’s share increased from 68.3% to 78.2%. The opening up of the economy is attracting meaningful FDI which is expected to reach around Rs 15 billion in 2008. Unemployment rate has gone down to 8.7% as opposed to 10.5% in 2006. The budget deficit, as a percentage of GDP decreased from 5.3% to 4.3% in financial year 2006/2007 and is estimated to further go down to 3.8% for financial year 2007/2008. The battle against inflation, though it decreased slightly over the last year, unfortunately remains a major concern.

However, since the beginning of this year, the global food and energy crisis has brought new convulsions on the international economic scene forcing policy makers and corporate leaders to re-think their development strategies. This double crisis will hit the developing world the most and especially, the LDCs and countries which are adjusting to their erosion of preferences. Mauritius which has already well embarked on the construction of a post-preference economic model based on economic diversification and competitiveness will need, therefore, to address the issue of energy and food security head on. Accordingly, over and above the need to accelerate reforms, the energy and food crisis would impose new strategies with respect to agricultural production, energy production from renewable sources and fight against absolute poverty to protect the most vulnerable group of the country.

3. OBJECTIVES OF THE 2008/2009 BUDGET

In view of the new context confronting Mauritius, the JEC believes that the main objectives of the 2008/2009 Budget should be as follows:-

(i) deepening economic reforms;

(ii) setting the environment to address the food and energy security crisis; and

(iii) enhancing the fight against absolute poverty.

On the basis of the objectives set above, we believe that 2008/2009 should make significant inroads with respect to the following areas:-

(i) improving business environment;

(ii) further economic diversification and enhancing capacity of

regulatory bodies;

(iii) strategy for energy security;

(iv) strategy for food security; and

(v) a programme to eradicate absolute poverty.

4. Improving business environment

The main proposals of the JEC, with respect to the improvement of the business environment are as follows:-

4.1 Embedding the Business Facilitation Act

Policy statement has to be translated into policy and process guidelines and ‘operationalised’. As such, it is crucial that the “policy and process guidelines” with respect to the permits/licenses (estimated at around 174) issuable by Ministries and Regulatory Bodies be clearly enunciated and made accessible, on-line, to investors and the population at large. This set of information which is important for investors and provided for under the Business Facilitation Act of 2006 should also be posted on the Website of the Board of Investment. Taking into consideration that the Business Facilitation Act was passed in 2006 and, over the last two years, tremendous work has been undertaken both by the Government and the Private Sector, we believe that this exercise could be completed within the next six months.

4.2 Maintaining the low tax regime across all sectors

While the JEC recognizes the major fiscal reform that was introduced last year in terms of reducing corporate tax throughout the economy to 15%, it is pertinent to highlight that two sectors, namely, tourism and banking have been singled out for additional taxes and levies. The JEC believes that in order to sustain our coherence as a low tax jurisdiction and to maintain a level playing field across all sectors, the 2008/2009 Budget should aim at a tax level which must not exceed 15% within the next two fiscal years.

4.3 Savings

In spite of a slight improvement in the savings rate during the past two years, the overall savings level remains low and continues to be a matter of concern. In that respect, and in view of the forthcoming salary increases (PRB Report), the JEC would like to reiterate the need for parity of treatment (with corporate pension plans) for individuals and self-employed wishing to subscribe to a private pension scheme or to supplement their pensions. It is necessary to remove the anomaly, whereby in case of personal pension plans or supplementary contributions into a corporate pension scheme, the capital element is being taxed twice. This corrective measure will complement the policy of encouraging self-employment and self-financed social protection.

4.4 Infrastructure improvement – A roadmap for optimal connectivity of Mauritius with the world

In spite of the consensus on the need for efficient infrastructure, there are still major infrastructural bottlenecks which are impacting negatively on the overall competitiveness of the country and, in some instances, stifling growth in some sectors. While we acknowledge the announcement of the implementation of Phase 1 of the “Richmond Package” regarding the road transport decongestion plan, we believe that Government should urgently chart out its strategy with respect to the port, airport and telecommunications infrastructure to ensure optimal “connectivity” of Mauritius with the world.

4.4.1 Port

The Port needs massive investment to maintain its competitiveness in the southern Indian Ocean region and, up till now, the present set-up has resulted in sub-optimal investment. Mauritius may also loose its competitiveness via-à-vis other ports in the region. 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-reform sugar sector. It must be pointed out that, as from crop 2009, the bulk of sugar exports will shift to container shipment requiring the handling of an additional 15000 TEU (twenty tons equivalent units) per year. It is also pertinent to highlight that our objective to make Port-Louis a regional hub and a logistics centre would be undermined if shipping lines were to move out of the port. We believe that Mauritius should within the next six months, put into place the appropriate framework to enable the advent of strategic partnership and to position Port-Louis as a regional port for transhipment, transportation and distribution.

4.4.2 Airport and air access policy unit

With the development of the hospitality cluster (hotels, IRS, medical tourism) and Mauritius positioning itself as a regional supplier of international services (IFS and knowledge industry) our airport should be overhauled. A major Public Private Partnership Investment Programme should be put into place urgently.

In spite of its opening up of the air access policy, Mauritius has not yet put into place an independent air access policy unit to define the terms, in a transparent manner, the air access environment to accelerate the arrival of more airlines. It is high time that Mauritius moves away from an “ad-hoc” process of its air access policy to a clearer and structured opening up of the sky. The JEC invites the relevant authorities to urgently set up an air access policy unit to implement the air access policy in an effective manner.

4.4.3 Telecommunications infrastructure

The requirement for competitive high speed international connectivity in the country is increasing in a significant manner. In this context, Mauritius has to establish a clear policy regarding redundancy (as stated in the Gartner Report in 2003) and access to landing station of SAFE. At this juncture of our development, Government should very clearly announce its position to encourage a second cable as well as its preparedness to facilitate the access to the existing cable landing station by service providers and new international cable carriers.

4.5 Labour Laws

Extensive consultations between Government and the various stakeholders have been held for months. The proposed legislations which would shift the labour environment from an inflexible mode to an approach which would contain both flexibility and security (workfare programme for re-skilling and re-deployment) will contribute significantly towards making Mauritius an efficient business platform. We would invite Government to legislate the new bills urgently.

4.6 Improving access to credit, especially SMEs

The existing Credit Information Bureau should urgently extend its coverage to all non-bank lending institutions as well as public utilities in terms of both positive and negative information with a view to profile credit worthiness for a maximum number of persons/companies in the country. Furthermore, there is a need to move for the provision of “value added services”, including credit ratings, to various parties (individual, companies, lending institutions (banks and non-banks lending institutions) in the market and, accordingly, the appropriate policy and legal framework for the supply of such services should also be put into place.

5. Reforming existing sectors and deepening economic diversification

Mauritius must maintain its trajectory of reforming existing economic sectors while at the same time keeping the momentum of economic diversification. In this context, the JEC would like to make the following proposals:-

5.1 Reforming the textile sector

The export companies, especially the textile sector will have to undertake a second wave of re-structuring as the architecture of the economy will undergo significant changes and will raise new challenges. Accordingly, we need to put into place a programme for restructuring textile companies as well as labour re-deployment to ascertain a fairly smooth transition of the sector to new levels of competitiveness.

5.2 Maintaining the momentum of the sugar sector reforms

Following the Agreement between the Government and the MSPA in December, 2007, the pace of the sugar sector reform has accelerated. However, in order for the sugar sector to maintain its reform momentum, there are other constraints which have to be removed, namely, the burden of the cess and the subsidy on imports (paid by the producers/planters). The removal of these burdens will enable the sector to further improve its competitiveness in anticipation of the 36% reduction in sugar prices that will be effective as from 2009.

5.3 Manufacturing sector

The transition of the manufacturing sector to a global competitiveness level is necessary. However, local companies should not be subject to unfair competition through dumping. Accordingly, the JEC would like to reiterate the urgency to enact an anti-dumping legislation as soon as possible. Furthermore, it is recommended that, in the present context of ensuring food security and employment, a residual duty of 15% on a very restricted list of sensitive products be maintained.

5.4 Economic diversification

The series of symposia organised by the Board of Investment earlier this year have demonstrated the potential of the new services sector, namely, the knowledge industry and the medical services, the international financial services (IFS) and the ICT. While the business environment for the IFS and ICT sectors have evolved quite well, the investment environment for the first two sectors have to be improved.

5.4.1 Knowledge industry

Though the Education and Training (Miscellaneous Provisions Act) of 2005 has laid down the legal framework for investment by the Private Sector in the knowledge sector, there are regulatory issues as well as operational constraints which have to be streamlined. There is also an urgent need to review the processes at the Mauritius Qualifications Authority and the Tertiary Education Commission to enable these institutions to support private training institutions/investors in the knowledge industry and to facilitate strategic alliances with international players.

5.4.2 Medical services

A major obstacle to the development of medical services is the absence of policy clarity. While there is a general consensus to develop medical training, super speciality services and medical tourism, there is need to give clear policy guidelines to regulatory bodies, (such as TEC and Medical Council) as well as to establish “process” guidelines regarding the provision of facilities for clinical training. Mauritius should not delay any further to develop this sector given that:-

(i) the investment potential in this area is estimated at Rs 2 billion for the next 2 years; and

(ii) the positive impact which the export of medical services will have on the public health services will be significant.

5.5 Real Estate development – the setting up of the Real Estate Investment Trust (REIT)

The partial opening up of the economy with respect to property development has shown that the potential of this sector is huge. Property development, however, is a very capital intensive sector and access to capital can be fairly difficult. One vehicle which can overcome this constraint is the Real Estate Investment Trust, which over and above, adding a new product on the local financial scene, will facilitate access to capital and eventually, upgrade the property asset of the country. Accordingly, the JEC would like to suggest the introduction of REIT in Mauritius. Following consultations with a number of property developers, it was felt that the REIT should, in the first instance, have the following parameters:- :-

(i) minimum size of the fund should be Rs 500 m;

(ii) the REIT should be a closed-end fund listed either on the main official market or on the DEM;

(iii) the REIT should pay a 15% tax at the distribution level (no tax on income received by the REIT), deductible at source, and payable by all parties except for non tax paying entities.; and

(iv) 90% of profits to be distributed.

6. Energy and food security

As stated earlier, the energy and food crises have triggered serious re-thinking throughout the globe, and policy makers, international organizations and the United Nations have called for innovative decisions to turn the tide. We believe that the 2008/2009 Budget should give the necessary impetus to tackle these two major problems and the time is ripe for bold initiatives.

6.1 Energy security

All studies (Kantor, Mauritius Research Council and Joel de Rosnay) are unanimous that Mauritius can easily produce over 50% of its energy needs (both for electricity and transport) from renewable sources. The JEC believes that the time is opportune to set a target for producing at least 50% of its energy needs by the year 2020. Already bagasse accounts for some 18% of demand. Its contribution can further increase and the use of other forms of cane biomass if commercially feasible can further enhance the contribution of cane biomass to our energy security.

However, in order to reach this target, it is imperative that the Utility Regulatory Authority (URA) Act be proclaimed, as soon as possible, to enable an independent regulator to set the investment scene and requirements for large and small investors to enter this market. The URA should be able, taking into account the characteristics of renewable sources of energy, to set the tariff and conditions for all producers of electricity from renewable sources (biomass, solar, wind) to connect to the distribution grid.

Mauritius should also clarify its policy vis-à-vis producers of electricity and biofuel from renewable energy sources as well as producers of renewable energy. Predictability is critical given the scale of investment to be effected by the Private Sector.

As far as renewable energy for transport is concerned, the JEC would like to suggest that clear targets be set with respect to the percentage of E10 and E20 over the next five years. Already a local company will be producing ethanol in Africa for a Swedish company. With clear targets and demand set, investors will be able to prepare their business plan and reduce the dependency of Mauritius on fossil fuel for transport.

The above target as well as the appropriate regulatory environment which would address the supply side of energy, should be accompanied by a joint Government/Private Sector awareness programme on energy savings to contain the demand side of the equation. The Government/Private Sector partnership awareness campaign, put into place during the Chikungunya crisis, is a model which brought good results. We would therefore, suggest that a joint team be set up to launch a massive awareness campaign on energy savings which would include initiatives such as the promotion of clean energy among industrial and commercial ventures and a disincentive introduced for energy inefficient household products.

6.2 Food Security

Mauritius can make significant progress with respect to food production at the national as well as regional levels. Accordingly, we should put into place an overall food security strategy to encourage investors to move towards both primary food production and food processing. Production articulated on agricultural lands and industrial capacities available in Mauritius and the region, in respect of perishables, semi-industrial and industrial products can be promoted on different and relevant efficiency scales that would make a significant change for the whole region.

In terms of local production, indications from various convergent sources are that Mauritius could aim at the following objectives within the next five years:-

From 2008 To 2012

(tons) (tons)

Potatoes 14,000 25,000

Onions 5,000 10,000

Pulses 100 500

Milk 2.5 (million litres) 10 (million litres)

In the medium term, Mauritius should in fact position itself as an important hub with respect to food security in the region and, as such, unleash business opportunities to meeting this objective. In that respect, the JEC would suggest the setting up of a full-fledged food transformation and services platform regrouping food technology and applied research capabilities, industrial capacities, processing and packaging services, and marketing activities. The ‘food security sector’ will attract primary production from Mauritius and the region and transform agricultural produce into a whole array of basic to sophisticated processed food, meant for both the local and export markets.

The absence of decisions on certain issues of concern to the sugar sector, cess and losses on sales of sugar on the local market, will undoubtedly have a major demotivating influence on future investors in the food crop sector which is fraught with much more uncertainty than sugar production.

Exceptional situations warrant exceptional actions. The food crisis which is looming to-day, according to all experts, is threatening the global food security position and could last for years. In this context, the JEC invites the authorities for special measures to encourage a deliberate shift of resources towards food production. Some of these measures could even appear to be contrary to the “spirit” of our economic reforms. However, ‘food security’ objectives have to be addressed in a forceful manner. In the light of this context, the JEC would like to propose the following package for immediate implementation:-

i) the recognition of the ‘métier’ of ‘agriculteur’ as distinct from the owner/planter and implementing a training programme undertaken by local and foreign professionals for continuous upgrading of the skills of the ‘agriculteur’;

ii) granting all companies involved in primary food production a tax holiday of 15 years;

iii) granting duty free treatment for additional investments into storage capacities solely meant to further food security (e.g. storage of cheaper sourced higher volumes of wheat, unpolished rice, maize or unrefined edible oil for prolonged periods over any given year;

iv) an improved Technology Diffusion Scheme whereby the 50% support will go up from Rs 200,000 to Rs 1 million;

v) ensuring a dedicated line of credit to support financing of infrastructure and equipment facilities in the supply chain of food (such as irrigation, transport, sorting and storage);

vi) harmonizing the VAT system so as not to penalize food crop production and processing;

vii) allowing sugar producers, large and small, raising loans denominated in forex to use their sugar euro proceeds to service such loans;

viii) extending some of the successful floor price policies to selected products grown by Mauritian companies in the region to meet the differential between local production and consumption;

ix) a Food Security Fund for investment in the region meant to raise food security of the region;

x) a PPP Research Programme for improving food production; and

xi) to mobilize international resources to raise the surveillance of our EEZ to prevent the “pillage” of our fish stock.

A fast track process by Board of Investment and EDB (Madagascar) for food security projects or any other equivalent mechanism.

The BOI and EDB of Madagascar have signed an agreement last year to facilitate investment by investors of both Mauritius and Madagascar. With a view to expedite investment in priority areas, namely, with respect to food security projects, we would like to propose that a BOI/EDBM joint process be set up to fast track the approval of clearances for all projects related to food security between our two countries. This facilitation procedure should receive unconditional political support from both countries.

Finally, it is essential for the country to have a coherent and comprehensive Action Plan, of say five years, in respect of food security at the earliest and to present the plan to international donors/lenders before the end of the year. The Private Sector stands ready to fully contribute to the formulation of this plan. The Action Plan is inter alia expected to cover both food crops and fish production to cater for trade and trade facilitation aspects, legislative and environmental issues and business facilitation and has to be bankable and implementable.

7. Empowerment Programme and Eradicating Absolute Poverty

7.1 Empowerment Programme

Though the Empowerment Programme is gathering momentum, there is still a need to rally all public sector institutions and to put the Empowerment Programme activity high on their agenda. The 2008/2009 Budget should encourage public institutions to include actions of the Empowerment Programme within their performance indicators.

7.2 Eradicating Absolute Poverty

The recent Government/Private Sector initiative on eradicating absolute poverty (EAP) within the next 10 years is a major challenge in terms of public/private/NGO partnership. The 2008/2009 Budget should put into place performance indicators to recognize the synergy of such partnership and support parties sharing the agenda to fight absolute poverty.

8. CONCLUSION

The reforms undertaken over the recent years have shown that Mauritius can build resilience against major challenges. The energy and food crisis will force policy makers, business leaders and civil society to revisit their strategies to fight back. The 2008/2009 Budget should re-position Mauritius on that new trajectory.

JEC

16 May 2008